Wednesday, April 4, 2012

Equity Market to Fed & Bernanke: "I Wanna Get High, So High!"

S&P 500 is down 15.03, or 1.10% today.  Simply put, the stay of that Fed 'insurance', the QE3 or 4 or infinity, is now less certain, based on the FOMC minutes released yesterday.  We touched on this in early March and in our last post , even after Bernanke juiced up the market.  In addition, it appears that Spain is now slowly taking Greece's role in this entire Eurozone fiasco that's been going on for a long time.  And no matter how low (comparatively speaking) Italy's 10-year yield is, don't count out Italy; its time may come due shortly.  The ECB President, Draghi, also hinted this morning of the increasing risk of inflation in the EZ.

All of this, basically hides the not-bad ADP employment report for March, which was pretty much in-line with estimates.  ISM Services was a slight miss, but not too bad.  So, what does all of this tell us?  For one thing, it demonstrates just how much the market has become dependent on the Fed's helping hand.  The addiction to QE policies will be tough to let go, as we're seeing today.  Such addiction has also brought about the non-rational market, where bad news is actually good news.  The more bad news, the more likely it is that the Fed will continue to supply the Street with the 'product' to which institutional and retail investors are addicted.  If the last couple of months' economic data had been worse, the Fed would've likely stated that more than "a couple" of its members are in favor of implementing more monetary easing policies.  As a reminder, Operation Twist ends this June, so we will see if the Fed begins to hint to expect more QE after June.  As many have stated, it will be tough to implement a QE post-June, mainly due to the upcoming Presidential election.  The Fed does not want to do anything that favors either side.   So the ones that did not begin to transition towards the risk-off strategy, better hope that this Friday's employment figures come in way worse than expected so that the Fed can start distributing more gibberish about the increasing likelihood of another QE. 

Let's not forget about oil.  As talks about invading Iran have died down, WTI front month has dipped to below $103.  However, this does not necessarily mean that gasoline prices will follow.  On the downside, gasoline prices do not adjust as quickly as they do on the upside, and we believe it will be even slower this year given the increasing volatility in oil futures.  The volatility is of course driven by lack of certainty regarding a strong-enough economic recovery, another QE by the Fed, and an invasion of Iran by Israel, the US, or both. 

Regarding the potential war with Iran, it appears that things are getting pretty heated between Israel and the US.  The White House may have listened to our suggestion that we included in our last post (of course we're only dreaming about that possibility!).  But it may have taken it a bit too far as there are reports (by Israel of course) that the US has leaked some strategic information regarding Israel to the media with the intention to either delay or change Israel's plan to attack Iran.  As an example, Israel's objective of using Azerbaijan as a base on which to station and fuel its aircrafts, and from which to attack Iran, was leaked to the Foreign Policy publication; at least that's what the pro-Israelis say.  No matter what though, for the time being, the tension between the US and Israel has increased; but we all know that the so-called 'tension' will die down as soon as some pro-Israel lobby groups dangle the re-election carrot in front of the Obama team. The risk of a war with Iran still remains, no matter if Obama wants it or not. 

From a technical standpoint, if S&P 500 closes below 1,400, and assuming that Friday's employment report won't be too good or too bad, then we could see S&P 500 dip down to around 1,390.  The next two support levels below that are 1,375 and 1,350.  The reason we chose to assume a no surprise in the March employment report is that we haven't yet had a chance to come up with our own estimate, mainly due to time constraints.  If we do, and if our estimates change anything we mentioned in this post, we will make sure to post an update before Friday morning.  


  1. Thanks AMBlog. Question: seems many companies have been trending towards paying out larger dividends (apple anyone?!), do you see this as a medium/long term trend or something that may change quickly once (if) investment picks back up and so could it be inflating current prices as I assume in general shares go up when more dividends are offered all else being equal? Is there a sense, or is there any way to have a sense, the the current market value of the U.S. markets are relatively in-line with traditional valuation models using discount cash flows (or am i so out of it that discount cash flows are not even used anymore!)


    1. I'm thinking it varies based on the company and its sector. Certainly if a company that's increased its dividend significantly, is in a growing sector which requires more R&D and/or capex then yeah, the CF should look solid and the same with the B/S. You're right, some companies have upped their dividend payouts just to make their shares more attractive to investors, and may have actually been better off strengthening their balance sheet and getting ready for expansion opps. Overall, I'm not sure whether the trend to which you pointed will continue or not. Its probably better to look at it each company and sector separately.