Stocks Run For The Roses

The Fed came through yesterday and gave the market what it wanted in the form of additional quantitative easing. Markets around the globe rallied in response to the FOMC decision to purchase additional agency mortgage backed securities at a rate of $40 billion per month.
Asian markets rallied strongly, with more than 2% gains in Hong Kong, Indonesia, S. Korea and Tawain. China lagged with a gain of only 0.6%. But not everyone was happy with the Fed's actions. The People's Bank of China suggested the Fed's action could spark global inflation. The Hong Kong Monetary Authority warned that the risk of a property bubble in their housing market is higher now. And the Bank of Japan was put on the defensive as the yen soared vs. the dollar sparking speculation the BoJ might have to intervene in the currency market.

Europe's markets are also higher despite continued debate over whether Spain will need to ask for a full bailout. There is also increasing unrest in the middle east with violent protests in Egypt, Yemen, and elsewhere.
In economic news, the Univ. of Mich. consumer sentiment index rose to 79.2 for September, near its high for the year and well above last months' reading of 74.3. Separately, retail sales for August rose 0.9% which was above expectations.

The dollar index is well lower today which is helping commodities.  Oil prices have risen to $99.70 and gold prices are up a bit to $1772 after a nice rise yesterday.  And the breakout in copper prices continues.  The copper etf (JJC) is up over 5% for the week.

The 10-year yield is also rallying.  I'm not sure if this has more to do with operation twist moving its focus to agency securities or simply an allocation move out of bonds and into stocks and commodities.  The 10-yr is currently at 1.87%, its highest level since May.

For its part, the VIX had a big plunge yesterday down to the 14 level where it has pretty much bottomed each time down there this year.  Today it is actually up 1.5% to 14.25 despite another up move in the stock market.

Trading comment: The markets staged a follow on breakout yesterday and pushed further into high ground for the year.  This is a tough juncture because the market has had a big move and does look a bit extended.  Investor sentiment is also growing more and more bullish, and we know that when the herd gets complacent the market is often ripe for a pullback.  But with the Fed in QE mode, the ECB adding liquidity, and portfolio managers chasing stocks to avoid underperforming their benchmarks it does seem that dips in the market will continue to be bought until the macro backdrop turns negative again.

Burrito bet

I do believe I'm going to earn a whole lot a burrito's :)

There will be a lot to go over in the weekend report, but basically everything is now in place for my inflationary shock in 2014 scenario, including the stock market at new highs, which has now already happened.

Fed Decides On More QE

Here is their press release:

Information received since the Federal Open Market Committee met in August suggests that economic activity has continued to expand at a moderate pace in recent months. Growth in employment has been slow, and the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment appears to have slowed. The housing sector has shown some further signs of improvement, albeit from a depressed level. Inflation has been subdued, although the prices of some key commodities have increased recently. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions. Furthermore, strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely would run at or below its 2 percent objective.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee agreed today to increase policy accommodation by purchasing additional agency mortgage-backed securities at a pace of $40 billion per month.

The QE Conundrum

Global markets were mixed overnight as investors around the world await today's FOMC decision and whether or not the Fed will initiate more quantitative easing (QE) measures in the near-term.  Many strategists have said the anticipation of more QE is the reason that global markets have been rallying and if we don't get any there could be some disappointment.

I have been on record as saying I don't think the odds are as high as everyone says, considering the stock market is at new highs and the Fed might like to keep some powder dry for when we need it more.  We still have the economy slowing and the fiscal cliff ahead of us.  For the near-term, the ECB seems to have done some of the heavy lifting with its recent bond purchase programs.

The FOMC statement will be released at 12:30 ET with the economic projections released at 2:00 ET followed by Bernanke's press conference.

There hasn't been a lot of market moving news this morning. US producer prices rose more than expected by 1.7% in August vs. the 1.2% expected.

Overnight in Asia, several central banks held interest rates steady.  Indonesia held at 5.75%, New Zealand at 2.5%, Phillipines 3.75%, and S. Korea held at 3.00%.  Asian markets finished mixed.

In Europe, markets are also mixed to lower this morning.  German Finance Minister continues to try to pour cold water on recent ECB announcements.  He said that he does not believe the ESM can get a bank license.

The dollar is slightly lower today and commodities are mixed.  Oil prices are higher to $98.20 while gold prices are roughly flat near $1735.

The 10-year yield is a bit lower to 1.73% after a nice bounce higher yesterday.  And the VIX is also slightly lower to 15.68 still hovering below its 50-day overhead resistance.

Trading comment: The major indexes are holding up in new high territory.  The SPX is at new highs again, but the Nasdaq is a few points below its yearly highs.  More growth stocks continue to lead the market.  But with investor sentiment growing more bullish and this recent uptrend in the market getting long in the tooth, I would not be surprised to see some volatility and choppiness pick up in the near-future.  I feel like investors are getting lulled into a sense of complacency and Mr. Market usually doesn't like it when that happens.  But for now, let's see what the FOMC has to say about further QE now or in the near future.

German Court Upholds Euro Stability Mechanism (ESM)

Global markets are higher this morning on the heels of the German court upholding the constitutionality of the ESM bailout fund.  There are still some limitations to the fund, including capping Germany's liability at 190 billion euros, but it still looks good that the ESM will come to fruition.  Elsewhere in Europe rumors swirl that Spain is considering asking for aid from the ECB bond buying program, and that France is urging them to do so.

Asian markets rallied overnight ahead of the German court ruling after Chinese Premier Wen suggested there is room for more stimulus to spur consumption.  Japan led the gains, while China lagged again.

In the US, investors are eagerly anticipating tomorrow's FOMC meeting and whether Bernanke will announce new QE initiatives.  I have been saying I don't think it is likely and that they would prefer to save some bullets, but most strategists expect to hear something and say that is the primary reason that the markets have been rallying - in anticipation of further QE.  So if we don't get anything from the FOMC, the market could be vulnerable.

Also later today we will hear from Apple at their San Francisco event where they will unveil the new iPhone5.  We could also hear about a smaller iPad (7") as well as other software updates.  But the stock has run quite a bit heading into this event, and I could see it taking a breather now that the news is out.

Yesterday Facebook CEO Zuckerberg spoke at a tech conference.  He said a few positive things relative to the stock and their expectations for growth, but nothing earth shattering.  Nonetheless the stock is 5% higher today.  I think investors were just happy to see him in person and hear that he is engaged and taking the drop in the stock price seriously.

The dollar is lower today as the euro gets a bounce from the German court news.  Commodities are mixed with oil slightly higher to $97.30 and gold down just a touch to $1733.  Silver prices are also taking a breather.

The 10-year yield is lifting further to 1.74%.  And the VIX is down 3% back below the 16 level but not giving that much back from Monday's upside reversal.

Trading comment: The S&P is back to making slight new yearly highs today.  So far Monday's selloff looks like a 1-day wonder, but a lot could depend on the FOMC tomorrow.  Many think that if the Fed doesn't announce new QE moves that the stock market could be disappointed and have a correction.  This is certainly possible, but with the stock market making new highs I just don't think that the Fed feels the same pressure to do more QE as it has in past summers.  Financials are leading the early action, which is always a positive sign.  And more growth stocks are continuing to lead the market higher.

KAM Advisors has long positions in AAPL and FB

Portfolio Change

A portfolio change has been posted to the website.

Changing the blog

Unfortunately as so often happens with blogs that aren't purely a bear blog, the SMT has deteriorated to the point where it's mostly inhabited by trolls. The conversation has gotten to the point where it no longer serves any purpose, other than to offer a stage for the trolls to rant.

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