July 12, 2013 Update

DJIA:15,461 S&P 500:1,675 NASDAQ:3,578 Gold:$1,274 Oil:$104.71 EURO:$1.30 YEN:99.46

The Man who Moves the Markets

I find it absolutely fascinating that one person has the ability to drive the entire global financial system any which way based on the perception people build of his thoughts that no one really knows anything about. The speech Bernanke gave yesterday was not breaking news. Investors have known that the Fed was going to wind down their monthly asset purchases once the economy seemed as though it was improving. Investors have known this since the Fed started buying the bad debt in the first place. However, the way in which Bernanke delivers his thoughts has an undeniably profound impact on the way people trade. Ambiguous claims like “highly accommodative” and “foreseeable future” can be logically interpreted in a multitude of ways. Yet, the market awarded these words with a bullish tone and made them out to mean that tapering would likely begin sometime in September (dependent on economic conditions). The way in which we say things can sometimes be more important than what we actually say; and, furthermore, what we chose to remember can portray more about our motivations than what we have actually done in the past. No one can predict future market behavior, which is why markets are largely based on investor perceptions. Equities reacted strongest to the Chairman’s “dovish” tone, with credit and emerging markets following behind. What does this say about investors, besides that we all are invested for return? Even with job claims coming in worse than anticipated, the markets ripped (since bad news keeps the music playing). I do not think that the markets have incorporated the uncertainty about the magnitude of diminution of the asset purchases. Nor do I believe that investors see much risk in equities, as the market seems to be reacting to the Fed and rationalizing their tone in order to ease fears and uncertainty. I think people are mis-pricing risks because they believe that the Fed will continue to just buyback the market. The asset bubble the Fed has created is real, and no one wants to believe it will pop. Talks of tapering create systemic risk that come and go, driving the quick rallies and reversals markets have experienced. As the “Bernanke Put” slowly transforms into the “Bernanke Call,” I do not think it is safe to assume that the Fed will be as “accommodating” as people believe they can be. To me, the riskiest way to trade is to believe that there is no risk at all. And judging by the markets’ “dovish” tone, investors may have mis-perceived risk when they formed their conclusions of Bernanke’s notions.   

Domestic News

• Market Update Futures are trading slightly down as the markets prepare for the release of bank earnings.
• The producer price index will be released at 8:30, and is forecast to rise 0.5% in June. Core whole prices (which exclude energy), are anticipated to rise 0.1%.
• The University of Michigan and Thomson Reuters will release their consumer sentiment data at 9:55, which is expected to result in a reading of 84.1 - stagnant compared to the levels at the end of June, but still highest in six years. 
• San Francisco Fed President John Williams will speak at 2:30 on “a defense of moderation in monetary policy.” 

International Updates

Asia

• Market Update Markets mixed ahead of Chinese growth data due next week, Japanese equities saw small gains. 

Europe

• Market Update Markets traded up for the third day in a row, tracking Wall Street’s bullish sentiment on tapering.  

Corporate

• Wells Fargo (WFC) is expected to report net income of around $5B and earnings of $0.92 per share on a revenue of $21B.
• J.P. Morgan (JPM) is expected to report earnings of $1.44 per share ($5.6B profit), on revenue of $25B.