Still Waiting for Clarity

Good Evening: One trading day after Treasury Secretary Geithner’s financial rescue “plan” seemed itself in need of a rescue (or at least some details), U.S. investors spent most of Wednesday considering their own action plans. Stocks mostly treaded water, while longer dated Treasurys and gold were sought for a second day in the apparent hope these asset classes will represent a safe haven while matters both economic and financial continue to be sorted out (see stories below). The ongoing search for clarity with regard to the Obama administration’s policies will continue apace, though if Ray Dalio is on the mark, it may be a while before investors are presented with truly compelling opportunities.

On the economic front, mortgage purchase applications once again plummeted during the latest reporting week, while the trade deficit narrowed slightly (for BAC-MER’s take, see below). Neither piece of data moved the needle much for market participants, and much of the day on trading desks was spent debating just what the government should and shouldn’t do to help resolve our nation’s financial woes. Volumes were probably also impacted by the sight of so many banking CEOs defending themselves in front of Congress on CNBC. When the boss talks, employees tend to tune out the trading screens in favor of the T.V..

After opening modestly higher, the major stock market averages spent most of the day within hailing distance of unchanged. Bank stocks enjoyed a bit of a dead-cat bounce in the process, while RIMM’s disappointing pre-announcement held back the tech sector. Stocks were down a bit and threatening to go lower when word came from Washington that a revised stimulus plan might soon be ready for President Obama’s signature (see below). Equities rallied on the news, but the averages eventually closed mixed to slightly higher. The S&P 500 (+ 0.8%) led the upside movers, while the Dow Transports (-1.15%) was the laggard. Shorter dated Treasurys came in for some profit taking after yesterday’s move, but the yields on 10 year and 30 year government paper fell 6 bps and 4 bps respectively. The dollar index traded in a fairly narrow range before finishing flat, while commodity prices (ex the 3% rally in the precious metals) once again sank. Grain prices were the weakest sector as the CRB index fell 1% today.

With so many people trying to offer so many opinions to policy makers these days, it makes sense to stand back and consider a broader perspective. Bridgewater’s Ray Dalio offers just such a viewpoint during his interview in the latest edition of Barron’s (see below). If you’ve already read it, take the time to do so again. Mr. Dalio is a luminous member of a fairly small group of people who saw this credit crack up coming well before Bear Stearns and Lehman breathed their last. He reminds us all that what has happened to our financial markets and to our economy is nothing like the post WWII recessions most investors and analysts use as a guide for portfolio decisions. No, what we are grappling with is much more akin to a depressionary process of debt liquidation, and in Mr. Dalio’s opinion, we need to write down much of the debt that’s been stranded during the previous cycle before either the markets or the economy can turn upward in earnest. Even then, in his opinion, stocks are likely to see lower lows this year. He also believes it will take more time than most people think before any recovery worthy of the name takes hold. It will surprise few readers that I completely agree with Mr. Dalio, especially when it comes to his investment prescriptions (e.g. own some gold). Team Obama, please copy!

— Jack McHugh

U.S. Stocks Gain on Optimism Stimulus Plan to Pass; Banks Rise

Long-Term Treasuries Rise as Geithner Declines to Detail Rescue

Gold Soars to Six-Month High on Investor Demand for a Haven

Ray Dalio Interview with Barron’s

Exports another barrier to gro.pdf

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