Archive for the ‘Fed Policy’ Category

1992 Says Don’t Assume Stocks Are Doomed With Slow Growth

Monday, June 16th, 2014

2014: Growth Is Unimpressive

Economic data in 2014 has aligned with “slow, but still positive growth.” It is easy to find blurbs in the press similar to the June 12 segment from The Wall Street Journal below:

Soft sales at retailers in May suggest U.S. consumer spending remains on a familiar trajectory of modest growth, further blunting hopes for a strong and sustained economic expansion this year.

1992: Growth Was Unimpressive

Those who have been following the markets for some time probably recall that it was easy to find “slow growth” stories in 1992. The excerpt below is from the February 1992 New York Magazine:

“If the economy doesn’t quickly snap out of its lethargy and begin to grow respectably, the stock market could get whacked.”

1992: What Happened Next?

As shown in the chart of the S&P 500 below, after the “stock market could get whacked” comments were published in New York Magazine, the S&P 500 gained 18% over the next 21 months. Looking out further from the date of publication, the S&P 500 gained 378% between late February 1992 and the spring of 2000.

But, We Are Trading Near An All Time High

In 2014, stocks are trading near an all time high, which is often cited as a reason not to invest. For the record, when New York Magazine published the article on slow economic growth in February 1992, the S&P 500 was trading near an all time high.

Stocks may or may not correct in 2014, but as the chart below shows those who tried to “wait for a better entry point” were left behind in a big way in 1992. Therefore, rather than basing our decisions on the admittedly concerning combination of slow growth and all time highs, we will continue to use the “pay attention and adjust as necessary” approach outlined in detail in The Most Important Thing For 2014.

1992 And 2014 Are Quite A Bit Different

No two periods in human or economic history are “the same”; a concept that applies to 1992 and 2014. The point is not to compare the periods head-to-head, but rather to illustrate the importance of keeping an open mind about better than expected stock market outcomes during periods of slow economic growth.

Slow Growth May Give Fed More Time

Just as assuming slow growth will doom the stock market, it is not prudent to assume the Fed is on the cusp of embarking on a stock-killing campaign to increase interest rates. From Reuters:

The International Monetary Fund cut its growth forecast for the United States on Monday and said the economy would not reach full employment until the end of 2017, allowing the Federal Reserve to bide its time before raising interest rates.

Investment Implications – Bears Need To Prove It

As outlined on June 13, our basic objective from a risk management perspective is to balance the need to “leave it alone” with the desire to “avoid losing 50% in the next stock market disaster.” As outlined in this week’s stock market video, the observable and unbiased evidence continues to side with the “leave it alone” camp, even in the context of recent unrest in Iraq.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.



Consequently, we made no allocation changes last week. We continue to have exposure to diversified U.S. stocks (VTI), leading U.S. sectors (XLK), and bonds (TLT). With the U.S. contemplating airstrikes in Iraq, we will continue to monitor the evidence with a flexible and open mind.

Which ETFs Performed Best During QE2?

Wednesday, September 12th, 2012

If you are looking for an edge in terms of Thursday’s highly anticipated Fed announcement, the statements leading up to the announcement of QE2 in 2010 are an excellent place to start. Thus far, 2012 has not strayed far from the 2010 QE script, meaning we believe it is only a matter of time before QE3 is announced.

QE2: Winning ETFs

Should the Fed announce another round of asset purchases as expected, it may be handy to know the following ETFs were the big winners during QE2: silver (SLV), oil equipment (IEZ), oil services (OIH), oil/gas equipment & services (XES), oil & gas exploration & production (XOP), energy (XLE), coal (KOL), metals & mining (XME), natural gas (FCG), global energy (IXC), agriculture (RJA), small cap growth (IWO), Russia (RSX), semiconductors (SMH), and private equity (PSP).

QE Script 2010

In 2010, the Fed used both Jackson Hole and a formal Federal Open Market Committee (FOMC) statement to set the table for the announcement of QE2 in November. The Fed language from points A, B, and C are summarized later in this article. Point A is Jackson Hole 2010, point B is a Fed statement that “disappointed” the markets since QE was not announced, and point C is the formal announcement of QE2. The chart of the S&P 500 allows you to see how stocks reacted at points A, B, and C.

