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Will the Fed Really Dial Back QE3 or Just Talk About It?

May 21st, 2013

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Tuesday, May 21, 9:25 a.m.

In April, as the economic reports were worsening and the stock market was sliding, the Fed quickly came out in its FOMC statement and subsequent interviews, to reassure markets that its QE3 bond-buying stimulus efforts were open-ended, that it could, and would, increase that bond-buying if necessary to provide still more liquidity into the financial system.

And its words had the desired effect. Although the economic reports continued as mostly negative surprises, the market came out of its funk, and with the aid of a stronger than expected jobs report, broke out to new highs three weeks ago, and has kept on going higher.

It’s interesting that now that investors are pumped again, that even though the economic reports continue to deteriorate, talk is now that the Fed could begin to dial back its bond-buying, begin to remove the stimulus punch-bowl.

Not likely. The Fed is in a bit of a difficult corner right now.

With the economic slowdown continuing, as evidenced by the continuing negative surprises in most of the economic reports, and earnings slowing, and major corporations warning of the slowdown continuing, the Fed would be hesitant to actually begin removing the punchbowl.

The QE bond-buying and easy money policies have not only been extremely important for 4 years now in keeping the recovery going, but the Fed had to step in with increases in QE in each of the last three years to rescue the economy from similar stumbles each summer.

So it’s very doubtful that this time, as the economy stumbles again, that the Fed would take the opposite approach to what worked the previous times, and begin to dial back QE. Not until it at least sees some signs of the economic stumble ending.

But at the same time, it wouldn’t want to take a chance on keeping the spigot open too long and be accused of creating another bubble in the stock market.

So if the stock market’s spike-up continues even as the basic driving forces of the market, the economy and earnings, deteriorate, the Fed will more likely resort to talk again, and indicate that it is preparing to dial back the stimulus, in hopes of taking some of the exuberance out of investors’ euphoria.

But I seriously doubt it will actually do anything but talk as long as the economic recovery continues to stumble. Historically, it has accomplished its goals through talk, hints, and promises much more often than it has actually taken action. But concerns about what the Fed might do is now topping the media debates.

Is commodity guru Jimmy Rogers just talking his book?

Legendary investor and Chairman of Rogers Holdings, said in an interview yesterday that he doesn’t see a problem for commodities, that their long bull market remains intact. He said, “I don’t see massive new supply coming into the market to keep prices down.”

But Rogers knows better than anyone that there are two sides to the supply/demand equation that drives prices in any market. It’s not just massive new supplies coming into commodities that would drive prices lower. A slackening in demand, as in a slowing economy, has the same effect in skewing the supply/demand ratio to the side of lower prices.

On Saturday’s blog I noted that Rogers recently also said that while he expects gold’s ‘correction’ to continue for a while yet, he would “not start to be concerned that this is more than just a correction unless gold drops to $800 an ounce”.

As I noted Saturday, gold is already down $513 (27%) an ounce from its peak at $1900 in 2011, already officially in a bear market, not just a correction. At $800 it would be down 58%. I said I can’t believe he was quoted accurately, that it would have to be down 58% before he would be concerned. But the comments were repeated in numerous sources.

Rogers is not only the chairman of Rogers Holdings, but in 2011 launched a new commodities index fund, which he says focuses on the top companies in agriculture, mining, metals, and energy sectors, the Rogers Global Resources Equity Index fund.

Is it remotely possible that in these interviews saying he sees no problems in gold or commodities that he is engaging in typical Wall Street spin of ‘talking his book’?

Is it possible that perhaps he launched his mining and commodities fund in 2011 with just a tiny bit of poor timing, just about when both gold and commodities reached record peaks and rolled over into bear markets, and his investors might need some encouraging talk?

I don’t know. I’m just saying that it seems odd to me that he sees no problems yet.

To read my weekend newspaper column click here: The Last of the 2008 Doomsday Scenarios Is Fading Away!

Subscribers to Street Smart Report: There is an in-depth ‘Gold, Bonds, Dollar, Commodities’ report from yesterday in your secure area of the Street Smart Report website. There will be an in-depth ‘U.S. Stock Market Outlook and Recommendations’ report tomorrow afternoon.

Yesterday in the U.S. Market.

A mixed day on light volume, with only 0.65 billion shares traded on the NYSE.

