September 18th, 2012
by Jeff Miller
Sometimes looking ahead includes understanding what has just happened. The coming week will emphasize housing news, but it will also include a continuing debate on the dramatic changes in policy both in the US and Europe.
Economic prospects improved greatly last week. Key policymakers have geared up to fight deflation and a potential liquidity trap.
For those of us who put aside our preferences about the upcoming election, focusing instead on the economy, the answer is clear. There is an active debate in the economic community, among those who have knowledge, analytical skill, and data. The Fed decision reflects that.
The investment community sees a different and wrongly-focused picture. It is one that has been costly in the past, and will continue to be so. This is because they rely on a bogus perception of Fed policy, something I emphasized last week. Anyone who paid attention was on the right side of the market last week, and will have a better understanding in the future.
There is not much mystery about predicting Fed moves and the market results, but it does require objectivity.
Implications for Housing
Savvy market followers are already watching the improving trends in housing. Bill McBride at Calculated Risk was bearish and authoritative on housing at the right time and for the right reasons. He earned the respect of the entire economic community and expanded his coverage aggressively and extensively. Readers of "A Dash" should set aside an hour or so to go through the archives at Calculated Risk, emphasizing the 2012 take on housing.
You can start with this article, The economic impact of a slight increase in house prices. Follow the links from there. Do the same with this piece, linking the housing bottom and unemployment. Bringing the story up to speed we have, Analysis: Bernanke Delivered.
You will find the analysis both cogent and convincing. Your hour will be well-spent and profitable.
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.
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.
The news last week was very good, even better than the market result.
- The new Fed policy is market-friendly in many ways. The additional investment of $40B per month in MBS securities is fresh and "unsterilized" buying. The focus on housing is constructive. Most importantly, the policy is open-ended, dependent on results rather than time. It cannot be gamed by traders or pundits.
- The German Constitutional Court delivered as expected. This sets the framework for more aggressive banking rules in Europe. It was a crucial step in the incremental process for a Eurozone solution. Those who do not see this are in denial over their incorrect forecasts. Italian and Spanish bond yields have moved dramatically lower. Italy might not even need a further bailout (via Reuters).
- Michigan consumer sentiment showed surprising strength. This is good news for employment and for consumer spending, especially since gas prices have been higher. Doug Short's chart captures the long-term patter, showing that we are back to the recent highs.
- Technical indicators remain positive according to Charles Kirk. One advantage of writing after my usual Saturday time is that I can include Kirk's weekly chart show, usually published on Sunday. I always read Charles and you should, too (small subscription required, and well worth it). The short message this week is that there is nothing yet to indicate that the rally is in jeopardy.
- Economic confidence (via Gallup) has surged.