QE2 Key Fed Dates 2010 2011

Below are the key portions of Ben Bernanke’s 2010 Jackson Hole speech, which are followed by this year’s remarks for comparative purposes.

In many countries, including the United States and most other advanced industrial nations, growth during the past year has been too slow and joblessness remains too high.

This list of concerns makes clear that a return to strong and stable economic growth will require appropriate and effective responses from economic policymakers across a wide spectrum, as well as from leaders in the private sector. Central bankers alone cannot solve the world’s economic problems. That said, monetary policy continues to play a prominent role in promoting the economic recovery and will be the focus of my remarks today.

I will conclude by discussing and evaluating some policy options that the FOMC has at its disposal, should further action become necessary.

Overall, the incoming data suggest that the recovery of output and employment in the United States has slowed in recent months, to a pace somewhat weaker than most FOMC participants projected earlier this year.

The prospect of high unemployment for a long period of time remains a central concern of policy. Not only does high unemployment, particularly long-term unemployment, impose heavy costs on the unemployed and their families and on society, but it also poses risks to the sustainability of the recovery itself through its effects on households’ incomes and confidence.

Notwithstanding the fact that the policy rate is near its zero lower bound, the Federal Reserve retains a number of tools and strategies for providing additional stimulus. I will focus here on three that have been part of recent staff analyses and discussion at FOMC meetings: (1) conducting additional purchases of longer-term securities, (2) modifying the Committee’s communication, and (3) reducing the interest paid on excess reserves.

A first option for providing additional monetary accommodation, if necessary, is to expand the Federal Reserve’s holdings of longer-term securities. As I noted earlier, the evidence suggests that the Fed’s earlier program of purchases was effective in bringing down term premiums and lowering the costs of borrowing in a number of private credit markets. I regard the program (which was significantly expanded in March 2009) as having made an important contribution to the economic stabilization and recovery that began in the spring of 2009.

I believe that additional purchases of longer-term securities, should the FOMC choose to undertake them, would be effective in further easing financial conditions. However, the expected benefits of additional stimulus from further expanding the Fed’s balance sheet would have to be weighed against potential risks and costs

Consistent with our mandate, the Federal Reserve is committed to promoting growth in employment and reducing resource slack more generally.

Jackson Hole 2012: The Case For More QE

If you read Ben Bernanke’s entire Jackson Hole 2012 speech, it is unquestionably pro-QE. Below are some key portions from the Fed Chairman’s August 31, 2012 remarks:

Tobin suggested that purchases of longer-term securities by the Federal Reserve during the Great Depression could have helped the U.S. economy recover despite the fact that short-term rates were close to zero, and Friedman argued for large-scale purchases of long-term bonds by the Bank of Japan to help overcome Japan’s deflationary trap.

Large-scale asset purchases can influence financial conditions and the broader economy through other channels as well. For instance, they can signal that the central bank intends to pursue a persistently more accommodative policy stance than previously thought, thereby lowering investors’ expectations for the future path of the federal funds rate and putting additional downward pressure on long-term interest rates, particularly in real terms. Such signaling can also increase household and business confidence by helping to diminish concerns about “tail” risks such as deflation. During stressful periods, asset purchases may also improve the functioning of financial markets, thereby easing credit conditions in some sectors.

How effective are balance sheet policies? After nearly four years of experience with large-scale asset purchases, a substantial body of empirical work on their effects has emerged. Generally, this research finds that the Federal Reserve’s large-scale purchases have significantly lowered long-term Treasury yields.

Three studies considering the cumulative influence of all the Federal Reserve’s asset purchases, including those made under the MEP, found total effects between 80 and 120 basis points on the 10-year Treasury yield.13 These effects are economically meaningful.

Importantly, the effects of LSAPs (large-scale asset purchases) do not appear to be confined to longer-term Treasury yields. Notably, LSAPs have been found to be associated with significant declines in the yields on both corporate bonds and MBS.14 The first purchase program, in particular, has been linked to substantial reductions in MBS yields and retail mortgage rates. LSAPs also appear to have boosted stock prices, presumably both by lowering discount rates and by improving the economic outlook; it is probably not a coincidence that the sustained recovery in U.S. equity prices began in March 2009, shortly after the FOMC’s decision to greatly expand securities purchases. This effect is potentially important because stock values affect both consumption and investment decisions.

