Market Talk

Sitting out the past week on vacation, one thing I was struck by is the vibe from Wall Street analysts, strategists, pundits, etc., that the stock-market pullback driven by the Japan disaster is just another buying opportunity. Just another chance to load up.

The sense of assurance in the voices of guests on CNBC, or in written missives, reminds me of the same widespread attitude in the months following the tech bubble bursting in early 2000. Every dip was to be bought, stocks were “on sale” and each sell-off just created another “buying opportunity.”

I admit to eventually buying into the logic myself, by picking up 50 shares of Cisco (CSCO) in an IRA in early 2001 after the stock had fallen more than 50% from its 2000 peak. How much further could a blue-chip tech darling like CSCO fall, anyway? Another 60% from where I bought it, that’s how far. Ten years later it still hasn’t recovered all the way.

Looking back, the bursting of the tech bubble seems like a brief rain shower compared to the mayhem in the global picture today. As Paul noted earlier, how can anyone say with reasonable accuracy that “the worst is over”? Simply absurd.

Another grabber while I was away was the Fed noting “that the economic recovery is on a firmer footing.” Maybe so. But how firm can it be if the committee, without a single dissenter, caps off the statement by saying it “continues to anticipate that economic conditions…are likely to warrant exceptionally low levels for the federal funds rate for an extended period”?

If things are firming so nicely, then why not cease with the QE2 and ease up interest rates a quarter or even half a point? Don’t hold your breath for that, citizens. The only thing on firm footing is Ben Bernanke’s loafer, pressing the liquidity pedal to the floor.

Some fresh-air comments from Dallas Fed President Richard Fisher, from a speech today. Expect him to pick up Hoenig’s banner of dissent. Newswires’ Mike Derby reports:

The official said none of his business contacts “are complaining about the cost of borrowing, the lack of liquidity or the availability of capital.”

Instead, “all express concern about taxes, regulatory burdens and the lack of understanding in Washington of what incentivizes private-sector job creation.” He added “all are stymied by a Congress and an executive branch that have appeared to them to be unaware of, if not outright opposed to, what fires the entrepreneurial spirit.”

Derby notes that Fisher “hit back” at the widespread criticism the Fed has gotten in Congress. “Those lawmakers who advocate ‘Ending the Fed’ might better turn their considerable talents toward ending the fiscal debacle that has for too long run amuck within their own house.” Fisher said “the Fed could not monetize the debt if the debt were not being created by Congress in the first place.”

Well said, Mr. Fisher.

One of the more absurd parts of the FOMC’s statement today is the committee’s references to their mandate of fostering price stability.

Judging by the crazy gyrations in financial markets after the FOMC’s QE2 announcement, there wasn’t much “price stability” being fostered there. Of course, it’s not unusual to see choppy moves after a Fed statement, but today’s seemed extra exaggerated, with abrupt turns, stomach-tickling drops and dizzying climbs all jammed into less than an hour’s worth of trading.

It’s been clear since the Fed signaled a couple months ago its intent on more QE that the plan was to provide plenty of cheap cash for speculation in order to inflate asset prices and hopefully create a wealth effect to spark consumption. How well does that m.o. align with a mandate to foster price stability? Continue reading…

Oh no they didn’t.

Yes, they did. FOMC meeting minutes say: “Stresses in European financial markets remained broadly contained but bore watching going forward.”

Contained? Uh oh, there’s that word again.

“Contained” has popped up a couple times in meeting minutes during the past two years, in references to inflation, but we haven’t seen it in this context since the central bank’s infamous observations that the subprime mortgage turmoil looked “relatively well contained” back in 2007. Gulp.

As a refresher, here’s what the meeting minutes said back in May 2007 (italics emphasis ours):

Members continued to view the risks to economic activity as weighted to the downside, although with turmoil in the subprime market appearing to have remained relatively well contained and business spending indicators suggesting a more encouraging outlook, these downside risks were judged to have diminished slightly.

Not hard to understand why we flinch when we see/hear the Fed say things look ”contained” in reference to something in which containment is consistently a troubling question, and very far from certain.

There’s a certain feel today, a somewhat subtle vibe, that investors may be (just maybe) looking a bit harder at the stock market’s expectations regarding QE2.

It’s clear that markets in general — stocks, bonds, commodities and forex — have priced in more Fed QE as a foregone conclusion, ready to roll as early as November. Presumptuous? Perhaps. Now the Dow Industrials are up more than 5% in the past four weeks, the 10-yr yield down more than 40 bps and a laundry list of commodities have soared. Coincidentally, with some greater insight into the FOMC’s Sept 21 meeting ready to spill, investors seem a bit more reflective.

Maybe they’re thinking those stock gains were a little excessive. After all, QE2 would largely be a last-ditch effort — the monetary equivalent of a hail-Mary pass — to spark something in the economy. Maybe we beat up the dollar a little too severely, bought the euro a bit too enthusiastically, they’re thinking, considering the festering problems on the continent that haven’t been fully addressed. We’ll know shortly if they feel chastened, or more emboldened, when we get a look at the FOMC minutes.