The Dow closed down 19 points or 0.1%. The S&P 500 closed down 0.1%. The NYSE Composite closed up 0.1%. The Nasdaq closed down 0.1%. The Nasdaq 100 closed down 0.3%. The Russell 2000 closed up 0.2%. The DJ Transportation Avg. closed down 0.6%. The DJ Utilities Avg closed down 0.4%.

Gold closed up $19 an ounce at $1,384.

Oil closed up $.42 a barrel to $96.71.

The U.S. dollar etf UUP closed down 0.6%.

The U.S. Treasury bond etf TLT closed down 0.1%.

Yesterday in European Markets.

European markets mostly closed higher yesterday. The overall Europe Dow closed up 0.6%. Among individual countries, London was up 0.5%. The German DAX closed up 0.7%. France’s CAC closed up 0.5%. Belgium closed up 0.3%. Italy closed down 0.6%. Portugal closed down 0.8%. Spain closed down 0.8%. Russia closed up 0.2%.

Most Asian Markets closed down last night.

The DJ Asia-Pacific Index closed down 0.3%.

Among individual markets:

Australia closed down 0.6%. China closed up 0.2%. Hong Kong closed down 0.5%. India closed down 0.6%. Indonesia closed down 0.5%. Japan closed up 0.1%. Malaysia closed up 0.6%. New Zealand closed down 0.2%. S. Korea closed down 0.1%. Singapore closed down 0.3%. Taiwan closed up 0.1%. Thailand closed unchanged.

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Markets This Morning:

European markets are off earlier lows, still mostly down but still improving. At the moment, the Europe Dow is down 0.2%. Among individual countries the London FTSE is up 0.2%. The German DAX is down 0.2%. France’s CAC is down 0.4%. Belgium is down 0.6%. Norway is up 0.6%. Portugal is down 0.4%. Spain is down 0.8%. Switzerland is up down 0.3%. Italy is down 0.5%. Russia is up 1.2%.

Oil is down $.25 a barrel at $96.46.

Gold is down $18 an ounce at $1,365.

This Morning in the U.S. Market:

This week will have a number of important economic reports that include the Chicago Fed’s National Activity Index, Existing Home Sales, New Home Sales, Durable Goods Orders, and the minutes of the Fed’s last FOMC meeting. To see the full list and times click here, and look at the left side of the page it takes you to.

Yesterday’s only report was not a positive. The Chicago Fed’s National Activity Index (CFNAI), which is a weighted average of 85 different economic indicators the Fed uses, worsened again in April, plunging from -0.23 in March to –0.53 in April. The 3-month moving average was also in negative territory, at –0.04. The Index is designed so that a 0 reading or above indicates trend growth, while a minus number indicates a slowing economy. A reading of -0.7 or below on the 3-month moving average indicates a recession is underway.

There are no reports scheduled for release today.

But as we’ve been saying lately the market doesn’t seem to care about economic reports anyway.

Our Pre-Open Indicators:

Our pre-open indicators are well off overnight lows, now pointing to the Dow being up 30 points or so at the open.

To read my weekend newspaper column click here: The Last of the 2008 Doomsday Scenarios Is Fading Away!

I’ll be back with the next regular blog post on Thursday morning at 9:25 a.m.

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Stocks Still Poppin – Gold Still Droppin!

May 18th, 2013

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Saturday, May 17, 11:15 a.m.

Four straight weeks of stock market gains without even a minor pullback to retest the support at the 30-day m.a. again. In the 7th straight month of gains since the November low.

It does have a lot of scrambling going on to reverse previous opinions, and a lot of interesting observations.

Financial Times: “The equity market is putting disciplined investment approaches to the test. The adage ‘Don’t chase a rally’ is a core principle in investing. But such advice counts for little at the moment. After spending much of April unable to break through 1,600, the S&P has mainly been a one-way bet in May, rising an additional 4.4% to 1,670. All of which places both private and professional investors in a quandary. . . . In the current momentum driven market we are on the cusp of partying like its 1999, all the while flirting with the danger that when the music stops the consequences of having bought anywhere near the top are likely to be brutal and swift.”

Comstock Partners (Hedge Fund): “Although the Fed, so far, has been able to lift stock prices, it has failed to elevate the economy to a point where growth is self-sustaining despite over four years of extremely easy monetary policy. The headwinds from fiscal policy will actually intensify in the months ahead.