Model simulations conducted at the Federal Reserve generally find that the securities purchase programs have provided significant help for the economy. For example, a study using the Board’s FRB/US model of the economy found that, as of 2012, the first two rounds of LSAPs may have raised the level of output by almost 3 percent and increased private payroll employment by more than 2 million jobs, relative to what otherwise would have occurred.

Overall, however, a balanced reading of the evidence supports the conclusion that central bank securities purchases have provided meaningful support to the economic recovery while mitigating deflationary risks.

QE Table Setting 2010

Since QE2 winners began moving rapidly higher after Jackson Hole 2010, many forget QE2 was not formally announced until the November meeting. The Fed’s September 2010 meeting “disappointed” the markets, but it did help set the table for QE2. Below are some key portions from the Fed’s September 21, 2010 statement:

Information received since the Federal Open Market Committee met in August indicates that the pace of recovery in output and employment has slowed in recent months.

The Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be modest in the near term.

Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to remain subdued for some time before rising to levels the Committee considers consistent with its mandate.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.

The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.

Was The QE Table Set In August 2012?

Key portions of the Fed’s August 1, 2012 statement are shown below, allowing you to compare them to the “table setting” statement from September 2010:

Information received since the Federal Open Market Committee met in June suggests that economic activity decelerated somewhat over the first half of this year. Growth in employment has been slow in recent months, and the unemployment rate remains elevated.

Inflation has declined since earlier this year, mainly reflecting lower prices of crude oil and gasoline, and longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth to remain moderate over coming quarters and then to pick up very gradually. Consequently, the Committee anticipates that the unemployment rate will decline only slowly toward levels that it judges to be consistent with its dual mandate. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee anticipates that inflation over the medium term will run at or below the rate that it judges most consistent with its dual mandate.

The Committee will closely monitor incoming information on economic and financial developments and will provide additional accommodation as needed to promote a stronger economic recovery and sustained improvement in labor market conditions in a context of price stability.

What Does A QE Announcement Look Like?

Below are portions from the Fed’s November 3, 2010 statement, which formally kicked off QE2:

Information received since the Federal Open Market Committee met in September confirms that the pace of recovery in output and employment continues to be slow.

Employers remain reluctant to add to payrolls. Housing starts continue to be depressed. Longer-term inflation expectations have remained stable, but measures of underlying inflation have trended lower in recent quarters.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Currently, the unemployment rate is elevated, and measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run, with its dual mandate. Although the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, progress toward its objectives has been disappointingly slow.

To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability.

What happens on Thursday may not matter in the longer term since the next round of QE is probably only a matter of “when”, not “if”. If you read the Fed statements from 2010 and 2012, it is relatively easy to see why Wall Street is confident QE3 will arrive sometime in the not too distant future. We share the Street’s confidence on “if”, but also respect the “when” is more difficult to pin down. We are positioned for QE with exposure to precious metals (SLV), energy (XOP), and commodities (XME).

WSJ Releases Fed Story During Decline

Tuesday, July 24th, 2012

For the second time in the last year or so, the WSJ has floated a story about possible Fed intervention while the market was open, something that is very rare. The S&P 500 rallied 10 points in the final forty-five minutes of trading. This text below was posted on the WSJ’s blog before the close:

Here comes another QE-rally. Stocks are bouncing off session lows in the final trading hour after WSJ’s Jon Hilsenrath is reporting Fed officials are moving closer to taking new actions if the labor market and economic growth don’t pick up soon.

Apple is down roughly 5% in the after-hours session after announcing earnings.

Fed Talks Open-Ended QE

Monday, July 23rd, 2012

The markets would be very receptive to open-ended QE. Seems unlikely to happen in the short-run, but quite likely longer-term. From Reuters:

An open-ended round of quantitative easing that could be adjusted to suit economic conditions should be considered if the Fed launches a fresh round of monetary stimulus, a top policy official in the Federal Reserve said in an interview with the Financial Times.

Markets Pointing Toward Rally In Risk

Thursday, July 12th, 2012

John Williams, President of the Federal Reserve Bank of San Francisco, delivered a risk-friendly speech in Portland, Oregon on Thursday. From the Wall Street Journal:

“This is a period when extraordinary vigilance is demanded,” Mr. Williams said. “We stand ready to do what is necessary to attain our goals of maximum employment and price stability,” the central banker said. Should the Fed need to do more, “the most effective tool would be additional purchases of longer-maturity securities, including agency mortgage-backed securities.”

