Fastdown Or Grind Up

Clean sharp lights shining on an undisturbed baseball diamond is one of the most calming images to behold.   There is no moment in trading ever so calming with the exception of a quiet trading floor hours after the close. Today's markets have no refuge, they just grind endlessly over hills and down valleys.  They are supported by serious explanations of value and derided by suspicious inquisitors.

Bulls have had no lifting problems in 2012, while the bears have repeatedly been trapped by pull backs believed to be so globally dire but only to become rally points.  Certainly the value of the great bailout promise from the EU has risen to new highs.  Nothing has been accomplished but the rewording of tired declarations.

This is a powerful time period for all markets as I so remember back in 1982 with the bottom of commodity markets and the month earlier bottom is equities.  All had be falling for a time and the slow upward march began in the second week of October.  But there is no indication to the direction here under these extraordinary economic times of deliberate intervention and almost constant upside bias.

If this is a top, it will fall rapidly. If it is a pullback, the grind higher will be at the bear's throat before he can cover cleanly.

Fed Picks Theme Song

Ben Bernanke was seen driving away from the Federal Reserve's Open Market Committee Meeting  this week with his head bouncing to Def Leppard's " Pour Some Sugar On Me" which he has personally picked as the Fed's theme song for 2012.  He has also privately predicted the DJIA to hit 20,000 shortly but only if there is world wide economic collapse.  If things get much worse the no telling how high the market can go.  But just in case, Bernanke believes increasing the value of expressionists paintings may be the boost the job market needs. 

Economic Fuel Gauge

Here is the Civilian Employment Population Ratio chart published by the Federal Reserve.
Generational employment as a percentage of the population have been declining since the dot.com bubble in 2000. Then the unprecedented downward momentum caused by the financial crash in 2007 left the chart hanging just over the gains forty years ago.  The chart is sort of an economic fuel gauge which illustrates the dilemma the Fed is in.  Their accommodations cannot seem to find the economic gas tank for the broad middle class and one can sense Bernanke is nervous.  He does not want the current consolidation turning into a ledge for further declines.  "Do something" is now the policy impetus.  Yet all accommodative QE programs have come from what has been called "the double down on trickle down" method.  Feeding the top so they might feed the rest is leaving the chart hanging.    

Market Good News Bad News

Conditional unlimited bond buying is the new spin to calm the markets being put forth by ECB President Mario "whatever it takes" Draghi and German President "not so fast" Merkel.  So far the EU participants have been in lip sync to show solidarity as they conjure a bond buying program which may ultimately be so conditional as to be worthless. Besides the directional talk to date, nothing has actually ever been implemented by the ECB. 

The U.S. has a stagnant work force producing marginal GDP and a Fed policy to promote cheap credit to a financial institutional structure which has proven to be incapable of financing commerce but excellent at blowing up any investments their trading operations pick.  The EU has not only a slowing economy but the added stress of solving cross country bailouts without the political ability to craft long term solutions.

Stock markets tend to be in front of good news and behind in bad news. The good news is of coarse the coordinated sensitivity to market direction by world finance leaders.  The bad news is the coordinated sensitivity to market direction by world finance leaders.  

Economic growth and the resulting race of asset price value to catch future value is a product of expanding participation by a broad base economy.  Inflating asset value as a replacement for growth is dangerous in that it is an "all in" strategy based the past performance old growth economic models. 

The markets are "all in" in front of the good news but are behind the bad news.

Financial Over Steering

Looks like Greece is odd country out.  German conditions will not allow it to constantly rework the previous workouts which will be required for it to stay in the EU since it has no viable way to accomplish the austerity measures as currently constructed.  Equity and bond markets are already bloated from the new normal trading strategy; i.e. place monster bets on the Fed/EU put protecting all assets.  The EU portion of the put has about as much behind it as a tooth under a pillow; you will get paid, but will be disappointing on how little.

Common thought now is that any crisis can be avoided by following a few simple steps worked out through a recipe concocted by the Fed during the 2008 financial crisis.  The buy math formula for all sorts of bond instruments is the patch solution.  But like all solutions of grand scale but limited to the best last strategy, a mutation of problems will appear and multiply into a panic of some unpredictable degree.   Over steering leads to dramatic spin.

