Bernanke disappointed traders to some extent by not announcing anything definite. However, he kicked the can down the road to the Sept 20th FOMC meeting by teasing investors saying the meeting had been extended to two days to fully explore existing policy options. Now we have a new date for the market to fret over.
Bernanke avoided a political confrontation by not listing available policy options as he has done in the past. With various groups hostile about expectations the Fed will act again soon he avoided giving them any indications of what actions the Fed might take. That would have given them time to ramp up specific objections to those actions. Secondly he avoided stealing any thunder from the President's speech on economic spending and jobs scheduled for Tuesday evening. He walked a thin line very skillfully but at the same time he basically told Fed watchers to prepare for action at the Sept 20th meeting. The expanded two-day meeting will give him time to form a consensus and win the dissenters over to his views.
Bernanke said the long recovery process was hindered by the Japanese earthquake to some extent but regulators are now applying much less impact to the break in the supply chain than previously. Instead the Fed now believes the longer term factors resulting from the worst recession in history are still weighing on the economy. Those factors are the weak housing market and lower home prices plus the high unemployment and the lack of demand for consumer goods. Businesses and consumers suffered more in the 2008 financial recession than in normal business cycle recessions and the severity of 2008 has harmed the credit worthiness of the consumer and confidence in the recovery by businesses. However, he said he is more optimistic now than in recent months. He believes, despite the economy recovering slowly today, that the pace of the recovery is stable and should average growth of +2.0% for the rest of the year.
He did take a couple shots at lawmakers for the debt debacle and blamed them for the deterioration in business and consumer confidence over the last two months. "The negotiations that took place over the summer disrupted financial markets and probably the economy as well, and similar events in the future could, over time, seriously jeopardize the willingness of investors around the world to hold U.S. financial assets or to make direct investments in job-creating U.S. businesses." He also warned that a comprehensive plan to deal with the extraordinary high levels of debt was a must in order to rebuild long-term confidence and accelerate the recovery.
He also said, "The quality of economic policymaking in the United States will heavily influence the nation's longer-term prospects. To allow the economy to grow at its full potential, policymakers must work to promote macroeconomic and financial stability; adopt effective tax, trade, and regulatory policies; foster the development of a skilled workforce; encourage productive investment, both private and public; and provide appropriate support for research and development and for the adoption of new technologies."
He spoke for several paragraphs about the need to lower unemployment, the impact of the Fed's monetary policy on employment and the hardships inflicted by long-term unemployment. He stressed the "urgency" to achieve a cyclical recovery in employment. I read those paragraphs as his reasoning behind the next Fed policy action to be taken at the Sept 20th FOMC meeting.
He closed with the following. "Economic policymakers face a range of difficult decisions, relating to both the short-run and long-run challenges we face. The Federal Reserve will certainly do all that it can to help restore high rates of growth and employment in a context of price stability." He did not say the Fed "has done" but instead said "will certainly do all that it can" which suggests further actions.
I believe there were certain sections of the speech designed to address objections of dissenters on the FOMC and to setup the parameters for action at the September meeting. I am not going to outline those possible actions because they will be repeated daily in the financial press for the next three weeks.
To summarize the speech Bernanke attempted to cheerlead for the economy as we expected. He tossed the debt ball back towards lawmakers and he might as well of said, "There will be action at the expanded September meeting." By holding off on any action until Sept 20th he gets to see what the president is going to suggest on the 6th and then he can decide on future Fed direction.
Link to full speech
The lack of any firm details disappointed some investors and the Dow dropped -221 points immediately after the speech to a low of 10,929. However, we were expecting a sell the news event because the market was expecting far too much from a general speech on the economy. As the analysis of the speech started to filter through the market and analysts focused on the implied action at the Sept 20th FOMC meeting the rebound began and shorts were again squeezed. Even a decent attempt to sell it off again at 2:PM was defeated.
Analysts will now focus on the Sept 20th meeting as the next Fed turning point. This suggests the next three weeks could see the markets drift higher in anticipation of additional Fed action. Remember, at the August 2010 conference Bernanke did not say the Fed was launching QE2. He alluded to further quantitative easing as well as several other options.
The key sentences in 2010 were, "I believe, the most plausible outcome, macroeconomic projections are inherently uncertain, and the economy remains vulnerable to unexpected developments. The Federal Reserve is already supporting the economic recovery by maintaining an extraordinarily accommodative monetary policy, using multiple tools. Should further action prove necessary, policy options are available to provide additional stimulus. Any deployment of these options requires a careful comparison of benefit and cost. However,the Committee will certainly use its tools as needed to maintain price stability --avoiding excessive inflation or further disinflation--and to promote the continuation of the economic recovery."
