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Farrell: Waiting for the Robert E. Lee

We're not Waiting for the Robert E. Lee (1913 Broadway musical, later a movie starring Mickey Rooney and Judy Garland- I think. And please don't tell me you don't know Mickey Rooney or Judy Garland. I can't be that old,) but it seems like that. The Fed will meet and have an announcement, and the G20 will also issue a communiqué. It would be nice to get the process moving a bit faster and the recovery more obvious, but patience is required.

The economy appears to be taking firmer root. We commented on the Index of Leading Indicators yesterday noting that the increase was the fifth in a row and a five year high. It used to be that three in a row would indicate the end of a recession. It may well this time as the high holies that determine the start and stop of a recession do so only after a significant time lag. The Institute of Supply Manufacturing's last reading would be consistent with a 3% GDP growth rate. With the recent strength from the New York Fed Index and the Philadelphia Index, we can expect continued expansion for the ISM. Also, the bulk of the $787 billion stimulus package has yet to be felt, but soon will be as expenditures are catching up with allocations. I mentioned that if inventories stopped being liquidated it would result in a 1.3% pop to GDP (annualized.) The economy looks to have some underlying near term drivers.

With the continued flow of good news, albeit modest, the argument could be made for the Fed to start to exit the stimulus mode. It is, I think, way too early for that. Unemployment is still rising and Fed tightening usually begins well after unemployment peaks. The peak rate is still some months ahead of us. If the Fed statement Wednesday afternoon at 2:15 Eastern time contains the phrase "Economic conditions are likely to warrant exceptionally low levels of the Federal Funds rate for an extended period of time" then we know the Fed will continue on its current path for some time. The only possible curve ball could involve the program for buying agency debt and mortgage backed securities. The Fed is committed to buying $1.25 trillion of mortgage backs and they are likely to extend the time frame for so doing. If there was to be language they would end the program early it could be construed as the first step towards tightening. That is why it won't be mentioned.

The Federal Housing Finance Agency -FHFA- issued its mostly ignored report on housing Tuesday. Mostly ignored since there are so many others like next week's Case Shiller Index that seem more informative. But the FHFA had good news that is worth passing along. The index was up .3% for the fifth gain in seven months. Using just this measure, home prices fell 12% (could be why it's not looked at since home prices fell so much more) but have now rebounded 1.5%. Use this as a supporting argument that the decline in housing prices might be near an end.

The two year Treasury auction was well received. The notes were heavily oversubscribed with a bid to cover of 3.23 (323 bonds bid for every 100 the Treasury sold) and "indirect" buying, which includes foreign participation, of 45.2%. Recent auctions have seen a 2.78 bid to cover and 43.75% indirect buying. Foreign buying of Treasuries continues strong despite the weakness of the dollar and the huge financing schedule for future debt auctions. One explanation for say Chinese participation is that China loans money to us via the route of bond purchases to keep the dollar in a range so their currency does not have to rise. Their export markets are thus protected to some extent.

Despite my own unease about the market's rise, there are arguments for it to continue upwards. End of the quarter window dressing is real and probably in full swing. Buying shares of stocks at the end of a quarter and issuing portfolio reports makes it look like you have been in the game. Also, everybody's favorite measure of volatility and risk, the VIX index, has been anything other than volatile. Sydney Williams in a recent piece pointed out that July, August and September of last year saw 30 days of 1.5% moves in the volatility index. This year for the same stretch of time we have had only 8 days of 1.5% movement. A lack of volatility is not typical of a market peak (or of a market bottom for that matter.)

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