The Morning Call--The problem with a stock market oriented Fed policy

The Morning Call

9/25/13

The Market

           

    Technical

            The indices (DJIA 15334, S&P 1697) after a generally positive day ended on the downside.  The Dow closed within its short term trading range (14190-15550) while the S&P remained within its short term uptrend (1661-1815).  So short term, the Averages continue out of sync and, hence, directionless.

           

            Both of the Averages are well within their intermediate term (14882-19882, 1583-2169) and long term uptrends (4918-17000, 715-1800).

            Volume was flat; breadth mixed.  The VIX continues to meander within a one year short term trading range but is also firmly within an intermediate term downtrend.

            The long Treasury was up, confirming stocks ‘risk off’ pin action.  It finished within a short term trading range and an intermediate term downtrend.

            GLD rose fractionally but remains within a very short term, short term and intermediate term downtrend.

Bottom line: the decline post the ‘no tapering’ price spike continues.  While some consolidation following a strong move up is to be expected, the entire move up has been given back---not a good sign.  Certainly, stocks could move higher; but given their proximity to the upper boundary of an 80 year uptrend, I don’t see a strong technical argument for such a move.

If stocks continue to the upside, our Portfolios will use the advance to lighten up on any stock trading in its Sell Half Range.

   

    Fundamental

    

     Headlines

            Yesterday’s US economic news had a slight negative bias to it: weekly  retail sales were mixed; the July Case Shiller home price index rose but less than anticipated; the September Conference Board index of consumer confidence was a bit below estimates and noticeably below August’s reading; the September Richmond Fed manufacturing index was well below expectations.  All in all, not great; but there is nothing here to suggest that the economy is not progressing in line with our forecast.

            Overseas, German business confidence  was up for the fifth month in a row but below estimates.

            The political headlines were focused primarily on the budget resolution (which defunds Obamacare) that the house sent to the senate.  We know the senate will not pass it; we don’t know what the house will do in response.  And that probably accounts for the downward bias of stocks on the day.  As you know, I believe that the budget resolution will get debated and cause investor/electorate heartburn right up to the eleventh hour, fifty ninth minute, fifty ninth second at which point congress will pull some half assed, kick the can down the road solution out of its hat; and then they will move on to the debt ceiling negotiations which will be a wash, rinse and repeat version of the budget resolution only cause even more heartburn.  In short, expect no grand bargain or anything that will reduce taxes or reduce government spending---in other words, nothing to help you and me.

Meanwhile, the debate continues over tapering, Bernanke’s no tapering comments and what all of this means.  You know my thinking: all that matters is the risk associated with a massively overextended Fed balance sheet and the Fed’s historical ineptness at transitioning from easy to tight money.  That risk is alive, well, will likely end very badly and is by far the greater threat than fiscal policy to the economy, in my opinion.

            Below are other thoughts on this subject

            This is a good analysis of the current state of QE, though the author touches on only a few of the risks associated with it and then only briefly in the last paragraphs (long but a must read):

            http://scottgrannis.blogspot.com/2013/09/fed-tightening-is-real-issue-not.html

            Confusion reigns at the Fed (medium):

            http://www.nakedcapitalism.com/2013/09/will-the-fed-ever-taper.html

            Scotiabank’s take (medium):

            http://www.zerohedge.com/news/2013-09-24/political-dis-unity-fed-dis-credited-and-market-dysphoria

            The taper problem (medium):

            http://www.minyanville.com/business-news/markets/articles/The-Real-Taper-Problem-s2526p500-spx/9/23/2013/id/51864

            The problem with a stock market oriented policy (short and the must read of the month):

            http://pragcap.com/more-thoughts-on-the-inherent-risk-of-stock-market-focused-policy

Bottom line:  no change from yesterday ‘despite the attention being given to the fiscal policy circus,  I think it a sideshow to the growing disaster that is monetary policy.  Yes, we might get a government shutdown (I would rejoice); and we might even get a technical default on US government debt and a downgrade in our credit rating.  Certainly, that would not make great reading especially with the media likely to go over board to paint it as the GOP’s fault.  But in the end, the politicians usually manage to come up with some sort of half assed remedy that keeps the country functioning simply because their ideological differences are not as important as facing the electorate (keeping their jobs).

On the other hand, the Fed has no such problem.  It is free to pursue its ivory tower Models with no negative consequences to itself even if those Models prove inadequate and lead to serious unintended consequences for you and me.  I am not suggesting any deliberate malfeasance on the part of the Fed; I am suggesting intellectual hubris.   In the current circumstance, barring some near term epiphany,  I believe that the only way this massive, misguided expansion of the Fed ‘s balanced sheet ever stops is for the Markets to hold the Fed to account; and as I have said, I don’t want a heavy equity exposure when (not if) that happens.  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 John Hussman (medium):

            http://advisorperspectives.com/commentaries/hussman_092313.php

            Global systematic risk (short and another must read):

            http://www.ritholtz.com/blog/2013/09/global-systemic-risk/

            Dumb s**t of the week award (short):

            http://www.zerohedge.com/news/2013-09-24/60-senators-sign-letter-protesting-japanese-currency-manipulation

            The runner up (medium):

            http://www.zerohedge.com/news/2013-09-24/aig-ceo-compares-anger-wall-street-bonuses-lynching-black-people-south

            Surplus, spending and debt (medium):

            http://www.zerohedge.com/news/2013-09-24/guest-post-big-picture-economy-part-2-surplus-spending-and-debt

Steve Cook received his education in investments from Harvard, where he earned an MBA, New York University, where he did post graduate work in economics and financial analysis and the CFA Institute, where he earned the Chartered Financial Analysts designation in 1973. His 40 years of investment experience includes institutional portfolio management at Scudder, Stevens and Clark and Bear Stearns. Steve's goal at Investing For Survival is to help other investors build wealth and benefit from the investing lessons he learned the hard way.