The much awaited official 'action plan' proclamation from 'ol reliable Uncle 'Ben' Bernake has hard core inflationists champing at the bit and foaming at the mouth. Ben B is our modern day Messiah navigating producer prices to the promised land.
No sooner were the magic words spoken; 'economic conditions will warrant exceptionally low levels for the federal funds rate for an extended period' then the price of gold and silver rocketed into new all time high territory. In his post-meeting statement - inflationary flames were further stoked with FOMC comments of regularly reviewing 'the size and composition of its securities holdings in light of incoming information and is prepared to adjust those holdings as needed to best foster maximum employment and price stability.' You can 'pencil me in' as expecting the exact opposite result.
Lower reported GDP figures of 1.8% and 429k jobless claims coincidentally dovetailed with the Fed's ultra accommodating interest rate policy of 0-.25% - for at least the 'next couple of meetings.' (Read: Post election.) Conditions continue to improve on a 'subdued' basis according to those who know.
Evidently the inflation threat (2.8% annual rate) is more 'transitory' than ever and 'well anchored' too boot. Ben's message to the corporate world is to pass any 'higher' costs along to the public. Looks like $5/gal unleaded and a $5 Big Mac is his idea of a good time.
And all of this and more in the face of earlier comments made by the dynamic duo of Geithner/Bernake of a 'stronger dollar being in the best interests for our country.' Looks like that pair needs a good 'snoot full' of damaging and debilatating inflation pressure before they get agitated. This from the pair who didn't expect any house price fallout from the troubles in the sub prime mortgage market? Once that dreaded inflation 'genie' leaves its bottle it is harder than heck getting it back in where it belongs. I guess you have to attend one of those fancy Ivy League schools to figure it all out correctly?
The DJIA/S&P also bullishly broke into new recovery high territory on the 'good news' - and looks to seriously challenge the 2007-08 crash highs (8% higher). The broad based Wilshire 5000 is on the verge of new record highs. The MSCI world Stock Market Index is less than 10% from the 2008 record high of 1,575. My earlier thoughts of more of a 'transitional range bound trading market' may require a little 'post Fed' tweaking - but I like Ben - will await further 'evidence.' Earnings do continue to to accelerate with almost 60% of companies exceeding expectations. The 'Street' doesn't seem to be doing a very good job at making earnings forecasts lately. The large multi-national - globally exposed companies are providing a solid and substantial amount of the momentum and leadership to date.
The broad commodity markets appear to be firmly entrenched with the expectation of increasing demand and higher prices. Gold and especially Silver appear to be a tad overextended in the short term but as we all know - nothing is more bullish than new record all time high levels. Most significant Gold and Silver stocks have negatively diverged from under lying commodity prices. These stocks appear to have 'attractively' discounted a 15-20% lower commodity price level. Base metals have been consolidating profitable prices for a few months and will be primarily influenced by 'real' world wide demand growth and 'real' inflation adjusted interest rates. Crude Oil refiners may be challenged to 'pass on' those higher gasoline prices in the longer term. OPEC has been anxiously trying to allay pricing fears and concerns - assuring all that the world is, and will be well supplied in the foreseeable future. My bottom picking favorite Natural Gas is on the threshold of breaking the important US$4.75 level in spite of being in 'over supplied' and 'under demanded' circumstances. My thoughts would be for a short Crude Oil and long Natural Gas spread to take advantage of the historic 25x ratio.
The TSX has underperformed in the short term in spite of all the rising resource price excitement. A US$1.05+ Cdn dollar will represent a significant drag on corporate profit and growth activity. Quarterly earnings continue to out perform expectations as the combination of increasing world wide demand and a very low interest rate structure provide a very positive profit environment. The TSX has been range bound since February in 500 point accumulation OR distribution pattern and is up less than 3% on the year. I continue to worry about the heavily weighted & fully priced financial sector particularly during these 'complicated' monetary conditions. Bank earnings are imminent and growth must be solid. Cash cow Barrick ruffled a few analysts feathers with an aggressive record C$7.3b move for Equinox and deeper into the base metal (copper) sector. It was interesting to see China's Minmetals retreat quietly without any resistance. I guess the Chinese don't get everything they want after all?
The normally sleepy Federal election has generated fresh interest and excitement with the rebirth of the socialist NDP party led by J Layton. They have strategically made many 'expensive' vote generating promises to younger and retired voters who may turn out and 'complicate' the political landscape to say the least. Every tree hugging global warming type has been uplifted and re energized by recent polling stats.
Bottom Line: The continuing highly accommodating Fed policy message has been sent loud and clear. At some point the effect of current outstanding corporate earnings will translate into expansion and meaningful broad based job hirings. Should the Fed not continue to pay interest on massive 'stimuative' banking reserves it would be reasonable to expect much needed increasingly aggressive lending and investment practices.
I continue to believe most major markets are fairly priced considering the inherent current fiscal and monetary challenges and risks. I'd be surprised to see a significant market move in either direction until the effects of a non QE I & II environment are fully realized.
Until then - perhaps a 'Waity Katey' stance is most prudent. It sure was most effective for the newly minted Princess! I had my money on Lay Gaga as Willy's new bride!
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