Futures are looking down this morning as San Francisco Fed President, Janet Yellen, warned that excessively easy monetary policy could create bubbles in the future. "It is conceivable that accomodative monetary policy could provide tinder for a buildup of leverage and excessive risk-taking." Since the Fed has been involved in nearly every US bubble, it is probably a bit more concrete than it is merely 'conceivable' but I'm glad to see someone on the FOMC express concern.
Also weighing on the markets this morning is India's August industrial production miss that came in at 5.6% (a 15 month low.) The number is very volatile due to the lumpy nature of capital goods orders, but certainly a 5.6% print vs. expectations of 10%+ is something to keep an eye on.
China's auto sales slowed in September as tax breaks and subsidies began to roll off. Sales rose 17 percent YoY to 1.56M, down a bit from 18% in August. But July was 16% growth, and June was 21% growth so while the auto industry in China is being described as normalizing, it must be pointed out that a.) they are still selling more cars than we are domestically in the U.S. and b.) the absolute growth in China continues to be tremendous with sales of 13.6M vehicles in 2009 (45% growth) and on pace to do about 17M vehicles in 2010 (30% growth.) Of note, Ford saw sales in China rise 26%, up from 24% in August. Ford sales in China were up 40% in the first nine months of the year at 419,073 units. GM on the contrary rose 15%, down from 19% growth in August. For the first 9 months of the year, GM sold a record 1.78M vehicles.
Goldman Sachs reports that it has heard from bank employees in China who say that the government has told its largest banks that they must increase reserves to 17.5% (up 50 bps) in order to cool inflation and housing prices. There has been no formal announcement from the government in Beijing. Estimates suggest that this latest reserve hike would remove approx 200B yuan or $29B out of the lending pool. Banks will be allowed to lend a total of 7.5T yuan ($1.1T) this year vs. 9.6T yuan ($1.4T) in 2009.
Despite all the bad economic news this morning (summarizing...signs of slowing growth in China and India, INTC reporting after the close today after negatively pre-announcing a few weeks ago, Fed warning that QE2 expectations for November may be a bit premature, etc) there is nothing that will change the fact that until investors are disappointed by either earnings or the Fed fails to announce QE2 on November 3rd, the market will hold its level. That being said, I do expect earnings to be somewhat disappointing especially for the banks and brokers. We have JPM reporting earnings on Thursday. With a bad print possible, I wonder that when the Fed releases its POMO schedule for the coming weeks on Wednesday, if it doesn't include a healthy dose of Thursday and Friday this week???
FOMC minutes are due out at 11 am PST.
Tuesday, October 12, 2010
Monday, October 11, 2010
Market Trading on a Policy Expectation Which No One Understands
Seeking Alpha contributor, Jeff Miller, whose 'Weighing the Week Ahead' piece I enjoy reading for its typically unique outlook on the coming weeks' events, wrote the following this morning:
"Before anyone is allowed to pontificate about the merits of quantitative easing, the pundit would have to demonstrate a minimal level of knowledge. Let us try the following:
In three sentences, please explan what quantitative is, how it is implemented, and what it is intended to accomplish. (slogans like "printing money" do not constitute an acceptable answer.)
This would probably eliminate nearly everyone, and confront CNBC with a major problem. How would they do any interviews if they could not ask people questions about things where they had no knowledge?
Meanwhile, the market continues to trade on expectations for Fed action, a policy which hardly anyone understands."
And this guy is bullish...?
He cites Art Hogan, chief market analyst at Jeffries, who recently mimicked David Tepper's comments, as most thoughtfully expressing his thesis. Art:
"The concept of a double-dip recession has been replaced with slow and steady improvement, and even if we don't get it, we have a Federal Reserve that's ready to step in and support the rally,"
Mr. Miller's reponse, "For me, this was hardly fresh news, but it is nice to see people joining in."[Emphasis Mine]
Does anyone else see this bubble for what it is? Has governing one's actions with a thoughtful prudence become a relic, a dinosaur? Perhaps the process of blowing and popping bubbles is something we've gotten comfortable with. At least it is dramatic, I suppose...
"Before anyone is allowed to pontificate about the merits of quantitative easing, the pundit would have to demonstrate a minimal level of knowledge. Let us try the following:
In three sentences, please explan what quantitative is, how it is implemented, and what it is intended to accomplish. (slogans like "printing money" do not constitute an acceptable answer.)