Nowhere in his speech did he say QE2 was coming. Nowhere in Friday's speech was a mention of QE3. However, he did say, "The Federal Reserve will certainly do all that it can to help restore high rates of growth and employment in a context of price stability." That is almost exactly the same sentence he used in 2010 and I believe there will be further action of some sort at the Sept 20th meeting.
In other economic news the second GDP revision was less bad than expected. The GDP for Q2 was revised down to +0.99% growth from the +1.28% in the first reading. There were whisper numbers under +0.5% so this number was actually a relief even though it was revised lower. Corporate profits rose +3% for the quarter. That is an increase from the 1% profits growth in each of the prior two quarters. Profits are up +8% year over year.
Growth at +0.99% is still very anemic but there was a big hit from the Japanese earthquake that will be a one-time event. Retail sales of domestic products rose only +1.2%. The recent market crash could cause higher income consumers to cut back on purchases even more in Q3. Corporations have the money to hire but they don't have any incentive to hire until demand increases. It is a classic chicken and egg scenario. Businesses won't hire until demand improves and consumers won't buy until they have a job.
Unfortunately you have probably read in the news that since 1950 whenever the year over year GDP declines below 2% growth we have always fallen into a recession. Will this time be different?
Bloomberg GDP Chart
The final reading on Consumer Sentiment for August rose slightly to 55.7 from 54.9. The earlier reading of 54.9 was a 30-year low. The 55.7 revision lifted it above the 55.3 28-year low set in November 2008. I know that is a small move and relatively speaking it is insignificant.
Consumer Sentiment Chart
Next week is very busy economically and several of the reports are critical. There are three ISM reports, NY, Chicago and the national ISM. The consensus for the national ISM is for a drop to 50 and right on the border between expansion and contraction. The FOMC minutes on Tuesday will give us insight into the discussions that led to three members dissenting with the decision to keep long term rates on hold until 2013 and it may provide a clue about Fed actions in September.
The ADP Employment report on Wednesday will predict the number of jobs gained or lost in the Nonfarm Payroll report due out on Friday. Current projections for the Nonfarm Payroll report is a gain of only 30,000 jobs compared to +117,000 in July.
On Tuesday President Obama will give his long awaited speech on his jobs proposal. Preliminary excerpts from the speech suggest he will call for more stimulus spending to create new jobs. The president was forced to cut short his vacation on Martha's Vineyard because of the hurricane.
The European debt crisis is depressing confidence in the financial system and that will bleed over into the corporate sector. The German DAX is down -24% so far in August and that is the strongest economy in Europe. Because of the short selling ban in other European markets traders are shorting the German market for protection against further declines in their home markets. If the European debt crisis intensifies it will further depress business confidence in the USA.
John Mauldin had an interesting letter this weekend suggesting Germany was not going to approve the bailout plans for Greece and Italy. Citizen support for the bailout is running 5:1 against it. The German courts will rule on Sept 7th on the constitutionality of the bailout. The Bundersbank claims the ECB bond purchases and broader bailout plans violates EU treaties and lacks "democratic legitimacy." Based on recent comments a negative vote is a real possibility and without Germany onboard the bailouts will likely fail. The EU is rushing towards a serious breakdown if something does not change quickly.
Gold rallied again on the potential for future Fed action and on the escalating problems in Europe. Gold rallied +64 to $1827 in regular trading and it continued to 1831.70 in after hours. That is a +$126 rebound off the $1705 low on Thursday. On the 100-ounce contract that is a $12,600 move in two days. Of course that followed a $21,200 drop from the $1917 high on Tuesday. In today's gold market you have to have nerves of steel to hold a contract for more than a few hours.
Amazon (AMZN) rallied $7.24 (+3.8%) on news their tablet, expected to be announced in October, would be discounted compared to the iPad's $499 entry price. The New York Post reported on Friday the new tablet could sell for "hundreds" of dollars less than the iPad. The tablet will run Google's android operating system. Amazon will be a viable competitor to the iPad because they have the customer base and the global scale to market the Amazon tablet.
Amazon registered the domain name KindleScribe.com on August 22nd. That suggests the new Kindle may have the long awaited stylus and touch screen. Amazon also registered the names KindleAir.com and KindleSocialNetwork.com. Since existing Kindles are fairly limited on Internet usage this means we could see added functionality in the new Kindles.
Aruba Networks (ARUN) rallied +20% on Friday after reporting income of $68.2 million or 57-cents per share compared to $400,000 and breakeven in the year ago quarter. Aruba said the current customer base was very robust and they added 1,500 customers for the quarter. Excluding items Aruba earned $20.2 million or 17-cents per share. Revenue rose +47% to $113.8 million.
