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Ben Bernanke and the other members of the FOMC (Financial Oligarchy Manipulation Council) have said that their decision to implement further monetary easing is dependent on the incoming economic data. Presumably that means if the data continues to scare the pants off the politicians - who fear nothing more than being held responsible for their own actions - then Bennie and the Inkjets will come to the rescue just in time for the lamest lame duck session since before Newt Gingrich grew large enough to attract satellites. If that is really true, last week’s data certainly won’t prevent them from proceeding with their attempt to create prosperity through the magic of cheap currency and higher prices.

The week started with a punk report on Industrial Production which fell 0.2% in September. Some of that might have been due to a fall in utility output of 1.9% but even factoring out the mild weather, manufacturing is softening. The Empire State manufacturing survey provided some hope a couple of weeks ago but the Philly Fed version last week successfully stomped out any thoughts of a near term revival.

New orders (-5), backlog orders (-8.9) and inventories (-18.6) were all negative while employment was basically flat although more firms reported fewer hours worked than more. Even more ominous for future corporate profits - and the efficacy of QE II - was the price data. The prices paid index increased 22 points while the prices received index remained negative, meaning more firms reported falling prices than rising. Paying more for inputs while getting less for outputs is not a recipe for higher profits or more hiring. The Fed might want to keep that in mind as they ponder the consequences of their monetary emissions.

One potential bright spot last week was housing. Homebuilders reported the first uptick in activity since the expiration of the homebuyer’s tax credit and housing starts actually ticked higher. Of course, we are still talking about housing starts just over 600k annually which is historically pretty bad - okay, awful - permits were down and mortgage applications fell off a cliff, but hey I did say potential bright spot. The Goldman and Redbook retail sales reports certainly showed no bright spots, potential or otherwise, as both recorded the weakest readings since last spring. The year over year rate of increase is slowly fading, now up about 5%.

Jobless claims were down from the previous week but are still stuck in the mid 400k range. Current levels are consistent with weak employment growth and no where near what is needed to reduce the unemployment rate significantly. Leading indicators were also released last week and were up 0.3%. Unfortunately, the most positive aspects were monetary and we’ve been beating that particular dead horse for two years now with limited effect. I’m of the opinion that beating the horse harder is not the answer to our problems but Ben Bernanke apparently thinks all we need is a bigger stick.

US stocks were slightly higher on the week while emerging markets sold off modestly. With finance ministers everywhere trying to limit the fallout from the assumed coming dollar tsunami, emerging market currencies also backed off a bit. If the Fed does indeed implement an aggressive easing, the setbacks in these currencies are likely to be short lived. Surplus countries can only do so much to prevent their currencies from rising; capital controls are generally ineffective in stopping inflows. China took a different tack by raising interest rates but a quarter point hike in rates is like spitting into a gale force wind. More promising would be allowing more mainland Chinese to invest abroad and the government is supposedly accelerating efforts in that regard. What would the US do if the Chinese allowed their citizens to freely invest outside China, let the Yuan float……and it fell against the dollar? Boy, that would throw a monkey wrench in the blame China, blame anyone but ourselves, coterie.

Commodities also sold off a bit with gold falling roughly $60 on the week. This coincided with a modest - very modest - bounce in the US dollar index. I have been looking for a correction of some kind in the prevailing trends of higher commodities/higher stocks/lower dollar and it might have finally arrived. Ask yourself what would happen to the market if the Fed were to disappoint after the next meeting and announce something more akin to QE Lite rather than the full calorie version currently expected by the Street. How far would stocks fall - and the dollar rally - if, God forbid, the Fed did nothing? I can’t be the only one pondering that outcome and it should not be surprising if some of the ponderers decide to take a few chips off the table before the actual event. Here’s something else to ponder; what if the Democrats retain the House of Representatives? Or more likely, what if the Republicans take the House and, like the dog chasing the car, have no idea what to do with it once they’ve captured it?

Sentiment is still overly bullish on stocks - particularly of the emerging market variety - commodities and gold. Similarly, the bearish sentiment on the US dollar is nearly universal. Unless there is a significant change in economic policy, I find it hard to disagree with the bearish regard for the dollar over the long term. Monetary policy - or at least potential monetary policy - is negative for the dollar because it involves an increase in the supply. Likewise, fiscal policy is seen as dollar negative as higher taxes, more regulations and negative national savings reduces the demand for greenbacks. Indeed, as long as the Treasury soaks up all the capital inflows and leaves little for the productive economy, higher, sustainable growth rates seem unlikely. Having said all that, a rally in the short term - and a correction in the prices of the things that benefit from a weaker dollar - seems likely as the market, I believe, is anticipating more than the Fed can deliver.

Disclosure: No positions

Source: Weekly Economic and Market Review: Ready for a Short Term Rally?