 | ||||
|
| | ||
| ||||
| ||||
By Costas Bocelli - Creator: Channel Trading Secrets
What a month!After the June swoon, which resulted in the only negative month of the year, the stock market rebounded with a tremendous pop in July. The S&P 500 rose 5 percent -- the best month of gains since the fiscal cliff rally in January.
But the real truth to the reassertion of the medium-term rally is that it’s supported by the Federal Reserve’s ultra-accommodative monetary policy and, in particular, their open-ended bond purchase program.
And while there’s been lots of speculation that the Fed will soon begin to taper the size of their monthly purchases, the latest policy communication doesn’t exactly make it seem like they're now in such a hurry.
Yesterday was a big day, and tomorrow may actually be even bigger.
On Wednesday morning, the advance reading for second quarter GDP suggested that the real economy had grown at an annualized rate of 1.7 percent. That was actually better than the 1.0 percent estimate that most economists were expecting, but still considered subpar for the economic recovery to gain substantial traction.
There was also yet another negative revision for the first quarter. In the first three months of this year, the real economy is now seen as having grown at a 1.1 percent annualized rate, which is 0.7 percent less than the final reading and a far cry from the advance reading of 2.5 percent!
And now, when we put the two numbers together, it equals an annualized growth rate of less than 1.5 percent for the first half of 2013 and now lagging behind the Fed’s economic forecasts that they update on a quarterly basis.
Later in the day we got the latest FOMC policy statement. It was eagerly anticipated, as market participants were looking for clues on the prospect that the Fed may soon begin to taper the monthly purchases. The market has discounted the fact that it may slow its bond purchases as soon as the next Fed meeting in September, which coincides with the Chairman’s next live press conference.
But I have to tell you, based on the recent data and the committee's reticence to add anything new to their policy statement on the taper scenario, that in itself seems very telling.
And while they offered very little, the subtle changes they did make in their language actually rang a more dovish tone that stimulus is still appropriate over the coming months.
For one, the committee downgraded their view on growth. They now see economic activity as having expanded at a “modest pace,” which was a notable change from the prior statements that implied expansion being at a “moderate pace”. In Fed speak, that’s a downgrade in their outlook.
They also highlighted the fact that mortgage rates are on the rise, which could restrain the recent momentum and strength in the housing sector. The Fed’s reasoning for buying treasury bonds and agency-backed securities, of course, are intended to apply downward pressure on longer-term interest rates like consumer and mortgage debt financing.
Ever since mortgage rates began to climb from their historic lows back in May, mortgage applications have been on the decline. Eleven out of the past twelve weeks saw a contraction in the MBA Composite Mortgage Index.
And lastly, the committee has now become more sensitive to the inflation rates or, in this case, the lack thereof.
In the second quarter, inflation ran at an annualized rate of 0.7%. Strip out food and energy, which actually saw prices decline during that period, and you get a core inflation rate of 1.1 percent (annualized). Any way you slice it, pricing power is softening.
and it’s slowing far below target
When you put all this together, it adds up to the fact that the Fed will need to keep monetary policy highly accommodative for the foreseeable future. And if they do happen to signal a taper in September, the reality will be that they’ll still be in there buying on a monthly basis and growing their balance sheet -- just at a slower pace.
You see, the US Treasury needs to issue less debt anyhow because of the reduction in the fiscal deficit. The sequestration spending cuts and higher payroll and income tax receipts from the fiscal cliff deal struck at the beginning of the year have reduced the supply of treasury debt, so less bond buying by the Fed does not necessarily mean less downward pressure on interest rates.
What does this all mean?
Glad you asked. It means that the Fed chose not to rock the boat with their July policy communication and, if anything, reassured investors that they will still be in there supporting the economy and most importantly risk assets and equities.
In essence, they are continuing to dangle the carrot in front of the bulls in hopes that stocks will continue to rise which ultimately will lead to a boost in sentiment, confidence, consumer spending, hiring and overall economic activity. It’s called "the wealth effect," and something that Bernanke and Company are banking on to help propel the recovery and lead to a normalized interest rate environment.
