Kruger Insights Thursday – December 19, 2013 by FirstMacro

BinaryOptionsNow | Published on December 19, 2013 at 2:29 pm

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Joel Kruger 

When The Third Strike Is A Foul Ball – In the great American sport of baseball it’s three strikes and you’re out. I suppose yesterday was my third strike with the S&P. Though I will argue that it was a foul tip (strike that still keeps you in the game) given I took no loss on the position (sold 1805 with stop 1805). Still, for the time being, I have been sidelined. Looking back at the Fed decision, it sure was something to see. To think we would get a taper and at the same time, a Fed sounding as dovish as ever, was quite perplexing. The Fed teased hawks with the reining in of asset purchases, and at the same time, buried these hawks with more dovishness than they could handle. Bernanke made it very clear in his statement the Fed was still doing a lot and would continue to do so, and then drove it home with some new forward guidance that rates would not go up until well after the unemployment rate dropped below the 6.5% threshold. That’s some kind of a threshold! I suppose two words that were used with a very liberal use on Wednesday were “threshold” and “qualitative.” Bernanke described the Fed’s approach to policy reversal as qualitative in nature. Now I get that “well after unemployment drops below 6.5%” is certainly not a quantitative metric. But assigning it as qualitative feels more like an assignment by default than anything else. I would classify the approach as vague, abstract and reflective of a central bank that will hold out on a tightening (taper is not tightening…wink wink) at all costs, to avoid the risk of making a bad call. So not too sure how helpful the forward guidance is, and in fairness, not too sure how helpful it could be anyway with so many things that could happen between now and 6.5% unemployment.

kruger insights december 19, 2013

Goldilocks – Another thing that struck me yesterday was the Fed Chair’s response to a question from Binyamin Appelbaum at the New York Times. Applebaum asked if the Fed was concerned it made the wrong decision in starting to taper too early and effectively do less to help stimulate the economy, as historically, this type of a move had burned the central bank in the past. Bernanke answered that he didn’t feel the Fed was doing less. Now I know we are splitting hairs here, but what is the point of a taper if not to signal to markets that the Fed is doing less. It might be on the most marginal of levels, but isn’t a taper by definition doing less? So anywhere you looked on Wednesday, it was clear the Fed had no intention of letting the markets think a taper was a tightening in an form or fashion. And so, the S&P rallied a spectacular 40 points off the daily low to trade back just shy of the recently established record highs. The equity market bathed in the dovishness and was relentless into the close. Yet I am still not convinced and am not sure I would be buying into the Goldilocks reaction. In my view, call it whatever you want and mask it however you want, but a taper is still a taper. Yesterday’s decision to taper still officially marked the beginnings of a very long path towards tightening, and I do not believe the Fed will revert back to a looser monetary policy than before yesterday, as much as they would have us think they still might.

Too Many Layers – The fact is, economic data has been showing healthy signs of recovery, and if the Fed weren’t so shellshocked by the crisis of 2008, they would have been quicker to respond to the recovery in the economy. Instead, the Fed has added several layers of caution into its guidance, and we see this with things like “threshold,” “well beyond,” “qualitative,” and “not doing less.” My point here is really not to be critical of the Fed and more so to be critical of the ongoing bid in equity markets. If the stock market is truly forward looking, it stands to reason that it should now be pricing in the end to historic, ultra accommodative monetary policy. And with this pricing in should be some form of a significant corrective decline as the Fed’s artificial support is slowly priced out. I believe this is what we will see in the weeks ahead, and would not be expecting much in the way of additional gains beyond the recently established record highs. In light of the above and circling back to where I started today’s analysis, I am still standing at the plate and will take another swing on the short side, should the market stall out once again above 1810 and roll back over below 1800. Even if you subscribe to the view that tapering is not tightening, it sure as heck ain’t accommodating, and even if you wan’t to take Bernanke’s word that the Fed isn’t doing less, it sure as heck don’t mean the Fed is doing more. So while the Fed shift might be analogous to watching an erosion, at the end of the day, the wheels are still in motion.

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