Market Bulls Taken to the Meat Grinder

The opening bell on Wall Street this morning signaled the beginning of a day at the slaughterhouse as bears went to work on carving the equity bulls into brisket. By the end of the day, the blue chip index had lost just about one percent of its value, putting it pretty much right back where it was before the bull run on Friday. The broader indices took their share of the meat clever treatment as well, with the NASDAQ losing about three-fifths of a percent in value. Other major indices lost as much as a full percent in the pounding.

Bonds faired no better, with the price of the bellwether 10-year Treasury retreating yet further, pushing its yield up to 4.53 percent late this afternoon, up from 4.38 percent in late trading yesterday.

Dark Wraith CyberGloss

Securities prices are based not upon what has already happened, but rather upon what market participants expect to happen.

  Much of the bond market flogging was blamed on a happy-news report from the Federal Reserve, which claimed that the economy is doing fine and dandy, meaning that the Fed is giving itself cover to continue pushing short-term interest rates up by representing that the economy is doing well even as interest rates are starting to move into recession-inducing territory. Bond traders, anticipating further rate hikes by the Fed, are selling out of their positions before bond prices drop even further.

Adding to the forces acting against a healthy economy, oil prices pressed close to all-time highs in intra-day trading, but backed off a bit by the close. Light crude pulled out of U.S. soil briefly hit $55.65 and Brent crude made it to an all-time high of $53.95 before settlement at $53.75.

Dark Wraith CyberGloss

Market prices are based upon what prices exist at the "margins" of trading. This means that the last, most critical trades set the prices sustainable within the entirety of the given markets.

  These tests of new highs came despite a U.S. government report claiming that supplies of crude oil are even better than had been previously thought. The mystery to some would be why oil prices could be rising in the face of robust oil supplies; but this is no market imperfection: the price of oil, whether it's pulled from Texas, the North Sea, or the Arabian Peninsula, is based on the world price of oil, which—because the U.S. dollar is so weak and is becoming weaker—makes oil more and more expensive when denominated in dollars. Thus the global price of oil in dollars is driven by the marginal price of oil denominated in dollars on world markets.

In other news, as mentioned above, the Federal Reserve today issued its "Beige Book" for the period from late January through February. The Beige Book assesses the state of the economy based upon reports and data from the regional banks in the Federal Reserve system. The Beige Book published today described an economy that, while showing some regional signs of softness, is growing robustly with no signs of recession or significant downturn on the horizon.

Dark Wraith CyberGloss

The Federal Reserve system comprises twelve geographic regions of the country, each one of these districts overseen by a Federal Reserve District Bank. The most influential of these Banks are the ones in New York and Chicago.

  It also claimed that inflation for the most part remained low, which is entirely at odds with the Federal Reserve's record string of short-term interest rate hikes, which would be done only if inflationary pressures were building in the economy. The Beige Book claimed that, across the country, job markets were strong and wage increases were moderate, with certain industries in some areas even facing shortages of skilled labor; and the report claimed that retail sales overall were robust, with only a few sectors, including auto sales, showing signs of weakness. The book also claimed that residential housing markets were in very good shape, too. In virtually every one of these areas of analysis, however, data exists that is clearly, if not sharply, at odds with the Fed's assessment. As examples, new home sales dropped by a surprising 9 percent last month, and the core producer price index shot up at an annualized rate of almost ten percent for the most recent month reported.

Some outside observers noted that this Beige Book gives further evidence of one of the most politically sensitive Federal Reserve Boards in recent memory, with assessments of economic activity and White House policies that are inconsistent with the realities facing households and businesses.

Dark Wraith CyberGloss

There are seven Governors of the Federal Reserve Board, one of whom is the Chairman. Each of the Governors is appointed by the President of the United States, with the advice and consent of the United States Senate.

  Because the Governors of the Federal Reserve Board are appointed, they suffer no risk in shaping their statements and even their policies to accommodate the ruling party to which they seem to answer in spite of their apparent independence. Ultimately, this erodes market confidence in their words and actions, and it leads to less certainty in markets that rely on objective information in forming sound assessments based upon well-informed judgments about the future of the economy. Once lost, that confidence may take years for a future Federal Reserve Board to once again earn.