So what did you expect? How many times have I said that the market invariably declines when Fed Chairman Bernanke testifies before Congress or holds a press conference. And for the second time in a row, his utterances caused the Dow to decline by more than 200 points, and as the old saying goes- with friends like that, who needs enemies?
What I had said in yesterday’s market notes is unfortunately exactly what came to pass, namely that “at 2pm when the F.O.M.C. announcement is made, followed by the 2:30pm news conference (ugh), how is this going to help?”
The Dow was just drifting in a very narrow range from the start until the 2pm release of the Fed minutes, at which point it was down by 20.
Then the fireworks began, as after a very fast momentary move into positive territory of 4 points which lasted for a few seconds only, things began their traditional downward post-Fed move, as the Dow was able to bounce off of three consecutive declines of 80 points to be lower by only 20 when the inevitable kicked in, as at 2:45pm things began to really crater to the downside, with a 150 point loss at 3pm, which was then followed by a rise to a decline of “only” around 100, before one of those revolting classic very late in the session collapses to a final Dow loss of 206.
Let us remember that his May 22nd Congressional testimony collapse from an early gain of 150 Dow points to a final close of 80 negative points made today the second time that Mr. Bernanke had the honor of doing the market in as a result of what he said to the tune of over 200 lower intraday Dow points, and when is he supposed to be leaving office?
You know things got really negative when crude oil, which seems oblivious to the negative supply/demand fundamentals that certainly do not support a price close to $100 a barrel, had the nerve to decline by all of $.40 cents a barrel down to the still elevated price of $98.01, but never mind. Gold prices did take a major league beating after what Bernanke said and ended right on that $1,350 support level that started to look a bit tenuous. Of course, s a result of what he said, bond yields began to rise further, as the 30 year maturity got up to 3.42% while the 10-year rose to 2.35% while the dollar strengthened with the Euro declining down to 1.329.
To no one’s surprise, the worst performers were those dividend payers that everyone ran into earlier in the year when bond yields were at ultimately unsustainably low levels, with such groups as the utilities, telecom and mortgage REIT’s getting blasted, and the fact that these groups were so weak should not come as a surprise to anyone.
So what did the F.O.M.C. statement and the Chairman’s disastrous press conference say that caused investors to get so bent out of shape? The Fed said in the prepared statement that they will keep buying bonds at the current rate of $85 billion a month and said once again that it is prepared to increase or decrease the rate of these purchases depending on the outlook for the labor market and the rate of inflation. They forecast that the jobless rate will decline to between 6.5% – 6.8% by the end of next year, which could then actually cause them to increase the current federal funds rate, which is between zero and one-quarter percent. They also said inflation for the foreseeable future will likely maintain itself below their 2% target. If unemployment remains above 6.5% and the inflation outlook is not higher than 2.5%, they will maintain the federal funds rate at its current level.
This statement in and of itself is not something that was unknown, so naturally it was up to Chairman Bernanke to do the damage, when he said at the press conference that “The committee currently anticipates that it would be appropriate to moderate the pace of purchases later this year” if economic data are broadly consistent with the Fed’s forecast. He then added that “If the subsequent data remain broadly aligned with our current expectations for the economy, we will continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year.”
This is when markets went into a downside panic, with the ending results as mentioned above.
Breadth numbers were horrible at a negative 1 to 6 downside ratio and the VIX actually had the nerve to be moderately lower for most of the session until the Dow hit the 200 point or worse level very late, and this was really astounding and it finally ended with an extremely small gain of only .03 to 16.64.
And if you thought yesterday was awful, welcome to today, although the only thing we can thank Mr. Bernanke for is the fact that crude oil prices are finally coming back down to earth in the sense that he did what all of the supposed anxieties about Syria, Jordan and the amorphous expression “Middle East tensions” could not do, namely bring the price of energy products down closer to more realistic levels. Crude oil is lower by $3 a barrel down to $95, probably still too high but at least a warning shot over the bow of those whose interest it is to raise the prices to consumers at any cost.
Then the fact that the June China Purchasing Managers’ Index declined by more than predicted to the lowest level since September was also thrown into the pot to justify this selloff as well, as it was the first reading below 50 since last October, and this signifies contraction.
Equities really had no chance as the various stock index futures deteriorated as the evening and early morning wore on, and actually got worse as the day is moving along and as a result the Dow declined to as much of a loss as 253 at its lowest level so far at 11:20am and is currently down by 240 as this is being written.
Breadth numbers are just about at the worst I have ever seen at a negative 1 to 14 ratio, as every member of the Dow is lower. And after having tried to behave normally yesterday as mentioned above, the VIX is making up for that by having an upside field day with a gain of as much as 2.86 up to 19.50, which has been some sort of a resistance level going back to late February and earlier this month.It is currently at 18.66, so this resistance area has held so far, although stocks are still languishing around their worst level of the day.
