Daily State of the Markets
Good morning. In case you are not familiar, the term "Bernanke Put" refers to the idea that if things get bad enough in the stock market, owners of equities will always be able to "put" their shares onto Ben Bernanke at some point. Well, not literally of course. However, history has shown that whenever things get ugly - I mean really ugly - the Fed's cavalry has always mounted their white horses and come to the rescue with plans to stimulate the economy, which, of course, caused stock prices to improve.
To be fair, it wasn't always called the Bernanke Put. Before Gentle Ben's declaration that he would drop one-hundred dollar bills from a helicopter if he had to in order to keep the economy from entering a deflationary cycle (think Japan since 1990), it was the easy money policies of Alan Greenspan that stock market investors came to rely on. Whether it was in response to the Crash of '87, the first Gulf War, the emerging markets crisis, or 9/11, stock investors knew they could count on Greenspan to cut rates and resurrect the market.
Since his appointment to the post of Fed Chairman in 2006, Ben Bernanke has upheld this long tradition of trying to rescue both the economy and the stock market whenever there has been difficulty. And on Wednesday, the FOMC made it quite clear (well, in Fedspeak terms anyway) that the Bernanke put "will" likely return to a bond market near you in the very near future - IF needed, of course.
Although the FOMC didn't do a darn thing yesterday, the statement released alongside the announcement that the Fed was standing pat for the time being contained one very simple line that caused analysts everywhere to sit up and take notice. In the section of the FOMC statement dedicated to what the Committee may or may not do next, the Fed wrote that they, "will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions."
To anyone who has spent any real time following the Fed and/or trying to interpret its cryptic communications (which, for the record, is a MUCH easier job today than it was in the early 1980's), today's statement was viewed as nothing short of a proclamation that the Fed "will" mount up - and soon - as long as they are needed.
The argument can be made that Bernanke's Fed has been laying the groundwork for another round of quantitative easing for some time now. Take a look at the key phrases from the last three FOMC statements and see if you don't agree. On April 25, the FOMC wrote, "The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate." Then on June 20th, the statement said, "The Committee is prepared to take further action as appropriate. And then yesterday, "prepared to take" turned into "will provide additional" stimulus. See the progression?
Thus, it seems pretty clear to us that Ben Bernanke "will" take action at the September 12-13 FOMC meeting if the job market continues to flag.
What does this mean for the stock market, you ask? While I'm not big on predictions and can be accused of just spitballin' here, it seems to me that since everybody now knows that Bernanke "will" return if necessary, any downside in the market may be limited to something along the lines of a standard correction (5-10%). To be sure, a pullback of 10% from here would not be pleasant. However, the key is to recognize that IF the market begins to head lower again, it will not likely be headed into the abyss. Instead of the 20% plunge seen during last summer/early fall's nightmare, we're guessing that any decline from here might be much more pedestrian in nature.
Well, unless the Europeans manage to botch the job going forward, that is. But again, if Europe does plunge the world back into uncertainty, it is a safe bet that one Ben Bernanke isn't likely to sit on his hands for long.
Turning to this morning... The ECB announced no change to their monetary policy, leaving their benchmark interest rate steady at 0.75%. However, all eyes are on Draghi's press conference, where the ECB president is expected to announce the resumption of bond buying in order to drive down rates. The press conference is scheduled for 8:30 am eastern. At this time, the futures point to a modestly higher open.
On the Economic front... Challenger reported that Planned Job Cuts fell to 36,885 in July, which was the lowest of the year.
We will also get reports on Weekly Jobless Claims, Bloomberg Consumer Comfort and Factory Orders this morning.
Thought for the day... "We must not look to government to solve our problems. Government is the problem" -- Ronald Reagan
Here are the Pre-Market indicators we review each morning before the opening bell...
Positions in stocks mentioned: none
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