The following commentary comes from my friend and colleague Stephan Weiss:
Last week at least started well as the upper echelon of fund managers heard from their “well-placed sources” that Helicopter Ben had miscommunicated the FOMC position when he spoke about tapering and would set the record straight at his press conference, imbuing them with the fortitude to get long in front of Wednesday afternoon.
Well, they got half the story right as he did set the record straight.
Taken alone, the FOMC minutes were positive for the market as nothing indicated that policy was going to change course. The indices acted accordingly, swaying between green and red. Then we found out that those sources were no more well-placed than a convertible parked beneath a tree with hanging bird feeders. First, the FOMC projections were released showing that the targeted 6.5% unemployment rate was now forecast to occur in 2014, not 2015, and that GDP growth was accelerating. Then, just prior to the reporter from TMZ asking Bernanke about his personal plans, his prepared remarks were released. Therein, Helicopter Ben dropped not more cash, but the bomb:
“We also see inflation moving back toward our 2 percent objective over time. If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year; and if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around midyear. In this scenario, when asset purchases ultimately come to an end, the unemployment rate would likely be in the vicinity of 7 percent, with solid economic growth supporting further job gains—a substantial improvement from the 8.1 percent unemployment rate that prevailed when the Committee announced this program.”
So here we are: the transparency thing as Bernanke explained the Fed’s thought process. The FOMC will apparently begin to cut back this year and, depending upon the next jobs number, may do so before the third quarter ends. The point that we reach 6.5% has been moved up but that is no longer the trigger; now it is 7% accompanied by an upward bias in the economy and inflation at 2%.
If only the Fed kept that information to themselves we could have read the minutes and gone on our merry way as the market stabilized and perhaps moved higher. Instead, traders relied traditionally unreliable FOMC forecasts – a flawed strategy in itself – and panicked. In the old days, pre-openness, the market took the real hit when the rate increase actually occurred and usually upon the move deep into neutral policy territory. That was decidedly less disruptive to the markets in terms of duration because by the time the liquidity geyser slowed to a drip, the economy was already on better footing, earnings growth was apparent and valuation could withstand less accommodative policy.
But this is the worst of all worlds since we likely won’t see much growth in earnings this quarter, Europe is still uncertain and China is on the verge of a credit crisis that will make 2008 look like boom times. Interbank lending rates in China have ballooned from just over 3% a month ago to over 11. Put in perspective, US rates are near zero.
I can’t imagine too many visitors to Jimmy Dean’s factory leave the tour and buy a few links in the souvenir shop, anxious to cook them up when they get back to the trailers. Seems like traders feel the same way about the Fed post press conference, puking out their stocks and bonds, violating important levels of support. However, once the vision fades and their stomachs settle, a curing period that will likely take us through the next jobs number on July 5th (a light attendance day in the midst of a “4 day” weekend making for Über volatility), earnings and up to the next FOMC meeting, they will recognize a great buying opportunity– at least for stocks. Bonds, unfortunately, will stay in the grinder.
For now, though, the carnage, bred through emotion, is likely done as atrophying now takes over. Within that time frame there will be peaks and valleys as volatility, courtesy of Fed transparency, becomes the norm. I’m up for nibbling for the intermediate and long term but the market hasn’t corrected enough to find many real values.