Wednesday, November 20, 2013

Lower markets on worries that Fed tapering will begin sooner

Dow dove 66, decliners over advancers 2-1 & NAZ dropped 10.  The MLP index was up fractionally in the 447s & the REIT index fell 2+ to the 266s.  Junk bond funds were 1-2% lower (big in this world) & the yield on the 10 year Treasury soared 9 basis points on bets for higher rates sooner.  Oil finally had a good day while gold sank 30. 

AMJ (Alerian MLP Index tracking fund)

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Ben Bernanke

Photo:   Bloomberg

The Federal Reserve (FED) may start winding down its stimulus program for reasons other than an improving job market.  "Participants also considered scenarios under which it might, at some stage, be appropriate to begin to wind down the [bond-buying] program before an unambiguous further improvement in the outlook was apparent," minutes from the last FED meeting in Oct said.  Tapering for any reason other than a stronger job market would mark a dramatic change from its stated policy.  Since last Sep, the FED has been buying $85B in bonds each month with one goal in mind: substantial improvement in the job market.  If the officials start to doubt the effectiveness of that policy or believe the risks outweigh the benefits, they would have to completely change their tune, & doing so rattles the markets.  While not at that point yet, they discussed that scenario in detail at the meeting.  For now, most officials still believe the bond-buying program has more help to offer the economy.  They also believe the job market will continue improving & "warrant trimming the pace of purchases in coming months."  The FOMC also discussed a 2nd way to continue stimulating the economy.  A couple officials said they would like to announce they will keep short-term interest rates low until well after the unemployment rate falls to 6.5%, the current stated goal.  Perhaps the FED should aim for an even lower unemployment rate, they said.  They succeeded in keeping the markets guessing.

Fed Taper Likely in ‘Coming Months’ on Better Data

Retail Sales in U.S. Increased More Than Forecast in October

Photo:  Bloomberg

Retail sales climbed in Oct the most in 3 months, indicating the gov shutdown did little to unnerve Americans before the holiday shopping season.  The 0.4% increase, from the Commerce Dept, exceeded the forecast after no change in Sep.  Consumers not only purchased big-ticket goods such as cars & furniture, they dined out, bought clothing & took home more electronics.  The figures boost the holiday-sales outlook for retailers & show that consumer spending is picking up from a Q3 slowdown.  Cheaper gasoline is stretching paychecks at the same time higher stock prices & home values drive gains in household wealth.  Gasoline prices near the lowest levels in more than 2 years helped drive down the cost of living in Oct.  The decrease helped boost purchasing power, as hourly earnings adjusted for inflation rose 1.3% in Oct from a year ago, the biggest 12-month gain in 4 years, according to the Labor Dept.

Sales Gain Shows Resilient U.S. Consumer Before Holiday: Economy

John Deere Tractors

Photo:  Bloomberg

Deere forecast better-than-expected earnings for 2014 fiscal as a house-building recovery boosts demand for its loaders & excavators.  Net income will drop to $3.3B in the year thru Oct 31, DE said, above the $3.06B forecast.  Total equipment sales should fall about 3%, compared with an estimate of a 9.5% decline.  Sales of construction & forestry equipment are advancing about 10% in the current financial year, partly because of the recovery in the US economy & an increase in housing starts.  That will limit the impact of a 6% decline in revenue from agricultural & turf machinery.  Fiscal Q4 EPS was $2.11, up from $1.75 a year earlier & above the $1.90 estimate.  Equipment sales fell to $8.62B from $9.05B, matching the estimate.  The company is the largest maker of agricultural equipment, which accounted for 76% if sales, while 18% came from construction & forestry.  DE is facing its first drop in annual earnings in 5 years as US farmers reap a record harvest of corn & other crops.  US farm cash receipts, a key indicator for equipment sales, will decline to $378B in 2014 from $392B this year, DE said.  In contrast, the housing industry is beginning to recover & construction spending in Aug was the highest since Apr 2009.  The stock jumped 1.71 in what has been a lackluster year.

Deere Full-Year Forecast Tops Estimates as Construction Demand Seen Rising

Deere (DE)

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It's sad that the fundamental force driving this whopper size rally in the stock market is the next move by the FED, not economic fundamentals.  Daily swings are largely from a whisper one way or the other about extending the bond buying program of the FED.  While I'm not a big fan of it now, all indications are that the easy money policy is locked in place for months, maybe years.  However a market that is this worried about every possible change, & not economic fundamentals, carries a lot of risk which is not priced into values at record levels.

Dow Jones Industrials

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