Overnight markets were a bit of a nonevent, though stocks here got the bit in their teeth early and managed to gain about 0.5% in the first couple of hours. The proximate cause for the rally appeared to be the fact that our illustrious Fed chairman would be making a speech later in the day and folks were hoping to hear dovish sweet nothings emanate from his lips. Whether that will happen, I don't know, but one can be fairly certain that, given that the real estate and job markets are both a mess, combined with deterioration in the economy, QE3 is a high-probability bet.
In addition, as Jim Grant has pointed out recently, Bernanke has essentially taken ownership of the stock market by publicly trumpeting the rally in stocks since QE2 began, and using it as a measure of that program's success. The Fed really has trapped itself and has no choice but to deliver more easing, we just don't know when that will be or what sort of weakness will precipitate it (some lower level of the S&P500 is most likely).
He Must Have Seen Them Without Their Makeup
On the subject of real estate, the LODM made an interesting observation today when he noted, "Would any of us be shocked if -- gasp -- everything that was labeled 'prime' circa 2006-2007 actually turned out to be subprime and Alt-A in drag?" To answer his question, I think that is exactly what took place, though I had not thought of it just that way, and it succinctly explains why housing cannot get out of its own way. That is, too much leverage was used and prices got pushed too far, leaving behind both too much debt and bad debts (which was exactly my criticism of that bubble at that time).
In any case, turning back to the action, after trading around the early highs for most of the session, the indices sold off and gave up almost all of their gains just prior to Bernanke's speech. He did indicate that "accommodative monetary policies are still needed," but that was not enough to appease the bulls and stocks sold off some more to close with tiny losses.
Away from stocks, the dollar was weaker. Silver gained 0.75% while bonds, oil, and gold were all flattish.
They're Just Looking for Trouble
Speaking of gold, yesterday the FT ran a headline above the fold that read, "Paulson Fund Falls 6% In May," followed by the subhead, "Losses raise question over portfolio volatility," and I said to myself, who cares? Why is this front-page business news? The combination of that head and subhead made it sound as if Paulson was in trouble and, of course, the anti-gold FT would like him to be because, as it notes, "May was also a painful month for Mr. Paulson's other big investment: gold."
The article then goes on to explain that his funds have seen big swings in the past, but actually he has done quite well over time. The first part of the article appears to be trying to foment some sort of angst about his gold holdings. It seems every couple of months there is some nonsense reported about Paulson being forced to liquidate his gold position, and while I can't believe anyone with an IQ higher than a houseplant would believe such a thing, it is even more difficult to believe it is considered news.