Apple's new CEO Tim Cook got a nice surprise after only three days in the permanent position. The board awarded him one million shares of Apple stock. That has a current value of $383 million. Not a bad payday! Half of it has a five-year lockup and the other half a ten-year lock. Assuming he does not make a mess of things he is now set for life. TMZ posted a current picture of Steve Jobs on Friday. Money can't buy health and it is obvious why he resigned. Steve Jobs
Cash on deposit in U.S. financial institutions rose to a record high of $9.8 trillion at the end of June. Given the recent market crash and the steady flow of cash out of the market those balances could be even higher today. That total is only for those accounts backed by FDIC insurance. With all the stress in the economy, the market crashing and worries over which bank owns what European debt, depositors are looking for institutions with FDIC insurance. The FDIC insures up to $250,000 but as a result of the recession is providing unlimited insurance coverage for non-interest bearing checking accounts through the end of 2012.
Banks are trying to come up with ways to avoid the cash. They don't want the money. It drives up their cost of insurance and they really can't put it to work making money because checking deposits can be withdrawn at any time. The Bank of New York Mellon (BK) is now charging its largest depositors for the privilege of storing money in their bank. JP Morgan said they received $63 billion in new deposits in Q2 that were tied to the weakness in Europe. I remember when banks used to give new customers things like toasters or microwaves as an incentive for opening a new account. Big depositors were wined and dined and given tickets to sports events and concerts. I remember one bank gave Green Stamps for savings account deposits. Younger readers won't know what those were. Times have certainly changed.
Bank of America (BAC) could be close to selling half its 10% stake in China Construction Bank for close to $9 billion and the deal could be done as early as Monday. They got a 10% stake in CCB back in 2005 for $3 billion. That stake is now estimated to be worth $19.6 billion and several parties have indicated they were interested in buying it. BAC is interested in selling in order to conform to the new capital rules under Basel III requirements. There is a six-year lockup on 23.6 billion shares of CCB owned by BAC that expires on Monday. Another 2.0 billion expires next August. BAC shares rose fractionally on Friday.
Hurricane Irene is causing a lot of trouble this weekend. There are evacuations all over the east coast with New York preparing for the worst. There are long lines of consumers stocking up on food, water, batteries, chain saws, generators, jerky, etc from South Carolina to Massachusetts. The pronounced jump in retail sales could provide a silver lining to Irene's clouds. Typically hurricanes provide a retail spike both before and after they hit. Stores like Home Depot, Lowe's and Wal-Mart are bringing in additional supplies as fast as they can stock them.
However, not every sector is benefiting from the news. U.S. airlines will cancel at least 6,100 flights over the next three days as the storm produces havoc on airline schedules. Airlines are moving planes away from the coast to avoid damage. United has already canceled 2,300 flights for Saturday and Sunday. Delta is shutting down 1,300 and U.S. Airways canceled 1,166. The airline sector has got to be one of the worst businesses in the world. Competition is extremely stiff, planes are grossly expensive, maintenance is extremely difficult and there is bad weather somewhere in the U.S. every day. On top of that their number one expanse, jet fuel, is on a non-stop move higher.
Stranded passengers could be stuck for days until planes can be rerouted back to their original routes and enough empty seats available to handle the roughly two million passengers whose flights were canceled. Those starting trips will likely cancel the excursion but those already on a trip are stuck.
In New York all public transportation was shutdown at noon on Saturday. Manhattan, only a few feet above sea level, is bracing for a monster storm surge that could flood subway tunnels, basements, utility tunnels, etc and cripple the city for weeks. The New York stock exchange was building sand bag dikes around all its underground access points and they plan on being open for business on Monday come heck or high water. Many employers have rented hotel rooms for critical employees in New York just in case the trains don't run again for a long time. It has been a long time since New York has been hit by a major hurricane. Bob passed by with only a glancing blow as it headed to Massachusetts and Maine in 1991. The last major hurricane before that was Gloria in 1985. Gloria did $2 billion in damage. Before that was Agnes in 1972 and Donna in 1960. Donna did $21 billion in damages.
Hurricane Irene Path
Casinos in Atlantic City, NJ closed their doors for only the third time in history at 8:PM on Friday night. Eleven major casinos closed then and the rest were told to close by noon on Saturday. Operators moved the money to banks and secured the chips in onsite vaults. All power was turned off with only security personnel on the premises. The shutdown will cost the casinos an estimated $30 million a day and the state government $2.0 million a day in taxes.
Dairy Case in New York Target Store
I was actually surprised to see any trading in the last few minutes on Friday with the very likely possibility traders in New York won't be able to get to work on Monday. It is likely the afternoon activity was traders closing positions just in case the unthinkable happened and the exchanges did not open for business on Monday. The NYSE computers are actually in New Jersey and fully redundant so the chances they will be offline are slim. Although the NYSE can operate without the market makers at their posts it would be at significantly less volume.