This would probably eliminate nearly everyone, and confront CNBC with a major problem. How would they do any interviews if they could not ask people questions about things where they had no knowledge?
Meanwhile, the market continues to trade on expectations for Fed action, a policy which hardly anyone understands."
And this guy is bullish...?
He cites Art Hogan, chief market analyst at Jeffries, who recently mimicked David Tepper's comments, as most thoughtfully expressing his thesis. Art:
"The concept of a double-dip recession has been replaced with slow and steady improvement, and even if we don't get it, we have a Federal Reserve that's ready to step in and support the rally,"
Mr. Miller's reponse, "For me, this was hardly fresh news, but it is nice to see people joining in."[Emphasis Mine]
Does anyone else see this bubble for what it is? Has governing one's actions with a thoughtful prudence become a relic, a dinosaur? Perhaps the process of blowing and popping bubbles is something we've gotten comfortable with. At least it is dramatic, I suppose...
The Week Ahead: 10/11-10/15
The Dow closed above 11,000 for the first time since May on Friday on a soft Unemployment report that indicated to some market participants that the Fed will commence QE2 on November 3rd. The dollar was weaker, and gold made new highs at $1,350.
With no already scheduled POMOs this week, we may have a chance to trade on economic data, earnings, etc (but we are the Smith Report aren't holding our breath!)
The schedule for the coming week's events is posted below.
Monday - Dudley and Bernanke speak Today. Both publicly in favor of QE2, so this should give the bulls a chance to run. We will likely hear things along the lines of, "more monetary stimulus appears necessary" and "inflation below mandate."
Tuesday - FOMC minutes from Sept 21st meeting. Everyone will be looking for clues re: QE2.
Wednesday - MBA Mortgage Applications, Export and Import Prices, Crude Inventories, and Treasury Budget, China Trade, Eurozone Industrial Production, POMO SCHEDULE FOR COMING MONTH out at 11 am PST. (Could anything be more important???).
Thursday - Initial and Continuing Claims, PPI, Trade Balance. PPI likely to continue to support deflationary trends or at least 'below mandate inflation' providing the Fed to continue to perpetuate idea that QE2 is acceptable because of low inflation. Ditto for the CPI report on Friday.
Friday - CPI, Retail Sales, NY Fed - Empire Manufacturing Survey, Michigan Sentiment, Business Inventories. Retail sales likely to come in fairly solid as both the most recent auto sales and chain store sales reports beat expectations.
With no already scheduled POMOs this week, we may have a chance to trade on economic data, earnings, etc (but we are the Smith Report aren't holding our breath!)
The schedule for the coming week's events is posted below.
Monday - Dudley and Bernanke speak Today. Both publicly in favor of QE2, so this should give the bulls a chance to run. We will likely hear things along the lines of, "more monetary stimulus appears necessary" and "inflation below mandate."
Tuesday - FOMC minutes from Sept 21st meeting. Everyone will be looking for clues re: QE2.
Wednesday - MBA Mortgage Applications, Export and Import Prices, Crude Inventories, and Treasury Budget, China Trade, Eurozone Industrial Production, POMO SCHEDULE FOR COMING MONTH out at 11 am PST. (Could anything be more important???).
Thursday - Initial and Continuing Claims, PPI, Trade Balance. PPI likely to continue to support deflationary trends or at least 'below mandate inflation' providing the Fed to continue to perpetuate idea that QE2 is acceptable because of low inflation. Ditto for the CPI report on Friday.
Friday - CPI, Retail Sales, NY Fed - Empire Manufacturing Survey, Michigan Sentiment, Business Inventories. Retail sales likely to come in fairly solid as both the most recent auto sales and chain store sales reports beat expectations.
Friday, October 8, 2010
St. Louis Fed President James Bullard on QE2 Today
"This upcoming FOMC meeting is going to be a tough call, because the economy has slowed but it hasn't slowed so much that it's an obvious case to do something."
"I do think the risk of a double-dip recession has probably receded some in the last six to eight weeks."
"I do think the risk of a double-dip recession has probably receded some in the last six to eight weeks."
Loss of 95K Jobs, Unemployment Rate Unchaged at 9.6%
The unemployment rate held steady at 9.6%, despite the net loss of 95,000 jobs in the month of September. The unemployment rate has now topped 9.5% for 14 consecutive months, which makes it the longest stretch since the 1930s.
