A flurry of headlines today suggested the Fed will not change any policy this week and that brought some investors back to reality.

Market Statistics

A Bloomberg survey of 58 economists found that 88% don't believe the FOMC will make any changes at this week's meeting. This should not be a surprise to readers but it was apparently a surprise to the market. Shares declined slightly as the enthusiasm slowly left the market.

However, in the Bloomberg survey 48% did expect the Fed to announce a $600 billion QE program at the September meeting. Another survey had that number at 56%. In a different survey 78% believe the Fed will announce a QE program sometime over the next 12 months. More than 89% believe the ECB will announce a QE program over the next six months.

Basically the expectations are high for monetary stimulus both here and in Europe. The flaw in these expectations is that the time frame is more likely 60 days from now rather than this week. The ECB may announce something this week but it may not start for 30-60 days. When they announce their LTRO programs they typically have a 45 to 60 day lead time so banks can each decide how much they want to borrow and what they are going to put up for collateral.

One option the street thinks the Fed may extend their promise to keep interest rates low into 2015 from the current 2014 stance. In the Bloomberg survey 26% do expect this to happen but 74% do not expect the Fed to change its forward guidance.

Economists believe the Fed will wait until September to make any changes because that is when they will update their forecasts and Bernanke has his quarterly press conference after the FOMC meeting. That way he can answer questions on why the Fed took that action.

Most analysts believe the Fed will wait as long as possible before announcing a new program. With very few bullets left in their arsenal they will want to conserve ammo until they are forced to act. The Fed is concerned about Europe and the potential for a disaster. They would like to save their remaining bullets to offset that disaster if it occurs.

If the survey outlook comes to pass the markets are setting up for a fall. The markets rallied on expectations for Fed and/or ECB action and the odds are good one half of that dynamic duo is likely to remain on hold.

The ECB is expected to make some sort of change but German officials have been adamant against further bond buying by the bank. The ECB may be hampered by its mandate from doing anything but cut rates or possibly announce a future LTRO program.

The ECB can buy bonds in the secondary market in an effort to push down sovereign debt rates but that only puts the ECB at further risk for future defaults. The Greek bonds they own now are already trading at 30% of face value and Greece is likely to default again. A different survey put the risk of a second Greek default at 76%.

That means the actions by the ECB and the Fed are likely to be disappointing to investors. The short squeeze on comments from Draghi and other European leaders last week could fade as we move past the central bank meetings and are forced to wait another six weeks for the next FOMC/ECB stimulus opportunity.

In the U.S. the economic calendar was busy but had only a couple of material reports. The Chicago ISM rebounded slightly from 52.9 to 53.7 for July. The Chicago ISM is influenced by auto manufacturing and that has weakened in the last couple of months.

New orders rose slightly from 51.9 to 52.9. That was the first increase in new orders since February. Order backlogs surged from 42.2 to 52.8. On the downside the employment component fell from 60.4 to 53.3.

The mixed report gave investors no reason to celebrate and it was ignored.

Chicago ISM Chart

Consumer Confidence for July also rebounded slightly from 62.7 to 65.9. The rebound was unexpected since Consumer Sentiment has been trending lower. The gains came from the expectations component, which rose from 73.4 to 79.1. The present conditions component declined again from 46.6 to 46.2. Consumers are starting to believe that change is coming.

Those respondents planning on buying a car rose from 11.6% to 13.7%. Those planning on buying a home declined from 5.3% to 4.3%. Appliance buyers increased from 47.0% to 48.3%.

Consumer Confidence Chart

Personal income has risen for two consecutive months with a +0.5% increase in June. That brings the year over year income growth to +3.5%. Overall spending was flat at zero but durable goods spending declined -0.1% and the fourth consecutive monthly decline. This report was mostly ignored.

The economic events on Wednesday will not be ignored. The ADP Employment report will be a preview of Friday's Nonfarm Payrolls. This number is critical for market sentiment. The national Manufacturing ISM is right on the border of contraction/expansion with a 49.7 contraction reading in June. The ISM is expected to move back into expansion territory but only barely. If that report remains in negative territory it will be market negative.

Lastly the Fed will release its announcement at 2:15 and that will be a critical event for market direction. A failure to make any changes will mot than likely be market negative.