Notions of Value

No one would argue that the greatest marginal advantage for the bulls this year is being provided once again by the US Federal Reserve.  Reports of outflows from Europe into the US has helped the upside lately but may create an unwanted technical burden to equities.  While the Fed promotes equities via the bond market where it has a direct hand intervening on the cost of money, the door always swings both ways in stocks.  Notions of value and safety are always the last criteria met before a decline.

Some interesting numbers from QRiskValue.  Despite all the claims of market volatility, this year has been the least volatile of the last five and a half years when measured by total range.  From the beginning of the year until last Friday, the S&P 500 total range has been just 160 points compared to last year at this time of just over 300 points.  The last time it was this skinny over same time period was 2007 at just under 200 points.

Market May Have Weak Timbers

Some overbought indicators produced at QRiskValue show only a few times when the market construct was this poor for the S&P500 futures.  October 9th of 2007 (futures 1576), January 24th of 2008,  (1352), July 7th 2011 (1318),  July 27 2012 (1368).

The 2007, 2008  break in the market went to 665.75 in the spot futures, 2011 break to 1068. 

Construct weighs upside potential and current market strength.

More Despair, More Worry, More Buying

The markets never move without the some confusion and important miscalculations but they are always convinced whatever the current direction must be the right direction, at the moment.  EU failure to produce any real substantive economic intervention has put the world markets into end of world mode. But looking at the map, the DJIA and the S&P500 are not far from all time highs and bearish sentiment is on every sign post. We must be at that place they call Going Higher Right Now, Down Later.

Now maybe there will be an event triggered from economic twists no markets can withstand.  But the game being played here is to placate the markets.

Fed intervention to stabilize asset prices has worked in so far as it has inflated financial indexes prices.  This is in part to cover the Fed's inability to stem the downward spiral of new job creation and its ineffectiveness to produce any reasonable economic recovery.

But there are real dangers.  Affecting the balance sheets of banks and providing massive liquidity for lending is much easier than ultimately controlling stock markets which have at their core random movements kicked around by price discovery.  Added volatility resulting from a policy of asset stock inflation works both positively and negatively and up cannot be guaranteed just because a Fed points its finger higher.  Markets are now faced with having to defend speculation in stocks promoted by lower interest rates without the benefit of economic growth.  No jobs, just higher stock prices. 

The Fed and now the EU have created a cloud upon which all financial markets now sit.  With whatever the EU comes up with being probably too thin to save massive red balance sheets, the Fed is locked in.  The Fed believes it has the dominant strategy so that no matter what any of the other players do, it has implemented the correct action.  Clearly the Fed believed things would be improving much more rapidly when it undertook its strategy.  As in any other game, if you are wrong about having the dominate strategy, you lose your defense, and for the Fed that would be asset price protection.

Fed's Asset Stabilization Strategy

In the past, Fed accommodations have helped to stimulate economic growth after a brief cyclical downturn.  This time a structural downturn is necessitating greater demand for relief through massive injections of liquidity to support a strategic plan to protect asset prices via the great buy hedge. Now, the EU's cheap euro strategy which is needed to facilitate repair of the economic conditions brought about by a de-leveraging world, is challenging the Fed's asset stabilization policy.  While the Fed has provided a covered hedge for assets such as stock prices, a cheap euro policy may ultimately force the hedge to be cashed-in as world pricing power wains, profits fall, and job growth remains weak. 

The world seems to heading towards a new standard of living set point.  The Fed's policy of asset stabilization may in the end be the difference between deflation and just a bit better than deflation.  Either way, the great buy hedge will see some pressure as some may take the opportunity to raise cash by liquidating against the hedge.

The Big Wean

Bernanke testimony this week clearly shows a Fed which would love to prepare the US economy for the beginning of the end of stimulus.  Without committing to further stimulus yesterday before the Senate and in his testimony before the House today, the Fed Chairman stated he did not see a double dip recession.  His message. The beginning of the big wean or the end stimulus is being cautiously prepared. 

The problem of course is if it were not for the European economic problems, Bernanke would be more confident in the initiation of the end plan. If Europe can repair itself even ever so slightly, then the markets will not need much more help.

Now the markets may not like the thought of growing ever so slowly all by themselves which is probably not good for owning equities right now.  In fact, it is the first time since 2008 the Fed has indicated it may not be the great asset enabler in the next investment cycle.  Thus the buy for equities was between March and September of 2009 and the potential end of that Fed enabling run may be March to September of 2012.