With Europe in a death spiral a lot of traders probably did not want to hold positions over the weekend. The German DAX is down -24% for the Month of August and with 400-600 point swings in the Dow the damage of holding a trading position for an extra 24-28 hours could be huge. However, as long we the NYSE is open electronically that risk is minimal.
The Dow dropped to a low of -220 after the Bernanke speech and then rallied to a high of +176 around lunchtime. At that point volume died and that was probably when traders packed up and headed for higher ground.
The S&P rebounded to initial resistance at 1175-1180 and that is where it stalled at noon. There was a dip to 1168 about 20 min before the close but it was bought on low volume to close just over 1175. The intraday dip to 1135 was clearly the result of two sell programs and those sales would probably have occurred regardless of what Bernanke said.
Since the initial crash on August 9th we have seen a pattern of higher lows and lower highs. The rebound on Friday should be discounted to some extent but we did close near the highs for the week. It is entirely possible we will retest the lows but I am becoming more optimistic that the double bottom is going to hold.
The economics were not as bad as expected. The U.S. will still have more than $20 trillion in GDP by year-end and corporate profits are rising at a faster pace. There are still some headwinds and the rate of growth is definitely less than desirable but it is growth. Bernanke has dangled the Fed action carrot in front of us on September 20th and traders looking for any reason to buy something are likely to take the bait. As long as Europe does not melt down over the weekend we could retest overhead resistance at 1200-1205 next week.
We are a long way from a bullish rally. I expect the markets to be choppy with an upward bias until the next unexpected event arrives to spoil the party. Strong support at 1120 and strong resistance at 1205.
The Dow traded in a 396-point range on Friday and closed with a gain of +134. That is scary if you think about it. The range was three times the closing gain. Dow 11,325 appears to have formed as initial resistance and the index slammed to a dead stop when it was hit. This was about the time the volume died so I don't know if we can attach too much value to that level although it is a recurring level of interest.
Much of the Dow's gains came from IBM with +28 Dow points. CAT, MMM, BA and MCD were the other leaders and while I am happy to see CAT and MMM catch a bid I am not sure if I believe their individual charts. Both look like one-day wonders. At least MCD has a steady uptrend. Despite IBM's gains is still looks like a buy. However, all three are more than likely benefiting from fund managers storing money in a safe blue chip. Boeing has the best chart of the group with a pending breakout over $63.
What I am saying is the Dow components don't inspire confidence in me that they are going higher. Solid resistance at 11,325 and 11,500. I would immediately turn bullish over 11,500 but until then I am only cautiously optimistic.
The Nasdaq was another index that slammed to a stop at prior mediocre resistance of 2480. There were only minimal indications 2480 would be much more than a downtick when touched but it turned into a brick wall instead. At least it was solid resistance in the slow volume on Friday afternoon.
Tech stocks were almost universally positive on Friday with PCLN and ISRG leading the winners list. On the losers list there were only four stocks that lost more than $1. That is pretty amazing to me after the big dip at the open. Even with all those individual gains it looked more like short covering on the bounce rather than actual buyers adding positions.
The morning short covering and afternoon stagnation is not awe inspiring but the afternoon market was dominated by hurricane news and very low volume. I am not sure we can actually draw any conclusions about Friday afternoon's lack of direction.
Nasdaq Top Point Gainers
Nasdaq Top Point Losers
The Transports are a secondary indicator to the Dow Industrials. Unfortunately the transports are weaker than all the other major indexes. This suggests traders are not convinced there is even a minimal economic recovery in progress and the Dow 30 may have trouble moving higher.
The transports closed at the highs for the day and week BUT the airline stocks were mostly higher. I expect airlines to trade down next week after the hurricane-induced cancellation of more than 6,000 flights. That should push the transports lower and produce a drag on the Dow.
Dow Transport Chart
I expect next week to be choppy and possibly volatile due to the large number of economic headlines with many of them critical events. The FOMC minutes, national ISM, ADP and Nonfarm Payrolls and more than a dozen other reports will provide plenty of opportunity for bad news. If by chance the ISM remains over 50 and the ADP jobs are close to 100,000 the bulls could shake off all the other bad news and push higher. The real pothole that traders will want to avoid is the Friday Nonfarm Payrolls followed by a three-day weekend that just happens to be the last weekend of summer. Volume should slow significantly on Thursday afternoon and die completely about an hour after the payroll report on Friday.
I will enter the week cautiously optimistic but fully realize there are multiple events both in and out of the U.S. that could impact the markets negatively. Be prepared.
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