The Day Ahead: The Fed's Mixed Message

 | May 23, 2013 | 8:00 AM EDT
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Wait, huh, what? In the words of Yosemite Sam, "What in Sam Hill transpired in the stock market on Wednesday?"

Bernanke testimony day, which we had been waiting for since January, was yet another lesson that access to information on the fly, coupled with new skills of copywriters, is a wicked brew that could cause your portfolio to puke.

At first, Bearded Ben took the form of one of those white doves that are let go at funerals (friendly ... market rallied). Then he assumed the mold of the Grim Reaper (unfriendly ... market tanked from the session highs). By the conclusion of his testimony, he was a white dove wearing a Grim Reaper mask (a confusing creature). To top off the extravaganza, Ben's pals reminded the investing faithful that the risk rally is predicated on electronic transfers instead of corporate margin expansion, and hey, even the art of retiring shares with funds meant for the mailboxes of investors. Complete lunacy through and through.

Two Hot Stats

  • At 3 p.m. EDT, the Dow was down 2% from its 10:30 a.m. level.
  • The first time the Dow finished in the negative column after being up more than 150 points was on March 16, 2009 (that is, until Wednesday).

The FOMC and Your Life

The Fed is basically communicating that it doesn't know how to communicate to markets while it sits on oodles of securities. That is a serious knock to the Fed's credibility in terms of being able to unwind its extraordinary accommodation without destroying bond and equity markets.

The Federal Open Market Committee minutes had been seen as heightening the potential that the Fed would taper its program of purchasing securities. The apparent shift in Bernanke's testimony indicates indecision and a Fed chairman who may be losing support among his peers.

"Evidence of sufficiently strong and sustained growth" is needed to shift policy, according to the Fed minutes. This was a throwing a bone to the bulls, since one April jobs report and accompanying positive revisions aren't qualifiers of this comment.

The issue at hand is that the Fed has begun its exit strategy review (two years later...). Why is this significant? It signals that sustainable improvement in the labor market could be in the offing, and that the June 18-19 meeting (which will occur after the May employment report and which will include a press conference by Bernanke) may warrant an alteration in language.

Obviously, the market has been running on the assumption that the Fed's Treasury-buying program will undergo zero tapering, and as I mentioned last week, on modest hope of an increase in the amount of bonds purchased monthly.

Fed Phrasebook: 'Tapering Potential'

This was the hot phrase in the markets on Wednesday. You should be aware that the process is not singular. For the Fed to taper its monthly bond purchases, it first has to signal to the market that it is doing so. That signal will likely come in tweaked language regarding the labor market, such as the removal of the phrase "substantial improvement."

Rapid-Fire Thoughts

  • If you are bullish on the U.S. economy, considering skewing defensive into the next jobs report.
  • I can't see Bernanke handing off the ship he built without developing a thorough exit plan to be communicated to markets prior to his leaving the Fed in 2014.
  • Homebuilders' stocks continue to act weak. This interest-rate-sensitive sector is a canary in the coalmine.
  • We did see a switch into defensive names on Wednesday, including Pepsi (PEP) and Kimberly-Clark (KMB) and others that sport better relative yields.
  • It's Home Depot (HD), not Lowe's (LOW) -- the intraday reversal in the latter's stock is irrelevant.
  • Target (TGT) is going lower.

Special Note

I am going to be on the floor of the NYSE around 11:15 a.m. EDT today. If you happen to be in the area and want to chat on some markets (and of course snap pictures to be shared across all of your social-media platforms), send me an email at

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