TUESDAY DECEMBER 8, 2009

Discipline Disappointment

Yesterday was a disappointing day for those who were hoping for some signs of an exit strategy from Ben Bernanke and President Obama.  Last Friday's strong employment report created an opportunity for both gentlemen to show a modicum of financial discipline.  Unfortunately, both took a pass.

The strong employment report is yet another indicator that the economy is on the mend.  In the markets, commodities, particularly gold, sold off quickly and the dollar rose.  The market's initial take on the report was that it created an opportunity for the Fed to begin to exit from its massive monetary stimulus.  Alas, in yesterday's speech, Mr. Bernanke spoke of the tactical ways the Fed could do this (reverse repos, selling securities) but gave no indication of the Fed's intent to do it.  Maybe the "extended period" will remain extended?

Similarly, President Obama was given an opportunity to demonstrate that he understands the long-term consequences of chronic deficits when it was announced that the TARP program would cost taxpayers $200 billion less than expected.  Good news indeed!  What a great opportunity to demonstrate that the administration gets it.  Imagine the President announcing the $200 billion savings and declaring that the money will be used to pay down the deficit which will reduce debt and keep interest rates low.  What a confidence boost that would give the markets.  Of course, that is not what happened.  Instead, the administration announced the newly found $200 billion would be spent on "job creation," whatever that means.

It will be interesting to see how the markets react to these disappointments.  I suspect that the "reflation trade," ( sell dollars, buy commodities and emerging market securities) will resume after the initial jolt from the strong unemployment report.  For the moment, gold continues to correct from its stratospheric highs, but I suspect this is just profit taking.  After a brief rise, the dollar looks to be losing momentum.  The markets were looking for some sign of financial discipline, but did not get it.

POSTED AT 1899-12-30 08:37:00.0

KEN ENTENMANN, CFA
SENIOR VICE PRESIDENT AND
THE DIRECTOR OF INVESTMENT MANAGEMENT SERVICES

Ken is a Senior Vice President and the Director of the Trust and Investment Services at Alliance Bank, N.A. He has 23 years of investment experience and oversees the management of assets totaling $1 billion. He holds a B.S. in Applied Economics and Business Management from Cornell University and an M.B.A. from the William E. Simon Graduate School of Business Administration at the University of Rochester. He has also earned his Chartered Financial Analyst designation. He is a member of the Executive Committee of the Trust Division of the New York Banker's Association. He is also a director of the Central New York Community Foundation.

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