Thursday's ECB announcement will be as critical, if not more so, than the Fed decision. It was the ECB head, Mario Draghi, that started the short squeeze last week by promising to do "whatever is necessary" to save the eurozone. Traders are looking for the ECB announcement to define that "whatever" comment.

The Nonfarm Payrolls on Friday will almost be an afterthought once all the big fireworks are released on Wed/Thr. However, negative news there could accelerate and market downturn.

Economic Calendar

I mentioned in a commentary over the weekend that the market was refusing to go down and apparently was pretty bullish in spite of all the negative fundamentals. A reader emailed me calling it the beginning of the Romney Rally. Polls are starting to show Romney pulling ahead of president Obama and investors are starting to get excited. I made a mental note and moved on to other things.

Today I ran across the term Romney Rally in two other commentaries. I think we are early for that election excitement but perception is reality. If investors believe it is so then they invest accordingly.

However, the polls still show president Obama in the lead. The margin is narrowing but never underestimate the power of the presidency in an election campaign. News media follow every step and quote every word from a president's daily campaign while the challenger has to fight to get heard on the national scale.

Real Clear Politics has president Obama up by 2% when you average all the major presidential polls. Romney Rally? Not yet but maybe by the end of August. Romney should get a boost with the convention coverage Aug 27-30 and the announcement of his VP selection. However, the president still has the hammer with the democratic convention Sept 3-6th.

RCP Presidential Poll Chart

The Q2 earnings continue to play out and Coach (COH) was a casualty today. Coach shares declined -18%, the biggest decline in 11 years, after reporting earnings that disappointed. Earnings rose +24% to 86 cents compared to estimates of 85 cents. Revenue rose +12% to $1.16 billion and slightly less than the estimates of $1.2 billion. What caused the big drop was a decline in same store sales to +1.7% from +10% in the year ago quarter.

The CEO said wealthy customers had slowed their spending and that is a trend we have seen repeated in multiple earnings reports and economic reports. Coach also said the retail environment had become "increasingly promotional" and that meant sales and discounts. Coach reinstituted discount coupons late in the quarter in an effort to boost sales.

Coach Chart

Humana (HUM) fell -13% after reporting Q2 earnings fell -23% to $2.16 per share. Humana said enrollment in medical plans was falling as the population grows older and moves to Medicare. Younger new members are using more medical care with people who are healthy opting to not enter into insurance programs or are covered by workplace plans. Expenses are higher because the 2010 health care law requires insurers to provide wellness visits and preventive care services.

The company cut full year estimates to between $6.90-$7.10 compared to analyst estimates of $7.88. WellPoint (WLP) also lowered its profit forecast last week. WellPoint is the second largest insurer and Humana is the second largest supplier of Medicare benefits.

Humana Chart

Dendreon (DNDN) reported a loss of 63 cents compared to estimates for a loss of 59 cents. Revenues rose +66.1% to $80 million but that was still less than the $86 million estimate. Slowing sales of Provenge were blamed as the track record for the drug has been disappointing. Shares of DNDN declined -22% on the news.

DNDN Chart

UBS (UBS) reported earnings that declined -58% to $425 million with a major loss attributed to the Facebook IPO. UBS said it incurred a $349 million loss on the Facebook IPO and it plans to file suit against the Nasdaq for that loss. UBS said it had orders for 10 million shares but because of problems at the Nasdaq they ended the day with 40 million shares that were significantly underwater. They did not get the notice of the shares until after the market had closed.

Another factor in profit decline at UBS is a major change in investor sentiment. They said wealthy investors were pulling back from the equity market and hoarding cash. The firm said wealthy investors were paralyzed by the impending fiscal cliff and the problems in Europe. Their recent client survey showed a 20% decline in consumer spending by those with incomes over $1 million.

UBS Chart

Facebook shares fell another -6% after the UBS earnings story broke. There are several suits trying to obtain class action status against the Nasdaq and Facebook over the botched IPO. Also weighing on Facebook, other than the crummy earnings, is the 268 million shares that will be unlocked for trading on August 15th. That will be about a 50% increase in shares available to trade. The next threshold for Facebook shares will be the $20 level where it could find some psychological support but odds are good we will see lower numbers. Recent price targets from some major brokers have been in the $11 to $17 range.

