Dow: +97.83; Nasdaq: +23.06; S&P: +10.78...
10-year note +4/32 yielding 4.16%
The market rose to a 3 1/2 year high today. Bear Stearns and Morgan Stanley reported better than expected earnings. In addition, brokerage firms upgraded American Express and Intel -- two Dow members. Finally, it looks like the Santa Clause rally is occurring. As the market moves higher, fund managers are essentially compelled to buy to keep up with the market. The market has rallied since the election.
As mentioned yesterday,
the Treasury market is essentially on holiday for the remainder of the year. Only really necessary trades will happen from here on out -- unless there is a major news item that would move the market in one direction or the other.
The dollar was mixed today, rising verses the yen and lowering verses the Euro. There is once again talk about the Bank of Japan intervening in the currency markets, but nothing firm has emerged as of yet.
No economic indicators were released today.
There are several items regarding Bush's SS plan that I wanted to mention.
First is Bush's often quoted figure of 11 trillion dollar deficit. This is the figure for the shortfall over an infinite horizon . It is akin to saying that a $1000/month electricity bill is a $120,000 unfunded liability. Yesterday at the press conference, Bush stated he was not an actuary, indicating he will not take responsibility for using a very misleading figure.
Secondly, Treasury Secretary Snow stated that more government debt would not impact interest rates. This is pure fiction at best. At worst, it is nothing more than an outright lie stated to influence a policy decision. Snow clearly has no experience actually participating in the market.
Finally, there is talk that the current interest rate (4.16% on the 10-year) already assumes the multi-trillion dollar SS liability figure that Bush is throwing around. Washington is arguing that the 11 trillion dollar liability is implicit debt. The current level of interest rates implies an understanding by market participants that the complete SS liability is inherent in US budget finances. By floating more debt, the administration is simply changing its character to an explicit debt. This is another fantasy creation from economic never-never land.
Currently, the US has a 7 trillion dollar deficit. This figure includes the federal budget deficit (4 trillion) and the unfunded liability for SS (3 trillion). The argument of implicit debt essentially states that the US has a combined deficit (federal government + SS) of 14 trillion (this assumes the 11 trillion dollar figure includes the SS trust fund) and that a 14 trillion dollar deficit would warrant a 4.16% yield. There is no way a 14 trillion dollar deficit would carry a yield this low. God couldn't get that interest rate for that amount of debt. In other words, Bush is lying through his teeth once again.