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Has the Market Discounted a Fed Policy Change?

By  +Follow July 31, 2013 5:51AM
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ADP  Employment, Private Sector Jobs  jumped 200,000 in July. That implies Friday’s Employment Situation will come in strong, as well..

   That increases the odds the Fed will begin tapering out of QE perhaps as early as September.

   Half the economists polled believe this, and the market is hanging tough, all of which suggests (at this time) that the Street doesn’t think taper is tantamount to tightening of credit, a rise in interest rates, etc.

  The Fed thinks the Street “gets it.” 

   That remains to be seen.

   Tapering would represent a change in Fed policy.  Interest rates popped immediately after Fed chief Bernanke’s June 19 comment about taper beginning in September and ending in mid-2014.

   Since then the Fed has repeatedly emphasized that taper in NOT tightening.

   So far, the market is saying – “no sweat.”

   It’s not a good idea to argue with the Fed, and the stock market, as well.  

   Nevertheless, investors need to be aware of the possibility that there will be a delayed reaction here and a sharp correction to adjust to the prospect of higher interest rates in the future as a result of a change in Fed policy.

   The stock market has demonstrated it can rise even as interest rates rise, but it will have to digest the fact rates will be rising after such a prolonged period of rates being at historic lows.

Chain Store Sales dropped 1.6% during the week ended 7/27 from a week ago. The drop was more for discretionary items (electronics, apparel, office supplies). Year over year sales are ahead 2.2%.

  The Consumer Confidence Index slipped to 80.3 from82.1 in July.  The  20-city S&P Case Shiller Home Price Index came in a smidge shy of estimates, but impressive just the same. Home prices were up on average 12.17% vs an estimate of 12.4%.

TODAY.

   This would be a lot easier if  the Fed didn’t scramble in June to stabilize bond and stock markets after they plunged in June in reaction to Bernanke’s taper comments. Their action triggered a sharp 7% rise in stock prices in four weeks.

   There is a risk that move up was artificial and created a higher risk situation today.

   The chances it was are great enough to warrant caution here.

   The bulls are still running the show, but indifference to risk is dangerous.

   Investor’s first readan edge before the open

DJIA:  15,520.59

S&P 500: 1,685.96

Nasdaq  Comp.: 3,616.46

Russell 2000:  1,043.98

Wednesday, July 31, 2013         (9:10 a.m.)

    TECHNICAL OBSERVATION – STOCKS:

Alert: I have successively accomplished my goal of  helping readers navigate through the plunges in both AAPL and FB and subsequent recoveries.  .I may soon drop coverage and either pick up other fallen angels, or begin the technical tracking of stocks on the move.

   Apple(AAPL: $453.32)

    While Q2 revenues were flat and earnings down 20%, the latter “beat” the Street’s projections.  iPhone sales were the surprise, up 20% vs. a year ago.

   Analysts will be revisiting estimates and we can expect some changes in ratings.  With a double bottom “in” at $385, AAPL can be expected to attack resistance between $460 and $470, but not in a straight line.

 Today:AAPL ran into some light headwinds later in the morning yesterday after a strong open, but buyers took it up to $457 before settling back, Stock looks higher. Support is $448.

FACEBOOK (FB - $37.62)

Buyers and short covering are powering FB up.  Support is now $36.65. Stock looks higher, maybe a smidge below $40.

 FB shares soared Thursday as Q2 revenues of $1.81 billion beat Street projections of $1.62 billion big-time. Net income more than doubled in the quarter  to $333 million from $157 million a year ago. Its monthly active users increased 21% over a year ago. Mobile ad sales accounted for 41% of total revenues up from 30% in Q1.

Today: FB broke out of a two-day consolidation yesterday en route to higher prices. Its report must have jolted bears and sent bulls back to the drawing board to revise future prospects. 

 I DO NOT OWN, NOR HAVE I EVER OWNED APPLE OR FB.

ECONOMY:

   Huge week for reports on the economy plus more insight on Fed policy coming out of the FOMC meetings Tuesday and Wednesday.

   For a detailed account of past and current economic reports, including charts go to: mam.econoday.com

MONDAY:

Pending Home Sales Ix. (10:00)  Declined 0.4% in July to 110.9, but signed contracts are still up 10.9% y/y.

Dallas Fed. Mfg. Svy. (10:30) July’s index dropped to 4.4 from 6.5, but is still generally seen as positive.

TUESDAY:

FOMC meeting begins

ICSC Goldman Store Sales (7:45)   Declined 1.6 pct for the week ended 7/27 with

                       drop more in discretionary vs. staples

S&P Case-Shiller Home Price Ix. 9:00 – rose 12.17 pct  (May) y/y

Consumer Confidence (10:00)  Slipped to 80.3 in July  from 82.1 in June.

WEDNESDAY:

ADP Employment (8:15)  Proj,: 179,000 July

GDP – Q2  (8:30)  Proj.: +1.1 pct annual rate.  GDP has undergone a major revision going back to 1929 so  expect some distortions. The revision will reflect a minor reduction in federal spending and debt as a percent of GDP.  Q2 estimates may lack relevence.

Employment Cost Ix.(8:30)  Proj.:  +0.4 pct Q2

Chicago PMI (9:45)   Proj.: 54.0 July  vs. 51.6 in June vs. 58.6 May

FOMC meeting announcement (2:00 PM)  QE commentary possible

THURSDAY:

Jobless Claims (8:30)  Proj.: 345,000 for 7/27 vs. 343,000 7/20

PMI Mfg. Ix. (8:58)   Proj.: 53.1 July

ISM Mfg Ix. (10:00)   Proj.: 53.1 July vs. 50.9 in June  and 49.0 May

Construction Spending (10:00)  Proj.: +0.4 pct June

FRIDAY:

Employment Situation (8:30)  Proj.: 175,000 July (nonfarm), 187,000 (private), Unemployment rate 7.5 pct

Personal Income/Outlays 8:30)   Proj,: +0.4 pct June

Factory Orders (10:00)  Proj.: +2.3 pct June vs. +2.1 pct May

www.mam.econoday.com.

*FOMC: Oversees nation’s open market operations, the buying and selling of U.S. Treasury securities, as well as the primary  “decider” in the direction of interest rates and money supply.

  George  Brooks

“Investor’s first read – an edge before the open”

This email address is being protected from spambots. You need JavaScript enabled to view it.

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The writer of  Investor’s first read, George Brooks,  is not registered as an investment advisor.  Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. Readers are expected to assume full responsibility for conducting their own research pursuant to investment decisions in keeping with their tolerance for risk.

 

 

 

 

 

 

 

 

 

 

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions.


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By  +Follow July 31, 2013 5:51AM
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