We've been discussing the probability of a run-up in the equity markets when the Fed launches another round of quantitative easing. Portfolio managers are so afraid of missing a rally that the mere mention of central bank intervention can send markets soaring. The back half of last week experienced such a rush after ECB chief Mario Draghi vowed to support the Euro. Markets viewed these comments as a guarantee of further easing. In reality, everyone knows that Draghi and crew will support the Euro until the end, so this comment shouldn't have come as any surprise. The market has been selling off and the negative sentiment is near levels where we have experienced market bounces over the past four years. In other words, the pump has been primed for a positive response to any bit of easing news.
All eyes will be on the Fed this week, with expectations running high the committee will at least hint at future intervention. We fully expect some type of Fed action before the election, and will use the resulting market surge to pull back on equity positions and play some defense heading into 2013. My suggestion is not to hold on too long because I get the sense most of Wall Street has the same plan.
One of the conundrums facing the Fed is how to get banks to lend more. Some are suggesting eliminating the dividend on overnight balances, thus making it less profitable for bankers to hold cash. Given the stumbling economy and weak jobs picture, I'm not sure encouraging banks to be more aggressive lenders is particularly sage advice right now.
Speaking of banks, our old friend Ed Yardini was caught saying that "banks are the Achilles heel of capitalism." Doesn't Ed know that we aren't supposed to state the obvious?
Almost lost in the week's craziness was the GDP report, which came in at 1.5% for the 2nd quarter. Revisions have been downward since 2008, so expect the final number to be closer to 1.0%. Remember that inflation is backed out of this measure, and given that the inflation rate has been understated, we could have just experienced a 0% growth rate in the 2nd quarter.
Second quarter earnings have also been limping in, with only 64% of companies beating EPS estimates and less than 50% beating sales estimates. Sales growth has been punk, and actually running negative for the quarter. This doesn't bode well for corporate hiring nor the employment picture.
Four years ago I wrote about the spectacular opening ceremonies for the Beijing Olympics. It is with great disappointment that I must write about the London Games' Opening Ceremonies. With the exception of Mr. Bean farting, I have to say the production was the worst I can remember since the Soviet Union drove tanks down the middle of Moscow in the US boycotted 1980 games. Yowsa! That was a snoozer.
Have a great day