As the odds increase of getting at least a QE hint from the Fed in a few weeks, the recent six day sell-off has featured waning downside momentum and numerous bullish divergences on 60-minute charts. We have discussed divergences between MACD and price many times in the past. Along with MACD, On Balance Volume (OBV), and the Accumulation/Distribution indicators have also been flashing “a rally may be coming” signals on numerous ETF charts. The text below, from, describes how OBV can assist investors:

On Balance Volume (OBV) measures buying and selling pressure as a cumulative indicator that adds volume on up days and subtracts volume on down days. Chartists can look for divergences between OBV and price to predict price movements.

Accumulation/Distribution can be used in a similar manner:

The Accumulation Distribution (Accum/Dist) Line is a volume-based indicator designed to measure the cumulative flow of money into and out of a security. Chartists can use this indicator to affirm a security’s underlying trend or anticipate reversals when the indicator diverges from the security price.

If divergences between price and an indicator can be used to “anticipate reversals”, it may be a good time to start the anticipation process. Clear bullish divergences between the three indicators and price can be seen by comparing the slopes of lines A, B, C, and D on the 60-minute S&P 500 chart below.

The divergences shown here are shorter-term in nature. They compliment longer-term bullish developments outlined in a July 8 video.

Since quantitative easing injects freshly printed dollars into the global financial system, investors tend to migrate toward inflation-protection assets before and during a round of QE. The short-term divergences in silver (SLV), copper (JJC), mining stocks (XME), and oil service companies (OIH) align with a market that may be preparing for Fed action.

With the situation in Europe continuing to drag on and on, the markets may get more intervention from the European Central Bank (ECB). From Reuters:

European Central Bank policymakers held out the possibility on Thursday of taking further measures to boost the flagging euro zone economy after a cut in their deposit rate to zero showed no sign of jolting banks into lending out more money. Faced with fading inflation pressures and no sign banks are about to funnel more money to business to help the stagnating economy, ECB policymakers signaled they could act again. “Should the situation deteriorate, there is no article of faith preventing us from going below 0.75 percent,” said ECB Governing Council member Klaas Knot.

The EAFE ETF (EFA) has exposure to France, Germany, and Spain. Thus, it is not surprising EFA has short-term divergences, keeping a bullish reversal on the table.

France is saying “don’t rule out a rally attempt”.

Back in the United States, large-cap (IWV) and large-cap value stocks (IWD) are also hinting at the possibility of an imminent rally attempt in risk assets.

If you are expecting a possible rally in stocks and commodities, it is helpful to see if safe haven assets are flashing possible reversal signals as well. As shown below, Treasuries (TLT) and the short S&P 500 ETF (SH) are exhibiting negative or bearish divergences.

Many traders do not want to be short when intervention and press conference risk are so high. Central banks can change the rules at any time, including Sunday.

As we have stated in the past, divergences alone are not a reason to buy anything. Divergences are “pay attention” and “keep an open mind” signals. When they are present, it is also easier to hold onto your long positions. Divergences can be removed from a chart based on future price action, but as long as they remain, the bulls probably have more hope than most believe. Headline-driven markets can do anything at anytime, including ignore every divergence presented here. Therefore, it is prudent to understand where long-term support resides. The chart of the NYSE Composite Index below could come in handy should the recent bearish trends accelerate.

When signals appear in numerous markets and across different asset classes, they tend to be more meaningful. There are too many ETFs with similar set-ups to show them all, but below is a sampling for your viewing pleasure.

Central Bank Intervention – Only A Matter Of Time?

Monday, May 14th, 2012

If Greece heads to another round of elections, the anti-austerity movement is expected to strengthen. It appears to be only a matter of time before central bankers have to step in again. The Spanish 10-year is hovering at yield levels not seen since November 2011, before the ECB’s unlimited three-year loan program for banks.

It is possible we are looking at a similar scenario to summer 2010, when stocks weakened considerably between May and July. Things did not turn around until Ben Bernanke strongly hinted at QE2 in his August 2010 Jackson Hole speech.

In a May 13 video, we outlined numerous ways to monitor the markets over the coming weeks.

More Juice on The Way From Fed?