It is also noteworthy that the market is losing the important boost it has received from rapidly rising earnings. Over the last four quarters earnings are up only 0.4% from the four prior quarters. Given sluggish U.S. and global economic growth, we think that current estimates of 22% second half earnings growth are highly unrealistic. Furthermore, the S&P 500 is now selling at 20 times cyclically-smoothed trailing GAAP earnings, at the very high end of the zone that was considered normal prior to the serial bubbles of the last decade and a half.

All in all, we believe that economic growth and corporate earnings will be highly disappointing in coming quarters and that investors will drop the pretense that the Fed can fix everything that ails the economy. Although Bernanke, himself, has been virtually begging for help from fiscal policy, it does not seem likely that he will get it anytime soon. In our view, the risk of a substantial decline in the market outweighs the limited rewards from current levels.”

Reuters: “As the major indexes inch higher and higher to set record after record, many analysts are shrugging off previous pullback worries. . . As the market continues its upward move, some market participants are beginning to reverse opinions of it being a bubble to thoughts that it might rather be the start of a new bull market.”

Okay, I can agree that it isn’t a bubble, but the start of a new bull market? That’s an opinion I’ve seen frequently lately.

Doesn’t make sense to me. How can it be the beginning of a new bull market when the bull market that began in 2009 remains intact?

By the way, note how the S&P is not just unusually overbought short-term above its 30-day m.a., but even more so intermediate-term above its long-term 200-day (40-week) m.a.

But as I’ve been saying, an overbought condition is not a sell signal. Markets can just become more overbought. It takes a reversal of momentum and money-flows showing up in technical indicators. And while that seemed to be threating in April, it didn’t come to pass, and the consensus of our technical indicators remains on the Dec. 11 buy signal.

But we are still advising caution at this point and being alert for potential changes. Something just doesn’t smell right, and it involves not just the overbought condition, but the unusual bullish investor sentiment at a time when the economy and earnings are slowing.

Meanwhile:

Gold is still droppin’.

Like all its previous rally attempts since the October peak, gold’s most recent rally attempt off an oversold condition also ran into problems when it reached the resistance at the 30-day m.a.

But it’s now at an interesting juncture.

Another rally attempt from here would be with a potential double-bottom in place, while a break to new bear market lows would likely bring another dose of intense selling.

At the moment anyway, the consensus of the 35 intermediate-term technical indicators we use remains on the October 15 sell signal.

And it’s not encouraging for gold’s outlook that the gold mining stocks, which have been leading the way down, did break down to a new bear market low this week.

I was surprised to see the comments of famed commodity trader Jimmy Rogers, who has been correctly very bullish for gold for years, that while he expects the ”correction” to continue for a while yet, he would “not start to be concerned that this is more than just a correction unless gold drops to $800 an ounce”.

Gold is already down $513 (27%) an ounce from its peak at $1900 in 2011, already officially in a bear market, not just a correction. At $800 it would be down 58%. I can’t believe he was quoted accurately, that it would have to be down 58% before he would be concerned. But the comments were repeated in numerous sources.

Investor Sentiment.

In recent blog posts I’ve pointed out the unusually high level of bullish investor sentiment, as measured by the NAAIM Sentiment Index (National Association of Active Investor Managers), the Investors Intelligence Sentiment Index (newsletter writers), the Consensus Inc. Sentiment Index, etc., and record level of margin debt.

Here’s another one:

The Credit Suisse Fear Barometer, known as the CSFB Index, fell 11.4 points over the past two weeks – the largest decline on record – and is now at a one-year low of 21.73.

The indicator essentially tracks investors’ willingness to pay for downside protection with zero-premium collar trades that expire in three months, using S&P 500 index (.SPX) options.

"It’s unusual to see at these stock market levels that there are very few indications (based on options activity) that investors are expecting a pullback," said Randy Frederick, managing director of active trading and derivatives at Charles Schwab in Austin, Texas.

To read my weekend newspaper column click here: The Last of the 2008 Doomsday Scenarios Is Fading Away!

Subscribers to Street Smart Report: In addition to the charts and recommendations in the subscribers’ ‘Premium Content’ area of this blog, we will have an in-depth ‘Gold, Bonds, Dollar, Commodities’ update on Monday in your secure area of the Street Smart Report website.