BigTrends

JP Morgan reported earnings early Thursday, and beat estimates handily. They guided somewhat higher, but who really knows what they could earn in a sluggish economy. But what caught me was something in the conference call.

CEO Jaime Dimon made some interesting comments, but one struck me as a big 'tell' in the market. A 'tell' is something that give you an idea of what someone feels or thinks. In this case, Mr Dimon stated that 'We are not sitting here terrified of deflation'. Now, JPM has a well-known relationship with the Fed and Treasury. We know what Bernanke fears: deflation which can merge into a depression...and he'll do anything to avoid it...even dropping bags of money from helicopters.

So, I'm sure Mr Dimon and JPM are comforted to know that the Fed and Bernanke have plenty of ink in their machines to get the flow of money rolling again.

Did you miss that rally on Monday?  4% move based on the 'shock and awe' from the eurozone.  A trillion dollars...imagine that!  If you were positioned for the rally on Friday then you did well.  Of course, that was a big bet on the euros making this bold statement.  What needs to happen now?  Well, the market may now be rangebound.  I'm not sure a retest of Thursday's low is really necessary and that is probably the low for the year.  Given the stimulus and liquidity it's likely money will be coming into our markets in droves.  In addition, the opening of swap lines between our Fed and the euro will make it easier for the euros to capitalize on a stronger greenback. 

Did the euros panic?  I think they did and probably with the help (push?) from our Fed and Government.  Look, our recovery is on track (or, it was) and the continued waffling back n' forth between the countries has put fear into all markets.  Bailout, no bailout.  Small bailout, large bailout.  Once this gargantuan number was rolled out Sunday right before trading began in Asia the reaction was as expected.  Heck, they are getting ahead of the curve now rather than chasing.  If Portugal fails, covered.  Spain?  Got your back, Spaniards.  Markets?  Well, a 4% move up after one of the worst weeks in recent memories sends a message to the shorts:  Don't mess with reflation.

The key here is avoiding the D word...Deflation.  The continued worries over inflation by the Euros were misguided, and much like the defensive posture of our Fed in 2007/08 they needed a bold response:  nearly a trillion dollars in 'potential' aid.  Why wouldn't they put this out to 'shock' the markets and the world?  It's yet to be seen if this response is damaging long term, but there is precedent.  Certainly our markets are the model here.  To be continued.

Last week's strange trading action led to an increased push by Congress to audit the Federal Reserve.  Now at this point, it looks like a watered-down (everything Congress does is watered-down nowadays, regardless of party) version will be passed, but will keep some protections for the FOMC in terms of disclosing its interest rate decision-making process.

From the Wall St. Journal online:

"Last-minute maneuvering in the Senate allowed the Federal Reserve to sidestep legislation that would have exposed its interest-rate decision-making to congressional auditors.

Pressure from the Obama administration led Senate lawmakers to alter a provision pushed by Sen. Bernie Sanders (I., Vt.) that was gaining momentum despite opposition from the Treasury and the Fed. It would have largely repealed a 32-year-old law that shields Fed monetary policy from congressional auditors.

The compromise, endorsed by Senate Banking Committee Chairman Christopher Dodd (D., Conn.) and the Treasury, would require the Fed to disclose more details about its lending during the financial crisis. It would also require a one-time audit of those loans and a one-time review of Fed governance."

What do you think about the Fed's right to remain somewhat secretive to avoid political manipulation vs. the right of the taxpayers to know how money is being printed and spent?

If any of you had seen Animal House some 30 years ago, you may remember a fraternity of non-conformists who were just having a good time in college.  Well, take a look a this video clip, but let's substitute players with some of those who took center stage in the financial crisis.  Perchance to dream a bit, but maybe this is the attitude taken at the time?  Maybe this modern day fraternity is also something to pay attention to!  Perhaps they were saying this to any naysayers who did not agree with their plan.

Animal House Player      as      Financial Crisis Player

Otter                                          Hank Paulson

Flounder                                    Larry Summers

Hoover                                       Alan Greenspan

Bluto                                           Tim Geithner

Niedermaier                               Chris Cox

Boon                                             Robert Rubin

Stork                                            Ben Bernanke

Dean Wormer                             Anyone From Congress                                           

Let's see, the last time we had such a big week with potential potholes was...um...last month!  We are chock-full of news and market-moving events.  Let's start with earnings, which will be in focus for a second straight week.  We'll see the names delivering hot n' heavy, in the biggest week yet for earnings.  Economic reports will be hitting as well, and let's not forget a big Fed meeting...aren't they all big?  We may get a clue as to the committee's direction on interest rate policy.

