Will the Fed Take Stimulative Action?

Right around this time last year, top hedge fund manager David Tepper told the CNBC audience “everything is a buy.” Tepper’s thinking was that you needed to own stocks and commodities going forward due to the environment. Tepper argued that if the economy strengthened stocks would be winners and yet if the economy weakened stocks would also be winners in light of the fact that the Fed was likely to stimulate the economy as a result of any weaker data. And while Mr. Tepper has not been on CNBC of late, it does appear that traders are treating the current environment as a case of déjà vu all over again.

Although almost no one expected Ben Bernanke to announce any new changes to monetary policy during Friday’s speech in Jackson Hole, analysts did expect – and also received – the necessary hint that more stimulative measures were on the horizon. If one compares the text of Bernanke’s 2010 speech from the economic gathering in Jackson, WY to that of this year’s, it becomes clear that Bernanke has once again left the door wide open for the Fed to take further action.

In addition, the minutes from the latest FOMC meeting were definitely a bit more dovish than the headlines may have led investors to believe. Although an eye-opening three members of the FOMC dissented on the idea of leaving interest rates at near zero for the next twenty months or so, the minutes of the meeting showed that several members wanted to take more stimulative action at the August meeting.

Staying on the subject of the FOMC, we also learned yesterday that (a) one of the three dissenters said publicly that his “nay” vote was unlikely to be repeated going forward and that (b) another FOMC member thinks that the time is now to do more for the economy.

The bottom line here is that it looks like the odds of the Fed taking further action have grown significantly since Friday morning. And as a result, traders appear to be dragging out David Tepper’s playbook again. How else do you explain the sudden flip-flop in market sentiment? Suddenly, all news is good news again, programs are being run consistently to the upside, and the buy-the-dip crowd has become fairly aggressive.

While I see “the trade” that appears to be unfolding and I do understand the logic behind it, I am more than a little perplexed about the idea that everything is a buy once again. You see, QEII actually did little to spur the economy as GDP growth has sputtered so far in 2011 and the hoped-for rebound in the second half is now in question. And on the issue of jobs, well, QEII was nothing short of a complete dud. The bond-buying program did weaken the dollar however, which was great for all those dollar-carry trades the hedgies enjoy so much, and it did push commodity prices higher. This, of course, was not so good for anyone buying gasoline or food around the world.

Last year’s summer swoon ended in response to the “Tepper Trade” and the idea that the debt debacle in Europe was under control. And while we have heard some talk about the EU’s “radical plan” to backstop banks, we should keep in mind that the plan has yet to actually be announced. In addition, there is a growing question about whether or not all seventeen EU countries will wind up voting for the Greek bailout. Should the bailout vote fail then a default is suddenly back on the table.

Sorry to be wearing my Debbie Downer hat this morning, but I am just a little concerned about the idea of “the Tepper trade” working so easily a second time around. So, while we will indeed follow our models and attempt to stay in tune with the environment, I currently have an eyebrow raised about the return of “the trade.”

Turning to this morning… It’s still all about the idea that the Fed will take stimulative action this morning. Foreign markets are higher and the futures in the U.S. are green.

On the Economic front… The ADP report shows that private sector jobs rose by 91K jobs during the month, which was below the consensus expectations for a gain of about 100K and also below July’s 109K level (revised down from 114K). However, this was not the disaster that some had feared. In addition, Challenger reported that there were 51K layoffs planned in the month, which was below last month’s level of 66.4K.

Note that we will get the Chicago PMI and a report on Factory Orders later this morning.

David Moenning
Editor: The Daily Decision