Friday, September 20, 2013

Taper at October FED Meeting (Trick-or-Treat?)

It used to be that all Fed governors spoke with one voice using official talking points.  Leading up to the latest meeting, the Fed Governors gave speeches that sent mixed messages.  The Bernanke claim that signals were “misread” by the market seems disingenuous.  Well here we go again. Below, we have Bullard’s comments that suggest taper in October. 

“Federal Reserve Bank of St. Louis President James Bullard, a voter on policy this year who has backed record stimulus, said a small tapering of bond buying is possible next month after the Fed made a close call this week in deciding not to slow purchases.  “That was a borderline decision” after “weaker data came in,” Bullard said today on Bloomberg Television’s “Bloomberg Surveillance” with Tom Keene and Sara Eisen. “The committee came down on the side of, ‘Let’s wait.’”  Story at…

Here’s another example from another FED voice.

“Kansas City Federal Reserve President Esther George was the only FOMC member against the central bank's Wednesday decision to not taper its asset purchase program known as quantitative easing.  In a speech this afternoon, George blasted the decision, saying it "created confusion, created a disconnect," according to Bloomberg...George said that reducing QE would have allowed markets to adjust gradually….But by hinting at a taper and then walking it back unexpectedly, the Fed's credibility is at risk, according to George.”

A “Put” option limits downside risk, so that’s what Steen Jakobsen is referring to in the “Morning After” piece below that was posted (originally) the day after the FED non-taper.

THE MORNING AFTER [THE NON-TAPER] (Global Economic Advisors)
“…we now effectively have not only a put on the stock market, but also a put on the bond market. The whole financial market is now “government controlled…I have no doubt inflation, or lack of, played bigger role than anything else in taking decision to not taper… Fed also de facto yesterday stated: the unemployment rate is invalid to use as gauge for future monetary policy but also as statistical indicator.” - Steen Jakobsen, Chief economist at Saxo Bank in Denmark
…Some people prefer short-term stability even when the outcome is long-term disaster.  – Mish Shedlock
Mish’s full blog on the FED, Inflation, market manipulation and more is located at…

“Each quarter the Fed releases their assessment of the economy along with their forward looking projections for three years into the futureThe problem has, and continues to be, that their track record for forecasting has been left wanting….
The FOMC lives in a fantasy world. The economy is not improving materially and deflationary pressures are rising as the bulk of the globe is in recession or worse. The problem is that the current proposed policy is an exercise in wishful thinking. While the Fed blames fiscal policy out of Washington; the reality is that monetary policy does not work in reducing real unemployment or interest rates. However, what monetary policy does do is promote asset bubbles that are dangerous; particularly when they are concentrated in riskiest of assets from stocks to junk bonds”. - Lance Roberts of Streettalk Live, September 19, 2013. Posted at at…

It is hard to know if Lance is right when he says, “the economy is not improving,” because it seems like the economy has been improving.  Unfortunately, it has improved so slowly that any turn down may hardly be visible.  One area that is visible is corporate profits and forward-guidance from compainies in the S&P 500 is not good (see FACTSET piece, below.) By that measure, Lance IS right.   

“At this point in time, 106 companies in the [S&P 500] index have issued EPS guidance for the third quarter. Of these 106 companies, 88 have issued negative EPS guidance and 18 have issued positive EPS guidance.  As a result, 83% (88 out of 106) of the companies that have issued EPS guidance for the third quarter have issued negative EPS guidance. This percentage is consistent with the percentage recorded in the previous quarter at this time (80%), but well above the 5-year average of 62%.”

In the end – the stock market is all about earnings.

Friday, the S&P finished down 0.7% to 1710 (rounded) at the close.
VIX rose 1% to 13.32.

Volume on the NYSE was over twice normal with “normal” defined as the monthly average.  I don’t think panic is the right word, but clearly a lot of investors wanted out today.  It’s been about 3-months since the volume on the NYSE was that high.

The 10-day moving average of stocks advancing on the NYSE was 58% at the close.  (A number above 50% for the 10-day average is generally good news for the market.) 

New-highs outpaced new-lows today, Friday, leaving the spread (new-hi minus new-low) at +129 (it was +313 Thursday), with the 10-day moving average of change in spread still barely positive. 

The Internals are positive on the market in the short term, but may be rolling over.

Friday, the overall long-term NTSM analysis remains HOLD at the close.
All indicators are now neutral.

I remain about 20% invested in stocks as of 5 March (S&P 500 -1540).  The NTSM system sold at 1575 on 16 April.  (This is just another reminder that I should follow the NTSM analysis and not act emotionally – I am under-performing my own system by about 2%!)  I have no problems leaving 20% or 30% invested.  If the market is cut in half (worst case) I’d only lose 10%-15% of my investments.  It also hedges the bet if I am wrong since I will have some invested if the market goes up.  No system is perfect.