Buzz on the Street: Fed Says No Taper, More Candy
A look back at the happenings on Wall Street this week, as seen by Minyanville's Buzz & Banter.
Mission in the Rain
Yesterday we asked if the FOMC would bless the equity melt-up; in the early afternoon, we got our answer.
In the current bizarro environment, where good news is bad (implies tapering) and bad news is good (pushes tapering), the on-the-margin hawkish commentary from the Federal Reserve was viewed as an incremental negative, as some perceived the 'sequence' of tapering could begin a few months prior than previous expectations.
Forget for a moment that economists suggested earlier this week that the Fed would avoid massive losses by never selling mortgage-backed securities from its record $2.84 trillion balance sheet; "Project Rug Sweep" has been the cause célèbre of a rally that drove 92.2% of the S&P higher this year with an average gain of 29.96%. On its face, Sir Isaac Newton got this one wrong; every action does not have an equal an opposite reaction, or so it would seem.
Given the ability of the Fed to control the money supply (or digital credit, as the case may be), the question is begged whether there will be a comeuppance--and if there is, how it will manifest? There are several emerging hot-button issues--the prevailing direction of social mood and increasingly strained foreign relations, among them--but they've been a distant chorus to the price action on the main stage. And as we know all too well, the stock market was designed to be the world's largest thermometer.
I've asked some of the smarter market observers I know to poke holes in this strategy, asking, "If FASB 157 (mark-to-market) never comes back in our lifetime and the Fed holds to maturity, is it 'really' possible that they can sweep all this under the rug?" I wrote a column several months ago likening the Fed policy to the put-writing strategies of high-tech companies in the late 90's; it worked great until it didn't and when it didn't, they simply wrote off their losses and never looked back.
The hard-core skeptics maintain "this" will matter, although there wasn't a uniform view in the timing or catalyst. Some pointed to how confidence in the Fed peaked last July--and as confidence in central banks weaken, "FASB 157 will be the least of the worries." Others noted that "mark-to-imagination" is not sustainable and therefore unrealistic over an extended period; and when underlying values emerge, there will be sticker shock."
Still others point to fatigue in risk assets (after a four-year 166% rally), policy (including "Obamacare," which will disproportionately impact stockholders) and a "tipping point" on the global stage, when globalization flips the switch to isolationism and leaders protect the interests of citizens rather than pander to what they view as a fading imperialist agenda.
There are a lot of moving parts and many competing agendas, particularly with mutual fund year-end today and the calendar year-end dead ahead. While the cast is not yet die, I would offer that IF the bears have a last gasp in them, it will emerge over the next two weeks. It's a tall order but not an impossible one; their mission in the rain is to drive prices below support at S&P 1730 and NDX 3255.
Good luck today.
Chicago PMI - Wow
Below is a chart of Chicago PMI going back to 2000. It has rarely had a higher print.
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During that time, it has NEVER jumped more than 10 points in a month.
I honestly have no clue what to make of it since it seems so different than almost any other data we have been getting.
All I can think is that Chicago is experiencing growth at a record rate of improvement, or something about the government shutdown lead to some strong orders or business flows once the government re-opened. So that seems weird too.
I am left scratching my head, but this morning we wrote about "bad being good" and this almost has to fall under the category of "too good to be true," but in this strange world, it is dragging stocks down, putting my morning analysis in the "right for the wrong reasons" category.
NFP Revisions Foreshadowing End To Hiring Cycle
September payrolls came in at 148k versus expectations of 180k, a negative surprise of 32k jobs. Prior month payrolls were revised up to 193k from 169k, an increase of 24k jobs. At face value, these differentials indicate a wash, but a closer look reveals conflicting signals.
Below in the first chart, the red lines are the Actual (First) NFP releases since 2000. In light blue, the subsequent First Revision for that date. The difference between the two is plotted in dark blue (right axis). For three years, this differential has been weakening. The channel's area below zero is now greater than the area above zero.
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If this trend continues, the probability and magnitude of positive revisions should decline, while the probability and magnitude of negative revisions should increase.
Next, in the second chart, we calculate the NFP Forecast Error Volatility of surveyed economists (blue), constructing an error band (gray). This measures the size of the surveyed economists' recent forecasting error. At a 13-year low, it has never been easier to make an NFP forecast. Historically, comparable low error readings have led to very volatile, poor forecasting regimes.
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Lastly, in the third chart, comparing the Actual (First) NFP release and the Latest Revision (Last Price) at each date, a cyclical pattern also emerges. In the last expansion, peak positive revisions occurred in mid-2005. In this expansion, the peak was in mid-2011. The July 2013 differential in particular (circled in red) stands out – having now been revised to 89k, down significantly from its original value of 162k. This very low reading suggests, similar to late 2006/mid 2007, that payroll numbers and their revisions may continue to deteriorate over the next several months, foreshadowing an end to the current hiring cycle. If historically low forecasting errors begin to rise in tandem, consensus may fall behind and have to chase the data lower, precisely when getting the right call has never been more important.
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[Excerpted from October 22 Economic Report]
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