The Day Ahead: Mail George Bush a Thank-You Note

 | Sep 14, 2012 | 8:00 AM EDT  | Comments
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Stock quotes in this article:

hov

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tol

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schw

Ah, to heck with it -- the end of the week is here, so let's leave it all on the field. While you count the trading riches from the #BernankeDay rave, be sure to pen a quick thank-you letter to former President George W. Bush. On Oct. 24, 2005, Bush appointed Ben Bernanke to succeed the larger-than-life Alan Greenspan as Federal Reserve chairman.

If you were a true Fed scholar and an economist devoid of a life -- I, for one, was still analyzing investment-bank balance sheets -- then you'd have realized the decision on Quantitative-Easing Lager (stronger than the Lite stuff) was never in question. Just take a glance at a few of the now-eerie comments from the announcement of Bernanke's ascent to the throne.

President Bush

"Ben Bernanke is the right man to build on the record Alan Greenspan has established."

That's what is scary: an obsessive focus on driving the consumption engine at any cost -- i.e., borrowing.

"He commands deep respect in the global financial community."

Yes, indeed, the man has guided market expectations exceptionally, and then has consistently delivered the goods at XYX speech or Federal Open Market Committee meeting. Consistency equals respect

Ben Bernanke

Noted the Fed would "continue to evolve" in the years ahead.

That's like saying children don't enjoy ice cream cones in the summer -- an understatement. Bernanke has officially -- close the book on it -- rewritten the monetary-policy playbook.

But as you ship that thank-you letter to a ranch in Texas, I am positive you're feeling anxious as to what your next series of actions should be for your portfolio. Nothing was bought pre-Fed-announcement for fear of no easing or not enough easing to support market expectations. Hey, I understand. Erring on the side of caution was where I was at mentally, as well, save for bullishness around top picks.

To wrap your head around what went down, the circus has to be deconstructed into three events: (1) press release; (2) conference comments; and (3) secret thoughts of Mr. Market.

Press Release

Ben & Doves came out swinging, and at the very least proved they are dead-set on reigniting the economy as a last measure under a chairmanship that may end if Mitt Romney wins the presidency. On the other hand, should President Obama win, Bernanke could have just sealed another reappointment -- the economy will be juiced with easing steroids between now and the election, as the program does start immediately.

By the way, the decision will only ratchet up the banter that the Fed doesn't stay out of politics Ben was reappointed by a president whose name is not Bush, after all.

Justifying the New Action

Fedspeak: Economy "continues to expand at a moderate pace."

English: Economy is caught in a rut, or one speed, and failing to reaccelerate -- that is, live up to the Fed's dual mandate.

______

Fedspeak: "Growth in employment has been slow."

English: See above comment.

______

Fedspeak: "Business fixed investment appears to have slowed."

English: No, it has slowed, as evidenced by a warning from Intel (INTC) and a lukewarm mid-quarter update from Texas Instruments (TXN). This comment is also a nod to fiscal policymakers. There has to be some reason why cash-rich balance sheets are not being utilized -- and there is: tax uncertainty.

Miscellany

● An upgrade was tossed in the direction of the housing market. This supports my continued bullishness on homebuilder stocks. (My top pick remains Hovnanian (HOV), but I will do a combination with Toll Brothers (TOL) on the high end.)

● "Concerned without further policy accommodation" constituted a harsher tone on the state of the economy, and was in line with Bernanke's Jackson Hole, Wyo., comments that the employment market was a "grave concern."

● The "considerable time after recovery" comment is a prime example of the problem with unconventional (becoming conventional) easing: When can we spot a recovery that is self-sustaining?

Conference Comments

● "Not a specific number we had in mind. What we have seen in the last six months isn't it." This is the true definition of "open-ended bond-buying."

● "We're hopeful that will increase confidence, make people willing to invest, hire, and spend." Lean toward early-economic-cycle plays, such as retail. The later cycle plays -- say, industrials -- still require fiscal clarity to reignite their earnings growth, and a move from China, and a leveling-off in the horrible state of Southern Europe demand. Refinance activity, a byproduct of easing that doesn't get enough attention, will be a helpful offset as food prices creep higher into year-end and gas prices are maintained near current levels. This easing stuff should reignite growth, no?

Secret Thoughts of Mr. Market

● Bernanke basically made many, many third-quarter earnings warnings irrelevant. Bad quarters will be viewed as being at the bottom in an earnings cycle -- that is, the cycle will now be tied to a deceleration in U.S. gross domestic product from the first quarter. Peer-to-peer analysis will be crucial.

● A powerful concoction has been formed for the first half of 2013 if the fiscal cliff is sidestepped to any degree: The Fed's upwardly revised employment outlooks suddenly appear reasonable. Obviously market players will begin pricing that in today. Watch transport stocks for signs of life, as they have been lagging.

● If you look at those stocks that have broken out despite uncertainty on QE Lager, you'll see they've continued to run. The market will be enthusiastic to stretch valuations, assuming earnings estimates have to be marked higher.

● This was the final major monetary policy event before the election, and perhaps for the balance of the year. In light of that, investors will be compelled to chase performance (see cyclicals) or return to the market for fear of missing the boat. A name such as Charles Schwab (SCHW) makes more sense to me now than it did weeks earlier.

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