Daily State Of The Markets: Distractions And A Threshold-Based What?

by: David Moenning

Good Morning. It was so easy to become distracted by all the shiny objects in the market yesterday. There was a batch of headlines produced in rapid-fire fashion by Jamie Dimon. There was a rather lengthy interview with Goldman's Lloyd Blankfein. There was the GOP leaders' press conference suggesting that the cliff negotiations were getting worse, not better. There was the doomsday outlook from deep-thinking Bridgewater founder Ray Dalio. There was Wal-Mart's (NYSE:WMT) CEO talking about how cliff worries were hurting sales (frankly, I wasn't aware that Wal-Mart shoppers were so economics savvy). And then there was Mr. Bernanke.

To be sure, it has been a while since the market focused on the Fed chairman as all the hoopla that preceded QE3 seems like a distant memory these days. But after what felt like a fairly long hiatus, Gentle Ben returned to the spotlight on Wednesday. And for a while at least, Bernanke didn't disappoint.

In all honesty, I wasn't waiting on pins and needles for the 12:30 p.m. FOMC announcement. With the Fed seemingly out of bullets and 88% of the economists surveyed expecting the Fed to replace Operation Twist with some new form of QE, it didn't seem like there was much to get worked up about.

But much to my surprise, Ben Bernanke did pull a new trick out of his bag and surprised us all. By now we all know that the Fed Chairman is committed to keeping the good 'ol USofA out of a deflationary spiral. However, nobody really expected the Bernanke cavalry to mount up again on Wednesday. So, when Bernanke announced that the Fed was employing what is being called "threshold-based guidance" for their QE programs, well, the algorithms sat up and took notice.

Although the announcement that the FOMC planned to purchase a total of $85 billion of mortgage-backed securities and treasury bonds a month wasn't a surprise, the revelation that Bernanke's gang intends to keep at it until they get what they want (an unemployment rate below 6.5%) did. And for a while anyway the stock market celebrated the idea that the Fed was indeed on a mission and would do whatever it takes, for as long as it takes, in order to get the economy humming along again.

But then the humans got involved. It probably occurred to some that Bernanke's statement, "The economy is not as strong as the unemployment rate implies" wasn't exactly positive. And if Ben Bernanke said it once during his press conference, he must have said it 5 times: The Fed isn't equipped to save the economy from the fiscal cliff. Then there was the reporter question that basically accused Bernanke's bunch of monetizing the U.S. budget deficit by buying the trillions in bonds the U.S. Treasury has been selling. And finally, there was Bernanke's response, which was something to the effect of "Hey, Europe and Japan are doing it too."

In short, while the algos were busy parsing the Fed chairman's answers (and running sell programs in response to words like "unintended consequences") real live humans appeared to be getting a little nervous. And before long, the celebration of the Fed's intentions turned into fear of what might (or, again, what might not) happen next. So, before you could figure out where the hyphen goes in the phrase "threshold-based guidance," the market had gone from green to red.

At the end of the day, the bears were screaming about some funky candle-stick formation that most certainly portends trouble ahead for the stock market. And I heard some analyst suggest that the entire economy was being held hostage by the political grandstanding in Washington D.C. As exhibits A, B, and C in his argument, this analyst pointed to the UofM Consumer Confidence number, the NFIB Small Business Optimism Index, and the recent data on business investment - all of which are already tanking.

But perhaps the best summary of the market situation was summed up in less than 140 characters as Yahoo Finance's Jeff Macke tweeted yesterday afternoon: "If POTUS could hold a closed door meeting and emerge with an actionable plan, Bernanke wouldn't matter."

So there you have it. While there was a lot to be distracted by and a new threshold-based thingamajig, the bottom line is the game is still all about the cliff. And until we get a resolution, stocks will remain chained to the hopes and fears that a deal either will or won't get done before 12/31/12 at midnight.

Turning to this morning ... After being up for the past six sessions, research shows that the seventh day is usually down. Couple this with some confusion over what to make of Ben Bernanke's latest plan to tie rates to unemployment and word that there is no progress on cliff negotiations (NBC's Chuck Todd called the negotiations "a disaster" over the last 48 hours) and you wind up with a sloppy market in the early going.

On the Economic front ... We'll get reports on Retail Sales, PPI, Weekly Jobless Claims, Bloomberg Consumer Comfort, and Business Inventories this morning .

Thought for the day ... Don't cry because it's over. Smile because it happened. -Dr. Seuss
Pre-Game Indicators
Here are the Pre-Market indicators we review each morning before the opening bell ...
Major Foreign Markets:
- Shanghai: -1.04%
- Hong Kong: -0.25%
- Japan: +1.69%
- France: +0.01%
- Germany: -0.27%
- Italy: +0.09%
- Spain: +0.15%
- London: -0.17%
Crude Oil Futures: -$0.53 to $86.24
Gold: -$21.80 to $1696.10
Dollar: lower against the yen, higher vs. euro and pound
10-Year Bond Yield: Currently trading at 1.699%
Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: -0.88
- Dow Jones Industrial Average: -4
- NASDAQ Composite: -3.18
Positions in stocks mentioned: none