This is also the end of the month, and currently the bulls have the upper hand, the SPX up about 4% so far for the month.  This could be the best April in quite some time.  Something to consider as well is the 1228 mark on the SPX, an area targeted by technicians as an important fibonacci level that could be some heavy resistance.  The VIX is still showing mass complacency, but that's ok if the trend is still in place.

Last evening the Fed raised the discount rate.  Big deal?  Well, only if you believe in history.  But, one has to ask...is it different this time around?  And, if you believe so...and you believe the Fed and their notion this is just a 'one off' event, then the Fed Funds shouldn't be touched.  But what about the futures market?  It seems the FF futures aren't buying it, and the hysteria over this preliminary move forced a 'shoot first, ask questions later' response.  You can see below the futures market sold off a bit.  Harsh reaction?  Initially, it could be...we'll have to see over time if these contracts continue to dip.

The discount rate is a measure only considered if banks are not lending to each other.  It is the 'penalty rate' from having to go to the Fed window and is really not used much in practice.  For all intents and purposes this move should be considered a 'closing' of certain emergency measures that were brought about from the financial crisis.

With all the unknowns out there...they all seem to be hitting this week, too...it's not surprise traders are guarded.  Why expose yourself to losses when support breaks?  Is the Fed and the news surrounding enough to bring the market down?  How about earnings?  So far, just a weak response to some rather stellar numbers.

End of the month and as we head into it, the markets are grossly oversold in the short term.  That doesn't mean we'll not get more oversold, rather the condition makes it highly probable for a sizeable bounce.  Bears are positioning though, and they are grumbling.   

So now there is chatter that the Fed is thinking rate hikes, or perhaps just preparing banks for such an event.  Spare me!  Oh, I know that'll happen, but at the risk of spoiling the economy at this point in time?  I sincerely doubt it, knowing what we know about this Fed.   Jawboning, lip service...yeah, par for the course when it comes to sentiment.  Let's see how the markets react to an idea, first.  I still watch the bond market, and while the curve is steepening, and that's something to be concerned with ONLY if growth is inflationary (so far, productivity is very high...so not much of the growth can be considered inflationary unless otherwise).  There is too much at risk for getting it wrong, and this Fed received a shock in 2008 beyond belief.  I don't see the Fed doing much before 2011, perhaps a bit earlier, but let's remember...it's not ever 'one and done'.

Watch bonds...if prices go up (yields down), all this chatter will go away. 

I recently received this question about the BigTrends 2010 Outlook that I would like to share along with the answer:

"Bob, I am trying to understand the corelation of bond rates and the effect that has on equities. I am hoping you can put this in laymans terms, please. Thank You xxxxxxxxx"

Thanks for your question.  I'll do the best I can to make this seem simple. 

There are different ways bonds and equities interact with each other in markets.  The most basic tenet is liquidity or money flow.  Let's pretend for a minute that there is a limited amount of capital in the system (I say pretend because the printing presses run hard everyday).  The search for yield is constant, but also must be balanced by risk tolerance.  An investor would like a given amount of return for a far amount of risk taken. 

So, where should that capital be deployed?  In most cases it's a choice, or even an allocation to either/or.  Since equities have a higher beta (risk) than bonds, you have the following:  If you desire less risk, you put more into bonds, less into equities.  More risk, vice versa.  Capital flows back and forth.  A strong bond market though, with money flowing into it is good for stocks, too.  How?  borrowing costs, costs of capital are lower which means more to the bottom line.  

I spoke recently about the yield curve and its importance.  The desire for an upward sloping yield curve is attractive to equities as it portrays growth (good productivity means it's not inflationary)...too steep and it's probably inflationary.  We have not had consistently good growth for a couple of years.  The Fed wants to see a steeper curve before it raises rates, even more they want to see good GDP numbers before they act.  What does an upward sloping yield curve represent?  If you lend your $$$ out longer you should be compensated better, with a higher rate. 

How do you shift the curve?  It needs to be whipped from the bottom (fed funds rates) or the top (10 year or longer).  Draw a yield curve on a line chart and you'll see it (upward sloping, left to right).  An inverted curve is not positive and is recessionary.  Further, we also watch spreads between riskier bonds (corporates) and treasuries to make sure there is no disconnect of historical risk.   So, the answer is low rates are good for stocks, but falling yields will take away from equities due to risk aversion.