Of course the market has rallied on the expectation of QE2. We broke the Dow 11,000 barrier this morning, but much like yesterday, have faded back below the line as the S&P can't seem to break above its 1163 resistance.
Volume is non-existent this morning as the last intelligent people still remaining are finally beginning to give up. Its an odd paradox to be bearish right now. For perhaps the first time in history, to be bearish means to hope for an economic recovery that develops organically. I was hoping for a good jobs number this morning, not just for the health of my PA, but for the health of the global economy, the economic security of my fellow countrymen, and the off-hand chance that Bernanke might not decide to destroy the purchasing power of the middle class. To be bullish on the market, you had to hope for the jobs number to be god-awful (which it was) so that we could rally above 11,000 on hopes that the rich get richer and the poor get shafted as the Fed launches round 2 of the currency wars.
Of course the market has rallied on the expectation of QE2. We broke the Dow 11,000 barrier this morning, but much like yesterday, have faded back below the line as the S&P can't seem to break above its 1163 resistance.
Volume is non-existent this morning as the last intelligent people still remaining are finally beginning to give up. Its an odd paradox to be bearish right now. For perhaps the first time in history, to be bearish means to hope for an economic recovery that develops organically. I was hoping for a good jobs number this morning, not just for the health of my PA, but for the health of the global economy, the economic security of my fellow countrymen, and the off-hand chance that Bernanke might not decide to destroy the purchasing power of the middle class. To be bullish on the market, you had to hope for the jobs number to be god-awful (which it was) so that we could rally above 11,000 on hopes that the rich get richer and the poor get shafted as the Fed launches round 2 of the currency wars.
Thursday, October 7, 2010
QE2 Special Feature: Exploring Hopes, Wishes, Dreams, and Realities
FOMC Members
Ben Bernanke
William Dudley, NY, Vice Chairman
James Bullard, St. Louis
Elizabeth Duke, BoG
Thomas Hoenig, Kansas City
Sandra Pianalto, Cleveland
Sarah Raskin, BoG
Eric Rosengren, Boston
Daniel K. Tarullo, BoG
Kevin M. Warsh, BoG
Janet L. Yellen, BoG
Alternate Members
Charles Evans, Chicago
Richard Fisher, Dallas
Narayana Kocherlakota, Minneapolis
Charles Plosser, Philadelphia
Christine Cumming, New York
Fed Opinions on QE2:
In Favor:
William Dudley: "Currently, my assessment is that both the current levels of unemployment and inflation and the timeframe over which they are likely to return to levels consistent with our mandate are unacceptable. In addition, the longer this situation prevails and the U.S. economy is stuck with the current level of slack and disinflationary pressure, the greater the likelihood that a further shock could push us still further from our dual mandate objectives and closer to outright deflation.
We have tools that can provide additional stimulus at costs that do not appear to be prohibitive. Thus, I conclude that further action is likely to be warranted unless the economic outlook evolves in a way that makes me more confident that we will see better outcomes for both employment and inflation before too long."
Charles Evans (Non-Voter, But will be a voter in 2011): "The unemployment rate is very high. Inflation is low. To me that means we need an accommodative stance of monetary policy."
"We need more accommodation. A lot of people respond that their take on monetary policy depends on the data coming in from here on out. For me, the data have spoken very clearly. As I stared at the forecast even before the August FOMC meeting, I had come to the conclusion that things were very different than what I had been expecting in previous meetings. This is a far grimmer forecast than we ought to have. So yes, I’m in favor of more accommodation."
On Bullard's idea of a contingent program, "I'm favorably disposed toward the approach that JIm has mentioned...I just think that far more accomodation is required."
Bullard (Voter): Believes we should have a contingent asset purchase program that has incremental purchases as the situation evolves, rather than a program which either pumps all the money into the system at once or that announces the full amount at the start of the program. That way changes can be made.
Against:
Thomas Hoenig (Voter): "I am convinced that the time is right to put the market on notice that it must again manage its risk, be acountable for its actions, and cease its reliance on assurances that the Federal Reserve, not they, will manage the risks they must deal with in a market economy." (April 7th in Sante Fe.)
Narayana Kocherlakota (Non-voter, but will vote in 2011): "I do not see why they [banks] would suddenly start to use the new ones [excess reserves] if they weren't using the old ones."
Charles Plosser (Non-voter, but will vote in 2011): "It is difficult, in my view, to see how additional asset purchases by the Fed, even if they move interest rates on long term bonds down by 10 or 20 bps, will have much impact on the near-term outlook for employment."
