The Day Ahead: Bernanke Plays

 | Mar 27, 2012 | 8:30 AM EDT  | Comments
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As I watched Federal Reserve chairman Bernanke make a television appearance Monday, I jotted down a laundry list of notes. They included:

  • The stress of the job appears to finally be finding Bernanke's face. Anyone else think he looked a little tired and thin? Or have I taken my analytical tendencies too far?
  • I sure am glad the CFA textbooks are handy so I can review Okun's Law and the Beveridge Curve.
  • Was the initial reaction in stocks warranted, considering Bernanke continues to reiterate his penchant for low interest rates for a long period?
  • Did this guy just quietly echo Pimco's call for a third round of quantitative easing?
  • Boy, I yearn for the days of Alan Greenspan. Quietness was at a premium then, instead of this excess communication that leaves the door open to wide-ranging interpretations in the marketplace.

The market wanted desperately to snack on a Bernanke peace offering following last week's upsetting of the bullish thesis. However, I am unable to definitively say whether Bernanke brought any new revelations to light. He was fully in character -- might as well have worn one of those cartoon hats with a propeller affixed on the top as he held bags of money in each hand to be dropped onto the roofs of primary dealers.

When all was said and done, below is the expanded checklist that I clutched so dearly.

Bernanke's true take: This individual is not pleased with the pace of economic growth being better than investor expectations. He is inclined to keep the foot on the pedal named "easing" until the expansion is in line with a historical figure concocted by the folks in the Fed's back room.

Inflation: If these numbers run hotter than what the Fed is comfortable with, this is OK as long as growth is strong. What dollar? Hello, commodities investors -- you will have your moment in the sun once more.

Does Bernanke believe in his actions? In my view, Bernanke succinctly acknowledged that QE has been ineffective in healing the job market, given a mere decline in layoffs as opposed to widespread hiring.

What has this extraordinary easing accomplished? The Fed's generosity has injected liquidity into corporate balance sheets, as Alan Farley pointed out in Columnist Conversation Monday. This liquidity has gone above and beyond the working capital needs of companies. As a result, we're seeing such things as non-binding share-repurchase programs that only offset stock options. (Do lower-income workers receive stock options? I think not -- the employer views them as easily replaceable.) Then there's the increased dividend-payout ratio. This doesn't necessarily funnel directly to low- and middle-income households, though there will be those who say it does so indirectly.

As a result, we are caught in this perpetual state of long-term unemployment that Bernanke immensely dislikes as much as Tiger Woods hates bogeys.

Banking on Bernanke

Now that we have a general grasp on what the bearded wonder has on his mind to conclude the first quarter, let's look at some opportunities to capitalize on the man's views.

ITT Educational (ESI): At a recent board meeting for my alma mater, despite my shock at the school's financial position (wish y'all could have seen me ripping through enrollment figures and other statistical slides), there was a reaffirmation of what I saw in 2011 on the college scene. That is, schools are closing their doors due to bloated faculty and maintenance expenses, poor enrollment trends after years of excruciating tuition hikes, lost access to funding -- from both government and parents -- and lame alumni giving.

I see the number of higher-learning institutions continuing to thin, with the share gainers emerging as those that differentiate themselves through the introduction of new programs in expanding industries and non-curriculum courses. I admit I'm still digging into ITT Educational. Still, I'm encouraged that it's holding tuition rates flat in 2012 and has significantly increased the amount of new programs being offered.

Why is this a Bernanke stock, you ask? The Fed chairman wants to clean up the structural employment created by the skills mismatch between the labor force and new jobs. So, in order to drive enough of a wealth effect that more people land a job or receive a promotion -- and return to school to bolster skills -- he'll be keeping rates low and the QE spigot open.

Dollar General (DG): I continue to be positive on this name following my earnings-related posts from last week. Bernanke's connection to Dollar General is that economic growth may be below an acceptable level in the intermediate term, and inflation uncomfortably on the rise (stagflation?). That, in turn, continues to foster new classes of value-seekers.

Macy's (M): This is a two-part Bernanke play. First, is the Fed continuing to prime the economy, and for middle America to return to work as a result of this. That benefits the Macy's brand. Second, the stock market's affinity for the Fed's easing initiatives and communication tools have the effect of supporting risk asset prices and the portfolios of Bloomingdale's shoppers.

JPMorgan Chase (JPM): Pick your reasons on this one, outside of the dividend increase and massive share-repurchase plan. First, there are advisory fees as investors seek higher-yielding assets in a land of low interest rates. There's increased trading activity as new money flows into the market to chase performance. Finally, there are corporate bond issuances to lock in low rates for new equipment purchases, or to improve the capital structure.

Economic Numbers: Many Reports, but One Tickles My Fancy

The international theme will enter the mix more Tuesday than it did Monday, as will a bunch of domestic economic reports. For my money, I'm very focused on consumer confidence. Piquing my interest here has been the commentary from consumer-products companies (check out Stephanie Link, co-portfolio manager for Action Alerts PLUS, discussing the staples sector). Over the last month, as well, has been discussion from retailers on types and quantities of merchandise being purchased -- that is, private label vs. brand; one box of cereal or two; dollar store trip or Target (TGT). I believe these are all granular levels of information that may eventually surface in the confidence reports and reflect the spike in gas from around mid-February -- the dreaded "lagged" consumer impact.

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