Monday, March 26, 2012

Bernanke Juiced Up the Market Once Again

Since our March 5th post, S&P 500 has risen slightly above 1,400 to which we referred at that time as the fair value. Nothing much has changed with regards to the recovery; it remains modest at best. We believe increasing chances of implementation of QE3 by the Fed, has driven the market higher. Two things, in our opinion, have increased those chances: less talk regarding a military attack on Iran, which has put the higher gas prices and fear of inflation on the back burner (although gas prices continue to rise); and a not so strong recovery as indicated by the latest economic data. These have helped keep the QE3 option on the table. This was verified today by Bernanke's speech at the NABE (National Association for Business Economics) conference.

We remain convinced that the threat of another war waged by US/Israel, higher gasoline prices even before the summer driving season, lack of enough growth in wages or full time jobs, and the S&P 500 being fairly valued will create a market pullback.

Military attack on Iran by Israel/US?

It is interesting that we're seeing and hearing less gibberish regarding the potential attack on Iran by Israel or the United States. Although less talk about this possible military conflict was expected especially after the almighty AIPAC conference, we certainly didn't expect near-complete silence from the White House. Then again, it is understandable. We can just imagine that the 'Executive Summary' section of a White House memo would look like this:
Open discussions with the press regarding aggressive military options against Iran will impact the economy and the upcoming election negatively.
  • More Iran war talk has increased speculation regarding oil and gasoline prices.
  • Higher gasoline prices will likely dampen consumer sentiment, consumption and therefore economic growth.
  • Voters' focus will also be shifted back to the economy from a negative standpoint, allowing the opposing party to create storylines of the Administration’s economic ‘failure’ which can be pitched to voters effectively.
 The amount of war talk is recommended to be minimized. This will allow opposition to make the 'bomb, bomb, bomb Iran' pitch, which the current Administration can then label as the culprit behind higher gas prices, and pressures on the economy and Main Street's pocketbooks.

Again, the above is just our imagination and in no way does it represent any official document from the White House or any other part of the government. If we were part of the staff, that's the advice we would give.

Economic data - not so bad, but also not so great.

Below is a glimpse of economic data released since March 5th, with respect to market expectations ('Estimate'). You will see that while not all numbers were disappointing, they were also not so great. Overall, the economy is growing, but at a moderate pace. And as indicated today by the market's reaction to Bernanke's speech, the market believes the economy must remain on the life-support system provided by the Fed, or else! Well, that life support system may not remain operational for long if oil and therefore gasoline prices continue to move higher and higher.

Lastly, given the drastic movements in VIX since our March 5th post (in which we made a few suggestions) - VIX jumped approx. 20.5% by March 7th and has taken a dump since, down nearly 32% - a strangle position on VIX options would've been a good move. The same cannot be said about USO, but then again silence regarding Iran, along with Saudi Arabia’s numerous promises has slowed the upward movement in oil prices.  We note that additional potential market-moving data will be released this week.  They include Case/Shiller real estate price index, consumer confidence, final durable goods orders for Feb., PCE, Chicago PMI and the final UMich consumer sentinment for Mar. 

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