Fed chief Bernanke and members of the FRB have emphasized over and over that tapering out of QE is not tantamount to tightening, and they may be spot on.
However, what is important, in the short-to-intermediate term, is the fact the reduction in Fed bond purchases, however gradual, represents a CHANGE IN FED POLICY.
The market will need to adjust to this first change in Fed policy, because it will not be the Fed’s last.
According to a Bloomberg News survey of 54 economists, the Fed can be expected to cut its $85 billion in bond purchases to $65 billion starting in September.
Interest rates shot up last month and the stock market plunged after Bernanke indicated the Fed may begin to taper in Q4 and end the program entirely by mid-2014, so we know the idea of a change in policy upsets the markets.
Members of the Fed scrambled to assure the Street that taper is not tightening and stock and bond markets soared.
I think it was a mistake for Bernanke to make that statement without first selling the “taper is not tightening” concept, and it was a mistake for the Fed to follow up they way it did.
As a result, the market soared more than 7% in less than four weeks and is nowvulnerable to a bigger correction than if it adjusted to Bernanke’s June 19 comments in the first place.
CONCLUSION:
Reducing bond purchases should not be a game changer, but is does represent a change in policy and with more coming, the markets need to digest that.
The only reason the Fed would taper is if it saw a meaningful improvement in the economy and jobs picture, which would bode well for static corporate earnings.
Nothing wrong with that.
Odds favor a correction in anticipation or in conjunction with the first taper.
While the Fed is determined to hold the line on interest rates, the yield on the 10-year treasury note is now 2.60% up from a May low of 1.63%. Obviously, higher interest rates are a threat to the economic recovery and especially the rebounding housing industry.
Adding to upward pressure on rates, is the prospect of an economic recovery in Europe where the 10-year German Bund is rising as a result.
So far, it does not look like the market is gaining traction from Q2 earnings, though projections for Q4 and beyond may be reason for higher prices in Q4.
TODAY:
Near-term support is DJIA 15,445 (S&P 500: 1,676)
Resistance starts at DJIA 15,584 (S&P 500: 1,692).
I would prefer to look for opportunity in a correcting or consolidating market, one that has time to digest the implications of taper, than to plow into stocks across the board.
Investor’s first read– an edge before the open
DJIA: 15,542.24
S&P 500: 1,685.94
Nasdaq Comp.: 3,679.60
Russell 2000: 1,048.83
Thursday, July 25, 2013 (9:14 a.m.)
Apple(AAPL: $ 440.51)
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. The stock could punch to $448 before the week ends. Support now at $433.
FACEBOOK (FB – $ 26.51)
FB shares soared after the close yesterday 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.
By now you should know I avoid buying a gap open. While FB may open around $32, I think $29.87 – $30.87 looks more reasonable.
I DO NOT OWN, NOR HAVE I EVER OWNED APPLE OR FB.
ECONOMY: Economic reports continue to reflect a slowly improving economy, not anything that would prompt a change in the Fed’s policy of accommodation. Any acceleration in this tempo will raise concern that the Fed will begin to withdraw from its bond buying program.
While the Fed believes the Street now “get’s it,” that taper is not tightening, investors cannot be convinced of that, clearly not after the plunge in stock and bond markets after Bernanke’s June 19 comments about tapering starting in Q4 and ending in mid-2014.
For a detailed account of past and current economic reports, including charts go to: mam.econoday.com
THURSDAY:
Durable Goods Orders (8:30) Proj.: +1.5 pct June vs. +3.7 pct May. Ex-trans +0.6 pct June
Jobless Claims (8:30) Proj.: 341,000 (7/20/13) vs. 334,000 prior week
Kansas City Fed Mfg. Ix. (11:00) Proj.: unchg vs. minus an index oif 5 in JUne
FRIDAY:
Consumer Sentiment (9:55) Proj.: 84.0 July
George Brooks
“Investor’s first read – an edge before the open”
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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.