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Stock futures pointmoderately lower premarket as the US dollar strengthens and the euro dips to its lowest levels in a week. Markets in Asia were mostly weaker overnight, with Tokyo hit particularly hard, Nikkei down 2.1% on ramped-up concerns about impact of yen strength.

Stocks also lower in Europe, euro recently hovering just above $1.38. Both oil and gold pull back on firmer USD.

FOMC meeting minutes, due out at 2:00pm ET, should command attention as folks try to glean more insight on any QE2 intentions. Intel reports 3Q results after the close. S&P futures down 6.80; 10-yr higher, yield at 2.34%.

Above the din – this furiously gleeful, Fed-induced, QE-inspired rally — there’s something very mystifying about it all.

It comes down to this: While a parade of Fed officials have gone to bat for QE II and espoused its supposed benefits, we’ve heard maddeningly little from them on the transmission. How exactly will it really (no BS) help get us out of our current economic predicament?

Stop with the academic blah, blah, blah and the hypotheticals, the ifs, ands and buts. How will QE create jobs?

Here’s the best Bernanke could do in a speech yesterday: “Additional purchases have the ability to ease financial conditions.” No mention of whether he said that with a straight face. Ben, please. Ease financial conditions? ZIRP, going on two years now. Enough said.

Continue reading…

US stocks little changed, after the Fed again dances around the question of whether it will throw yet another net under the economy. They talked real smart, and danced around the issue, but ultimately didn’t really say anything new (although they came perilously close to almost saying “deflation.” But they didn’t.)

DJIA adds 7 to 10761, but S&P 500 slips 3 to 1140, Nasdaq Comp eases 6 to 2349. Stocks did rally, but gave it back by the close. You wonder what’ll happen with stocks. Have they climbed too far? Are the heights too much? I tend to think that the bulls have this thing by the tail, to mix metaphors, and aren’t about to let go. The data are (marginally) better, the central bank’s got their back, the midterms are coming up and everybody expects the business-friendly party to come back to town. ‘Course, you never know.

Treasurys and gold stick their rallies, however, while the dollar sells off. Yield on the 10-year Treasury note fell back to 2.58%, and gold jumped to $1,287. The dollar got smacked around. With the Fed ever-so-subtly threatening to debase the currency, euro jumps to $1.3240, and the yen slides to 85.05, although there’s no overt signs the Bank of Japan stepped in to defend its line in the sand.

What’s been going on the past week or so is really something to see, though. Stocks, gold, Treasurys are all rallying. It can’t last and somebody has to be wrong, but if there is, ahem, some invisible hand behind all this, it’s doing one bang-up job right now.

Anyhow, key event today was the statement coming out of the Fed’s one-day rate-setting meeting. The bankers kept rates at zero, of course. But it’s assessment of the economy wasn’t so hot, and the Fed says it’s prepared to “provide additional accommodation” if needed. While it didn’t signal the start of any new bond-buying programs, most read this as yet another incremental step toward what’s being called QE2, another massive bond-buying program to hold things together.

But it did say, in it usual circuitous way, that inflation’s too low, and if it goes much lower, the central bank will step in. The Fed’s stance raises the issue of how other central banks will react to the notion of the world’s premier central bank bashing its own currency. As our colleague Mike Casey wrote this afternoon:

The FOMC’s latest dovish statement implying further QE to fight deflation lands at an awkward time in global currency markets. The dollar is weakening on the news, but that’s not what central banks from Brazil’s to Japan’s want to see. There’s a distinctive shift toward more intervention around the world right now. Anything the Fed does to soften the dollar raises the risk of a self-destructive round of competitive devaluations. It’s yet another sign of how global imbalances are making it harder for policymakers.

“Competitive devaluations.” Keep that phrase handy.

What's he doing in there?

If I were a betting man, if I were in the markets and not just somebody who reports on the markets, I’d be betting hard money that the Fed will do nothing today. If I could find anybody to lay odds on that, of course.

It just seems kind of nuts to think the Fed is going to embark on some major initiative today, at the end of its one-day rate-setting meeting. Isn’t the economy healing? Isn’t the recession over? Haven’t the data points been getting better? Then why are so many people thinking the Fed’s going to jump back in with some big support program?

Of course, on the issue of rates, it’s beyond obvious that the Fed’s not going to raise them, despite the fact that the recession is apparently over and the economy growing again. You want to know when the recession will really be over? When the Fed starts raising interest rates.

But the market isn’t focused on that. The market, and not just the stock market, is focused on whether the Fed’s going to announce a new round of quantitative easing, buy Treasurys in order to hold down interest rates (and, oh, if some of that money happens to trickle down to risky assets like, say, stocks, well, they can’t really help that now.) In the market, this is a real question.

Continue reading…

Stocks are hardly moving at all, although Treasurys are rising, as everybody’s waiting to see what the Fed’s going to say this afternoon. (It seems odd to me, because, you know, the recession’s over and all that, but people are actually expecting the Fed to do something material in support of the bond market and economy.)