Market Talk

With the Dow crossing 12000 and the S&P 500 poised at 1300, and commodities across the globe on a tear, we leave it to Gluskin Sheff’s David Rosenberg to put things in perspective. We pick this up from Rosenberg’s daily commentary, right after he noted that some retailers are sounding a bit panicky.

We’ll tell you someone who isn’t panicky at all. His name is Ben Bernanke. He runs the nation’s printing press, and he is one cool customer. His nickname is Helicopter Ben. We’ll call him HB for short.

We just saw in the King Report that HB gave an interview on CNBC last Thursday when he was queried about the success of QE2, especially since bond yields and mortgage rates have gone up substantially in recent months. Here was his response:

“Policies have contributed to a stronger stock market just as they did in March 2009, when we did the last iteration of this. The S&P 500 is up 20%-plus and the Russell 2000, which is about small cap stocks, is up 30%-plus.”

Well, there you have it. When you have a central bank chief talking about the virtues of small-cap stocks, you know you really have a pro looking after the country’s monetary affairs. One has to wonder whether Cramer will end up on the short list for HB’s replacement when the time comes. So what we have is a Fed that is now targeting the stock market and engaging in some form of manipulation to invite the same speculative risky behaviour that has ended so badly in the past. But make no mistake, HB is spiking the Kool-Aid in a significant way and it is working for now. So the Bernanke put is really an extension of the old Greenspan put, but with just a different strike price.

Jim Cramer for Fed chair. That’s the quote of the day, right there. Boo-yah!

We weren’t the only ones who seized on the comments yesterday from Brian Sack of the New York Fed. Gluskin Sheff’s David Rosenberg also realized just how telling they were.

The line in the speech that set us off was this: “Nevertheless, balance sheet policy can still lower longer-term borrowing costs for many households and businesses, and it adds to household wealth by keeping asset prices higher than they otherwise would be.” Perry Mason couldn’t have teased out a more incriminating statement. Rosenberg thought so, too. From his comments today:

I just love that one comment to the effect that QE “adds to household wealth by keeping asset prices higher than they otherwise would be.” When will these guys ever learn that maybe, just maybe, these Fed policies aimed at targeting asset prices at levels above their intrinsic values is probably not in the best interests of the nation? As our friend Marc Faber likes to say, the “Bernanke put” is cut from the same cloth as the fabled “Greenspan put” — only the strike price is different.

Imagine running a policy aimed at getting people to spend money based on an artificial level of asset values — what an admission. Then again, this is what the Fed has been all about since the LTCM bailout of 1998. We’re still not convinced after reading this sermon that this next “pull-another-rabbit-out-of-the-hat” experiment is going to end with very much success. There is something to be said about paying for our mistakes and to have the Fed try to rekindle an asset-based economy that has only ended up in generating a series of burst bubbles over the last 12 years, not to mention encourage a lifestyle of living beyond our means, is irresponsible at best, dangerous at worst.

Heard the one about the Bernanke Put? That’s the notion that the Fed will save the markets, no matter what. It started under the Sorcerer’s Apprentice, Alan Greenspan. Mind you, no central bank chieftain ever says I’ll save the market. But Greenspan through his actions made it abundantly clear he’d do whatever he could or needed to to keep the party going. The idea has kept on through the current Fed chairman.

This all came to the fore because last week’s FOMC meeting statement is being taken by the markets as a de facto promise from the central bank to save the economy, or at least asset prices, even if it means bashing the dollar to Kingdom Come. That’s why stocks, the euro and gold are rising, and Treasurys are falling (or, were falling. The Treasury market continues to tell a story nobody wants to hear.)

Newswires columnist and Markets Hub crewmate Mike Casey looks at the Put, and wonders what happens if it goes bad (subscription required):

What happens if foreign investors start worrying that the Fed, by indirectly monetizing the federal government’s debt, is debasing the dollar? Or what if Treasury holders think the Fed is getting too much of what it wishes for and foresee inflation spiraling out of control?

In those cases, wholesale flight from Treasurys could drive up long-end yields sharply. And if that happens before the economy is in a robust recovery, it could quash credit creation right when it is most needed.

Would the Fed then ramp up asset purchases even higher to keep yields down? And would that not only make matters worse by further fueling inflation expectations? It could mean the Fed pays the highest price of all: the loss of its credibility.

Yet the Fed is in a big bind. With unemployment near 27-year highs and prices toying with deflation, it is quite literally failing on both parts of its dual mandate to promote maximum employment and price stability. You could even argue that the Fed has a legal obligation to announce QE II.

The real problem is that America’s economic malaise stems from factors outside of the Fed’s control. The crisis left the U.S. with a massive debt overhang, for one, which portends a long, painful process of deleveraging. And second, global imbalances mean that jobs and businesses are leaving the U.S. in search of lower costs. The roots of the deflation threat are structural and global.

Only the federal government can address such problems, through fiscal strategy and international negotiations. Yet if the Fed simply throws the ball back in the government’s court, Congress could attack it for abandoning its mandate.

Who would want Ben Bernanke’s job right now?

US stocks rally sharply, after the Fed chairman pledges to do “whatever it takes” to pull the economy out of any tailspin, which is a nice reassurance since that’s exactly where the economy seems to be headed.

DJIA surges 165 (1.7%) to 10151; even with the rally, the index lost 0.6% on the week. S&P 500 jumps 17 (1.7%) to 1065, importantly after bouncing hard off support at 1040 – which may point to short covering. Nasdaq Comp gains 35 (1.7%) to 2154.

Stocks rally even after 2Q GDP gets revised down to 1.6% – and the 3Q isn’t looking so hot either, by the way. By now, you know the parade of bad news that was ignored today: Intel cut its 3Q revenue outlook, consumer confidence slipped, Boeing delayed the Dreamliner again, the ECRI’s weekly leading index showed no improvement and remains mired at recessionary levels.

The market is apparently taking Fed Chairman Bernanke at his word that he will do “whatever it takes” to pull the economy out of any tailspin – the infamous Bernanke (nee Greenspan) put. This is giving a big boost to the risk trade – heck Boeing was the Dow’s third-best component today, after risk-trade darling Caterpillar and IBM.

So, the market rallied either because of a massive short-covering surge, a belief in the Fed’s ability to arrest the economy’s slide, we’ll be polite and refrain from calling it a misguided belief, or the market just has absolutely no idea what’s going on. We’d put our money on either number one or number two, but neither is particularly inspiring.