Return to Equilibrium

Should the whole frame of nature round him break
In ruin and confusion hurled
He, unconcerned, would hear the mighty crack
And stand secure amidst a falling world
Translation of Horace, Odes

I like the idea of the market getting hit on bad news and yesterday there was a fair amount of bad news or at least flaccid economic news. I like the idea of the street getting used to the fact the Fed will slow down on accommodation someday. I like the idea that the Fed pulling back may put real pressure on the White House to adjust policy to help business. I like all these things and I'm not a masochist or a dreamer. Okay, I'm a dreamer, but only in the best way. On that note this corrective phase shouldn't be seen as a nightmare but instead a return to equilibrium that makes attractive stocks even more attractive.

All will not be ruined even if there is confusion and it feels like the whole frame of nature is breaking upon the Fed walking away to allow the economy to live without influence. Ben Bernanke doesn't get this and the market is manipulated in such a way to make him even more fearful of cutting off the spigots and not looking back. Bernanke has been sucked in by the Street just as Greenspan was sucked in after all the accolades in 1987; the Maestro couldn't stand to be bad-mouthed by Wall Street. So, he left interest rates too low for too long and once he figured out his mistake he tippy-toed back with 25 bps rate hikes that were too little too late - but the street loved him.

Faced with the need to stop a banking crisis Greenspan began lowering rates in June 1989 eventually taking them all the way down to 3.00% by February 1994 from 9.75%. The Fed took no action in all of 1993, allowing banks to borrow at 3.0% and buy long bonds yielding 7.0% - what you might call a no-brainer. Finally the Fed began to hike rates, with a 25 bps hike on February 4, 1994. The Dow opened at 3,963 that session and closed at 3,871 - and never got higher for the rest of the year. By this time the Fed had to focus on other things so it raised rates several more times, each one reflecting a heightened sense of angst - March 25bps, April 25bps, May 50bps, August 50bps and Nov 75 bps.

The Fed hiking rates didn't help the stock market in 1994 but it didn't crush the market either, and once the last hike of 50bps happened in February 1995 the market took off like a rocket. There were additional unique factors. Be that as it may, while Greenspan was hiking rates the economy was adding jobs. From Feb 1994 through Feb 1995 the US economy added 4,921,000 jobs. At the moment the best anyone expects is one job creation of just a third of that 12-month span (this is one of the many reasons the Fed probably will not stop accommodation for another year or two).

The wildcard back then was the rise of the Internet which resulted in all rules of investing being tossed out the window. Even when the Maestro, so eager to appease banks and the market, found the market to be too irrationally exuberant.

But, the fact of the matter is the Fed kept rates too low for too long to save banks but was able to aggressively remove the punch bowl in an environment of strong job growth. Yesterday's report from ADP reminds us this isn't a period of strong job growth. By its own standards the Fed really cannot begin to stop stimulating the economy but this asset-buying program is unique and maybe could be tapered but I still don't see that happening this year unless there's a remarkable surge in job and GDP growth. What bothers me is, when the coast is clear, if Ben Bernanke is so worried about spooking the street he allows the seeds of inflation to take root to the point of not being able to avert disaster.

For now all that stuff is really on the backburner. The economy isn't strong enough for the Fed to hurry and they have the luxury of claiming low to no inflation.

The street must realize the Fed isn't going anywhere and there really is little difference between buying $35.0 billion a month on assets instead of $85.0 billion - neither is going to work against the backdrop of the war on success and higher taxes. Be that as it may there has to be some traditional pent up demand for consumers and businesses. How to tap that remains elusive for Bernanke and Co. People are buying trucks and cars but the difference is subprime loans. That's not happening with mortgages and businesses just don't need money they aren't going to use for capital investments.
 

The street was looking for 165,000 jobs from ADP but got a lot less. According to the narrative just a week ago that should have sent stocks higher, even if ADP has been averaging 60,000 fewer than BLS (government number) over the past three months. Instead stocks waffled, for a moment found footing from positive comments on business conditions from Juniper Networks (JNPR), but eventually crashed.

Trade +31,000
Financial +7,000
Professional Services +42,000 (speaks to demand for higher-paying knowledge jobs)
Construction +5,000 (speaks to continued housing rebound - but very low)
Manufacturing -6,000

The Beige Book saw the word "modest, moderate and moderately" used extensively. Not a roaring assessment of the economy or a threat to trigger Fed tapering.