Reasons to Believe QE2 is not coming in November:
1. If economy went into double-dip recession, what then could the Fed do? They'd be literally out of ammunition.
2. Don't know the impact of additional asset purchases. This point has been repeatedly admitted by none other than the Fed members themselves.
Reasons to Hope QE2 is not coming:
1. Bubbles are forming in unproductive asset classes such as gold.
2. Companies are using excess liquidity for M&A which reduces employment.
3. Paul Volcker, the former Fed Chairman, and master stagnation fighter has said that just as a woman can't be a little bit pregnant, the Fed cannot create a little bit of inflation without running the risk of inflation becoming out of control.
4. Soaring commodity prices. $8/gallon gasoline. Heating oil and food prices rise. Americans have even less disposable income. The 70% of GDP that is consumer spend will be be negatively impacted. Recovery will be even weaker as a result. Possible class wars. A broken political system. Both larger and more frequent Tea Party-like political groups forming populist/anarchist/libertarian/mob-like coalitions.
5. New York Fed estimates that the Fed would need to purchase an additional $2T in Treasuries to push down the yield on the 10 year by 100 bps. So, if the worst happens and QE2 ends up being about $1T or 50% growth on our currently $2T monetary base, we will get a mere 50 bps decrease in the 10 year yield. This will have a virtually non-existent effect on the demand for credit, but will certainly provide a hefty blow to the value of the USD.
6. The Fed (along with HFTs, dark pools, etc) is destroying the ability for the market to trade based on fundamentals. With announcements of hiring freezes at Morgan Stanley, 22 straight weeks of equity outflows, rapidly diminishing volume, etc, it is becoming clear that a rigged market will destroy the credibility of what was once (I believe anyway...) a lawful, efficient market system, which in turn will result in job losses in the financial sector which in boom times accounted for some 20+% of GDP.
7. Growing concern over possible (partial-)loss of reserve currency status.
8. On the mere suggestion of possible QE2, the trade-weighted dollar has lost approximately 6% of its value in September alone. This could wreak havoc on global financial markets. The euro has been rising against the dollar, hitting multi-month highs this morning around $1.40. This will be very bad for the eurozone's recovery. Germany, an export led economy, will soon need to increase its rhetoric against competitive currency devaluations or suffer from weaker forward GDP growth. The Japanese look as though the nation could fall back into recession. Their QE2 impacted the Yen positively for all of two days when attempted in the face of US currency destruction. China will become increasingly less interested in purchasing soon to be monetized US Treasuries and in fact, ironically, will see the value of the remnimbi continue to fall as the USD falls.
Dreams regarding QE2
1. That a lower US dollar will increase US exports, assisting in domestic job creation, and leading the US out of slumping economic conditions. This might be true if our economy were not based 20% on manufacturing and 80% on services. Manufacturing might pick up, but not materially so, and again, the American consumer faced with higher commodity prices will see an offsetting drop in demand for discretionary items, further hurting actual export driven nations like China. Probably unwise to kick the stool out from under the emerging markets. For if we hope China, India, and Brazil to lead the world out of economic purgatory, we'd better not up the odds against them.
2. That a lower dollar, and higher stock prices will raise consumer optimism, and thus spending via the wealth effect. WRONG. Higher stock prices, bigger bonuses for executives, etc only create further divisions between the citizenry of the United States. The rich getting richer has been shown over the last thirty years to do nothing to help the poor get richer. If costs rise and quality of life for the bottom 80% starts to take a hit, then expect increased violent crime, theft, calls for secession, etc to begin to boil over. This may over a longer horizon provide an opportunity, as did the Civil War in the 19th Century, to create a more perfect union. But first, we'd have to suffer through a lot of unpalatable changes, especially given the level of 'me-ism' our population (especially amongst our young people) supports and nurtures. There is the possibility that many rude awakenings await our over-fed, under-read citizenry.
3. That lower rates will increase aggregate credit demand. US Households have been de-levering for the past 9 consecutive quarters. QE1 did not have an effect on credit demand, why should QE2?
