Reject TransCanada Application

Daily Market Commentary for January 18, 2012

The Obama administration announced they will reject TransCanada Corporation’s application for a permit to build a huge oil pipeline across the U.S. - Canadian border but, gives the firm a chance to reapply after it develops an alternate route.
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Treasury Department released data that showed foreign investors were buyers of a net $58.0 billion of long-term U.S. securities in November up from a revised $12.2 billion in October. During November, overseas investors were net buyers of $54.0 billion of Treasurys, up from $15.3 billion in October. Overseas investors bought a net $6.2 billion of government agency bonds in November compared with $4.8 billion in October although international demand for corporate bonds remained weak. Foreign-based investors sold a net $7.1 billion of U.S. equities in November. Taking into account purchases by U.S. residents and overseas investors, the net foreign purchases of long-term securities was $59.8 billion in November, up from $8.3 billion in October. Sales of Treasury bills, bonds and notes directly attributed to Mainland China were $1.5 billion however, China often trades Treasurys through firms in other countries. According to the data, Japan was a buyer of $59.9 billion of short and longer-term Treasurys in November and the United Kingdom was a buyer of $18.2 billion of Treasurys.

Labor Department reported U.S. wholesale prices fell in December for the second time in three months, as the cost of gas and food declined and the producer price index dropped a seasonally adjusted 0.1% last month. The decline in wholesale prices stemmed entirely from lower energy and food costs. Energy costs fell 0.8%, mainly because of lower prices at the gas pump. Food costs dropped 0.8% as well mostly the result of an 11.1% decrease in the price of vegetables. Core wholesale prices, which strip out the volatile food and energy categories, jumped an unexpectedly high 0.3%. One-third of the increase in the core rate was attributed by the government due to rising prices for light trucks while higher cigarette and pharmaceutical prices also contributed. The core index is viewed by the Federal Reserve as a more accurate gauge of inflationary pressure because food and energy prices jump up and down frequently and can distort underlying trends. Over the past 12 months, core prices have climbed 3.0% striking the largest one-year increase since the summer of 2009. The rise in core prices stems from a run-up in the cost of raw materials in the first half of 2011. Declining commodity prices in the latter stages of last year could lead to lower core prices in the near future. Overall wholesale prices have risen an even faster 4.8% in the past 12 months. Many companies have absorbed higher wholesale costs and kept price increases in check to maintain market share, to avoid passing higher costs onto consumers. Price index for intermediate goods, such as the cloth used to make clothes or stamped metal parts used in engines, fell 0.5% during December, striking the third straight decline. Government data showed that crude prices, the cost of raw materials, declined 1.1% in December.

The Federal Reserve reported the output of the nation's factories, mines and utilities rebounded in December after struggling in November. Industrial output rose 0.4% in December, in line with expectations while output fell a revised 0.3% during November which was slightly worse than the previous estimate of a 0.2% decline. Output rose at 3.1% annual rate during Q4, despite month-to-moth volatility. Factory activity alone rose 0.9% in December after a 0.4 decrease in November and capacity utilization which is a gauge of slack in the economy, rose to 78.1% in December from 77.8% in November.

A top Federal Reserve official acknowledged that the distinction between prohibited profit-making speculative proprietary trading and permissible market-making, liquidity-injecting trades can be difficult to draw, all of which complicates the implementation of the Volcker Rule. The Volcker Rule - named after an idea suggested by former Federal Reserve Chairman Paul Volcker - would prohibit big insured banks' speculative proprietary derivatives and stock investments. In testimony prepared for a House Financial Services Committee hearing, Federal Reserve Governor Daniel Tarullo suggested that firms and regulators may have a difficult time differentiating between legitimate market-making actions and prohibited, speculative transactions. Observers argue that such complications could limit needed liquidity for the markets. Tarullo adds that the statute seeks to distinguish between these activities by looking to the purpose of the trade and the intent of the trader.

National Association of Home Builders reported a measure of builder confidence in the market for newly built single-family homes climbed in January to the highest level since June 2007. The gauge rose 4 points to 25, the fourth consecutive rise. NAHB Chief Economist David Crowe attributed the gains to improvements in employment and consumer confidence. The seasonally adjusted index, which correlates closely with single-family housing starts, is designed so that readings over 50 are considered "good," which hasn't been the case since April 2006. The Northeast had a 9-point surge, the West showed a 5-point advance and each component current sales conditions, sales expectations in the next six months and traffic of prospective buyers, rose 3 points. NAHB Chief Economist David Crowe attributed the gains to improvements in employment and consumer confidence. Crowe noted 'caution' in order, pointing to clients unable to qualify for a mortgage, appraisals coming through below construction cost and the continuing flow of foreclosed properties hitting the market. The seasonally adjusted index correlates closely with single-family housing starts and is designed so that readings over 50 are considered 'good' which hasn’t been the case since April 2006. The iShares Dow Jones U.S. Home Construction Index Fund, an exchange-traded fund of various home builders has climbed around 60%, from Octobers low.

In a statement, the International Monetary Fund said that it would like to raise an additional $500 billion in lending resources. An IMF spokesman said the organization estimates global potential financing needs of about $1 trillion in coming years. The $500 billion figure includes the recent European commitment of $200 billion in increased resources. "At this preliminary stage, we are exploring options on funding and will have no further comment until the necessary consultations with the Fund's membership have been completed."


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