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You Pick Your Spots

Daily State of the Markets
Friday, June 8, 2012

Good morning. Imagine if you will that you are currently wearing the shoes of either "Gentle Ben" Bernanke or "Super Mario" Draghi, who happen to head the central banks of the USofA and the European Union. If you are interested in playing along this morning, think about what is going on in the world right now and then spend some time trying to figure out what you'd do next. And no, jetting off to the south of France and burying your head in the sand is not really an option!

The whole of the financial world is basically clamoring for your thoughts, your expectations, and your plans. Everyone from Munich to LA wants to know what you are going to do to fix this fine mess the world collectively finds itself entrenched in. Bankers are begging for help. Politicians want something they can use to either keep their job or get elected. And the traders of the world are pounding the table for you to pull the trigger on a policy move so that they can make a buck or three. So let's be honest; this is probably a job that very few people actually want at the present time.

During my 32 year career in the markets, the Fed's job has been fairly straightforward. When I came into the business fresh out of college in 1980, Mr. Volcker had declared war on inflation and was hiking interest rates on what seemed like a monthly basis. In response, rates skyrocketed and I can recall telling my wife in the very early 1980's that I just had to buy a new car because rates were "only" 12.5%! To Mr. Volcker's credit, his plan worked. And when President Regan brought in some guy named Stockton to take a hatchet to Washington's budget, the economy eventually wound up on a path of steady growth. Mission accomplished.

Obviously there were hiccups along the way, but the next Fed-head, Alan Greenspan, had a pretty easy path until 1987 rolled around. And yes, the Gulf Wars as well as the Long-Term Capital Management/Emerging Markets crisis did require Mr. Greenspan to do some work on rates. The key point is that from 1980 until just recently, the Fed was able to pretty much fix everything by moving rates either up or down (mostly down). But then things got out of control.

In hindsight, Volcker and Greenspan had it relatively easy. Flip the switch on the direction of interest rates and presto - things worked out for them. But as they say, that was then and this is now. And the bottom line now is that low interest rates, no, make that REALLY low interest rates, aren't getting the job done.

Both Super Mario and Gentle Ben admitted as much this week. In fact, over one 24-hour period, both effectively said that Monetary Policy can only do so much. This after the two have come up with all sorts of creative ways (and using a myriad of acronyms along the way) for the central banks to try and keep the global financial system from crumbling.

But despite their monumental efforts and the fact that Mr. Bernanke's Fed has done more than any Fed before it, the world once again finds itself on the brink of financial straits and is frantically asking for more help. Never mind the fact that interest rates are very close to all-time lows or that the $2.3 trillion the Fed has already spent buying bonds hasn't done much on the mandate of full employment. No, the world wants results - and they want them now.

So what do you do? Do you succumb to the traders of the world and give them another QE fix (QE = Quantitative Easing, which is where the Fed buys bonds on the open market in order to drive down interest rates)? You know full well that doing so will cause "asset prices" (stocks, commodities, and hopefully real estate) to rise, which, in turn will cause Mr. and Mrs. John Q Public to feel better, which, of course will allow them to spend more at the malls (once they get that credit card balance under control, of course). Frankly, this sounds like a decent plan and it might have worked the first two times you tried it if only Europe would have stopped imploding.

The only problem with implementing another round of QE is that it causes the "stuff" that everyday people use and eat in their daily lives to go up. Sure, investors like it when their Apple (NASDAQ:AAPL), Wal-Mart (NYSE:WMT), Dr. Pepper Snapple (DPS), Southern companies (NYSE:SO), and the SPY's in their 401(k)'s go up - they like it a lot. But, call it an unintended consequence if you must, you've also got to recognize that increasing the cost of food when the value of everything people own is dropping is simply not a desired result.

So, again, what do you do? For starters, you look for some help. Draghi made it clear on Wednesday that the ECB stands ready to lend a hand - if and when the politicians of the Eurozone ever do something constructive. And while Ben Bernanke didn't go there yesterday on Capitol Hill, he might as well have. You see, the politicos have got to do something about their current money-to-the-wind habits soon; otherwise all the monetary policy in the world isn't going to fix a darn thing.

Next, you've got to realize that the supply of ammunition at your disposal for this fight is running low. So, instead of firing off another round right now, you try to "negotiate" instead of fighting by "talking the talk." You see, with the Greek election as well as Spain's banking mess on the calendar this month, there is no question that you've got to pick your spots. And the bottom line is that this week is NOT one of those spots where you should be firing any of your weapons.

So, before you join the emotional trading fray that may at any moment start to throw a hissy fit over the lack of any Fed/ECB commitments this week, remember that these two will likely be picking their spots carefully going forward.

Turning to this morning... There are two ways to look at the weakness in this morning's markets. First, traders are throwing a temper-tantrum over the fact that they didn't get what they wanted from central bankers this week. And second that investors are merely taking money off the table in front of what is sure to be a weekend full of headlines from both Europe and China. In any event, stocks are down in Europe and Asia, and the U.S. is following suit at the present time.

On the Economic front... There are no reports scheduled for release today.

Thought for the day... "Failure is the opportunity to begin again more intelligently" -- Henry Ford

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell...

  • Major Foreign Markets:
    • Australia: -1.09%
    • Shanghai: -0.51%
    • Hong Kong: -0.94%
    • Japan: -2.09%
    • France: -0.79%
    • Germany: -0.59%
    • Italy: -1.22%
    • Spain: +1.06%
    • London: -0.67%
  • Crude Oil Futures: -$2.49 to $82.34
  • Gold: -$8.70 to $1579.30
  • Dollar: higher against the yen , euro and pound
  • 10-Year Bond Yield: Currently trading at 1.573%
  • Stock Futures Ahead of Open in U.S. (relative to fair value):
    • S&P 500: -3.69
    • Dow Jones Industrial Average: -30
    • NASDAQ Composite: -8.30

Positions in stocks mentioned: SPY, AAPL, DPS, SO

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For more of Mr. Moenning's thoughts and research, visit

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Disclosure: I am long SPY, AAPL, DPS, SO.