Thursday, April 12th, 2012

The markets are reacting to two stories today: (1) GDP in China is expected to exceed the consensus forecast, which may or may not happen, and (2) the Fed is talking about quantitative easing (QE)/printing more money. This from Reuters:

U.S. policymakers are considering the costs and benefits of additional monetary stimulus and are ready to deploy a third round of quantitative easing measures if the economic outlook were to worsen, New York Federal Reserve Bank president William Dudley said on Thursday.

Fed’s “Market Manipulation”

Thursday, March 8th, 2012

We noted earlier today how the Fed released possible plans via the Wall Street Journal during the trading session and once again altered the tone of the markets. James Grant of the Interest Rate Observer was interviewed on CNBC with the topic being Fed policy. The full interview and some excerpts are below:

“We should call this what it is…this is market manipulation”

“The Fed and central banks the world over are, in unprecedented ways, manipulating the value of the currencies they print. They are printing them by the ton.”

“The Fed is manipulating perceptions of risk.”

“The Fed is, in effect, dulling the risk sensors of the entire market place. Is this good?”

“This is the Fed interposing itself into the market place.”

“The Fed is creating distortions. What has the Fed got against the price mechanism? It’s gotten this country a long way over 200 years.”

“Somehow as soon as the market sells off, we have a Fed interjection of money.”

“The ECB’s balance sheet has positively exploded.”

“The world over, we are seeing unprecedented things.”

“The central banks are printing like mad.”

“I think it’s all terribly dangerous.”

“We keep on hearing this propagandist drumbeat of assertion that in order to get us out of our sorrows they, the authorities, the high and mighty ones, must run immense deficits, they must cut interest rates to the bone, and they must starve savers.”

“Capitalism is the alternative to what we have now. I highly recommend it.”

Fed Money Printing Story

Wednesday, March 7th, 2012

With the markets weak, they had to come out with something. We have to be open to buying here. The central banks are out of control, but we have to account for them. It is what it is. The S&P 500 futures are near resistance at 1,352.25. From MarketWatch:

Crude-oil and gold futures traded higher Wednesday, leaving behind their anemic floor-trading opening as investors cheered a Wall Street Journal report that Federal Reserve officials are considering a new type of bond-buying program. Gold for April delivery GCJ2 +0.80% rose $15, or 0.9%, to $1,686.90 an ounce on the Comex division of the New York Mercantile Exchange. Crude for the same month’s delivery CLJ2 +0.96% rose $1.10, or 1.1%, to $105.80 a barrel on Nymex. The program would buy mortgage or Treasury bonds but would tie up the money by borrowing it back for short periods and at low rates.

Directly from the WSJ:

Federal Reserve officials are considering a new type of bond-buying program designed to subdue worries about future inflation if they decide to take new steps to boost the economy in the months ahead.

Under the new approach, the Fed would print new money to buy long-term mortgage or Treasury bonds but effectively tie up that money by borrowing it back for short periods at low rates. The aim of such an approach would be to relieve anxieties that money printing could fuel inflation later, a fear widely expressed by critics of the Fed’s previous efforts to aid the recovery.

Fed officials are set to meet next week and have signaled that they are unlikely to launch new programs at that meeting. Moreover, it is far from certain the Fed will launch another program later on. If growth or inflation pick up much, officials seem unlikely to launch a bond-buying program because the economy might not need the extra help or because doing more could spur higher inflation. But if growth disappoints or inflation slows substantially, Fed officials might decide to act again.

Early Response To LTRO Muted (Updated)

Wednesday, February 29th, 2012

Some short-term S&P 500 levels we are watching that would increase the odds of a meaningful turn: 1366, 1364, 1360. Possibly the most meaningful indication of a turn would be to have a daily close below the current weekly low of 1354. While we have numerous bearish set-ups, the bulls remain in control until we see some evidence of a turn. Short-term up side includes 1376, and 1384.

From a DeMark perspective, we have a valid daily S&P 500 exhaustion signal in place. With a close above 1363, we will pick up another S&P 500 sell setup. A close below 1363, would “confirm” the valid exhaustion signal. Therefore, either way (<1363 or >1363) another sign of a tired market will appear at today’s close.

The ECB printed a little more money than the market’s expectations, but well within the expected range. As shown below, the DAX has given back about 60% of this morning’s early gains. Most markets are either up a little or down a little - nothing dramatic either way.