Ben Bernanke Cringing

New Fed chair, Janet Yellen, presided over her first FOMC meeting this week with her first press conference yesterday afternoon. In short, as much as I supported her for the position, it’s crystal clear that she is no Ben Bernanke and has much to learn. On the positive side, she was very calm and took time to give thoughtful and detailed answers. I especially liked when she stated that the glide path to tighter monetary policy was going to be shallow, meaning that once the Fed began to raise rates it would not be a straight shot to the historical norms. Rather, it certainly sounded like the path to 1% and then 2% would be very gradual without committing to specific timetables.

On the flip side, Janet Yellen completely and utterly fell on her sword, stuck her foot in her mouth and any other appropriate analogy for making a huge blunder when she put an almost exact time frame of six month after QE ends to begin raising rates. As the words rolled off her lips, I immediately said “rut roh” and then watched the stock market crater. Defining “considerable time” as six months puts the Fed in a box and loss of credibility. I am sure she wishes she could unscramble those eggs, but that one statement is going to follow her for a long time, especially when the written statement doesn’t even hint at a specific time frame rate increases. Ben Bernanke would never, ever have done this.

If stocks don’t immediately right themselves, it looks like we will see new lows for March before stabilizing and heading back to all time highs. The bull market may not be over yet, but Janet Yellen certainly poured some cold water on it and the bears have their sights on 2015.

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Ho Ho Ho! Santa Bernanke Arrived

Greetings from usually cold and snowy, but recently tropical and wet Vermont! After three days of skiing in the rain, Old Man Winter came back and cut the temps by 70%! From short sleeve shirts and a light jacket, I am gearing up in full winter weather garb for wind chills around 0 today on top.

Ben Bernanke did it! The master. The maestro. He saw the downside of announcing a taper to their $85B a month in asset purchases, but felt strongly it needed to be done. As much as I really like and admire him, I respectfully disagree. Anyway, the man who has threaded needle after needle after needle threaded his final one last week and it was picture perfect, another beaut!

With enough hawks on the committee to push for the taper, Bernanke gave them what they wanted but also prevented the very nasty negative market reaction so many feared by pushing off the raising of rates farther into the future. It was genius and after a few minutes, the markets celebrated in a huge way with the celebration still ongoing. The Fed’s move also solidified a trend that I and many others have spoken about for some time, the strength of statement day in the stock market. With some qualifiers, it’s been like shooting fish in a barrel, the proverbial layup in trading.

Fed statement day last week also kicked off the traditional Santa Claus Rally. I have done an incredible amount of research in my 25 years in the business, but as I think about it, none more in the seasonal department than December and early January trends. And I know I am far from alone. To date, the stock market has pretty much followed historical patterns that included a mild early December decline to a mid December low from which the year-end rally launches to the most seasonally positive time of the year.

Bernanke may be given the credit (or not), but stocks are in the midst of the Santa Claus Rally that is supposed to last into the New Year. That doesn’t mean that every single day will be up! Depending on when you begin your study and which instrument you use, the positive seasonality can start anywhere from December 17 to the 24 and last until December 30 or through the first week of the New Year. On the flip side, as we recently saw in 2007 is that the famous adage usually works; If Santa Claus should fail to call, bears may come to Broad and Wall, meaning that if the traditional year-end rally does not occur, it is a warning sign to look closely at the market for winds of change.

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Do NOT Taper

As difficult as it was at the time, quantitative easing (money printing) has now become an acceptable weapon in the Fed’s arsenal. Throughout my life, I was always taught, wrongly so, that printing money always leads to inflation and sometimes hyperinflation. And that all we needed to do was look at the Weimar Republic or Argentina or most recently Zimbabwe for examples of a currency gone rogue.

When the Fed cut rates to essentially zero, critics and Doomsdayers came out of the woodwork crying that Bernanke was “out of ammunition” and that “the Fed was now impotent”. The initial decision to print money must have been one of the most difficult debates that any Fed has ever faced. I imagine that the FOMC meetings were only a small part of the spirited discussions that went on during late 2008. But in the end, after rates are zero, Bernanke & Co. used QE as a way to effectively continue cutting rates until the economy and markets began to stabilize and turn.

