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U.S. stock index futures are pointing to a higher opening. Asia and
Europe were stable overnight. Indicators suggest that a big move is
coming.
News For Thought
Goldman's big clients aren't bolting. According to The
New York Times: "Despite all the bad headlines — the accusations of fraud,
the talk of a big settlement, the risk, however remote, of criminal charges
— there’s an inconvenient truth that’s been largely ignored: Most of
Goldman’s big customers are not bolting. To the contrary, nearly all
of them are standing by Goldman, despite come-hither looks from Goldman’s
rivals."
Despite trillion dollar mineral find Afghanistan opposition grows. According
to The Washington Post: "A series of political and military setbacks in Afghanistan
has fed anxiety over the war effort in the past few weeks, shaking supporters
of President Obama's counterinsurgency strategy and confirming the pessimism
of those who had doubts about it from the start. The concerns, fed largely by
unease over military operations in southern Afghanistan that are progressing
slower than anticipated, spurred lawmakers to schedule last-minute hearings this
week to assess progress on the battlefield and within the Afghan government."
Health care costs to employers expected to rise nearly 10% in 2011. According
to The Hill.com: "The cost for businesses providing health coverage to employees
will jump by 9 percent in 2011, according to a report released Monday by PricewaterhouseCoopers.
The figure would be higher, but analysts predict employers will shift more costs
to workers next year. The projection — on which the new health reform law has
only a small influence — is less than the 9.5 percent hike estimated for this
year, but remains several times higher than the growth of the economy, squeezing
employers amid already difficult economic times." |
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The Federal Reserve is worried about the potential for
a second down leg in the recession and is having secret meetings in order
to plan for the possibility of such an event, reports The Wall Street Journal.
It's good to know that the Fed is actually thinking ahead, given the uneven quality
of the recovery. According to The Journal: "Federal Reserve officials are beginning
to debate quietly what steps they might take if the recovery surprisingly falters
or if the inflation rate falls much more." And although, they publicly stand
behind the recovery, The Journal reports that "fiscal woes in Europe, stock-market
declines at home and stubbornly high U.S. unemployment have alerted some officials
to risks that the economy could lose momentum and that inflation, already running
below the Fed's informal target of 1.5% to 2%, could fall further, raising a
risk of price deflation."
In other words, the Fed is considering the possibility that the U.S. could follow
a Japan-like road for the foreseeable future and is starting to consider possible
solutions, should that develop.
According to the report, even the hawks on the FOMC are concerned about the possibility,
with Europe's woes being the central theme. The Journal noted: '"The European
sovereign-debt situation is serious, and there are many unanswered questions
about how events will unfold," James Bullard, St. Louis Fed president, said in
Tokyo on Monday.'
What the Fed is hoping for, according to the report, is that the economy shows "a
few months of strong job growth and solid consumer spending and business investment." That
would allow the central bank to raise interest rates "sooner than markets expect,
which is early 2011." And yes, there are some on the Fed who want to raise interest
rates now, such as Kansas City Fed president Thomas Hoenig.
The biggest concern is deflation, which is what happened in Japan, as consumers
walked away from the economy, fearing personal ruin. According to The Journal: "if
the recovery falters, or if inflation slows much further and a threat arises
of deflation, a debilitating fall in prices across the economy. In such cases,
there would be a few avenues the Fed could take," except to repeat some of the
things that it is doing and has already done, such as asset purchases and reinvesting
money that it receives from its investments in the assets that it has bought
from Fannie Mae and Freddie Mac.
The fear is that even if the Fed resumes or accelerates these programs, they
may not have the same effect as they have had so far. One study from the Fed's
own economists in San Francisco "based on projections for inflation and unemployment,
suggests that the Fed may not need to raise short-term interest rates to curb
growth or inflation until early 2012, later than is commonly expected on Wall
Street. The report cites a rule of thumb that the Fed tends to lower the federal-funds
rate by 1.3 percentage points if inflation falls by one percentage point and
by almost two percentage points if the unemployment rate rises by one percentage
point." If the Fed followed this rule "the federal-funds rate—now near zero—would
be minus 2.9% under today's conditions and wouldn't need to move higher until
the first half of 2012, according to San Francisco Fed economist Glenn Rudebusch.
The analysis factors in the stimulus the Fed has provided with its mortgage purchases" according
to The Journal.
Conclusion
The Federal Reserve is running a bit scared, and it should be. It has poured
everything into this recovery attempt and it is getting a whole lot bounce for
its money than it expected.
That's because, as Pimco puts it, this is a "structural" problem. And as we've
noted here in the past, there aren't enough people working any more, a direct
result of the rise in automation, and a permanent loss of jobs, without any planning
for how those people who permanently lose their jobs will contribute to the tax
rolls.
The growth of "welfare" programs, and the lack of work is the centerpiece of
what lies ahead, flat economic growth at best, with the potential for lots of
pockets of weakness.
To be sure, there is no hard and fast rule for where and when this will happen.
As we noted here yesterday, once again, it seems that smaller towns with a university
at the center of the local economy, and sports and conventions as part of their
business models, continue to weather the storm better than larger cities where
manufacturing is the major employer.
But as state coffers dry up, so will the funding that keeps university towns
flowing decrease, putting those current islands of success in jeopardy.
To us, the fact that the Fed has decided to leak that it's worried about the
future, is significant, and makes us even more cautious about what lies ahead.
Now, more than ever, a trading posture to the markets makes sense.
We'll be on Twitter
some time today before the market closes with some updated comments.
Know when to sell and how to make money when the market falls. Get
a detailed trading plan in your pocket. Read Dr. Duarte's All
NEW Books "Market Timing For Dummies." and "Trading Futures For Dummies." The Trading Manuals for
All Seasons. Also Available As Kindle Books. |
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The S & P
SPDR ETF (NYSE: SPY) has been improving of late failed
to rise above key resistance on Monday.
Chart Courtesy of StockCharts.com
We've been looking for a W bottom on the S & P 500.
And as each day passes, the formation has solidified. But
the index needs to start showing a bit more strength here,
or this rally attempt could fail.
The technicals, especially oscillators such as MACD and RSI are bullish. We've
had some good up volume/down volume days. And the rally has not fallen apart
altogether. These are all positives, but not overwhelmingly so.
What is happening is that the volatility bands, also known as Bollinger Bands,
around the S & P 500's 20 day moving average are starting to constrict. That
is a sign that a big move is coming. It's hard to predict the direction of the
move, but indirectly, you can make a case for the move to be likely up.
The key is that the market remains oversold, and that fear has risen to the point
where the Federal Reserve is having "secret" meetings about what it may do if
the economy fails for a second time despite its efforts after the 2007 crash.
To us, it looks as if the next few days will give us an answer about which way
this thing is about to shake out. A key intermediate term resistance level for
the S & P 500 is 1044, the 50-day moving average.
Follow Dr. Duarte on Twitter |
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