Will the Fed's statement re-ignite the inflation trade?
Steve Cook on Disciplined Investing

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Economics

   This Week’s Data

    May durable goods orders came in surprisingly strong, up 1.8% versus expectations of a 1.5% decline; ex transportation, the number was also up +1.1%.
    http://econompicdata.blogspot.com/2009/06/durable-goods-update.html

    May new home sales fell 0.6% versus estimates of a 2.6% increase.
    http://www.ritholtz.com/blog/2009/06/new-home-sales-fell-328/

    Final first quarter gross domestic product was reported off 5.5% versus the preliminary report of -5.7%; the personal consumption expenditure  index (inflation) rose 2.8%, in line with forecasts and versus +0.5% in the fourth quarter of 2008; corporate profits fell 21.8% versus the preliminary report of -22.0%.

    Weekly jobless claims rose 15,000 versus an anticipated increase of 2,000.

   Other

    An interesting chart comparing credit card write offs with the ‘exhaustion’ rate for unemployment (# of people whose unemployment insurance has run out):
    http://www.ritholtz.com/blog/2009/06/credit-card-chargeoffs-vs-exhaustion-rate/

    And:
    http://www.nakedcapitalism.com/2009/06/credit-card-chargeoffs-rise-to-over-10.html

    Some interesting eye candy on oil/energy:
    http://paul.kedrosky.com/archives/2009/06/three_oilenergy.html

    Shadow housing inventory:
    http://www.calculatedriskblog.com/2009/06/shadow-housing-inventory-walked-away.html

    More bad news from Europe:
    http://econompicdata.blogspot.com/2009/06/euro-zone-new-orders-plunge.html

Politics

  Domestic

Another outrageous aspect of the Obamacare (must read):
http://online.wsj.com/article/john_fund_on_the_trail.html

What going on inside the EPA:
http://michellemalkin.com/2009/06/24/the-climate-change-e-mails-epa-doesnt-want-you-to-see/

    Buffet (Warren) on ‘cap and trade’:
    http://www.clubforgrowth.org/2009/06/warren_buffett_slams_capandtra.php

    Milton Freidman on healthcare (a bit long but worth the read):
    http://www.hoover.org/publications/digest/3459466.html

  International War Against Radical Islam

The Market
    
    Technical

    The indices (DJIA 8299, S&P 900) were on a bit of mini roller coaster yesterday; though by the close, there was little change.      They remain in a trading range with an uncertain support level.  My candidate for that support level is 8220, 876; but time will tell.

    Volume is nonexistent; the VIX remains in a downtrend (which is a positive); and most of the volume/breadth studies suggests a Market near a short term low. 

    Though this intermediate term indicator (stocks above their 50 day moving average) is not good:
    http://bespokeinvest.typepad.com/bespoke/2009/06/breadth-gets-bad.html

Out of 98 stocks owned in our Portfolios:

    29  remain above the lower boundary of their uptrend off the March low
    63  have traded out of the March to present uptrend but have established a                      
            trading range and remain within it
    6   are in clear down trends

    None of this suggests any near term major downside risk.

   Fundamental
  

    Interest rates and stock prices:
    http://money.cnn.com/2009/06/24/pf/treasury_drop_means_stocks.fortune/index.htm

    Market capitalization versus GDP (graph):
    http://www.ritholtz.com/blog/2009/06/market-capitalization-as-a-percentage-of-gdp/

       Headlines

 (1)      Everyone was watching the Fed statement which all in all didn’t change that much.  Nevertheless, many investors were hoping that the Fed would back off its purchases of Treasuries and agencies (see (d) below) as a first step of part of a more comprehensive exit statement (how it intends to neutralize all the liquidity it has pumped into the system—[though the really, really positive guys think that the fact that the Fed didn’t announce additional purchases is an initial sign of tightening]--see (e) below).  We got neither which I think helps explain the Market sell off after the release of the Fed statement:

(a)    the statement regarding economic growth [low and improving only slowly] didn’t change,

(b)    the statement on inflation [not a problem] changed only slightly--it dropped any reference to deflation,

(c)    rates remained unchanged,

(d)    the statement on future Fed purchases of Treasuries and agencies didn’t change [meaning that it will purchase additional $1.7 trillion by year end],

(e)             there was no talk of an exit strategy.
       
           This question is, does this somewhat disappointing statement of Fed policy re-ignite the inflation trade?  I will be paying very close attention for the answer to this one.   

(2)    there was another bit of news on the Fed.  Republican congressman Issa                  of the House Oversight Committee put out a statement accusing Bernanke of ‘covering up’ the pressuring of Ken Lewis by the Fed and Treasury to complete the Merrill Lynch deal.  Hearings start today.  If Issa’s accusation is anywhere close to the truth, we could get some turmoil in the Markets in as much as most economic/investment heavyweights are big fans of Uncle Ben.       





Posted 06-25-2009 8:33 AM by Steve Cook