Another Up Week...Number 8

After yesterdays somewhat volatile session the market was quite today. Prices zigzagged through the unchanged line throughout the day. We spent the majority of the day in the red before a late day rally lifted prices across the board and the Dow closed at 8212.41 , + 43.65 points (+ 0.54 %).

Today was a holiday in almost all European countries and one could tell. Volume and volatility was low with very little directional trade going on.

On the economic front it was also quite...never the less a couple of interesting tidbits emerged. The Consumer Confidence Index compiled by the University of Michigan came in stronger than expected. The reading was 65.1 whereas the consensus forecast had only beeen for 61.9. The higher reading clearly signals that the consumer feels better about the current economic climate.
If you recall...the 1st quarter GDP number also had showed higher consumer spending increases than were expected. As such it clearly seems now that the risk of the consumer going into a savings shock have been averted...at least for now.

The release of the bank stress test results has been delayed to May 7th now. (prior May 4th). The suspense relating to the release of the results should keep the market on its toes next week and limit major market moves until such time the results are out.

Since today was light on economic news I am gonna mention one more thing. (food for thought over the weekend) Longer term interest rates have been on the rise for some time now (5 weeks) and this is clearly starting to become a problem. We are now a full percentage point above the levels seen just 6/7 weeks ago (now 3.18 % in the 10 year Treasuries).

The rise in long term interest rates poses some significant problems for the Fed. The health of the housing market depends on the availability of financing at cheap rates in order to sustain current housing prices. The disproportionate impact of a rise in interest rate from the current low level has serious consequences in homeowner affordability. (a rise of 1 % has proportionally less impact when interest rates are high).

To put it in another way...the higher interest rates get the more downward pressure should develop for real estate prices.

The Fed is well aware of this issue and and in an attempt to keep long term interest rates low has been buying government debt for that reason. However...the problem developing is that despite the FED having taken an estimated 350 Billion US-$ in government paper out of the market interest rates keep on rising. This is not good...if rates continue to rise it will cause a serious headache for the Fed. (and by extensions for all of us)

As you recall...I am now negative (at least short term) and expect prices to trend lower. Today's price action was in accordance with what could be expected after yesterday's reversal. Unless the Dow closes above 8300 I would hold onto put options. I expect the Dow to hit 7800 at the very minimum.

Have a good weekend,

Steve Benger