08/29/12   Will Bernanke Open Door #3?

Editor’s Corner
Ron Rowland

For better or worse, the financial world is focused on Jackson Hole to the exclusion of almost everything else.  Ben Bernanke’s Friday speech to his central bank peers is no doubt important.  Is it important enough to justify such breathless anticipation?  We wonder.

As many have noted, Bernanke used this event the last two years to unveil significant policy changes.  This suggests he might do it again.  Alternately, he may see this as good reason NOT to announce anything major.  Fed chairmen need some degree of unpredictability in order to remain effective.  A third consecutive big revelation could set up a habit that will be difficult to shake.

Whether it comes this week or not, analysts seem increasingly convinced the Fed will pull the QE3 trigger soon.  Last week’s release of the August 1 FOMC minutes said “many members” expected additional stimulus would be necessary “fairly soon”, barring a “substantial and sustainable” strengthening of the economy.  Today’s revision of second quarter GDP from 1.5% to 1.7% doesn’t strengthen the case for QE3 but probably doesn’t hurt it much, either.  The Fed’s own Beige Book analysis also shows only gradual improvement.

Leaders in Europe continue to squabble over bailout plans and conditions.  It is difficult to assess how much of the rhetoric is for public consumption and how much represents actual disagreement.  European Central Bank president Mario Draghi used a newspaper column today to dangle the possibility of “exceptional measures.”  Draghi, by the way, is not attending the Jackson Hole meeting.  Some analysts think he is staying home to prepare for some kind of big announcement at the September 6 ECB meeting.  We presume he has a fax machine and knows what Bernanke will say.

The stock and bond markets are taking a break ahead of Jackson Hole and the Labor Day weekend.  Both are little changed and will likely remain so until next Tuesday.  Treasury auction activity is going well despite all the uncontrolled-debt speeches emanating from Tampa.  Bond buyers, at least for now, aren’t afraid of the fiscal cliff.  They have plenty of time to change their minds.

Investor Heat Map: 8/29/12


Technology lost some momentum since our last report but is still on top of today’s list.  Energy moved up a notch to take the #2 spot away from Telecom.  Hurricane Isaac appears to have spared offshore infrastructure from serious damage.  Consumer Discretionary also improved its standing, climbing from fifth to third.  Telecom is now in fourth place.  The week’s top-performing sector was Health Care, in both absolute and relative terms.  This is a potentially significant change; just a week ago the defensive trio were huddled at the bottom of the list.  Consumer Staples also improved.  Financials is still unable to climb and sits at #6.  Industrials and Materials both dropped significantly to the lower rungs of the ladder.  Utilities remains on the bottom with a slightly negative momentum score.


Patterns in the Style categories were unusually elusive this summer.  We do see persistence at the extremes.  Mega Cap has generally controlled the top of the rankings, and Micro Caps have lagged more often than not.  On the other hand, the Value preference we noted just last week is already being upset.  Large Cap Growth jumped to second place today, displacing all three Value categories and Large Cap Blend as well.  The other two Growth categories remain near the bottom.  Given the unsustainability of recent patterns, we will refrain from short-term predictions today.  The picture next week could be totally different.


Last week we were surprised to see Europe leading the list, and today we are surprised it is still there.  Granted, much of the Continent is still in vacation mode, but one needs to be extremely optimistic to think Europe’s troubles are over.  Canada continued its climb and now holds the second-place position.  Having an Energy sector well-removed from hurricane danger may have helped.  Pacific ex-Japan slipped to #3.  We have a three-way tie for the fourth-place position: World Equity, USA, and EAFE all have nearly identical momentum readings this week.  The U.K. falls next in line, and combined with the trio just above constitutes this week’s “middle of the pack.”  The bottom four regions are the same as last week but fell further behind the rest of the world.  Emerging Markets and Japan have vanishingly-small uptrends which are likely to turn negative by next week.  Latin America and China are already in the red.  Speculation about a Chinese “hard landing” seems to have crimped all rally attempts in that country’s stock market.



The charts above depict both the relative strength and absolute strength of various market sectors, styles, and geographic locations on an intermediate-term basis. Each grouping is sorted (top to bottom) by relative strength. The magnitude of the displayed RSM value is a measure of absolute strength, which is our proprietary method of measuring and reporting the intermediate-term strength as an annualized value.


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Michael Beschloss, NBC News Presidential Historian


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