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MLR - PMP 10/16/14

Major averages continued their slide yesterday, gapping down hard at the open and selling off sharply before bouncing back and erasing most of the day's losses to close in the top 1/4 of their respective trading ranges. Volume surged. The sell off was triggered by further evidence that quantitative easing was not helping the economy. Retail sales came in weak, and building materials, apparel, and other goods all saw sales declines. Commodities including oils got slammed, and Treasury prices jumped higher as flight to quality buying took over. This morning futures are down as sharply as they were yesterday morning as fear swarms the market.

Will the market bounce here or after a further slide? A hefty line-up of Federal Reserve speakers who will be speaking today could dictate market direction. Given their overall dovish stance, they will attempt to soothe ailing markets with their Fed-speak as they dont want markets to undo what their easy money policies have done since 2009.

The recent correction calls into question once again whether the unemployment rate which stands below 6% is anything close to reality. The hope is that as unemployment falls, continued jobs growth should lead to wage growth, which should lead to increased consumption, and thus help the economy. But the reality is that this sub-6% unemployment figure does not tell the story, or is just plainly manipulated to make the economy seem as if it's on the mend when in reality, it's not getting better, despite all the easy money tools central bankers want to throw at the economy. So while few analysts could point to any one reason for the recent drop, a loss of confidence in central banks could be an ominous underlying reason for the current selloff and/or fears the QE spigot is being turned off at the end of this month.

One does not have to go back far in history to see what happened to markets after QE2 ended in mid-2011. Volatility zoomed to near record levels, matching volatility during the flash crash of 2010, and second only to the record levels of volatility reached during the crash of 2008. Expect heightened levels of volatility to continue for now. With the markets declaring QE3 about to end, the US economy potentially not on the mend, and worries that Europe may head into a third recession since 2009, the current correction could worsen. As of yesterday's close, the S&P 500 and NASDAQ Composite stand about 7-8% off their highs. Futures are currently down more than 1%.

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