The Street loved the statement but hated the reality that accommodation may be reeled in sooner rather than later. The fact of the matter is there are a number of issues here. The market was actually edging higher after Bernanke was forced to give a time line on tapering that suggested action happening in September ("next few meetings"). But the Fed minutes spooked the market because some see pressures inside for swift unwinding of the $85.0 billion monthly asset buying program. In many ways the minutes suggest an Arab Spring situation inside the Fed.
Is Bernanke losing control?
Alan Greenspan had such a vise-grip control over the Fed it was like a monarchy, but members today understand their voices carry a ton of weight, and they can move markets even when expressing views not in line with the chairman's. Moreover, these members appear to be putting more pressure on policy decisions and that's why this one particular paragraph in the minutes sparked a reversal in the market, leading to the most volatile day since November 2008:
A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth; however, views differed about what evidence would be necessary and the likelihood of that outcome.
Earlier in the day Mr. Bernanke made precise comments designed to counter this statement. He noted policy changes and tapering in next few months (I rule out July because there is no press conference with that gathering and there is no way the Fed makes a major shift in policy without trying to sell it and quell markets) and mentioned "real" improvement in the labor market. I suspect real means people coming back to the job market and the unemployment rate still trending lower. On that note a trend means more than one or two months.
Then there's the fact some in the Fed actually want to see more accommodation, which is probably more in line with Bernanke's thinking:
One participant preferred to begin decreasing the rate of purchases immediately, while another participant preferred to add more monetary accommodation at the current meeting and mentioned that the Committee had several other tools it could potentially use to do so.
To be sure, Ben Bernanke worked hard to make the case the Fed still has room for accommodation even in an improving economy. Yesterday on Varney & Co I pointed out Big Ben came into the meeting feeling like he was finally in his sweet spot—the ability to print at will as the virtuous cycle was taking hold. Yesterday saw strong numbers from the housing market with existing home prices at multiyear highs. But Main Street hasn't bought into the plan enough to even begin to consider tapering, which makes those selling solely on Fed policy probably early.
Bernanke's Sweet Spot
> Consumer Delivering
> Banks double capital of four years ago
> Improved willingness to lend (still needs work)
> Credit availability improving
> Inflation on "low side" historically
> Stock and bond prices not inconsistent with fundamentals
There continues to be a great sense of frustration that the Fed is doing this alone without help from Washington- especially the White House. Bernanke mentioned the grand bargain budget deal would "inspire" confidence in markets and households that would strengthen the economy.
Action in bonds was overshadowed by the equity market, but the 10 year yield pierced 2.0% yesterday which is a red flag for the much ballyhooed bond correction. Such a correction should see funds migrate into stocks, although if too violently, funds might seek the shelter of the sidelines.
I think the reaction to yesterday's events was a bit exaggerated, but in the proper context we are talking about a 1% pullback from the all-time high in the Dow and S&P. There is pressure on the market this morning as the experts continue to guess the Fed's next move.
Mighty Meg and the Retailers
Earnings last night and this morning were pretty good once again, hinting at gradual improvement in the economy, which might be bad news for those that want more Fed action, but in the end it is what we all want and need.
HPQ posted earnings of $0.87, beating the Street's forecast by $0.06 and offered guidance that's well ahead of consensus.
PETM beat the Street by $0.02 and raised the range for the current quarter and full year outlook.
PSUN lost $0.14 per share; the Street was looking for a loss of $0.18, and management hiked revenue guidance for the quarter above consensus.
PLCE posted earnings $0.22, better than expected, and raised guidance for the current quarter and full year.
DLTR beat by $0.02 and raised full year guidance although it's below current street consensus.
Conclusion
I do not see the Fed tapering soon, and there is still a chance it could happen next year. But the real deal is we should be cheering an improved economy. Yet this economy will never be as strong as it should be, but it's not the wreck the doomsday crowd says it is.
In the meantime Mead Johnson (MJN) was a giant winner in a down session yesterday. I gave this idea to everyone on the market commentary in addition to paid subscribers because it underscores one of my main investment theses.
There are companies out there that making real profits around the world, taking market share, inventing new products and that are cheap based on those developments and potential. I don't want to see investors whipsawed. Sure, we've been raising cash mostly by taking profits on a bunch of positions, but there are stocks worth holding during increased volatility.
Let's see how the market shakes out this morning. I'm licking my chops and actually looking for a chance to own great companies at discounts.
As for the Fed I actually think it would be better for swift and determined unwinding rather than trying to appease markets. If the initial reaction is harsh that's fine because we need policies based on the economy and not emotions. In fact, the big problem in this world of soft landings is trying to make tough medicine go down easy. Greenspan kept rates too low for too long, but a greater mistake was raising them at such a slow pace that the damage already planted into the system took full bloom.
If Bernanke wants to take a real victory lap it should ignore the market and make bold moves in the opposite direction. Consider how much the Street is whining from the notion of buying less debt might as well say we've won and cut the juice when they decide the coast is clear. On that note I suspect Bernanke is watching the action in the market and will be more reluctant to change policy.