Today’s economic reports were good in the sense that May existing home sales rose to their best level since November 2009, the June Philadelphia Fed Manufacturing Survey increased from a decrease last month, May L.E.I. showed a small gain from a higher revised number last month, but weekly jobless claims did rise to 354,000, a gain of 18,000.
If things do not improve, this will be the worst two-day decline for stocks since November and it will now be the eighth straight Dow triple-digit move in a row with the scorecard reading 3 positive and 5 negative, and the 14th out of the past 18 days where a move of this magnitude has taken place, with the larger scorecard now 6 positive and 8 negative.
Bond yields are naturally higher once again, as the 30-year is now up to 3.54% and the 10-year is at 2.44%, which are the highest levels since October 2011. The dollar is strengthening against both the Euro and the Japanese yen, and hey wait a minute, I thought that when this happens, stocks are supposed to go higher because of the so-called yen “carry trade”, which can now be consigned to the junk heap of history as well because if the yen weakens as it is today and yesterday, aren’t you supposed to be able to borrow in cheaper yen to buy stocks?
But then comes the amorphous “explanation” that the rise in rates here makes “funding of these carry trades into emerging markets (which of course Japan is not) more expensive to carry”, whatever that is supposed to mean, and once again proves that market experts will find any “explanation” to show that they are in fact experts.
As the dollar gets stronger, the price of most commodities it taking a beating, particularly gold and crude oil as mentioned above. But whereas the latter is just back to where it was a week or so ago, gold is now at its lowest level since September 2010 when it was on the way up to its record higher of $1,900 an ounce (a wonderful but fading memory) a year later. And this of reminds me of the scene from the Woody Allen move “Broadway Danny Rose” where as a third-rate talent agent he is in a discussion with some rough gangster types who tell him that they are in the “cement business”. After Woody makes an aside to his companion (played by Mia Farrow) that the cement business is sometimes the province of organized crime and these gentleman move toward him in a threatening manner, he tries to restore the peace by saying that “everyone needs a little cement in their lives!” Remember when gold was moving strongly ahead to this upside, all of these television touts and other market experts would solemnly pronounce that “every portfolio needs a little diversification into gold”, because gold is the ultimate hedge against the downside effect of currency devaluation and stock market declines.
Perhaps this argument worked in the old days when higher inflation was indeed a detriment to stocks, but with very little inflation at the present time, this argument becomes more difficult to make and in a sense ever since the initiation of the first QE programs in December 2008, gold and the stock market have moved in tandem together most of the time as Bernanke wanted to inflate all asset values in order to prevent deflation from entering into the economy, which is sometimes worse than inflation because it discourages people from borrowing if you think that the price of your house is going to be lower.
Economic reports this week are over, so we do not have to add them into what is becoming a very difficult equation. First quarter earnings for 2013 rose by 5% and the projection at the present time for the second quarter is for earnings to be just around flat, and then we will ostensibly see earnings advances of 4.6% for the third-quarter and 5.7% in the fourth-quarter.
The S&P trades at 15 times the projected 2013 earnings of $111. Earnings were $85 in 2010, $92 in 2011 and $102 in 2012. The estimate for 2013 is $111, a gain of 9%. The average P/E multiple for the S&P going back to 1954 has been 16.4 and it has been 14.4 for the last 10 year’s average.
After four consecutive quarters of negative G.D.P. growth, we have had 15 consecutive quarters of positive growth, starting with the third-quarter of 2009, every quarter in 2010, every quarter in 2011, and every quarter in 2012. G.D.P. rose by 2.2% in 2012, and is projected to increase by 2% in 2013, according to various surveys, with 2.5% in the first-quarter and then in the low 1’s for the second and third-quarters before a fourth-quarter acceleration to over 4%.
Donald M. Selkin
Don Selkin is the Chief Market Strategist at National Securities Corporation, member FINRA/SIPC, (NSC) and provides the Fair Value analysis for CNBC each morning. The commentary provided in this Market Letter is intended to provide our customers with timely market analysis and should not be considered a research report. This Market Letter may contain, and is limited to: Discussions of broad based indices; Commentaries on economic, political or market conditions; Technical analyses concerning the demand and supply for a sector, index or industry based in trading volume and price; Statistical summaries of multiple companies’ financial data, including listings of current ratings; and, Recommendations regarding increasing or decreasing holdings in particular industries or securities. This Market Letter does not make a financial or investment recommendation or otherwise promotes a product or service of the firm. This Market Letter contains only news, facts, and commentary on information previously reported from a news source believed to be accurate and reliable by the author. These news sources include the following: {Bloomberg Financial, Reuters, Associated Press}.