Friday, August 27, 2010

Bernanke "Punts" and Bonds Don't Like It

We got a big giant nothingburger from Ben Bernanke despite a sharp revision in Q2 GDP growth down to 1.6% from 2.4%.

The market cheered the news as stocks jumped over 1 percent.  Many economists were looking for a revision down to 1.4% so the market breathed a sigh of relief.  We were also pretty oversold although I wasn't too impressed with the rally(more later). 

The bond market however was not very happy. The 10 year sold off violently following the news from Bernanke:

My Take:

Now lets not get too excited over this move because it's only one day.  However, it is something that you need to take notice of.

I believe that many were piling into treasuries this week thinking that they could front run a possible QE announcement by the Fed.  Bernanke's speech today was a big disappointment to those who made that bet.

Ben did not rule out the option but he did say he needs to see "significant deterioration" before proceeding with more QE.

I'll give Ben some kudos for his actions today.  As I have repeatedly said:  More QE will do nothing but waste more taxpayer dollars.

Lower rates have done nothing to stimulate lending.  Giving more money to the banks will do nothing because they aren't lending and Main St has no desire to borrow it anyway.

Another QE would have been a potential disaster because it would have put the dollar at serious risk.  I do think we will eventually see another QE because the economy continues to worsen.

We saw further evidence of the slowdown after Intel came out and warned today:

"SAN FRANCISCO/NEW YORK (Reuters) – Intel Corp warned that third-quarter revenue could fall short of its own estimates by more than $1 billion, reinforcing doubts about the strength of a technology sector recovery.

But shares in the industry bellwether, which dominates the market for PC microprocessors, gained 1.05 percent on Friday because investors had braced for bad news and were relieved the downward revision had not been worse."

Quick Take:

I included the second paragraph because it cracks me up.  Every piece of bad news is continually spun positively.  If it's not spun positively then you can almost guarantee that you will some sort of saying that the news was "worse than expected".

Folks, anyone with a brain in their head should not be surprised by any of the news.  The economy is in shambles.  The Fed is pretty much out of bullets.  Ben stayed calm today and did nothing which was the right thing to do.

The problem is there is really nothing left that he can do.  The Fed can't make people borrow money. 

The housing numbers this told you all you needed to know:  We saw record low sales(-27% yoy) at a time where lending rates were at an all time low.


The AP reported today that birth rates were the lowest seen in 100 years:

"The U.S. birth rate has dropped for the second year in a row, and experts think the wrenching recession led many people to put off having children. The 2009 birth rate also set a record: lowest in a century."

This trend is alarming and should continue as families lose confidence in their ability to raise a family.  You gotta wonder who is going to replace all of the aging baby boomers as they become net sellers of stocks as they retire(that is if they have anything left after losing 50% twice in the past 10 years)

The Bottom Line

I was not all that impressed by the rally today. 

You should have seen a much bigger move in stocks given the huge amounts of money that came out of bonds today.

Where did all the money go that came out of bonds?

Metals and commodities were pretty flat so it didn't go there.  I would be curious to see what the money market fund flows were today.  Perhaps some central bankers decided to sell their treasuries in an attempt to start getting their money out of the US?

Time will tell.  Needless to say I wasn't impressed with the price action today.

There are some big numbers that are coming out of China next week so perhaps Wall St decided to just take a breather. 

That's fine with me.  This was another long week for investors.  I think it's time for a cocktail so I will end things here.

Until next week!


flipdippy said...

I think i mentioned a few days back to watch for the fed to goose people back into stocks.

Jeff the market will go higher since all that retirement and mutual fund money takes time to move. I fully expect a nice upward move regardless of how bad it is. And after that so many are bearish i wouldn't be shocked to see new or close to 2010 highs despite the news getting bleaker as the algos manipulate the shorts.

I guess i am still hopeful you come around to my pov which is free markets died in September 2008 and this game will continue until it absolutely cannot. And i don't think we are there yet.

Jeff said...


I hear you.

I just think the downside risk far outweighs any move to the upside.

I don't think the buyers are there flip for any big move. Stocks should have been up 300 points today bases on the amount of money that moved out of bonds.

We will see.

Jeff said...

BOJ intervention on the Yen.

Rally time! Nikkei up 3%.

I figured this was coming.

Anonymous said...

since you weren't impressed with the 70% rally off the march 09 lows I supposed no rally will ever impress you lol!

Jeff said...


I was impressed by that. I missed it but I was still up for the year based on my bond holdings.

I knew it wasn't based on government simulus vs. real economic growth.

I got out at the top so I didn't have to chase returns because I was still looking down at the people that caught this.

That being said I missed an opportunity to have a great 2009 versus an average one.

I am ok with how it played out. I am generally conservative my nature. Focusing on return of capital versus on capital.

That may be boring for some but It's worked for me since this crisis started.

that 70% move was much stronger than I could have imagined.

YOu live and learn. I think I will have a better chance at catching the next one.

Futes are backing down. Rally seems to be fading.

Tomorrow will be interesting.

Best of luck

Jeff said...

ooops typo

Rally was government based.