The Daily Dose: Getting Inside the Fed's Head

 | Feb 20, 2014 | 12:30 PM EST
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Maybe the market isn't so dumb after all. That is, maybe it was wise in sending stocks higher from the dreadful lows that ushered in 2014.

It would appear that the market has become an old pro at helping to craft monetary policy: Overreact to a word from a Federal Reserve voting member on the pace of stimulus tapering, and stocks lose value. Then the Fed is forced to downplay its commitment to easy money -- for instance, in the latest minutes from the final court of former Fed chief Ben Bernanke.

When it comes to interpreting those minutes, by the way, don't lock in on a tapering comment. Be well-rounded, and try to get inside the Fed's head. Trust me -- it will prove helpful come policy-decision-release time. With that in mind, here are 10 must-know items from the Fed minutes.

1. "Indicators of manufacturing production, such as the readings on new orders from national and regional manufacturing surveys, were consistent with a further expansion in factory output early this year, but automakers' production schedules indicated that the pace of light motor vehicle assemblies would decline in the first quarter."

2. "Available information did not point to significant inventory imbalances in most industries."

3. "Nominal average hourly earnings for all employees increased slightly faster than consumer price inflation."

4. "Somewhat better-than-expected economic data releases . . . despite mixed fourth-quarter earnings results."

5. "In contrast, credit card balances were little changed, on net, through November, as underwriting appeared to remain quite tight."

6. "The staff revised downward its view of the pace at which potential output had increased over recent years and would increase this year and next."

7. "Inventory investment would likely come down from its recent unusually high level."

8. "Participants continued to debate the reliability of the unemployment rate as an indicator of overall labor market conditions, taking into account the further decline in labor force participation in recent quarters, still-elevated levels of underemployment and long-term unemployment, and the apparent absence of wage pressures."

9. "A number of participants saw the low rates of increase in most measures of wages as consistent with continued labor market slack. . . . lack of pricing power reported by business contacts in various parts of the country."

10. "A number of participants noted that if the economy deviated substantially from its expected path, the Committee should be prepared to respond with an appropriate adjustment to the trajectory of its purchases."

My take:

First, the Fed fully realizes the core of the U.S. economy remains weak, and it is prepared to halt its tapering of quantitative easing if we see a couple more data misses. Stocks should rise in advance of that.

Second, the Fed recognizes that its efforts are not spurring companies to engage in capital investment, nor are they triggering strong earnings growth -- and it is loath to say or do anything that might move the economy from mediocrity to ugliness. So the Fed might as well continue its slow tapering campaign and promise to backstop any economic or financial market shortfall through the use of its engorged balance sheet.

On Tesla and Wal-Mart

If you want to understand Tesla (TSLA) hype, just read this single line from Wednesday night's earnings press release: "Production is expected to increase from 600 cars/week presently to about 1,000 cars/week by end of the year."

Investors are buying the hope and expecting continued cost out, forgetting everything else that goes into asset selection.

As far as Wal-Mart (WMT) is concerned, here's what you immediately need to do with this company's earnings report: Check the inventory number, where it has reported a bulge, as I've expected. Then see how key suppliers trade, for example Campbell Soup (CPB) and Kimberly-Clark (KMB).

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