The Daily Dose: Breadcrumbs From the New Fed Chair

 | Feb 10, 2014 | 11:30 AM EST  | Comments
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Stock quotes in this article:

ms

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gs

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gs

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jpm

A below-consensus January jobs report? Well, let's completely write that off due to an apparent rosy household survey. More companies beginning 2014 weakly, just as they started off 2013? No worries, the Federal Reserve will stop tapering stimulus at its March meeting in order to juice price-to-earnings multiples. That should help offset forecasts and subpar earnings quality (see: outstanding share reductions this earnings season).

It's pretty weird having to analyze all of these nuances when deciding to buy or sell a stock, huh? We're missing a concrete playbook, that's for sure. Lucky for us, the single most important event between now and the February employment report is Fed Chair Janet Yellen's testimony to Congress, and this can be somewhat foretold by Yellen's prior comments.

Given this, of course, legions of publications have developed lists of easy-to-digest Yellen quotes for the lone goal of boosting page views. The glaring problem with these is that they are just cut-and-paste jobs, and are devoid of the necessary analysis to aid in connecting the dots.

I do believe that a person's past actions constitute a decent gauge for the future. Of course, this is not a precise science, as people may also learn from their mistakes. Still, let's take a look at -- and properly analyze -- some of Yellen's past comments, and gauge how these notions could play a factor in her testimony this week.

Personally I expect at least one Yellen stumble that will upset the market. Also, keep a close eye on broker-dealers Morgan Stanley (MS), Goldman Sachs (GS) and JPMorgan Chase (JPM). A review of Yellen's historical comments suggests she may take a bit more of a heavy-handed approach on the regulatory front than did her bearded predecessor.

June 2009: "I will be the first to say that it is always difficult to get monetary policy just right."

Given a potential end to the recent market selloff, Yellen may view the Ben Bernanke tapering as the right course of action. In that case, she may want to see a steep market decline and a new degree of weakness in macroeconomic data before she'll first articulate a pullback in tapering.

June 2013: "I'm not convinced that the existing [systematically important financial institution] regulatory work plan, which moves in the right direction, goes far enough."

Again, watch those broker-dealer stocks.

November 2010: "For my own part, I did not see and did not appreciate what the risks were with securitization, the credit ratings agencies, the shadow banking system, and structured investment vehicles. I didn't see any of that coming until it happened."

I think the above revelation stands to make Yellen a more hawkish Fed chief as compared with Bernanke -- one who is looking closer for imbalances in the system and the appropriate response from the Federal Open Market Committee.

January 2011: "I disagree with the notion that the large quantity of reserves resulting from our asset purchases poses some special barrier to removing policy stimulus when the right time comes."

This is yet another reminder that Yellen is not Bernanke. Certainly she dovish in her stances against low inflation and high levels of structural unemployment, but otherwise there are significant differences here.

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