Just so you know, I was wrong yesterday. The Fed threw us all a curveball. The market liked it, but I am not so sure it will benefit the market in the longer term. At some point, the Fed needs to taper its liquidity and the market needs to accept that. Unfortunately, now that the Fed has postponed that day, we just might have to go through another “adjustment’ period in which the market reaccepts that reality.
- The U.S. Federal Reserve defied investor expectations on Wednesday by postponing the start of the wind down of its massive monetary stimulus, saying it wanted to wait for more evidence of solid economic growth.
I haven’t read the full text of what the Fed said yesterday, but the gist of the reasoning is enough for me to shake my head. The Fed wants “more” evidence of “solid” economic growth?
- U.S. home resales hit a 6-1/2 year high in August as buyers flocked back to the market to lock in cheap borrowing costs amid rising mortgage rates
- The Philadelphia Fed Business Outlook Index was reported at +22.3 in September, which was well above the consensus for a reading of +9.8 and last month’s +9.3. The New Orders component improved to 21.2 from 5.3 in August.
- The Conference Board reported that their Leading Economic Index rose +0.7% in August, which was above the consensus for a reading of +0.6% and well below last month’s reading of +0.6%. Ataman Ozyildrim, an economist at the Conference Board said, “After a brief pause, the U.S. LEI rose sharply in July and August, resuming its upward trend.
Okay, so the economic growth is “spotty,” but it is growth, and the growth is starting to improve in key places around the world.
- Japanese exports rose 14.7% in August, data showed. That’s good for a sixth consecutive gain and is the largest increase in three years.
Again, admittedly, even I can’t argue that the US economic growth is stellar enough for the Fed to stop its liquidity flow, but I can argue that the Fed has achieved the growth it wanted in the housing sector and the threat of stopping it did little to curb that growth.
- Mortgage lending jumped to a five-year high last year, driven by a sharp rise in refinancing as borrowers rushed to lock in the lowest mortgage rates in at least 60 years, according to a Federal Reserve report.
Some might argue that the Fed’s forcing mortgage rates down has led to another housing bubble, and the breathless media has reported it this way at times in the recent past, but facts are facts and I love to deal with them.
- Last year’s levels, however, remained far short of lending volumes reached during the housing bubble and even before the bubble over a decade ago.
So, pressuring interest rates downward has helped the housing sector, but it has not turned it into a bubble. What about the argument that the recovery is built on the back of the easy qualifying and low down payments, thus, it is a bubble waiting to burst when borrowers default?
- Subprime lending and home-equity loans, both of which helped to fuel the housing boom, stayed at very low levels last year. The Fed report found that the incidence of “high-cost” lending, a proxy for subprime loans, fell to about 3% last year, down 0.7 percentage point from 2011 and off a peak of 28% in 2006.
- Delinquency rates have fallen sharply on mortgages made after lenders ratcheted up lending standards in 2009, the report said. For conventional home-purchase mortgages made in 2010, just 0.5% of loans had missed two or more payments within their first two years, about 1/20 the rate for loans in 2006.
The market does what the market does and even though I believe the market ultimately gets around to flowing in the direction of the fundamentals, there are times in between where it dances to the tune of common belief. Yesterday, the music played and the tune was that keeping the liquidity spigot open a bit longer is a good thing. The market leapt higher. Today, a bit of grogginess after the party, an awakening with a headache is keeping the market in check.
Well, here is something else that will keep the market in check, but it won’t kill it, even if the breathless media feeds it to us as something to fear. Forget about the QE tapering drumbeat for now. Get in tune with next dance coming our way.
Next up for the market? Government shutdown!
Trade in the day; Invest in your life …
