September 9th, 2012
by Jeff Miller
After weeks of buildup, culminating with Fed Chair Bernanke's Jackson Hole speech, the time for decision has arrived. While some of the economic data is better, the jobs picture remains poor. Friday's employment report has raised expectations for some aggressive action. Are these hopes justified, or will the Fed disappoint the markets?
I was very accurate last week in predicting that the story would be all about jobs. The Democratic Convention, the pundit commentary, the GOP response, the media focus, and the Thursday and Friday data all followed this theme. Given Friday's disappointing employment situation report, the question became, What now? I suggested in my employment preview that reaction would be dampened by the expectation of more aggressive Fed action. This is exactly what we saw from Friday's trading.
The general expectations have shifted, setting the bar higher. Here is the take from Jon Hilsenrath, who seems to have the pulse of the Fed:
"Officials have been leaning toward an open-ended bond-buying program in which the Fed holds open the possibility that it will continue to buy bonds after an initial allotment is purchased if the economy doesn’t pick up. They also have been leaning toward purchasing mortgage backed securities."
Michael Derby at the WSJ Real Time Economics Blog notes that the expectation is now "QE3 and more."
The expectations from these sources are at odds with the investment posture of both the Street, and the public. Check out two of my favorite sources.
Barry Ritholtz has tracked the "most hated rally" so check out his article for the history. Here is the chart that shows why this is important -- the underinvestment of some big firms.
Josh Brown shows the same psychology on the part of average investors, explaining that they have left $65 billion on the table through recent decisions to bail out of stocks.
I'll offer some of my own expectations in the conclusion, but first let us do our regular review of last week's news.
Background on "Weighing the Week Ahead"
There are many good sources for a list of upcoming events. One source I especially like is the weekly post from the WSJ's Market Beat blog. Ben Fox Rubin and Steven Russolillo go beyond the formal list of economic releases by mentioning major earnings reports, speeches, and even conferences.
In contrast, I highlight a smaller group of events. My theme is an expert guess about what we will be watching on TV and reading in the mainstream media. It is a focus on what I think is important for my trading and client portfolios.
This is unlike my other articles at "A Dash" where I develop a focused, logical argument with supporting data on a single theme. Here I am simply sharing my conclusions. Sometimes these are topics that I have already written about, and others are on my agenda. I am putting the news in context.
Readers often disagree with my conclusions. Do not be bashful. Join in and comment about what we should expect in the days ahead. This weekly piece emphasizes my opinions about what is really important and how to put the news in context. I have had great success with my approach, but feel free to disagree. That is what makes a market!
Last Week's Data
Each week I break down events into good and bad. Often there is "ugly" and on rare occasion something really good. My working definition of "good" has two components:
- The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially -- no politics.
- It is better than expectations.
There was a fair amount of good news last week.
- The ISM services index provided an upside surprise. The employment component is especially encouraging. Bespoke has a comprehensive look with the components individually listed and charted. Here is the overall history, but the full article is worth a look.
- Home prices continue to rise as measured by CoreLogic. Global Economic Intersection has an excellent discussion and charts comparing different approaches. Here is a sample:
- Productivity was up 2.2%, handily beating expectations. Productivity gains have come from corporations doing more with fewer workers. At some point they will need to add workers to meet growing demand. Meanwhile, this is good news for profits.
- Job creation was strong, according to ADP and various other analysts, as I described in my monthly employment report preview. I understand the need for some "official" result, and the BLS method is very good. Alternative approaches are also very good. In the richness of time, these estimates often prove to be more accurate.
- Auto sales are rebounding smartly (via Scott Grannis).
- The ECB delivered on promises. Unlike many of the past incremental steps in Europe, this one did not generate a "sell the news" reaction. The potential open-ended nature, the willingness to take equal status with private investment, and the assertion of power to act independently from government decisions were all factors. The one downside element was that the purchases will be "sterilized" so that the overall balance sheet does not expand. This is not the all-out money printing that some craved. The overall effect was rather amazing, stretching into the 10-year yield for Spain and Italy, even though that is not where the ECB proposed to buy. Attitudes seem to be changing, as reflected in market prices.