MARKET SUMMARY

Lots of reasons for people to be ‘proud’ of themselves Wednesday.

There was ‘no time for silliness’ Wednesday.  The President was talking about his birth certificate.  Trump was modestly talking of his self-pride in getting the President to talk about his birth certificate.  Bernanke fielded questions at his first press conference and indeed the first Fed press conference in 97 years.  The birth certificate didn’t come up and the market didn’t crash afterwards so Bernanke was proud as well.  The shocker: the President actually deigned to answer the allegations by personally granting a press conference.  If he was really serious about the lack of seriousness he would have acted a bit more Presidential and dismissed the ‘controversy.’  Good thing the silliness is over.

The session was not silly.  At first it was downright boring.  Futures were up and stocks started higher only to fade to flat or lower by midmorning.  The FOMC announced no change in rates and minor tweaks to its statement.  The market bounced modestly and again went quiet, awaiting its leader, the Fed chairman.  When Bernanke started to wind up his press conference with no major hitches the market started to rise.  It rose into the close, adding to the Tuesday breakout move.

Why the positive response? Bernanke said QE2 would end but that the Fed’s balance sheet would remain the same as the Fed would, as the administration likes to say, ‘reinvest’ in the US, plowing the proceeds of its bond and Mortgage Backed Securities holdings back into the economy.  In effect, Bernanke continues quantitative easing but simply in a different form and by a different name.  Thus the ‘rose by any other name’ reference above.

It certainly smelled sweet to stock investors.  After all this is as much a liquidity rally as any growth rally.  Indeed it is more due to liquidity than economic growth: even today Bernanke said the recovery was subpar by any standards, particularly given how deep and nasty this Great Recession was.  You would expect a bigger, indeed roaring recovery.  The problems are big, however, and the Administration’s policies are tried and true . . . at keeping growth low.  The 1930′s and the 1970′s proved it.  Another 40 years has passed so it was time to try it again I suppose.  I said when all of this started it would take a long time to unwind what has been done.  The next generation has a lot to do, but of course they have to learn what the Constitution is in order to do it.  Yes, lots of work ahead.  But I digress.

What else did Bernanke say?  The Fed revised its CORE inflation forecast upward to 1.3% to 1.6% from 1% to 1.3%.  Still within the ‘speed limit’ so no issue with that, at least for the Fed.  For the rest of us actually paying higher prices for most items it is a real issues.  Consumer Confidence is up, however, so I suppose I worry for naught.

Bernanke also explained the phrase ‘extended period.’  According to the Fed, each time the phrase is used it ‘probably’ means a ‘couple of meetings.’  Sound vague?  Bernanke said the phrase was meant to be vague.  No kidding.

Getting the Treasury Secretary Involved.

The real kicker involved both Bernanke and little Timmy Geithner.  Ahead of the press conference Timmy gave Bernanke some cover, protesting with red cheeks that ‘under my watch’ there was a ‘strong dollar policy.’  Apparently ‘strong dollar’ is a relative term.  Are we talking the Clinton years when the dollar was strong?  Reagan when the dollar was strong as well, both mind you because of good economic policy that led to good economic results.  Clinton may not have engineered the prosperity he enjoyed during his tenure but he certainly knew enough to get out of the way and let it work for the country.

Bush and his Treasury Secretaries all boasted of a strong dollar, but one that was much weaker than the Reagan dollar or the Clinton dollar.  The relativity starts to appear and the dollar started to slide.  And why not?  Like father, like son.  Bush I had James Baker involved and he is a big weak dollar advocate. 

Now we have the Geithner dollar and it is even weaker than Bush left it.  Weaker and getting weaker by the day.  But apparently still in a class considered strong.  After all Geithner said no weak dollar on his watch.  Did you see his nose grow as he spoke?  Have you noticed he does not look into the camera when he makes those statements?  He cannot, and any behavioral analyst will tell you that is the classic indication the speaker does not believe the words he or she is uttering. 

Bernanke continued the ‘interesting’ stance, indicating that he and the Fed championed a strong dollar as well, but that there are times that the dollar has its ‘temporary ups and downs.’  He didn’t elaborate, but we are pretty sure it is now heading into one of those down times.  With our debt, our inability to get serious about it, and the Fed’s bald-faced mischaracterization of what it is doing, it is likely to go a lot lower.  The Fed’s actions HAVE lowered the value of the dollar and as seen on Wednesday after the Fed Chief’s press conference when it fell apart, its actions will continue to do just that.  Obama loves it with his visions of the US as an also-ran exporter to growing economies but you would think Bernanke would now be worried about his legacy.  He may have averted GD II but he risks a 1970′s Malaise II right now.

THURSDAY

With NASDAQ and SP500 solidifying their breakouts it does not look as if there will be a reversal that gives up that move.  It does not mean it cannot happen, but the market avoided that immediate reversal action on a breakout that is a tell tale sign of failure.  That said, the indices have rallied for seven sessions and on this move and are extended.  The leaders of the move are extended as well.  Thus we were more content to let positions run.  If the move continues, we let them continue.  When the move starts to falter we can bank some more gain and look for the pullback to set the leaders up for new moves.

As for new buys there continue to be stocks setting up for moves even as others extend their rallies and become overbought near term.  That is how a rally works: newbies or recycled leaders come back around to start higher as the last wave of leaders test their most recent move.  We see some of those setting up, e.g. FFIV and CRM noted earlier. Others that gapped higher on earnings are testing, and as they have made their consolidation we can look their way as well for a continuation of the gap.  That is frankly our favorite way to play earnings though a rip higher on results such as with AMZN is pretty decent. 

With the move upside the buys will be fewer; if the market tests most stocks will test with it.  With those that are pulling back and setting up nice flags, if they show the breaks higher we can go with some positions.  Why?  Because they have made their pullbacks while the market rallied, moving counter-cycle.  So if they break higher as the market tests or prepares to test they will likely just be moving counter-cycle once more.

Jon Johnson