Good Morning. When there is no data to key off of, as has been the case so far this week, traders and their computers are basically left to on their own to ponder the big picture. And based on the action of the last four days, it doesn't appear that anyone is feeling especially optimistic right now.
While we can argue until the cows come how about why the market is doing what it is doing on a daily basis, I'm going to opine that the issues of the Fed's Taper and Bernanke's successor are the big-picture topics of the day at the present time. So, in my last morning missive before I head across the pond for some R&R, I thought we should explore the idea that the Fed may have lost control of the situation in the bond market.
One Reason Stocks are Falling
Usually, the catalysts behind a 3.7 percent decline in the market are fairly obvious. News, data, and/or rumors tend to give traders cause to move the market in one direction or the other. However, this time around the issues are more muddied and investors who have become accustomed to the market rebounding quickly from each and every decline may be left scratching their heads right about now.
One of the drivers behind the bulls' run for the roses over the past nine months has been the idea that central bankers around the world have been targeting asset prices with their policies. In plain English, this means that Mr. Bernanke and specifically his counterpart in Japan have been trying to push prices of stocks and real estate higher. The thinking behind what is commonly called the "wealth effect" is that when folks see the value of their homes, their 401Ks, and their mutual funds rise, they feel better about their financial situation. And when people feel better about their finances, they tend to spend more, which in turn, stimulates the economy. What's not to like, right?
Based on the steady improvement seen in the housing market over the past year and the new all-time highs in U.S. stock market indices, it is safe to say that Bernanke's bunch has achieved at least part of their goal. However, due to a variety issues, the outlook for further success of the Fed's stimulus strategies may be coming into question.
With the Federal Reserve currently buying up more than 1 trillion dollars per year of bonds, rates have stayed low - artificially low - for some time. Until just recently, the thinking was that Mr. Bernanke and his merry band of central bankers would continue to err on the side of caution when it came to the economy. In short, Bernanke has pledged to do whatever it takes to make darn sure the U.S. doesn't wind up in a deflationary cycle. And if this meant that rates had to stay low - again, artificially low - for an "extended period" and that asset prices would inflate along the way, so be it.
The Fly in the Ointment
The problem is that there appears to be a fairly large fly in the ointment right now. First, in an ongoing effort to make the Fed even more political than it already is, President Obama has declared that he's seen enough from Ben Bernanke. In what can only be categorized as a sacking, the president recently announced that the Fed chairman would not be seeking another term come January 2014. According to the latest poll, Obama's close economic advisor, Mr. Larry Summers, is the front runner for the appointed post.
As a quick aside, does anyone besides me find it annoying that the most important financial/economic position in the country and perhaps the word is an unelected one? But I digress ...
The problem here isn't whether anybody thinks Larry Summers will do a decent job. No, the issue is that "Gentle Ben" will be leaving. And based on the discussions being held by Fed governors in the media, so too will Mr. Bernanke's policy to err on the side of caution and easy money.
So, while everybody knows that the Fed's uber-easy monetary policy would end at some point, now there is an actual spot on the calendar to point to. Instead of Bernanke continuing to pump money into the system until unemployment comes down to 6 percent or so, or until inflation reaches a level that becomes a problem (which would undoubtedly include more wealth effect, btw), now traders and investors have to decide whether or not the game will change completely in the next four to five months.
In short, this creates uncertainty. And as everybody knows, traders hate uncertainty. So, what do traders do when uncertainty rises? Yep, that's right; they sell.
The key is that because (a) the Fed is "talking taper" and (b) Bernanke is leaving, the Fed appears to have lost control of the bond market. Rates are spiking as the yield on the 10-year has moved from 1.63% to 2.88% in just a little over three months. In what may be the most publicized market move in history, investors are selling bonds. And the bottom line is this isn't likely to change any time soon.
So, with traders feeling fairly confident that the era of artificially low rates is coming to a close in the near future, it appears that there are simply more sellers than buyers in the bond market these days. And with the Fed ready to back away a bit in the near-term, well... you get the idea.
Publishing Note: My vacation time has finally arrived. I am traveling with family in France for the better part of the next 2.5 weeks. Thus, my oftentimes meandering morning market missive (aka "Daily State of the Markets") will be published as time and energy levels permit.
Turning to This Morning ...
Overnight markets were red across the board as the Asian indices had an especially rough time. European bourses are also down more than 1 percent across the board this morning. However, a better than expected earnings report from Home Depot (HD) and a modest drop in interest rates has spurred some buying in U.S. futures. And after being down nine of the last eleven sessions, a rebound at the open is probably to be expected. But with no economic news scheduled once again, we will have to wait and see if the upbeat mood can last.
Here are the Pre-Market indicators we review each morning before the opening bell ...
Major Foreign Markets:
- Japan: -2.63%
- Hong Kong: -2.30%
- Shanghai: -0.63%
- London: -0.60%
- Germany: -1.14%
- France: -1.49%
- Italy: -1.63%
- Spain: -2.21%
Crude Oil Futures: -$0.68 to $106.42
Gold: -$0.20 to $1365.50
Dollar: higher against the yen, lower vs. euro and pound.
10-Year Bond Yield: Currently trading at 2.817%
Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: +3.99
- Dow Jones Industrial Average: +37
- NASDAQ Composite: +7.37
Thought For The Day ... A good leader takes a little more than his share of the blame, a little less than his share of the credit. - Arnold Glasow
Positions in stocks mentioned: none