The Morning Call
The Market
Technical
Yesterday
was spectacular, responding to the surprising non tapering from the Fed.. The indices (DJIA 15676, S&P 1725)
soared. The Dow broke above the upper
boundary of its short term trading range (14190-15550). Our time and distance discipline kicks
in---if the DJIA trades above 15550 through the close on Friday, the short term
trend will re-set from a trading range to an uptrend. The S&P remained with its short term
uptrend (1661-1815).
Both
of the Averages are well within their intermediate term (14827-19827,
1581-2167) and long term uptrends (4918-17000, 715-1800).
Volume
expanded but not dramatically so; breadth improved. The VIX fell about 6%---less than I would
have expected.
The
long Treasury rallied hard, continuing to trade with its short term trading
range and intermediate term downtrend.
GLD
also spiked; but stayed within its short term and intermediate term
downtrends. However, it closed above the
upper boundary of its very short term downtrend.
Bottom line:
given yesterday’s powerful pin action to the upside, the Fed clearly took a
majority of investors by surprise when it announced no tapering. Certainly, a part of the upward impulse was
short covering by traders that were positioned for a tapering statement. But I am sure that the oil lamps on Wall
Street were probably burning late into the night as strategists revised upward
their Market expectations
This turnaround
in Street thinking is apt to carry stocks to higher levels, though as I have
noted, both of the Averages are getting perilously close to the upper
boundaries of 80 year uptrends. To me, the
confusing aspect of investor sentiment right now is that the primary reason the
Fed gave for not tapering was the sluggish economy---which if correct means the
outlook for growth in the economy and corporate profits remains cloudy; and yet
stocks are at near historical valuation highs, facing extraordinary political
dysfunction and the now postponed prospect of the transition from easy to tight
money.
Nevertheless, the
reason for all this jigginess not surprisingly is money for nothing/QE to
Infinity and a probable resurgence in the carry trade---which in my humble,
clearly contrarian and to date wrong opinion is a pretty thin reed on which to
build equity exposure.
Stocks will
likely continue to smoke to the upside.
But if they do, our Portfolios will use the advance to lighten up on any
stock trading in its Sell Half
Range
A
technical look at September market performance (short):
Fundamental
Headlines
US
economic news yesterday were a yawn: weekly mortgage and purchase applications
were up after a series of down reports and August new home starts were up but
less than expected. There was nothing of
import more overseas.
With
that out of the way, the clear Market moving event was the decision by the Fed
to not start the tapering process. It
took many observers, including yours truly, by surprise which in turn led to a
short covering led spike. I don’t say
that dismissively; it just that there was a lot of short covering driving the
initial move up. Certainly, I would
expect strong follow through as Wall Street recalibrates its expectations.
But
I am getting ahead of myself. First the
statement from the FOMC following its latest meeting read a bit less positive
than its prior statement---not a lot mind you; but enough to justify not
tapering. Below is the FOMC statement
(short):
In
the Bernanke press conference following the FOMC meeting, he put a little flesh
on the less positive outlook. Here are
those FOMC projections (short):
Goldman analyzes Fed’s
unexpected move (medium):
So
the stated reason for the unexpected was that the data had changed, so the Fed
changed. I could buy that if:
(1)
the change in the data was not the
direct result of the Fed’s actions. By
that I mean that astonishingly, Bernanke said that he was
concerned that market interest rates, driven
higher by his own suggestion that he would scale back QE, would curb growth. You can’t make this s**t
up. What in God’s name did he think
would happen when the Fed announced a transition from the most expansive
monetary policy in history? In short,
Bernanke changed that data, then changed policy based on it. If you are confused, join the crowd.
(2)
QE had pumped the economy up in the first place. But that is not what happened. Even if you assume that QE was the sole
reason for the improvement in the economy, that progress has been sluggish at
best---and I am not giving QE that much credit.
The economy has improved, I believe, largely as a result of the skill,
tenacity and hard work of American business.
The biggest thing QE did was line the pockets of the bankers and hedge
fund managers by providing easy money at a cheap price with which to speculate.
Two
other reasons for the decision not to taper to which I give some credibility were:
(1)
fiscal policy remains in shambles; the current rhetoric
out of our politicians does not inspire confidence that we will see any
improvements in this arena; and the Fed is worried that a stalemate or worse
could have a negative impact on the economy.
So it wants to wait to taper rather than proceeding then having to
reverse itself if the clowns on the Hill really muck things up,
(2)
it is increasingly clear that Janet Yellen will be the
next Fed chief; she is a dove, perhaps more so than Bernanke. So the Fed didn’t want to proceed with a
policy than she found objectionable.
A look at Janet Yellen and her policies (medium):
I am not
advocating any of these reasons primarily because I don’t think it makes any
difference. My point is and always has
been that (1) Fed policy is in completely uncharted waters, (2) its
irresponsible expansive policy might be justifiable if there was some tangible
benefit other than making the banksters richer, (3) sooner or later it has to
end, (4) and when it does, the Fed has never successful executed a transition
from easy to tight monetary policy (5) and the longer it goes on, the more
likely the Markets will take matters into their own hands---indeed, that seemed
to be happening a month ago [which as I noted above, is the reason for the no
taper], (6) we have no clue what the unintended consequences of unwinding this
policy will be, whoever does it (7) but the longer it continues, the more
likely that those consequences will be unpleasant.
One final
thought. I posited in yesterday’s
Morning Call, that the FOMC meeting marked the beginning of the transition
process from easy to tight money.
Clearly, I was wrong.
Nonetheless, I do believe it gives us a hint as to how the Fed might err
in the transition, if indeed, it does err.
In other words, if I am correct in my concern that the Fed will botch
the transition by either getting too tight too soon or not tighten soon enough,
then perhaps yesterday’s lack of action points in the direction of the Fed’s
potential mistake---it doesn’t have the courage to tighten before it is too
late.
Bottom line: in
the big picture, yesterday was important because while the transition process
didn’t start, it gave us an idea of where the Fed will err---too easy too
long. So from an investment strategy
standpoint, I need to focus more attention on investments that protect against
inflation versus those that would protect against recession.
Shorter term, the fiscal issues both here
(budget resolution, debt ceiling) and in Europe (German elections followed by
re-addressing the crushing funding needs of southern Europe ) are apt to be dominating the headlines
for the next month. Again, finding the
solutions is not likely to be an easy process if indeed they can be found.
The question now is, how long will money for
nothing dominate investor sentiment before they start discounting the
inevitable?
.......in my opinion, that stocks are way
over valuing the likely earnings that can be produced from an economy on the
current trajectory of the US
The
latest from Marc Faber:
Stocks,
QE and buy backs (short):
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