And since the next Fed meeting is not until the middle of September, that means at least four more weeks of a dovish market landscape that will likely extend the summer rally.
Tomorrow brings the July monthly jobs report, and the expectation is that roughly 190K new net jobs will have been added to the economy. That’s about on par with the previous six-month average on monthly job creation. The unemployment rate is seen dipping just a fraction to 7.5% while another modest increase of 0.2% in average hourly earnings is expected.
Whether the jobs data comes in positive or negative, markets are poised to continue their trend and head higher because the Fed’s still signaling their unwavering support should the incoming economic data falter.
Markets are once again approaching all-time highs, which has caused short-term trading conditions to become overbought. Any upcoming weakness, especially if a sell-off on the jobs report should happen to occur, can be viewed as a buying opportunity.
The summer seems poised to head higher, but as we move into the fall, things can quickly change and we could then be confronted with an entirely different landscape.
Next week, I’ll share my approach on how I detect potential key shifts in the marketplace with you.
 |
Costas began his trading career in 1998, at Gateway Partners, an Equity Options Trading Specialist Unit on the Philadelphia Stock Exchange (PHLX). During his successful tenure, and though unprecedentedly volatile trading levels, Costas boldly and adroitly navigated the global "financial meltdown" that saw the downfall of the hedge fund and of Long Term Capital, and the Russian Currency Crisis. Having achieved the coveted Senior Equity Options Market Maker position for his firm, Costas eventually left to join a proprietary trading desk, where he successfully makes markets for large customer and institutional orders. In addition to his more than 7 years of experience as an options market maker, Costas has also trained and educated many junior traders on option theory, risk analysis, and strategy. His passion is helping self-directed investors achieve all of their financial goals through a clear, practical understanding of the power of options and of the many benefits of trading in a proven systematic way. |
| ||||
|
| | ||
| ||||
| ||||
OUR PRINCIPLES |
1. Our Customers
I think it was Frank Sinatra who once said, 'If you think customers are not important try doing business without them for a while.'
Although he was referring to another singer who didn't like to sign autographs, he could have been talking about any customer in any business.
In our offices here in Delray Beach we keep that quote posted on the wall just to remind us how fortunate to have you as part of our family.
2. No Hidden Agendas
Please forgive the populist tone here, but the sheer audacity of what some brokerages pawned off as "research" in the 90's was stunning. As a result, the New York State Attorney General forced many of them to fund separate independent stock research firms.
We here at the Institute for Individual Investors have no interest in the "conflict of interest" business (we've seen what it does to people.) We do what we do because we enjoy it and we're good at it. Therefore know that we will never accept any payment, in any form, to recommend the shares of any company. Period.
Our goal is to not only provide you with our unbiased opinions, but to also bring you behind the scenes and show you exactly how we form those opinions. Knowledge is your best defense in the investing battlefield.
3. Information You Can Understand
In addition to the research and educational courses we offer, we try to present our facts in a way that will help you understand the rationale behind our thinking.
It is our hope that during the course of our relationship you will gain a more sophisticated framework for making investment decisions both as an investor and as a businessperson. We believe that the more educated you become, the more likely it is that you will appreciate and recommend our work.
4. We Will Always Admit Our Mistakes
Only fools never admit and learn from their mistakes. Good investors are not born they're forged. It's that simple.
5. Real Wall Street Experience
Everybody we hire to teach and inform you will actually have real investment experience.
Need I say more? Well, I will. Why?
Because many of our "competitors" aren't real investors - they're marketers and journalists pretending to have the real world experience that separates the men from the boys.
© 2013 Institute for Individual Investors, LLC.
110 E. Atlantic Ave., Suite 200, Delray Beach, FL 33444, USA
North America: 877-489-2666
International: 561-272-2919
Fax: 561-272-6040
Customer Service Email: support@ifii.com
www.ifii.com
Privacy Policy | Disclaimer | Update your Profile, Unsubscribe, & Update Preferences
Whitelist Us
No comments:
Post a Comment
Keep a civil tongue.