The Day Ahead: The Fed as Wrecking Ball

 | Jul 30, 2013 | 8:00 AM EDT
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The market does not like 10-year yields north of 2.5%, yet. Stocks have been bid up to a 10% valuation premium relative to their historical norm (trailing price-to-earnings ratios) on expectations of low interest rates spurring demand across many sectors (for example, autos) for a long while.

So whether there is a late-afternoon leak to someone who has direct access to Federal Reserve Chairman Ben Bernanke is almost irrelevant in the grand scheme of things.

Rates have begun to creep as we head into the Fed meeting for a reason, and this has caused me to adopt a cautious approach to new long recommendations. The reason is straightforward: The market doesn't really care about the policy statement this week. It's fully aware that the eventual release of the minutes will show either one or two items: 1.) A further divide in the Fed from the June meeting, just as a new chairman is poised to be announced, a divide that would counter the hot air spewed by those inside the Fed in order to paper over Bernanke's press conference gaffes. 2.) A clear signal that a reduction of monthly bond buys -- a tapering of quantitative easing -- will commence in September, not "later in the year," as the Fed already communicated.

The Fed Day Watch List

  • The highly educated folks at the Fed will get to see the July employment report before we mere mortals do. So any teensy upgrade (which would come after a more subdued outlook for growth on the last go-round) in the assessment of the economy will imply -- you guessed it -- tapering! Markets will get sucked into a vortex (look how emerging-market stocks are trading into Fed day ... it's not all due to China slowdown worries).
  • Remember, the Fed has noted that it sees "diminished downside risks" to growth. This was a statement change back in June, and if it's reiterated or removed completely, stocks will head lower on fear of tapering.

Sure sounds akin to an upcoming lose/lose scenario, right? Yup, and this brings me to this longer-term thought: the true factor behind a September selloff, other than the "because it has to happen" rationale currently being discussed.

Quite frankly, a good deal of the commentary from homebuilders last week was disturbing. Orders are slowing because of higher rates. Revenue is moderating on a sequential basis. So I am very much trying to time when to go completely bearish on housing recovery names such as Home Depot (HD), and Lowe's (LOW). My chat with Whirlpool (WHR) provided an initial clue. 

Apparently, it takes nine months before any changes in housing, good or bad, appear in the financials of Whirlpool. If that general rule of thumb holds true, then the latter half of the first quarter of fiscal 2014 could look messy for these housing-recovery companies.

Using another general rule of thumb, that a stock moves in advance of a company's news six months forward, we could be looking at housing names retreating in around October. (Around September, you theoretically start to get stock-price weakness in the Dow Transports, which are those companies responsible for transporting the goods to construction sites and home retail stores.)

Not helping matters for the markets in September will be a Fed meeting on Sept. 17-18 and a press conference with Chairman Bernanke. If there is no announcement on succession before, we could receive a bit more clarity from Bernanke on his intentions, after his recent testimony in which he graciously accepted "thank you" comments for his service.



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