Having been in the deflation camp since 2007 and remain there today, I have always said that printing money would not even slightly increase the risk of problematic inflation. I can’t tell you how many times I did interviews on CNBC, Fox Business and Yahoo Finance where I defended this very minority view against the masses. And when I boldly declared after QE I that the Fed’s balance sheet would eventually approach $5 TRILLION, I was literally laughed at and dismissed as a nut job (well, part of that may be true!). Furthermore, as longtime readers know, I turned very bullish on the dollar, long-term, in early 2008 and have stayed that way ever since. It was such an easy argument to say that all this money printing would devalue the greenback, but the truth of the matter is that the U.S. dollar bottomed in March 2008 and with almost $5 trillion being printed since, it has never gone lower than that level. Once again, the masses were wrong.

Once a Fed, or anyone else in my opinion, does something that is so distasteful, like having to print money, the hardest part is over, the first act. It makes the next and the next and the next much easier. After QE I ended and people argued against any more printing, it wasn’t a stretch to believe that a whole lot more was on the way. In fact, I would and have argued that once a Fed begins the process, they absolutely MUST see it through to the end, much longer than anyone imagines.

For the fifth time since Bernanke first hinted at tapering in May, the Fed will have the opportunity to begin the scaling back of asset purchases today. I firmly believe they should NOT taper! While the employment picture is certainly much improved, it is far from “escape velocity” with the participation rate at extremely low levels. After a “normal” recession, GDP growth should be double where it is today and remains frustratingly below trend levels. And that says nothing about the inflation rate and money velocity which indicate we should be worried more about deflation than any kind of problematic inflation. No sir. The Fed should NOT taper now or any time in the near future.

Let’s not repeat the mistakes made by FDR in the late 1930s when the government caused part II of the Great Depression by pulling stimulus and raising taxes. And let’s not let the Japanese debacle of starting and stopping and starting and stopping QE become our pattern. From my usual minority seat, my thesis is that the Fed should not begin to taper until we get to the other side of the next recession. Said another way, the Fed shouldn’t consider scaling back their asset purchase program until at least 2015 or later. Doing so now or early next year will jeopardize the flailing recovery and have a very negative impact on the financial markets over the intermediate-term.

I have heard plenty of people say that “tapering isn’t tightening”. I vehemently disagree. If a crack addict smokes 12 times a day and then is cut to 10 and then 8 and then 6 times a day,  his body will certainly feel the reduction. As I have said many times before, our markets have become addicted to QE and are not healthy enough on their own to survive without it.

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Big Week Ahead

For several weeks, I have warned about market sentiment at “rally killing levels”. Not a single thing has changed for the better in this department. The bulls are bulls and the bears are kinda, sorta bulls, at least through year-end. That continues to make me worried, but not enough given the calendar to take serious action.

I want to preface my next comment by saying I absolutely do not believe we are on the precipice of another financial crisis like 2008, but the current sentiment and calendar have a very similar look and feel to late 2007. And my own feelings are similar. At that time I vividly recall being concerned about sentiment after stocks pulled back from the October all time high without bullish sentiment wavering. The calendar heavily favored the bulls and I was too complacent. Currently, the market is in much better shape than it was 5 years ago, but the comp was worth sharing.

Looking at the Dow, S&P 500 and Russell 2000 through last Friday, there was a clear two step pullback with one short intervening rally. The market began the week a bit oversold on a very short-term basis and that has now been relieved. The rally on Monday was underwhelming to say the least with only two stocks up for every one stock down. Most of the major indices closed near their lows for the session, which sets up an interesting next two days.

The FOMC begins their two day meeting on Tuesday and that is also Ben Bernanke’s final meeting as Fed chair. With the announcement not until Wednesday, volume will likely dry up and the trend is to see a mild drift higher into the event. If stocks had closed stronger today, I would have had a lot more confidence in the added upside than I do right now. Perhaps the stock market rallies into the announcement and sells off on the news, whatever the taper decision. On the flip side, we could see something very unusual like a sell off on Tuesday and Wednesday morning and then reversal on the news.

One thing is for sure. Ben Bernanke’s tenure as the most powerful financial person on earth is ending and I for one will be very sad to see him go.

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Taper Talk

Why does it seem like every single Fed meeting has become “the single most important FOMC meeting ever” in the media? And here we are again. The Fed begins a two day meeting tomorrow and it is widely expected that they will announce the first of many subsequent tapers at either this meeting or the one in November. The only surprise will be if they remove any kind of taper talk from their announcement or commentary. Although I do not agree with tapering at all here, consensus believes the Fed probably begins with a token taper of $10-$15 billion per month skewed towards treasury bonds. If they don’t, something else is at play in Bernanke’s mind.