4. That QE2 is a given. Bernanke was clear that it was on the table, but I think many overstate their talent for clairvoyance. Bernanke in the same comments at Jackson Hole mentioned that much of what the Fed was considering would be the Fed's communication strategy. And he was dead-on in his belief in the efficacy of spoken/written Fed communiques. He mentioned the possibility for QE2, the dollar got absolutely hammered in September, a worldwide currnecy war broke out, the stock market went up, and gold rallied. Probably not all of these consequences were intended (let that be a lesson to you Ben!) but just the suggestion of its possibility seemed to have a rather dramatic effect! Much of the supporting rhetoric driving the belief in QE2 has come from non-voting members of the FOMC including Brian Sack and Goldman Sachs, neither of which have an un-vested interest if you get my drift...?
Realities regarding QE2
1. It is likely that the Fed will take a wait and see approach, which in my mind probably amounts to the start of QE2 sometime late in the year, but in small increments so as not to draw too much populist ire and also to allow for the Fed to change its mind and keep at least some amount of its remaining ammunition on the sidelines, in case of negative GDP in 2011 (for example.)
2. The rhetoric coming from the Fed over the intermediate term will likely continue to show that the Bernanke Put, even if not fully in use, is at the ready.
3. No one knows what exactly will result from QE2. It is not a given that it will have all of even its positive intended consequences. Foreigners may see its very possibility as a need to begin demanding higher rates, otherwise we may begin to see indirect buyers fall as a percentage of Treasury buyers, leaving only the Fed to finance our debt.
Pop quiz: Where does the Fed get the funds it uses to monetize US Treasury debt???
Ben Bernanke
William Dudley, NY, Vice Chairman
James Bullard, St. Louis
Elizabeth Duke, BoG
Thomas Hoenig, Kansas City
Sandra Pianalto, Cleveland
Sarah Raskin, BoG
Eric Rosengren, Boston
Daniel K. Tarullo, BoG
Kevin M. Warsh, BoG
Janet L. Yellen, BoG
Alternate Members
Charles Evans, Chicago
Richard Fisher, Dallas
Narayana Kocherlakota, Minneapolis
Charles Plosser, Philadelphia
Christine Cumming, New York
Fed Opinions on QE2:
In Favor:
William Dudley: "Currently, my assessment is that both the current levels of unemployment and inflation and the timeframe over which they are likely to return to levels consistent with our mandate are unacceptable. In addition, the longer this situation prevails and the U.S. economy is stuck with the current level of slack and disinflationary pressure, the greater the likelihood that a further shock could push us still further from our dual mandate objectives and closer to outright deflation.
We have tools that can provide additional stimulus at costs that do not appear to be prohibitive. Thus, I conclude that further action is likely to be warranted unless the economic outlook evolves in a way that makes me more confident that we will see better outcomes for both employment and inflation before too long."
Charles Evans (Non-Voter, But will be a voter in 2011): "The unemployment rate is very high. Inflation is low. To me that means we need an accommodative stance of monetary policy."
"We need more accommodation. A lot of people respond that their take on monetary policy depends on the data coming in from here on out. For me, the data have spoken very clearly. As I stared at the forecast even before the August FOMC meeting, I had come to the conclusion that things were very different than what I had been expecting in previous meetings. This is a far grimmer forecast than we ought to have. So yes, I’m in favor of more accommodation."
On Bullard's idea of a contingent program, "I'm favorably disposed toward the approach that JIm has mentioned...I just think that far more accomodation is required."
Bullard (Voter): Believes we should have a contingent asset purchase program that has incremental purchases as the situation evolves, rather than a program which either pumps all the money into the system at once or that announces the full amount at the start of the program. That way changes can be made.
Against:
Thomas Hoenig (Voter): "I am convinced that the time is right to put the market on notice that it must again manage its risk, be acountable for its actions, and cease its reliance on assurances that the Federal Reserve, not they, will manage the risks they must deal with in a market economy." (April 7th in Sante Fe.)
Narayana Kocherlakota (Non-voter, but will vote in 2011): "I do not see why they [banks] would suddenly start to use the new ones [excess reserves] if they weren't using the old ones."
Charles Plosser (Non-voter, but will vote in 2011): "It is difficult, in my view, to see how additional asset purchases by the Fed, even if they move interest rates on long term bonds down by 10 or 20 bps, will have much impact on the near-term outlook for employment."
Reasons to Believe QE2 is not coming in November:
1. If economy went into double-dip recession, what then could the Fed do? They'd be literally out of ammunition.
2. Don't know the impact of additional asset purchases. This point has been repeatedly admitted by none other than the Fed members themselves.
