Morning Report: FOMC day

Vital Statistics:

	Last	Change	Percent
S&P Futures	2055	9.2	0.48%
Eurostoxx Index	3271	33.0	1.03%
Oil (WTI)	36.77	-0.58	-1.76%
LIBOR	0.492	0.006	1.13%
US Dollar Index (DXY)	97.77	-0.165	-0.17%
10 Year Govt Bond Yield	2.28%	0.01%
Current Coupon Ginnie Mae TBA	104.2
Current Coupon Fannie Mae TBA	103.4
BankRate 30 Year Fixed Rate Mortgage	3.93

Stocks are up this morning ahead of the FOMC meeting. The decision should be released around 2:00 EST. Given that this was the most telegraphed rate hike in history, I don't necessarily expect a lot of volatility around the decision, however the language in the statement could always spook the markets. The consensus seems to be a hike of 25 basis points and very dovish language.

Housing starts increased to 1,173 million last month and building permits increased to 1,29 million. The increase in housing starts was in both single-fam and multi-fam, while the increase in permits was mainly in multi-fam. We still continue to under-build which is just creating more pent-up demand. We are in the seasonally slow period for housing, so I wouldn't read too much into these numbers. 

Mortgage Applications fell 1.1% last week as purchases fell 2,8% and refis rose 1.4%.

The strong dollar is still wreaking havoc on the manufacturing sector. Industrial Production fell 0.6% last month and capacity utilization fell to 77% from 77.5%. Manufacturing Production was flat. 

As the Fed begins to remove support from the market, stock market strategists are wondering what will happen to the stock market. Are current market levels a function of the Fed's stimulus programs or are they supported by earnings and economic fundamentals? I can't see a gradual tightening cycle collapsing the market, but it will mean that further increases in the market will have to be driven by earnings and economics and you can't expect to see further multiple expansion. Dividends will become much more important. Here is a chart of the S&P 500 versus the Fed Funds rate over the past 45 years:  

Interest rate cycles are long. The bull market in Treasuries started in 1982 or so is probably over, unless the economy rolls over again. The previous bear market in Treasuries ran from the mid-50s through the early 80s. 

Note that the other central banks (especially Japan and Sweden) have tried to get off the zero bound, only to see rates fall back to 0% again. If that happens, then what? The Fed would have to raise its inflation target.

The story of Marty Whitman's Third Avenue downfall. A value investor who simply didn't fit with the current momentum-investor world. The current liquidity crunch in junk bonds is being attributed to Third Avenue's Focused Credit Fund, which just put up gates preventing investor withdrawals. Daily liquidity, they promised.