The Daily Dose: What Just Happened at the Fed?

 | Sep 19, 2013 | 9:00 AM EDT
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Fed days have always been difficult to handicap. The insertion of the press conference feature under the Ben Bernanke regime has not made pre-and post-decision-making for clients any easier, I can tell you that much.

Comments on a digital press release jolt markets initially. Then there is a 30- minute window in which the chairman is in the back studying Mr. Market's response and tweaking his verbal attack plan for story hungry reporters. Finally, the chairman arrives on stage rocking his Jos A. Bank suit and either sets the market ablaze (a rip higher that crushes the shorts) or waves in the black clouds from out yonder (a spike lower that demoralizes the bulls).

I will give myself a hearty backslap for predicting no taper by the Fed because that's what the generation before me does in order to thunderously call attention to their awesome predictive powers. But, this backslap will last a mere millisecond (unlike the generation before me) as the market's enthusiastic response caught me by surprise.

In hindsight, I should have recollected that the market has suspended having a logical view on the real economy. It prefers instead to send stocks to loftier valuations amid promises of further electronic debits into virtual bank vaults. Those debits are then used to buy stocks (and for investors doing it on their own, tap into low-priced leverage to juice their can't miss investment opportunities).

To address the burning, yet simple, question of "what just happened", and hopefully reconfigure a portfolio correctly into October, here are 10 things to consider.

1. Third quarter earnings warning season (emphasize "earnings warning") suddenly seem less relevant. Muted reactions to warnings, depending on the moves prior to October, at this juncture appear likely given the renewed Fed commitment.

2. The Fed is concerned on the outcome potential of the September employment report following August's miss and robust negative revisions. A re-acceleration in the labor market has been pushed further out for the next Fed head to deal with, as is satisfying the requirements of "substantial improvement."

3. Markets, bond and stock, continue to dictate Fed policy rather than this dual mandate nonsense of maximum employment and price stability.

4. There is no trusted plan in place that real investors could see to give them confidence that quantitative easing will be gradually wound down with little market impacts.

5. Look for subdued 2014 capital expenditure forecasts from corporate America. Not only do companies have no impetus to invest as rates were talked lower by Bernanke, but they can blame "policy uncertainty" similar to the Fed's musings on fiscal policy to maintain a disciplined eye on expansion initiatives.

6. I truly hate the concept of share repurchases, and believe it's a byproduct of Fed policy that is constraining job creation. Nonetheless, expect a pickup in share repo announcements into year end. Be aware of when a company's authorization date on a current plan is set to expire. This was one of the reasons why I was positive on Microsoft in March (I knew its plan was done in mid-September and I studied its track record of capital allocation).

7. It's unlikely there will be a taper in 2013, meaning reinvigorated flows of money into emerging markets (this perked up a bit in the past two weeks). You may want to rotate out of some European Union recovery plays (which have oddly been a safe haven of late) into names with a decent exposure in emerging markets; perception on favorable flows will trump the sluggish data in store for those emerging markets near-term, reflecting of course the impact of the summer money exodus spurred by Bernanke's tougher talk on bond purchases.

8. All investment bank forecasts (the top houses were wrong) regarding Fed policy must be used as a secondary source for making buy and sell decisions for the portfolio. Your own research should take precedence. Just because a broker dealer has a trading floor with Bloomberg terminals on the desks and extensions to "noted" economists doesn't mean there is a Batman-type line to the Federal Reserve that spews secret information. We are all generally flying blind at the moment!

9. I have been hot and cold for clients since April on Toll Brothers (TOL). I am thinking you could chase it here. You could apply the thesis of the Fed sparking higher stock prices (favors Toll Brothers' wealthier clientele) and committing to a rate talk-down leading to better commentary from the company in third quarter 2013. Improved weekly mortgage app data will begin to build the bull case (has started to stabilize).

10. The Fed basically said structural changes in the economy, plus the inaction in Washington, are limiting prospects of inflation, which honestly would be welcome at this point in the recovery. Beneficiaries of deflationary forces: restaurants. I am more inclined to do the homework first on a Cheesecake Factory (CAKE) and Texas Roadhouse (TXRH), or those catering to a higher income clientele.

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