Show and Tell for the Fed

George Brooks |

U.S. Federal Reserve FedInvestor’s first read   - Brooksie’s edge before the open

Wednesday, June 20, 2012        9:07 a.m. ET

DJIA:  12,837.33

S&P 500:  1357.98

Nasdaq Comp.: 2928.76

Russell 2000:  786.43

The market has run up in recent days in anticipation of an announcement by Fed chief Bernanke that the Fed will undertake (not just verbalize) measures to prompt a rebound in the economy, which has been slipping in recent weeks.

His press conference will be held at 2:15 today.

We know the Fed intends to do what is necessary to goose the economy, the question is does it take action NOW.

Odds favor the Fed will expand Operation Twist rather than go the QE3 route, since it does not impact the Fed’s balance sheet.. Essentially, the Fed sells short-term debt then uses the proceeds to buy longer term debt, “twisting” long-term interest rates lower hoping banks will lend and businesses and individuals will borrow.

Europe: Reportedly, no help from the G-20 summit in Mexico except “words” of intended support for Europe’s debt problems. Couldn’t these people decide to do nothing  without meeting ?

  European Union leaders will meet in Brussels on June 28-29.

CONCLUSION: Individuals and businesses with excess cash are not earning anything on short-term investments.  A 10-year treasury note yields 1.62%. If  long rates are cut further, long maturities won’t yield anything meaningful before long either. Imagine the impact low rates are having on millions of consumers that used to rely on t-bills, CDs and money market instruments for income.

Lenders aren’t lending, borrowers aren’t borrowing – too much uncertainty.

Fortunately, the U.S. government is borrowing on the cheap.

The real fix for uncertainty among business and consumer spenders is for Congress to abandon extreme ideological tenets and find common ground for decisions on key issues and especially budget cuts and selective measures to raise government revenues now, not later, before the nation is shoved over the “fiscal cliff” next year.

TODAY: If the Fed is planning to announce a dramatic new initiative  to stimulate the U.S. economy other than an extension of Operation Twist, I think the market would have soared on thunderous volume prior to this. Volume has been low.

That is my assumption based on market action and my belief that the softness in our economy in recent weeks is partly seasonal, but mostly due to the uncertainty surrounding the worries about the  consequences of  the “fiscal Cliff” facing the country next year as huge budget cuts are possibly forced and taxes possibly increased.

By law, both must be addressed.  While Congress has “wiggle room” on budget cuts and the Bush-era tax cuts, few people are aware of this. The press will trumpet the fear factor through year-end. If businesses are reluctant to spend and consumers reluctant to buy, because they have no idea whatsoever what Congress will or will not do, who can blame them ?

STOCK MARKET:  This is not a situation where an investor MUST make a decision to go all-in ahead of the Fed’s policy  announcement.

If the Fed surprises, there will be plenty of time and opportunity to make money. A lot of good quality stocks are attempting to bottom out.

There is a risk in front running the Fed. It may not announce anything new, aside from extending Operation Twist, which is pretty much expected.

That means a correction is possible as early as today, most likely after a brief spike up across DJIA 12,900 (S&P 500: 1365) before a sell off to DJIA12,680 (S&P 500: 1339).

Facebook (FB): It looks like FB has a “lid” on its price around 32. Sellers come from several sources. Some traders bought it around 26 -27 and are satisfied with a quick 5-point gain. Others bought it on the offering or in the mid 30s and were stunned when it dropped below 26. Some will cut losses short and sell now that a major portion of their loss has been reduced. Then too, there are short sellers who are selling (short) to stop the run up, and to hopefully make money on another plunge in its price.

Its stock is trading sideways in a “consolidation” pattern. A break above 32.30 could chase shorts and fuel another run up. A lack of buying or increased selling could break the stock down to 30.80. I could be more optimistic if it were not for the negative sentiment associated with the IPO. It will take some serious buying (and time) to cut through that.

ECONOMIC DATA:  Big week for economic data, especially Thursday (see below).  The Federal Open Market Committee (FOMC) meets Tuesday with commentary and Fed chief Bernanke’s press conference Wednesday at 2:15 p.m.

MONDAY:

Housing Market Index (10a.m.)-Rose to 29 in June from a revised 28 in May.  Currently, tight lending conditions and inaccurate appraisals are to blame for fewer closings, according to David Crowe, Chief economist for the NAHB.

TUESDAY:

Housing Starts (8:30a.m.)- declined 4.8% in May to 708,000 vs a revised 744,000 in April. Both multifamily and single house sales were good, apartment house construction adversely impacted the number for May.

WEDNESDAY:

FOMC Meeting Announcement 12:30p.m.)-

FOMC Forecasts (2p.m.)

Bernanke Press Conference (2:15)

THURSDAY:

Jobless Claims (8:30)-Rose 6,000 in the June 9 week to 386,000 claims vs. a revised 380,000 the prior week. The 4-week average was up 3.500 to 382,000.

PMI Manufacturing Index (9a.m.)-Slipped 2.1 points in May to 53.9.

Existing Home Sales (10a.m.)-Up 3.4% in April after a 2.8% drop in March. Gains were solid across all regions, however year-to-date is flat.

Philly Fed Survey 910a.m.)-Dropped in May to a negative 5.8 from a positive 8.5 in April.  New Orders dropped 3.9 points to a negative 1.2 for the period. A year ago, this  Index plunged from the 40 level in February to a negative 25 in August, rebounded  to a positive 10 until March 2012 after which it declined. Its behavior in 2010 was similar. I took the data from a chart so the exact numbers may vary slightly.

FHFA House Price Index (10a.m.)-Rose 1.8% in March after a 0.3% gain in February. Year over year rate also surged to a plus 2.7% reflecting a pronounced increase in home prices.

Leading Indicators (10a.m.)-Declined 0.1% in April after a 0.3% rise in March and 0.7% jump in February. Building permits and jobless claims were the big contributors to the April decline.

*Bloomberg.com

 

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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Companies

Symbol Name Price Change % Volume
DIN.DB:CA DIR Industrial Properties Inc. 6.75% Convertible U 101.50 0.50 0.50 20,000

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