Al Procaccino II, MBA

Special Update … 

Mortgage Bonds are trading lower and losing some of their safe haven bid as reports out of Libya suggest that Muammar Qaddafi’s regime is falling apart and the end of his rule may be near.

There are no economic reports set for release today, but this week brings some potentially huge market movers, including a sizable $99B in Treasuries hitting the market.

Potentially the biggest news of the week will come Friday when Fed Chairman Ben Bernanke makes his speech out of Jackson Hole, Wyoming.  Last year at this speech, is when he talked about the likelihood of QE2 and sent both the Bond and Stock markets into rally mode with the former rally ending on the Eve of QE2 when the official announcement arrived.

Amazingly the Stock market is very close to levels seen last August, which means that Stocks have given up virtually all of the gains seen from the enormous rally sparked by QE2.

Seeing the Stock market get banged up in recent weeks in response to the downgrade, uncertainty in Europe and concern about global growth – many Traders will be looking for the Fed to do or say something that will be "Stock" friendly – maybe a QE3 or modified version. Some people are thinking the Fed will take proceeds from their MBS (mortgage backed securities) portfolio runoff and purchase longer-term Treasuries, rather than short-term Notes.  With Long-term rates already very low – I think such action would have a very limited effect on the economy.  Stocks may just get disappointed from this meeting.

However – that doesn’t mean that Bonds are going into rally mode either.  The recent pop higher in prices is probably more than anything the Fed could do with further easing.  How much lower can rates go?

We need leadership out of Washington and maybe Fed Chairman Ben Bernanke will say as much, because the Fed is very limited to what they can do to spur investment, create jobs and have entrepreneurs take risk. We need clarity from a tax and regulatory front and we are simply not seeing it.  Accordingly, I do not believe a sustained rally in equities is forthcoming.  When I see constructive and positive signs, I will let you know and don’t be fooled by the fake rallies engineered in the after-market hours in the stock futures. 

In Europe, there are terminal strains in economic and monetary union (EMU) and that foundation is now starting to crumble. In coming months, Germany may have to make an agonizing choice: stable money or European integration.

What the German political establishment didn’t realize with the formation of the Euro is that monetary union is a two-way street. Germany exported its own currency, and it imported other people’s. The d-mark was sent out on what appeared a successful conquest.

There has been a lot of talk of contagion in Europe, but the real infection has been borne by Germany. It displays the progressive debilitation of stronger nations coming under viral attack from the debts of uncompetitive smaller countries, whose trade deficits are automatically financed by German credits, which then have to be written down when the debtors can’t or won’t pay.

Last week’s meeting between French President Nicolas Sarkozy and German Chancellor Angela Merkel, which brought more promises of economic government, predictably failed to calm the markets. Since there is no firm buyer of last resort to repel bond-market contagion, the viral assailants are now closing in on Berlin. Many of Merkel’s natural supporters are uneasily aware that, were Germany and other creditor countries to submit to demands that they formally pool government borrowing with the other euro states, that could mark the gradual end of Germany’s own economic sanctity – not a pretty picture for Germany. The German people were not in favor of the Euro. Once again, German government leadership has failed.

Al Procaccino II, MBA
Registered Investment Advisor
CERTIFIED FINANCIAL PLANNER™
Certified Fund Specialist
President & CEO
Castle Financial & Retirement Planning Associates, Inc.
2899 State Highway 35, Hazlet, New Jersey 07730-1549
4875 Pelican Colony Boulevard, Suite 1401, Bonita Springs, Florida 34134-6922
Phone: NJ 732-888-4994 or FL 239-947-9255
aap@castlefinancial.com
www.castlefinancial.com
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