Fed to Step in to Stem the Carnage

George Brooks |

Fed to Step in to Stem the CarnageInvestor’s first read      - Brooksie’s edge before the open

Monday, June 4, 2012        9:15 a.m. ET

DJIA:  12,118.57

S&P 500:  1278.04

Nasdaq Comp.: 2747.48

Russell 2000:  737.43

Investors need to step back and examine their emotions.

My guess is “fear” rather  than, “Aha ! What a great opportunity to buy on a pullback” dominates investors’ thinking. In fact, I would not be surprised if many investors are prepared to sell out today or this week, certain that the stock market is  about to crash.

I don’t blame them. Economic reports indicate we are likely on a fast track for a recession, just like the doomsters and congressional obstructionists are hoping for. Foreign country slowdowns and recessions practically ensure a crash.

Don’t bet on it !

What is now happening here and abroad isn’t coming as a surprise to the U.S. Fed and the leaders of foreign countries. Just about the time it looks like it looked like it is safe to sell short, they will intervene to head off a devastating wipeout.

Fed officials are out in force this week, giving speeches or testifying before government groups.

QE3?

Don’t know. Not sure it would help. What is important is the “perception” that something is being done.

I do believe the Fed got an early read on the soft numbers ahead of what are seeing now and have been tracking economic and fiscal problems abroad, as well as the slowdown in China, India and Brazil. No fewer than nine Federal Reserve officials are speaking this week. Fed Chief, Ben Bernanke, will testify before the U.S. Congress Joint Economic Committee on the condition of our economy, starting at 10a.m., Thursday .

Likewise in Europe.  Damage control is again front burner.  Global investment markets must be assured that European leaders can head off contagion as the euro faces a major facelifting. They have been wrestling with this issue for two years.

TODAY: I still think the DJIA can drop below 12,000, to my target for the second leg of this decline - DJIA 11,915 (S&P 500: 1255), before an attempt to stabilize develops.

Commentary by Fed official officials this week can slow the slide. I suspect their tone will be that they are prepared to do what they feel is necessary to goose the economy.

Game’s on!  With global economies skidding, the Fed must at least attempt to cut U.S. losses.

I don’t expect a sustainable rally until late summer/ early fall, sharp rallies –yes, but nothing sustainable. Worst case, based on what I see now, DJIA 11,450 (S&P 500: 1210). It’s too early to project accurately – too many balls up in the air, any one of which can come down to make matters worse.

ECONOMIC REPORTS:  Stock prices have accelerated their decline in face of increasingly dour reports on the U.S. economy. Is this just another summer slump ? Will this trigger QE3 by the Fed. ? What’s important about this week’s line up of reports is a lot of Federal Reserve  brass is out there addressing the issues - hmmmm.

Monday:

Factory Orders (10p.m.) Fell 1.5% in March, the steepest drop in two years. Durable goods were down 4% (ugh!), non-durables up a smidge (+0.5%).

Tuesday:

ISM Non-Manufacturing Rept (10p.m.) The ISM Index dropped sharply in April to 53.5 from 56.0Both New Orders and business activity were soft reversing a surge that started in January and February then trailed off.

Wednesday

Productivity and Costs (8:30) Q1 business productivity slipped at an annual rate of 0.5% after 1 1.2% rise in the prior quarter. Hours worked increased at an annual rate of 3.2% vs. 2.4% in the prior quarter, however compensation slowed to 1.5% from 3.9% in Q4.

Beige Book (2p.m.) Produced two weeks ahead of Federal Open Market Committee meetings (FOMC), the book reports on the economic conditions in each of the 12 Federal Reserve districts. It CAN offer clues to future Fed policy changes.

Thursday:

Jobless Claims (8:30) Claims increased 10,000 in the May 26 week to 383,000 bringing the 4-week average to 374,500. Claims have been sliding down for well over 18 months.

Bloomberg Consumer Comfort Index (9:45) This Index results from a weekly survey of American views of the economy, their personal finances and buying intentions.

Friday:

International Trade (8:30) The trade gap widened to $51.8 billion in March from $45.4 Billion in February. Exports rose 2.9% after a 0.3% increase in February. The deficit in non-petroleum goods was a major contributor.

Wholesale Trade (10p.m.)Wholesale inventories rose 0.3% in March with sales up 0.5%, the inventory/sales ratio remained unchanged at 1.17.

George  Brooks

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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.

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