Reasons to Hope QE2 is not coming:
1. Bubbles are forming in unproductive asset classes such as gold.
2. Companies are using excess liquidity for M&A which reduces employment.
3. Paul Volcker, the former Fed Chairman, and master stagnation fighter has said that just as a woman can't be a little bit pregnant, the Fed cannot create a little bit of inflation without running the risk of inflation becoming out of control.
4. Soaring commodity prices. $8/gallon gasoline. Heating oil and food prices rise. Americans have even less disposable income. The 70% of GDP that is consumer spend will be be negatively impacted. Recovery will be even weaker as a result. Possible class wars. A broken political system. Both larger and more frequent Tea Party-like political groups forming populist/anarchist/libertarian/mob-like coalitions.
5. New York Fed estimates that the Fed would need to purchase an additional $2T in Treasuries to push down the yield on the 10 year by 100 bps. So, if the worst happens and QE2 ends up being about $1T or 50% growth on our currently $2T monetary base, we will get a mere 50 bps decrease in the 10 year yield. This will have a virtually non-existent effect on the demand for credit, but will certainly provide a hefty blow to the value of the USD.
6. The Fed (along with HFTs, dark pools, etc) is destroying the ability for the market to trade based on fundamentals. With announcements of hiring freezes at Morgan Stanley, 22 straight weeks of equity outflows, rapidly diminishing volume, etc, it is becoming clear that a rigged market will destroy the credibility of what was once (I believe anyway...) a lawful, efficient market system, which in turn will result in job losses in the financial sector which in boom times accounted for some 20+% of GDP.
7. Growing concern over possible (partial-)loss of reserve currency status.
8. On the mere suggestion of possible QE2, the trade-weighted dollar has lost approximately 6% of its value in September alone. This could wreak havoc on global financial markets. The euro has been rising against the dollar, hitting multi-month highs this morning around $1.40. This will be very bad for the eurozone's recovery. Germany, an export led economy, will soon need to increase its rhetoric against competitive currency devaluations or suffer from weaker forward GDP growth. The Japanese look as though the nation could fall back into recession. Their QE2 impacted the Yen positively for all of two days when attempted in the face of US currency destruction. China will become increasingly less interested in purchasing soon to be monetized US Treasuries and in fact, ironically, will see the value of the remnimbi continue to fall as the USD falls.
Dreams regarding QE2
1. That a lower US dollar will increase US exports, assisting in domestic job creation, and leading the US out of slumping economic conditions. This might be true if our economy were not based 20% on manufacturing and 80% on services. Manufacturing might pick up, but not materially so, and again, the American consumer faced with higher commodity prices will see an offsetting drop in demand for discretionary items, further hurting actual export driven nations like China. Probably unwise to kick the stool out from under the emerging markets. For if we hope China, India, and Brazil to lead the world out of economic purgatory, we'd better not up the odds against them.
2. That a lower dollar, and higher stock prices will raise consumer optimism, and thus spending via the wealth effect. WRONG. Higher stock prices, bigger bonuses for executives, etc only create further divisions between the citizenry of the United States. The rich getting richer has been shown over the last thirty years to do nothing to help the poor get richer. If costs rise and quality of life for the bottom 80% starts to take a hit, then expect increased violent crime, theft, calls for secession, etc to begin to boil over. This may over a longer horizon provide an opportunity, as did the Civil War in the 19th Century, to create a more perfect union. But first, we'd have to suffer through a lot of unpalatable changes, especially given the level of 'me-ism' our population (especially amongst our young people) supports and nurtures. There is the possibility that many rude awakenings await our over-fed, under-read citizenry.
3. That lower rates will increase aggregate credit demand. US Households have been de-levering for the past 9 consecutive quarters. QE1 did not have an effect on credit demand, why should QE2?
4. That QE2 is a given. Bernanke was clear that it was on the table, but I think many overstate their talent for clairvoyance. Bernanke in the same comments at Jackson Hole mentioned that much of what the Fed was considering would be the Fed's communication strategy. And he was dead-on in his belief in the efficacy of spoken/written Fed communiques. He mentioned the possibility for QE2, the dollar got absolutely hammered in September, a worldwide currnecy war broke out, the stock market went up, and gold rallied. Probably not all of these consequences were intended (let that be a lesson to you Ben!) but just the suggestion of its possibility seemed to have a rather dramatic effect! Much of the supporting rhetoric driving the belief in QE2 has come from non-voting members of the FOMC including Brian Sack and Goldman Sachs, neither of which have an un-vested interest if you get my drift...?
