The Fed Wants Inflation

Yesterday, the Fed said it was prepared to move on new
stimulus if the economy weakens further. What’s more, the Fed’s statement
that inflation is below levels it wants to see suggests that further easing
is coming. That’s a clear indication that the Fed is still worried about
deflation.

I suppose it’s a good sign that the Fed held off on new
easing action. But the Fed also failed to sound a confident tone about the
economic recovery, which I think is mistake.

Of course, we know the economy isn’t great. But most
economic data has improved over the last month or so. And it should be
understood that there is no magic bullet that puts millions of Americans back
to work. It’s going to take time, re-training and probably some government
incentives.

What the Fed Should Say

Today is Fed day. That’s when we will get the latest policy
announcement and economic outlook from the Federal Open Market Committee
(FOMC). There are 8 of these meetings a year, and the Fed uses these meetings
to decide whether to change interest rates, among other things.

FOMC have been market-moving events for a while now, as the
U.S. economy has struggled.

When the Fed has good news for the markets, its job is easy.
But days like today require some careful comments.

Major Changes Expected for Index Funds as Russell Rebalances







Russell Investments will reconstitute the stocks in the Russell Indexes
after the closing bell today, Friday June 25. For many funds that track
Russell’s indexes this means there will be frantic buying and selling over
the coming days.

Given the turmoil in the market over the past 12 months, analysts are
looking for many familiar stocks to be jettisoned while previously unknown
stocks are cast in the limelight.

Will Cash on Hand Lead to Hiring?






Sometimes, trying to decipher the stock market’s signals
is easy. Like during the rally out of the March 2009 lows. It was clear
that stocks were ready for a strong move higher.

Sometimes, it’s more difficult to get a handle on the
subtle shifts in sentiment that drive stock prices. The correction in
January of this year is one such example.

Other times, it’s darn near impossible to read the tea
leaves. I’d say now is one of those times. The stock market is giving off
mixed signals. And that’s because, at the most fundamental level, the
economic picture is mixed. For every bullish point investors can make,
there’s an equally valid bearish counterpoint.


Bernanke to Congress: Reduce the Deficit!

As stocks traded mostly sideways today, Federal Reserve Chairman
Ben Bernanke paid a visit to Congress to address the House Budget
Committee. In a surprising turn from what’s been the hallmark of
his reign as the head of the Fed, Bernanke seemed legitimately
concerned about sovereign debt issues here in the United
States.

He said, “To avoid sharp, disruptive shifts in spending programs
and tax policies in the future, and to retain the confidence of the
public and the markets, we should be planning now how we will meet
these looming budgetary challenges.”

Strong words for a Fed Chief who has been responsible for the
largest money supply increase in the history of the U.S. 

Alcoa: Meet, Miss or Beat?

There are some investors who think the significance of aluminum company Alcoa’s earnings is overblown. There are stocks that provide a better measure of consumer spending habits, or otherwise give more insight into the economy’s health.  

 

But because Alcoa is always the first major company to report, it’s numbers are still treated like an omen for the 499 companies on the S&P 500.  

 

So, if you ignore one-time charges, Alcoa (NYSE:AA) reported $0.10 a share 1st Quarter profit yesterday afternoon. I would swear I read on Yahoo! Finance that analysts were expecting $0.11 a share. That would mean Alcoa missed estimates.

Earnings Season

Finally. Greece has been offered a lump-sum loan by the European Union. It’s been obvious for weeks that this needed to happen. Now that it has, at least we can look forward to not reading about this saga every day.   

 

A month ago, this Greek bailout might have been a significant catalyst for the stock market. Now, after the seemingly endless back and forth, there’s not much impact beyond a rally for Greek banks and bonds.   

 

From a trading perspective, the Greece news is being overshadowed be earnings season… 

Rooting for the Underdog

What a great Super Bowl game! I have to admit, I was pulling for the
Saints, but mainly because of what the Saints mean for that city. I’m
sure we all remember the horrible aftermath of hurricane Katrina. The
very existence of New Orleans was in question. The Saints considered
moving, and I recall suggestions that only the French Quarter be saved
and made into a corporate convention amusement park.

Of
course, that would have been an absurd commercialization of a proud and
rich heritage. That New Orleans has come back to resemble the city it
was before Katrina is nothing short of miraculous, and now the people
of New Orleans have a Super Bowl trophy to crown their achievement.
Congratulations, New Orleans and the Saints.

It’s
tempting to extend the metaphor of New Orleans to the United States as
we rebuild after the financial crisis. Of course, I have no doubt that
we will recover. But there will likely be no single event that crowns
the recovery like the Lombardi Trophy does for New Orleans.

And
besides, we’re investors. It is our desire to be properly positioned
for a growth in stock valuations, all the while avoiding the pitfalls
of overvalued stocks and worsening economic conditions.

Clearly,
investors have been pondering the potential of weaker economy as some
stimulus policies end, Europe faces debt problems and China moves to
slow its economy. Bloomberg reports that investors pulled $9 billion
out of global equity funds during the last week of January. And
investors have bet heavily on an extended sell-off as evidenced by huge
volumes of put option activity.

At the same time, 73% of
S&P 500 companies have beaten 4th quarter earnings expectations.
That’s the best performance since 1993. Strong earnings, coupled with
the recent 7.3% decline, have left the P/E for the S&P 500 at 18,
down from 24. The forward P/E, based on future earnings expectations,
is below 13.

Earnings this Week

There’s no doubt that there are investors who believe that current
valuations for stocks and an improving economy offer money-making
opportunity. It’s also true that there are plenty of investors who feel
the exact opposite and are selling stock. And for the last three weeks,
the sellers have been winning.

The fact that stocks couldn’t
hold a 1% gain after a stellar 4Q GDP number on Friday is a little
worrisome. That was a lay-up for the bulls, and still, stocks finished
the day with losses.

Volume has been stronger on the down days
lately, and the S&P 500 is now well below its 50-day moving
average, a common measure of support. I expect we’ll see stocks bounce
before Dow 10,000 is breached to the downside.

But at the same
time, there’s nothing magical about Dow 10K. Just because it holds on
the first test or two doesn’t make it an important line in the sand.
The Dow is just 30 stocks. Far more important is the S&P 500. And
interestingly, there is an important support point at 1064 on the
S&P 500. And 1071 actually lines up with Dow 10,000 nicely.