June 30th, 2013
by Jeff Miller, A Dash of Insight
Last week I suggested that the market might need to "digest" the FOMC announcement. Wow, was I right! This continues a pretty good streak of predicting the main theme for the coming week.
I really struggled with last week's forecast since I absolutely hate the idea of a delayed reaction. In general, I do not like such explanations, and sharp readers could easily find my own words on this subject. We got a lot more than digestion. It was a full-fledged hissy fit. Since the issue has not been settled, the debate continues.
We have a rather strange week ahead – plenty of data, an ongoing debate about the Fed, and a mid-week holiday that usually sends market participants on vacation by Tuesday, if not for the full week.
I predict that the market focus will be on the new higher interest rate environment, especially the question of the implication for stocks and overall asset allocation.
Last Week's Battle Lines
There was so much written and spoken. As usual, my weekly summary can only hit the high spots. I am going to identify three perspectives:
- The Fed. There were many speeches and all had the same theme: The markets misinterpreted, over-reacted, and were basically just wrong! The New York Times used this language to describe a speech by NY Fed President William C. Dudley, but much the same could be said about the more hawkish Dallas Fed President Richard Fisher's reference to "feral hogs." CNBC's colorful commentator Jim Cramer did the typical trader extrapolation saying that the "word went out" and that everyone was on message, even including Sports Center!
- The Traders. The story from these sources was that the Fed was clueless and did not understand markets. This viewpoint was repeatedly expressed by Santelli and friends, mostly in the typical notion that having an advanced degree in economics proves that you are dumb and disqualifies you from making policy decisions. Instead, let us cite the more measured commentary from Vince Foster at Minyanville. He describes the effect on the Eurodollar market. I suspect that few academics and almost no individual investors even know what this market represents (confusing it with the currency), and despite the importance and size.
- The Academics. There is an honest and extensive effort to evaluate the effect of Fed policy and the market reaction. With many, many posts in the debate, I need to focus on just one. Scott Sumner has had more effect on economic thinking and Fed policy than most realize. He wisely notes other influences on interest rates – not just the Fed. Read his "Orient Express" post and follow the links if you want to understand the academic perspective.
What should we make of this? The disagreements are sharp and no clear resolution seems possible. As one who has moved comfortably among top government officials, traders, and academics I have an unusual perspective. It deserves a thoughtful response, and I am working on that. Meanwhile, I'll provide some thoughts 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.
This was a very good week for economic data, despite the market reaction.
- The Senate approved the immigration bill with a solid bipartisan vote (68-32). It is now up to the House. Most average voters do not understand the economics of this issue including both competition for jobs, tax payments, and government spending. We shall see.
- Durable goods increased at a solid 3.6% pace.
- Earnings per share move higher despite flat total earnings (and cash flow) growth. Ed Yardeni explains as follows:
"…(A)lthough corporate cash flow has flattened along with corporate profits, it's done so at a record high. There is plenty of it to drive stock prices higher. For the S&P 500, the sum of buybacks and dividends totaled $702 billion over the past four quarters through Q1-2013. Since the start of the bull market during Q1-2009, the sum total is a staggering $2.3 trillion."
He also notes that corporate buybacks seem to be less than announced or modeled – something to watch.
- Pending home sales were strong, 12.5% higher y-o-y and accelerating. (See Steven Hansen's analysis at GEI).
- Personal income was up strongly at 0.5%. Calculated Risk has a good story with charts.
- Michigan sentiment was solid. This was a final reading for June and a touch below May's final. I am scoring it as "good" because there has been a lot of variation from preliminary to final and the 84 range is important, as you can see from Doug Short (who shows GDP and recessions as well as the long-term series:
- Case-Shiller home prices increased at a record pace. Calculated Risk has the full story and charts.