Wednesday, May 1, 2013

US Stock Market: "Sell in May and Go Away" Again, Despite the Accommodative Fed?

Dow drops 138 points after Ben and his gangs (aka Federal Reserve) say they could increase or decrease stimulus as they see fit.

From Reuters UK (5/1/2013); the best part of the article is the title:

US STOCKS-Wall St drops as steady Fed can't offset data, earnings

* Fed maintains stimulus measures despite job market improvements

* Merck, MasterCard shares slide after earnings

* U.S. companies hire less, factory growth slows in April

* Dow off 0.7 pct, S&P 500 off 0.6 pct, Nasdaq off 0.7 pct

By Ryan Vlastelica

NEW YORK, May 1 (Reuters) - U.S. stocks fell on Wednesday as the Federal Reserve's decision to stand pat on its current monetary stimulus was not able to offset weak economic figures and several lackluster earnings reports.

The U.S. Federal Reserve stood by its plan to stimulate the economy through bond purchases, and while the central bank noted some improvements in the labor market, it said recent budget tightening in Washington could be a risk to growth.

The statement came in largely as expected. While equities have performed well of late, with the S&P 500 hitting both intraday and closing highs on Tuesday, a trend of discouraging data indicated that the Fed wouldn't ease up on its accommodative monetary policy of quantitative easing.

"That the Fed won't end QE any time soon is positive for stocks in the near term, but the data we've seen is creating a lot of angst for investors," said Mike Gibbs, co-head of the equity advisory group at Raymond James in Memphis, Tennessee.

U.S. private employers added 119,000 jobs in April, well below economists' expectations. A separate report showed the U.S. manufacturing sector expanded only modestly in April.


"We're a bit overextended, which is leading to some profit taking," said Gibbs, who helps oversee about $400 billion. "But relative to historical measure, we're not in an expensive market, and we would view declines as buying opportunities."

(Full article at the link)

A "bit overextended"? The two of the major stock indices (Dow, S&P500) are at all-time high, and as far as the "93%" of the US household are concerned who have seen their net worth decrease since 2009 March market bottom, it's been overextended for over 4 years.

And what "data" is creating a "lot of angst" for the investor class? Just about everything on the real economy which is no longer reflected in the stock market thanks largely to the Fed's large-scale money printing for the past four years.

Much more interesting is the talk given by Kevin Warsh, former Fed Governor who resigned the position in March 2011, at Milken Institute on April 29, 2013. He says "There is no plan B", and that the Fed has enabled the federal government to do nothing (other than spending money on companies like Solyndra and Fisker, I may add, among many others). The US growth has been mediocre and will remain so because of the Fed policy, he says.

From Zero Hedge (5/1/2013):

...The entire discussion is worthy of attention but Warsh's comments begin around 18:00:

...but "the ability of a central bank, exclusively, without the rest of Washington doing any bit of the task, to turn an economy from a modest recovery to a robust one is an experiment that is untested - and will not prove to be successful."

...The Fed is taking on the problem of the shortfall in aggregate demand alone. Warsh does not believe that the Fed means to do this alone but their "good intentions" are simply not enough to get the economy to a 3-4% growth rate needed to create sustainable improvements in the labor markets.

... Warsh adds, "over the last several years, [the Fed] has over-promised and under-delivered," and the bank's most important asset - credibility - is under attack.

...The Fed has "enabled" Washington to do nothing, since the politicians expect the same "rabbit out of the hat" rescue that occurred in the darkest days of the financial crisis. This means no growth strategies ("the mix of policies has to be right") will occur - until the Fed draws the line.

...Since the financial crisis, Washington has done its level best to focus on GDP in the next quarter, or perhaps the election, and precious little beyond that short-term horizon. Warsh concludes, "There Is No Plan B." The Fed has fewer degrees of freedom and the rest of Washington is not coming to the rescue.

...In light of our status as reserve currency, the rest of the world's central banks feel empowered to match the Fed's efforts since "we do not act in a vaccuum" which due to economic and competive reasons, means "the US economy will not break out to the upside."

...It is not bad luck that is creating this medicrity, it is bad policy

Zero Hedge seems to leave out the best part of the speech, which you can view in their post.

(From what I watched, first pass)

  • The Fed's monetary policy is nothing but buying time.

  • The Fed shouldn't care about the stock market, instead of continuing to manipulate the financial market to stoke risk appetites of people.

  • Real effect is not trickling down.

I wonder if Mr. Kuroda, governor of Bank of Japan, knows about this video. Probably not. Japanese financial media? Probably not.

Economist and former NHK director Nobuo Ikeda dubbed Kuroda BOJ as "a whale in a small pond", whose slight move will splash all water in the pond. It's the same Mr. Ikeda who said radioactive cesium would disappear once you burned the contaminated wood, but on Bank of Japan, I share his assessment.


Anonymous said...

US stock markets are about the only safe haven parking place left, for the time being if you want any kind of decent return on money.

Probably start making news highs while running to 20,000 before it finally crashes and burns along with the dollar.

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