Market Summary: Tues. Jan. 13, 2009

Stocks were flat on the day, but energy and financial names were the leaders. Morgan Stanley agreed to pay Citigroup $2.7 billion for a 51% stake in Smith Barney. After the market close, Citigroup announced it is also considering selling CitiFinancial, its consumer lending unit. Citigroup is slowly shedding assets to raise much needed cash.

In a speech today, Federal Reserve Chairman Ben Bernanke said “more capital injections [into banks] and guarantees may become necessary to ensure stability and the normalization of credit markets.” He also explained that “fiscal actions are unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system.”

Let’s go back to “The Dollar versus the Euro (and Yen)” from my January 4^th post. So far the Dollar has rallied significantly against the Euro. The Euro finished the day at 1.315, well off its December 18^th high of 1.4687. During that same time, gold (a hedge against inflation) is down $55. In regards to pumping trillions of Dollars into the economy, people are focused on the near term effects (economic stimulation) rather than the long term effects (inflation).

According to Treasury Inflation Protected Securites (TIPS), traders are expecting consumer prices to only increase 1.66% over the next five years. That is, they expect minimal inflation. How can you figure out this number? A 5-year US Treasury note yields 1.46%. A 5-year TIPS yields 1.13%. The difference between the two yields is the expected annual inflation rate over the duration of the securities. Right now traders believe we are in and will remain in a deflationary period.

I heard some CNBC commentators debating about Obama’s stimulus package and the proposed tax rebates/credits. Obama believes these tax rebates/credits will stimulate spending, but I do not think so. The recipients have two options – spend it or save it. I would bet that the majority of the baby boomers will be saving their tax rebates/credits. They need to make up for the 30-40% decline in their retirement portfolios. Sorry, Barack, saving the economy is not as easy as you think!