Facebook Chart

Apple (AAPL) shares rallied +$16 to $610 on a comment from Bernstein Research that Apple may be preparing to announce a stock split and within 30 days of that announcement they would become eligible to be added to the Dow. Bernstein said a 10:1 split would not be unrealistic. Bernstein has a $750 price target on Apple.

Also pushing the stock higher is a growing consensus that they will announce the next iPhone in early September in order to really build up orders for the Q4 holiday season. Apple could be targeting sales records for Q4. That was definitely a buying opportunity at $570 after earnings.

Apple Chart

Dun & Bradstreet (DNB) shares spiked +13% late in the afternoon when news broke they had retained Credit Suisse and JP Morgan to explore strategic options. That normally means a sale of the company. DNB has informally explored a sale over the last year and apparently had no luck.

DNB Chart

In India 620 million people are without power. The blackout is the largest in history and doubles the 320 million people who were without power just a day earlier. India has a very poor power system with antiquated systems and a serious lack of generation capacity. Even when the power is on most businesses are limited on how much they can use and tens of thousands of businesses have their own generators as back because the power fails so often. Diesel consumption in India has been rising because of the proliferation of backup generators.

Even when the power is on more than 400 million people have no access to electricity. The power problem is a main reason why India cannot attract more industry or move out of last century economics. India's economy is growing at a 9% annual rate but power generation growth is only a fraction of that. As the population grows and becomes more technology aware the demand for power is rising faster than India can build it. Per capita energy consumption in India is expected to double by 2020 but the government is struggling just to keep its current systems running. With most generation facilities decades old and poorly maintained the odds of these system wide blackouts occurring in the future are about 100%.

In the U.S. the price of crude oil declined to settle under $88 for a loss of -$2.40 on falling expectations for Fed action. The price of oil has been lightly supported over the last couple weeks by the sanctions on Iran and worries over the civil war in Syria. Those tensions appear to be decreasing even though the president ordered new sanctions on Iran today. He ordered new sanctions on Iran's energy sector and on foreign banks in China and Iraq that the U.S. says is helping Iran avoid the prior sanctions. The new sanctions target any bank anywhere that facilitates payment for Iranian oil. The president reaffirmed that he will target any country or entity that purchases oil from Iran.

That sounds really good in a press release but the administration has already given waivers to 20 countries to exempt them from the sanctions. The press release specifically reiterated that those exempt countries would still be exempt. Those include India and China, the two largest purchasers of Iranian crude. China has contracted tankers that can carry up to 20 million barrels of oil to ship oil from Iran to China in August. What is wrong with this sanction process? Clearly it is a lack of credibility in the current sanction process when 20 countries including the biggest buyers get a free pass.

WTI Crude Oil Chart

The markets traded sideways all day with minor losses as traders wait for the events on Wednesday and Thursday. The Dow hit a new two month high on Monday but then lost ground over the last two days to give back the late Friday short squeeze ahead of the Fed.

The decline has been like watching paint dry but it was persistent. The volume on Monday was a ridiculous 5.4 billion shares and that rate was holding through much of Tuesday until volume accelerated into the close when the indexes broke down. Tuesday's volume was 6.4 billion shares and right in line with the mediocre average of 6.1 billion for all of July.

Dow Chart - 5 Min

Dow Chart - Daily

The S&P resistance at 1392 held and like the Dow the index saw some of its Friday gains evaporate over the last two days. Support at 1380 held on two attempts on Tuesday with the closing print right at that level.

If the Fed takes no action and the ECB disappoints we could easily see a retest of the 1335 support from July.

Monday and Tuesday were month end for July and there was a lack of noticeable buying from fund managers. Clearly the trade was to hold existing positions ahead of the economic events starting on Wednesday.

S&P Chart - 5 Min

S&P Chart - Daily

The Nasdaq maintained the gains from last week by giving up only -6 points. That was helped by Apple's +16 point gain. Tech stocks could be under pressure tomorrow ahead of the meeting after the Electronic Arts (EA) earnings after the bell tonight.

Direction will still be headline related and it will take a major headline to rescue the tech sector from a normally dreary August decline.

Nasdaq Chart - Daily

If you have read this far down in the commentary then you know that fundamentals do not matter for the rest of the week. The markets will be taking direction from the Fed, ECB, ISM, ADP and Nonfarm Payrolls. The rest of the week could be very volatile so seatbelts will be required.

Enter passively, exit aggressively!

Jim Brown

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