As you would expect, the financial markets probably have a very negative response if the taper is more than $15 billion. If the taper is as expected, I think you will see moves in both directions until Bernanke’s press conference ends at 3pm and how he couches future tapers. If they surprise without a taper, I would expect a very positive immediate response that would run the stops in at the old highs.

Currently, the Fed is buying $85 billion a month in mortgage back securities and treasury bonds to keep interest rates, specifically mortgage rates, artificially low. That, in turn, helps the housing recovery which is so vitally important to the economy. Equally as important, the printing of $85 billion per month has resulted in dramatically higher stock prices because investors have been almost forced into other investments as bond yields plummeted, not to mention the additional torrent of liquidity in the system.

Should the Fed taper? Should they not taper? How much? When?

There is no right or wrong answer. Once the Fed Funds rate dropped to 0%, Bernanke & Company were forced to use other monetary tools. Printing money has similar results as lowering rates, so in this case, interest rates have effectively been below zero for some time. By beginning the process of ending QE, the Fed is returning rates to 0% for an eventual move to 0.50% and above much later this decade.

I completely understand those who believe the Fed’s hand is too heavy in the market. Forget about the thumb on the scale; Bernanke has his hand, wrist, elbow and arm on it. By that token, those people would rather let what’s left of the free market to rise and fall where it may. No arguments here.

On the other hand, we have an economy that is performing like almost every other post financial crisis period with sub par growth and stubbornly high unemployment. Since our elected clowns in Washington cannot get any fiscal policy passed, the Fed has become the juice of last resort. In effect, the Fed is plugging dykes and adding sandbags until the waters hopefully subside down the road which I continue to believe to be after the next recession.

We cannot have it both ways. I believe that tapering will drain liquidity and adversely impact the markets and economy over the intermediate-term. But long-term, we will be in excellent shape. The quicker we taper, the closer we come to recession and eventually get to the other side. But that comes with pain. Staying the course prolongs the markets’ and economy’s addiction to the crack of QE but prevents more serious short-term injury in hopes of an eventual fiscal solution from Washington.

Take your pick.

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Announcement from Bernanke & Co. Just Around the Corner

Here are my thoughts on the Fed meeting today and into the fall as well as Bernanke’s impending successor. I think this was one of the clearest, most concise Fed discussions I have had.

What do you think?

For today, anything other than what Bernanke said in front of Congress last week will be a big surprise. And no, I absolutely do not think Bernanke knows what Friday’s jobs report will be. As a tiny business who participates in the survey, I don’t input my information until the day before (Thursday).

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Fox Business Markets Now on July 25th at 1pm

I am going to be on Fox Business’ Markets Now tomorrow (Thursday July 25) at 1:00pm EDT discussing earnings, the upcoming Fed meeting and where stocks are headed this quarter. 

I am also going to spend some time with the folks at Yahoo Finance creating three segments. The first will be on the comparison between 1987 and the current market while the second will focus on the upcoming Fed meeting and when Bernanke & Co. will begin to pull the punch bowl. The final segment will focus on Canaries in the Coal Mine, the topic I regularly write about in Street$marts and will again in the next issue.

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Short-Term Crossroad

Interesting crossroad for the stock market. Price action says more rally coming shortly while sentiment and internals argue for a 4-8% pullback into August. I guess both could occur in theory.

With the Dow, S&P 500 and Russell 2000 hitting fresh all time highs, it will be telling to see if any more cracks appear in the market’s foundation. We’ll take a look at our regular column of Canaries in the Coal Mine shortly.

Yesterday, Ben Bernanke’s much anticipated and likely final testimony to the House was a dud so all that is left is earnings…

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Big Ben to the Rescue

It wasn’t long ago that we discussed Bernanke throwing cold water on the rally, something I thought was overblown. But on Wednesday after the markets closed, he did a complete 180 and essentially gave the crack addict more crack. While I was not at all surprised with what he said, I thought the market overreacted somewhat. Precious metals stocks and emerging markets were the biggest beneficiaries of the Bernanke Bang which should be expected given how decimated they were. Friday morning should be quiet and it will be interesting to see how much firepower the bulls have left heading into the weekend.

The bull market may be old and wrinkley but it remains alive and should be even after the next correction later this year.

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And Now China

Financial markets have been hit with the double whammy. First, Bernanke described the Fed’s plan for tapering asset purchases later this year and next and overnight, China reported weaker economic data and some trouble in their banking system. The markets responded with much selling on the heels of yesterday’s sell off, taking the Dow under 15,000.

The next downside target for the major stock market indices is just below their respective May lows. After that, markets are probably looking at a 10% correction or thereabouts.

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