10 Reasons Not To Be Short Ahead Of The Fed

by: Cullen Roche

The usually bearish David Rosenberg of Gluskin Sheff is sounding bullish on the basis of more expected Federal Reserve action. In today’s research note, he explains why he believes the Fed will act more aggressively than investors think, and says the S&P 500 could rally to “at least” 1,250. He provided 10 reasons investors don’t want to fight the Fed today:

1. Just go back to August 9: The Fed was supposed to make a more emphatic comment in the press statement about “extended period” as it pertained to the length of time the Fed would stay ultra-accommodative on the rates front. Ben Bernanke went much further than anyone thought with his pledge to keep rates at the floor to mid-2013.

2. Bernanke has shown repeatedly that he is willing to take risks and be very aggressive.

3. The Dow finished the August 9 session with a huge 430-point gain after the FOMC press statement was fully digested. Not only that, but when Bernanke held his two-day meeting in mid-December 2008 and unveiled QE1, the Dow soared 360 points. And last November, the day after the two-day meeting when Bernanke made it clear in his Washington Post op-ed how key it was to ignite the stock market, the Dow jumped 220 points. It may all be just for a near-term trade, but in an industry where every basis point counts, who wants to be short in front of that?

4. At that August meeting, we know both from the statement and minutes that additional rounds of unconventional easing were discussed. And Bernanke made it very clear at Jackson Hole that they would be on the table again the coming meeting.

5. The Fed would like to be out of the picture during the election campaign (especially if Rick Perry ends up winning the GOP nomination).

6. The Fed has cut its GDP forecast at each of the past three meetings.

7. The stock market is actually little changed from where it was at the last meeting, and we know based on the Washington Post op-ed that it is equity valuation (specifically the Russell 2000) that Ben wants to see rally. Sanctioning lower bonds yields is just a means to that end.

8. There is no fiscal stimulus to bolster the economy, with the odds very high that the Obama jobs plan – which some in his own party object to – will be dead on arrival on the House floor. The Fed is the only game in town.

9. Financial conditions have tightened nearly 100 bps since the spring and deserve a policy response.

10. Bernanke announced at Jackson Hole that this coming meeting was going to be a two-day affair, not one day. The last time he did this was back in December 2008, and that was when he invoked QE1. There has to be a reason why it is two days, and it must be because he wants to build the case for three dissenters. The board is being sequestered for a reason!