WASHINGTON, June 5, 2013 — Just when you thought it was safe to go back in the water, our friends at the Federal Reserve threw the markets for another loop Tuesday. Continuing the maddening “taper” cross-talk and chatter that’s dominated the Fed’s collective public comments over the last month or so, yet another Fed official yesterday said the central bank could start easing its support for the economy soon. The result was another pervasive and sickening market swoon throughout much of yesterday’s trading action.
ADP’s bad job numbers are not helping this morning’s action which showed all markets opening down again. For more on this, check out our “Today’s Trades” segment below.
While it’s true that many stocks recovered somewhat in the last hour of trading to end with slight losses yesterday, the corrosive effects of this kind of repeating action are going to be increasingly hard to repair. The damage has been particularly notable in the area of mortgage-backed REITs—long our favorite defensive investments—largely due to the kind of interest rate fears the Fed seems bent on generating. (More on this in our other column, The Prudent Man.)
Snippets from a prepared speech by Esther George, president of the Kansas City branch of the Federal Reserve, were reported in the early afternoon. George pointed to “improving economic conditions” as well as evidence that financial markets were getting dependent on the Fed’s support. “I support slowing the pace of asset purchases as an appropriate next step for monetary policy,” she said. George didn’t give the speech because she was sick, but news outlets still reported her comments, and the Kansas City Fed posted the speech on its website.
It was the latest volatile turn in stock trading as investors try to figure out when the Fed will make a move. Traders, and particularly headline-driven HFTs have seized on comments from Fed officials and minutes from a recent meeting of policymakers, sending stock and bond prices swinging sharply over the past two weeks.
On Monday, for example, stocks rose as traders interpreted an unexpected slowdown in U.S. manufacturing as the latest sign that the Fed wasn’t close to winding down its stimulus program. The next big data point for investors is the Labor Department’s monthly employment survey due out Friday.
“My sense is that all bets are off until we see the jobs number Friday,” said Jack Ablin, the chief investment officer at BMO Private Bank in Chicago. “That’s the ultimate barometer.”
The Fed has been buying $85 billion in bonds each month, helping to keep bond prices high and the yields they pay low. In theory, that should lead people to borrow and also shift money out of bonds and into other investments.
Many investors expect long-term interest rates to rise when the Fed scales back its bond-buying. If they climb high enough, more investors may be tempted to buy bonds instead of stocks. Trying to anticipate that outcome, many traders are pre-emptively selling stocks on the slightest signs that the Fed may be closer to slowing its stimulus. QE is still key.
–AP contributed to this report.
It’s now about 8:45 a.m. EDT. According to CNBC, “ADP and Moody’s Analytics said the private sector created just 135,000 jobs in May, less than the 165,000 estimate…. Traders, however, have used the weak economic conditions to keep hopes up that the Federal Reserve will not back off its easing measures anytime soon.”
In other words, same old, same old. ADP numbers have been quite unreliable over the past few months, so the market might wait to take its cue from U.S. government numbers (unreliable for different reasons) later in the week.
Thus, once again, no trading recommendations until further notice, although we impulsively bought a tiny bit of gold ETF IAU yesterday without actually planning to. It’s not enough to do us damage, but it seemed like a decent thought.
On other fronts, we’ve put in a bid for a few hundred shares of what must be the second or third secondary issue of KAR Auctions (KAR) that’s come up over the past five months or so. KAR is one of two major businesses in the U.S. totally devoted to, effectively, recycling inventory of used cars. As such, it’s a swell business in this continuing mediocre economy. It’s a real company and actually makes money.
The reason for continued secondaries is simple. The vulture capitalists who took the company/companies now known as KAR private a few years ago are recouping their investment at market highs. We’ve actually made money each time we’ve bought shares of KAR and are tempted to follow through yet again even though, as usual, KAR itself doesn’t get any of the proceeds which will be pocketed by “selling shareholders,” i.e., the vulture capitalists.
In the current market, if we can get shares of KAR at a better than current price, we might actually go through with this secondary purchase once it’s priced after today’s close. But if the pricing, and or the market action today, happens to be less than promising, we may take a pass. If our readers have any interest and can get shares (likely), however, we’d advise reading the prospectus thoroughly and also watching the tone of the market.
If further strong downside is indicated this month, this might finally be the time that buying shares of KAR turns out to be a poor idea. Otherwise, this seems to be a pretty good company in a business that’s bound to remain fairly lucrative as Great Depression II grinds on.
Market-wise, though, even if we get a big up-day or two, we remain pessimistic. While the market is horribly oversold in the very short term and fully capable of a big bounce here, the overall action is increasingly poor as it often is every summer for a variety of reasons. Let’s not get caught by the happy talk coming from Wall Street shills this week who only want you to buy their inventory of stressed merchandise so they can profit from your inevitable loss.
Have a good one.
Disclaimer: The author of this column maintains several active trading and investment portfolios and owns residential and investment real estate.
Positions mentioned above describe this author’s own investment decisions and should not be construed as either buy or sell recommendations. The current market is highly treacherous and all investors travel at their own risk, so caution should be exercised at all times.
Illustrations, charts, commentary, and analysis are only the author’s view of current or historical market activity and don’t constitute a recommendation to buy or sell any security or contract. Views, indications, and analysis aren’t necessarily predictive of any future market or government action. Rather they indicate the author’s opinion as to a range of possibilities that may occur going forward.
References to other reporters, analysts, pundits, or commentators are illustrative only and do not necessarily represent an endorsement of such individuals’ points of view. If specific investment vehicles are mentioned in any article under this column heading, the author will always fully disclose any active or contemplated investments in said vehicles.