Wednesday, July 13, 2011

More Thoughts

Here is an excellent summary of the Fed minutes by Miller Tabak's Peter Boockvar:

As should have been expected, the June 21-22nd FOMC meeting had members discussing their exit strategy with days before QE2 was winding down. In the minutes they emphasized that a discussion of reversing policy in no way implies that it would be happen anytime soon. The talk was on a "set of specific principles that would guide its strategy." With the state of the U.S. economy, we know nothing will be implemented for a while as they revised down their GDP estimates. They do though think that some 'transitory' factors influenced growth, such as Japan.

On inflation, sanguine continues to be their attitude toward it as they continue to expect headline inflation will recede over the medium term and the recent rise in core inflation doesn't bother them. The stock market has bounced subsequent to the minutes on this one sentence, "Some participants noted that if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate and if inflation returned to relatively low levels after the effects of recent transitory shocks dissipated, it would be appropriate to provide additional monetary policy accommodation."

While QE3 calls are now out there, there are "if"s there and also, "Others, however, saw the recent configuration of slower growth and higher inflation [what we call "stagflation"] as suggesting that there might be less slack in labor and product markets than had been thought.

Bottom line, the bar is extremely high for QE3 and I believe it only comes after a 15-20% decline in stocks and a dramatic downturn in the U.S. economy, thus those buying stocks right now on the possibility of QE3, be careful what you wish for. Buy after it becomes a much greater possibility, at lower levels. As long as Ben, Janet and William are running the Fed, more money printing is always a possibility, but the next time will be much more contentious within the Fed.

Which will be resolved first -- the NFL labor dispute, or the debt ceiling?

The Labor Department's Job Openings and Labor Turnover Survey, or JOLTS, was relatively weak, with only a small (20,000) increase in job openings in May. Total job openings are now at 2.97 million vs. 4.4 million openings at the end of 2007. The hire rates were unchanged, but separations increased modestly.

The trade deficit widened in May ($50.2 billion) to the largest print in almost three years. This should take down the final second-quarter2011 GDP number.

Finally NFIB small business optimism fell slightly. "Weaker sales" not "credit supply" continues to be the sore point.

The tug of war between the cyclical recovery in corporate profits and the nontraditional headwinds facing the world's economies will continue to be a relative standoff and frustrate those with strong directional opinions.

Headlines, such as this morning's news on Italy's debt, will influence the day's and week's prices, but soon following, amnesia will set in, and all will be forgotten with the release of another headline.

From my perch, I feel comfortable in a base case for the S&P 500 to be confined to the 1,250-1,350 range over the balance of the year.

"If one does not understand the severity of the profound problems that plague Europe and the U.S., as well as smaller but significant China ills, then there is little that can be preached at this point that will convert the misguided."

-- Bill King, The King Report

With the structural disequilibrium in our labor force, the eurozone debt contagion spreading, consumer confidence in the U.S. weakening, a housing market laboring under a large shadow inventory of unsold home and with the fiscal imbalances being kicked down the road (over here and over there), we can say sayonara to a jobs recovery and to a smooth and self-sustaining domestic economic recovery in 2011-2012....