Realities regarding QE2
1. It is likely that the Fed will take a wait and see approach, which in my mind probably amounts to the start of QE2 sometime late in the year, but in small increments so as not to draw too much populist ire and also to allow for the Fed to change its mind and keep at least some amount of its remaining ammunition on the sidelines, in case of negative GDP in 2011 (for example.)
2. The rhetoric coming from the Fed over the intermediate term will likely continue to show that the Bernanke Put, even if not fully in use, is at the ready.
3. No one knows what exactly will result from QE2. It is not a given that it will have all of even its positive intended consequences. Foreigners may see its very possibility as a need to begin demanding higher rates, otherwise we may begin to see indirect buyers fall as a percentage of Treasury buyers, leaving only the Fed to finance our debt.
Pop quiz: Where does the Fed get the funds it uses to monetize US Treasury debt???
NFP Number Tomorrow, QE2 Expectations, AA after the market close
Markets are down somewhat this morning ahead of two very critical events over the next 24 hours.
1. Alcoa reports earnings today after the close.
2. Tomorrow morning we will get the Nonfarm Payroll Number for September.
With virtually the entire market fixated on how soon the Fed will launch QE2, tomorrow's NFP number will be a critical factor for determing the market's direction over the coming weeks. The consensus is for no change in jobs on the aggregate from the prior month, but with jobs coming from the private sector to see an increase of 74K, with the unemployment rate to tick up 0.01% to 9.7%.
What is going to be fascinating however, is seeing how the market reacts to this number. If the report is better than expected, will the market necessarily have to sell-off on good news? Surely a good number must be read as a mitigating factor against the current Goldman Sachs (and therefore market consensus) expectation of a Nov. 3rd launch of QE2.
If the number is bad, we will likely rally through Dow 11,000 as it will be assured that Bernanke will officially declare war on the middle class on election day.
If the number is in-line, then we will likely trade off of Alcoa's numbers from this afternoon.
Alcoa is expected to report EPS of $0.05 on revenue of $4.95B. The consensus ranges are $0.01-$0.12 and $4.52B-$5.36B. The stock has risen from $10 to $12 in September. With the stock already up 20%, investors appear nervous heading into earnings with good news already somewhat priced-in, AA trading down $0.14 or 1.21% at the time of this writing. Also creating anxiety is an article on Bloomberg this morning which notes that Alcoa's profits may drop 20% as the weak dollar offsets the higher realized spot aluminum prices. Alcoa's revenue is in USD but pays costs in its non-US operations in local currencies. The largest source of revenue after the US is Australia, whose currency is up 14% against the USD this quarter alone. Alcoa also has sizable operations in Brazil, and the real has climbed 7% this quarter (Thanks BB!)
1. Alcoa reports earnings today after the close.
2. Tomorrow morning we will get the Nonfarm Payroll Number for September.
With virtually the entire market fixated on how soon the Fed will launch QE2, tomorrow's NFP number will be a critical factor for determing the market's direction over the coming weeks. The consensus is for no change in jobs on the aggregate from the prior month, but with jobs coming from the private sector to see an increase of 74K, with the unemployment rate to tick up 0.01% to 9.7%.
What is going to be fascinating however, is seeing how the market reacts to this number. If the report is better than expected, will the market necessarily have to sell-off on good news? Surely a good number must be read as a mitigating factor against the current Goldman Sachs (and therefore market consensus) expectation of a Nov. 3rd launch of QE2.
If the number is bad, we will likely rally through Dow 11,000 as it will be assured that Bernanke will officially declare war on the middle class on election day.
If the number is in-line, then we will likely trade off of Alcoa's numbers from this afternoon.
Alcoa is expected to report EPS of $0.05 on revenue of $4.95B. The consensus ranges are $0.01-$0.12 and $4.52B-$5.36B. The stock has risen from $10 to $12 in September. With the stock already up 20%, investors appear nervous heading into earnings with good news already somewhat priced-in, AA trading down $0.14 or 1.21% at the time of this writing. Also creating anxiety is an article on Bloomberg this morning which notes that Alcoa's profits may drop 20% as the weak dollar offsets the higher realized spot aluminum prices. Alcoa's revenue is in USD but pays costs in its non-US operations in local currencies. The largest source of revenue after the US is Australia, whose currency is up 14% against the USD this quarter alone. Alcoa also has sizable operations in Brazil, and the real has climbed 7% this quarter (Thanks BB!)
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