I really don't know if I can hold myself together until this evening. It's way too hard. We've all been waiting since Monday. Well actually that's not quite true, on a stock by stock basis there's a lot of action, but if we take the market as a whole and try to find a global trend, we're suddenly left paralyzed by the possible outcomes of the next 48 hours.
It's possible we'll meet again on Friday and say "in the end we still don't know anything", but until then our brains are working overtime and are overloaded with all the possible outcomes and crazy scenarios that could happen in the coming hours.
You may not know this but today will be the day we get the FOMC Meeting and American GDP announcements, and if you don't know that it probably means you've been on holiday for the past 3 weeks (at least), you've left your lifelong companion (iPhone) back home and you've been exercising your freewill by trying your best not to switch on the TV and watch CNBC or Bloomberg…
For the past three days now, we've all been in « I don't do anything until I know something » mode. Market volumes are at an all-time low and the focus is on "how long do we wait" instead of "what do we do". As a result yesterday's session was in the top 10 of the lowest volume days, at number 7 in the charts.
So what are we waiting for ???
It's quite simple actually, at least I think it is.
This evening the FED should announce they will keep rates low for the foreseeable future, but the important bit will be Bernanke's "implied" position on the tapering -let me remind those of you in the back of the classroom, tapering means reducing the support for the US economy and as an extension to the financial markets, by reducing the amount of money injected in the economy, currently that injection is 85 billion $ per month- And this evening Bennie will imply how or when he will start doing it. He'll either say; starting from September it's dry bread and water diet for everyone or he could say we still have a bit more time ahead of us.
To make their decision, the FED is looking at a number of different indicators, for example the job market and the GDP. And what a coincidence, the GDP will be published this afternoon. One could think the FED is currently working on two different speeches. The first one, to be used if the annual GDP growth rate is above the FED forecasts (approximately 2.3-2.6% growth), will mean a belt tightening for everyone. And the second one, if the growth rate is below the FED's forecast, should mean the tapering will wait a while longer.
So here we are with a « heads or tails » scenario. Once we know what the "Messiah of the financial" market thinks we'll be able to focus on how most traders will understand and interpret his thoughts.
Situation number 1 :
The tapering will begin in early September. This wouldn't be good news for markets, because it will lose one its main supports. But on the other hand this would be good news, because it means the FED thinks the economy is healing and could become autonomous once again.
Conclusion : Everything will depend on the optimists-pessimists ratio who will be in front of their screens. But when in doubt, maybe we should wait for Friday's unemployment numbers.
Situation number 2 :
The tapering will start later, around December. This would be good news, because it means 5 more months of guaranteed money injections and our dependence will be covered for a while longer, and we know these conditions can only push the markets higher.
Conclusion : The market will continue to climb higher until it realises the economy cannot sustain itself without QE. And from that point forward anything can happen. But when in doubt, maybe we should wait for Friday's unemployment numbers.
Situation number 3 :
The GDP is so awful the idea of tapering goes out the window and is postponed indefinitely.
Conclusion : Yippeeee!!! Markets around the world explode higher because they know the American economy will be fed fresh money for centuries, amen, even though this would mean the real economy is doing terrible, the FED will print as much money as necessary to support the economy and the markets, guaranteeing a free and not time limited insurance against any market declines. At then we'll realize we're totally addicted to QE and that's no way to live…At this point the massive correction will happen…but that's only wild speculations… But when in doubt, maybe we should wait for Friday's unemployment numbers.
Situation number 4 :
It's great, ALL IS GOOD, ALL IS TOO GOOD, the GDP is way above expectations, the job numbers are leaked early and are FANTASTIC, the US economy is under dopamine boosting amphetamines and the FED is considering whether they should parachute 100$ bills over all the major US cities. This would halt QE immediately.
Conclusion : The market would PLUNGE because traders would understand they lost their FED support, and now they're on their own like grown-ups…And then suddenly you wake up, tell yourself you should eat less before going to bed, and you should really do something about those reoccurring nightmares you keep getting night after night. After this you get up, put your suit on and go to the office to wait for the GDP numbers of this afternoon…
That, in a nutshell, is where we're standing at the moment. We should see things (a bit) more clearly this evening. And if that's not enough, Draghi and the new guy at the Bank of England, the George Clooney of finance, will both speak tomorrow before Friday's unemployment numbers.
Did I mention we're getting the unemployment numbers on Friday ?
Yesterday's session in both the US and Europe went nowhere. The markets finished more or less where they started. Except in Spain where the GDP numbers showed everyone the country was still in a recession, but is almost back to growth…
In the indices themselves there are a few noteworthy events to keep in mind.
In the US, Facebook keeps going up and is closing in on its IPO price. If you had told me this a few months ago I would've died laughing. But today, with a PE ratio of 175, the company is fundamentally not that expensive. Other breakout results include Sprint (+7%), Goodyear (+9%). But the numbers were terrible for Coach (-8%), but yesterday's big story was about the fertilizer sector and anything related to potash, a component of fertilizers.
