June 23rd, 2013
by Jeff Miller, A Dash of Insight
We have the first reaction to the FOMC announcement and the Bernanke press conference, but there is more to come. Sometimes there is a compelling story line, and the financial media will not let go. This is such a time. Every twist and turn of the market is attributed to Fed policy or interpretations by one and all.
Despite plenty of fresh news on tap, I expect another week of discussion and debate about the Fed. The stories will ask what the new Fed policy means for individual investors as well as for active traders.
There are many opinions about this week's Fed news, but I want to highlight three distinct ideas with a representative comment from each:
- What is the big deal? The Fed announcement merely amplified what everyone already knew. Former Dallas Fed President Bob McTeer writes:
"Chairman Bernanke, in his last two post-FOMC press conferences, said what most people in the markets expected him to say and what the logic of the situation called for. Given the still weak economy the present degree of quantitative easing ($85 billion of security purchases per month) would be maintained, but, if the economy strengthens sufficiently, that pace of purchases would be tapered down in the next several months and, when the economy is healthy enough to be on its own, the purchases would be ended. Short-term Interest rates would remain low some time after that. While one of the medicines would be reduced and eventually withdrawn, the economy would be much stronger before it happens….
… (W)hat happened to the rule of buying on the rumor and selling on the news. That makes sense, but day after day we see markets appear to be surprised by the obvious or the telegraphed….Chairman Bernanke must be tearing his hair out. He offers to help as long as it's needed and to quit only when it's not and we respond with sell, sell, sell."
- The timing and tone was wrong. The announcement of a reduction in policy accommodation at a time when the Fed was reducing economic estimates (still widely regarded as too optimistic) seemed to limit the upside for growth. St. Louis Fed President Bullard took this theme in explaining his dissent, analyzed here by Tim Duy. Ryan Avent of The Economist elaborates the theme with three reasons which I will summarize as limiting the upside, doing too little, and accepting a pace that is too slow.
- The actual Fed impact is exaggerated. Scott Grannis explains as follows:
"The most important message to be found in today's bond market action (i.e., sharply rising real and nominal yields on Treasuries) is that the Fed's purchases of Treasuries did not artificially distort the Treasury market. Yields were low because the market expected the economy to be very weak for a long time—not because the Fed's purchases made them low."
"If the market thinks the economy is improving and/or inflation is rising, then no amount of Fed purchases will be able to keep yields from rising. That is what today's market action is all about."
These three approaches have very different implications for the eventual impact on financial markets. As usual, I have some thoughts to add in the conclusion. First, let us do our regular update of last week's news and data.
Background on "Weighing the Week Ahead"
There are many good lists of upcoming events. One source I regularly follow is the weekly calendar from Investing.com. For best results you need to select the date range from the calendar displayed on the site. You will be rewarded with a comprehensive list of data and events from all over the world. It takes a little practice, but it is worth it.
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. Each week I consider the upcoming calendar and the current market, predicting the main theme we should expect. This step is an important part of my trading preparation and planning. It takes more hours than you can imagine.
My record is pretty good. If you review the list of titles it looks like a history of market concerns. Wrong! The thing to note is that I highlighted each topic the week before it grabbed the attention. I find it useful to reflect on the key theme for the week ahead, and I hope you will as well.
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.
Despite the negative reaction in financial markets, there was some good news this week.
- Forward earnings edged higher. Some are focusing on changes in calendar year earnings. The forward earnings have been more accurate and useful, since these estimates can be continuously compared. Brian Gilmartin has both the data and a discussion of why earnings matter. Factset provides strong support for Brian's viewpoint with this chart:
- Household debt service ratio is the lowest in 30 years (via Calculated Risk).
- Existing home sales beat expectations with another decline in inventory. Another "solid report" according to Calculated Risk.
- Inflation remains low as measured by the CPI. See Doug Short for great charts, comparisons and analysis.