Market Analysis

The market deterioration is worsening during the day.  The 10 Yr Treasury Note yield has moved back up to 3.7%.  Below is text from CNNMoney.com wich captures the better than expected economic data driving the stock market improvement today (the bond market often moves in an opposite direction to stocks):

CNNMoney.com :   The manufacturing sector contracted in May, but the pace of deterioration was slower than expected, according to an industry report.  The Institute for Supply Management said its index of national factory activity rose to 42.8 from 40.1 in April. Economists had expected the index to increase to 42, according to a survey by Briefing.com. A reading below 50 in the index indicates the manufacturing sector is contracting. But May's gain puts the index over the tipping point that suggests expansion in the overall economy. A reading above 41.2%, over a period of time, is generally consistent with growth in gross domestic product. Meanwhile, two separate reports showed manufacturing activity in China expanded last month. A measure of India's manufacturing sector rose to its highest level in eight months. European manufacturing activity shrank at a slower pace in May, with a euro zone purchasing managers index marking its biggest monthly jump on record. In the Untied States, construction spending unexpectedly rose 0.8% in April, its biggest increase in eight months, the Commerce Department reported. Analysts had forecast spending to fall 0.8%. Separately, personal income rose 0.5% in April, the biggest increase in 11 months, the government reported Monday. But consumer spending dropped 0.1%.  (End of text quoted from CNNMoney.com)

While we can hope that the Federal Reserve announces intentions at their next meeting to increase their purchases of Fannie Mae and Feddie Mac mortgage-backed securities (MBS) and US Treasury notes, an article in the online edition of the Wall Street Journal today questions the cost effectiveness of the Fed strategy.  The article references a recent JP Morgan Chase study which estimates that if the Fed were to sell the $480 billion of mortgage-backed securities they have purchased so far under the program to purchase up to 1.25 trillion of mortgage backed securities, they would have losses of $5 billion dollars.  JP Morgan Chase estimates that 2 million refinances have occurred and that the current cost of the program is $2,500 per refinance.  It is important to note that the Fed does not have to sell their holdings.  They can hold them to maturity.  If they do this, then the Fed's true losses would occur only if their cost of money began to exceed the rates on the notes.