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MLR - PMP 6/26/13

Major averages were up on lower volume. Economic news was strong all around as durable goods orders increased 3.6% in May, consumer confidence hit a five-year high, and new-home sales rose to the highest level since July 2008. A strengthening economy increases the odds the Fed will slow QE sooner than later which could put further selling pressure on markets since Bernanke discussed the possibility of slowing QE a few weeks prior. This morning the futures are up again, indicating that the market's oversold rally will continue, at least at the open, but with the indexes trading well below their 50-day moving averages this should be watched for as a potential area of resistance. Should this morning's futures action hold up, it would constitute the second day of a rally attempt. Volatility is not unexpected given the potential impact and uncertainty of the Fed's ongoing QE policies.

While the Fed expects the unemployment rate to fall to about 7% by the middle of next year, Pimco's legendary bond manager Bill Gross thinks this is a long shot. Gross commented that Bernanke is blaming lower growth on fiscal austerity while Gross believes it has more to do with structural factors. For example, wages continue to slow due to globalization, and demographic trends such as retirement of the Baby Boomers will slow consumer demand. Further, advances in technology continues to eliminate jobs. Gross believes these are issues that will prevent unemployment from falling to 7% by the middle of next year. Indeed, should Gross's observations prove true, QE will continue to flow and thus markets will either trend higher if past QE influences continue, but if markets fail to trend higher outside of exogenous circumstances such as more economic crises out of China or Europe, this would be a clue that QE is failing to affect the markets in the way it has in prior times. This would manifest in deleterious price/volume action in leading indices and stocks.

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