A company called Uralkali, one of the world's biggest potash producers published catastrophic results, blaming the competition for reduced margins. According to them the price for potash could decline by 25% before the end of this year. Because this is such an important component for fertilizers, the whole sector was in turmoil. Uralkali plunged 17%, Mosaic was free falling by 22%, K+S also declined by 22%, Agrium "only" lost 7.7% and Potash Corp Of Saskatchewan plunged by 23%. Bad time to be in the fertilizing business.
As for the rest of Europe, UBS can pat itself on the back once again. As predicted not that long ago, the Investment Banking division published very good results and was back in the black. On the other hand at Deutsche Bank, things weren't quite so good, the company declined 4.6% after announcing a 50% decrease in profits during the second semester. Bad news at BP as well, but very good results for EDF who took advantage of the first 6 months of miserable weather in Europe, and who pulled the CAC40 upwards. Barclays announced plans to raise 5.8 billion £, and the stock plunged 5.8&…all banks aren't equal in Europe at the moment.
Nobody cared about the economic numbers published yesterday. Despite the consumer confidence being lower than expected and despite the S&P Case Shiller being also just below expectations. The only product that cared about these numbers, and used them to justify its decline, was Oil that came back below 104$. This morning the barrel is trading at 103.34$. A small detail you might want to keep in mind regarding the Case-Shiller Index, of the 20 cities analysed in the report, Dallas and Denver are showing prices above the levels seen in June 2007 and August 2008… No need to remind you what happened after that. Put simply, the real estate prices in both these cities are at an all-time high, which is unbelievable…
Gold isn't doing much, this morning it's at 1332$.
This morning, Asia in in pre-FED mode. Nobody is willing to initiate the hostilities before the FOMC Meeting. The Nikkei is down 0.37%, probably because of the Yen once again, and China is up 0.6%.
As for other news, there are a few noteworthy items even though most financial media are focused on the FED.
Microsoft made 853 million $ with its « Surface » tablet in 2012. During the same time Apple made 25 billion with the iPad alone. One of these products is failing, can you guess which one? Facebook will give the possibility to put a video-ad (15 seconds) on the site, for a mere 2.5 million $ a day…To put that in perspective, a Superbowl ad -the single most viewed event on television- costs 3.5 million $ for 30 seconds. For those who are interested, on Investir.ch you can have a 20 second ad for 2500CHF per day…a bargain don't you think? You can contact me at firstname.lastname@example.org for details.
Two days ago, McDonald employees were striking. They wanted higher wages, as usual, no real other reason to strike is there? They are asking for 15$ per hour, compared to the current 7.81$. Now you could be shocked by the amount of increase in %, but recent studies indicate only 17% of McDonalds profits are allocated to salaries. Simply put, if wages were doubled, and you kept the prices at their current level, McDo would make a bit less money, but the consumer would be happy and the workers would be happy, both would still stink of McDo, but they would be happy.
Where things get really interesting is if tomorrow you doubled the wages for everyone working at the company including the CEO -and you passed this whole increase on to the consumer, the BigMac would cost 4.67$ instead of 3.99$. And the "dollar menu" would cost only 17 cents more…During all of this, McDonalds CEO is going in front of the camera and telling everyone his company is paying EVERY worker more than minimum wage…very classy.
Bill Fleckenstein, an ex-Roubini-follower when he was bearish, thinks one of these days the 10 year bond market could pop up to 3% and the stock market could crash 25% in three days. What if that started this evening?!?!
The Barron's thinks Pfizer, with or without restructuration, is cheap at its current price. They also think the broad market is a bit too high and exuberant at the moment.
Today's we'll be waiting for : The MBA Purchase Applications, but today nobody will care about it. Then we'll have the ADP Employment Report, a preview of the Non-Farm Payrolls on Friday. After that the GDP-Employment Cost Index-Chicago PMI and then finally the FOMC MEETING !!! This will mark a new era, whatever it may be…
Again a bunch of quarterly results are set to come out, but this isn't the main concern today. Currently 300 out of 500 companies have published their results and 66% did better than expected. Historically a good number, but I think historically expectations have rarely been this low so take it with grain of salt.
Futures are SURPRISINGLY flat at the moment, but they are ready to go at any moment.
That's all for today…Tomorrow will be Swiss national day, so unfortunately no newsletter will be available as I decided to sleep 4 or 5 hours more than usual. Yes I know, I'm a weak, but that's how it is…We'll review the FED's speech on Friday with cool and rested heads, and let's not forget the BoE and BCE speeches tomorrow, Friday will be quite the full day!!!
Have a great day and may the force be with you.
See you Friday!!!
« The golden rule is that there are no golden rules. »
George Bernard Shaw
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