Fear of Phrasing

Daily State of the Markets 
Friday Morning – August 27, 2010  

The most recent trip down through the trading range has been sponsored by Ben Bernanke’s decision to introduce a new pharse into the FOMC’s vocabulary. In short, stocks have been reeling ever since the words “unusually uncertain” were used by the FOMC to describe the Fed’s current economic outlook. It wasn’t the words per se that caused traders to worry that the Fed saw something they didn’t, but rather the fact that the Fed Chairman decided to make a change.

Thus, we are going to suggest that at least part of Thursday’s ugly tape action can be attributed to the worry that Mr. Bernanke might consult the thesaurus again in his speech this morning from the Economic symposium in Jackson Hole. And with computers these days trained to pick up (and act) on key words, it isn’t a stretch to think that any new phrasing from Bernanke might cause the HFT gang to get busy again – and not in a good way.

Although trepidation in front of Bernanke’s speech (and perhaps this morning’s big revision to Q2 GDP) was certainly part of yesterday’s swoon, there were actually plenty of other negative tidbits for those traders still at their desks to latch onto. First and foremost was the report out of the Kansas City Fed, which showed a contraction in the manufacturing sector in the region. While the news wasn’t exactly surprising given all the other economic data suggesting a slowdown is indeed underway, the report served as a reminder that the “soft patch” could be a problem that sticks around for a while.

With the macroeconomic worries remaining front and center, it didn’t help that a handful of economic heavyweights provided sound bites that were less than optimistic. For starters, the rarely upbeat Nouriel Roubini (aka Dr. Doom) told us that the chances for a double dip are growing stronger and that the odds now favor a return to recession. Next up, PIMCO’s usually thoughtful Mohamed El-Erian got our attention by actually agreeing with Roubini on the idea that the chances for a double dip are on the rise (yes fans, El-Erian actually uttered the words, “I think Nouriel is correct…”). And finally, the phrase “The Fed has run out of bullets” managed to flash across CNBC’s screen a time or two yesterday.

Now stir in the fact that bond yields sank back down to their lowest levels since the crisis ended in March 2009 (the yield on the 10-year closed at 2.499% – and remember, it was at 3.994% on April 5th) and you’ve got a recipe for some sell programs throughout the day – and especially into the close. The bottom line is no one was interested in taking any new positions in front of this morning’s big events (Bernanke’s speech, the GDP report, and the UofM’s Confidence Index).

From a chart standpoint, while yesterday’s action felt pretty miserable, it once again didn’t change much. The indices did close at a modest new low for this phase, but the key is the Dow, S&P and NASDAQ all remain trapped in a trading range. So, with the market appearing poised to break out to the downside on any new negative surprises, we will brace for the next batch of news.

Turning to this morning… Things are fairly quiet in the early going as the UK’s GDP revision actually came in above expectations (imagine that).

On the economic front… The government’s report (1st revision) on the nation’s second quarter GDP shows the economy grew at an annualized rate of 1.6% in the quarter, which is below the preliminary reading of 2.4% but above the consensus expectations for a growth rate of 1.3%. Looking at the all-important consumer activity, the Personal Consumption component of the report came above expectations with a gain of 2.0% vs. 1.6%. And on the inflation front, the GDP Price index was a in line with expectations at 1.8% and the Core PCE came in at +1.1%.

But, don’t forget about Mr. Bernanke and his phrasing at 10:00 am eastern…

Finally, best of luck on this Friday and be sure to enjoy the weekend!

Pre-Game Indicators

Here are the important indicators we review each morning before the opening bell…

• Major Foreign Markets:
  • Australia: +0.33%
  • Shanghai: +0.28%
  • Hong Kong: -0.07%
  • Japan: +0.95%
  • France: +0.34%
  • Germany: -0.05%
  • London: +0.12%

   

• Crude Oil Futures: – $0.16 to $73.20
• Gold: + $1.60 to $1239.30
• Dollar: lower against Yen, higher vs Euro and Pound
• 10-Year Bond Yield: Currently trading higher at 2.55s%

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: +7.33
  • Dow Jones Industrial Average: +66
  • NASDAQ Composite: +13.32  

Wall Street Research Summary

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