All’s Quiet on the Western Front – for now. We expect the action to heat up later this afternoon when Bernanke takes to the mike. The action in the market for the last week and a half has been driven by the fast money guys as real investors have sat still waiting for the latest communiqué from the Federal Reserve. This could be the key moment that investors point to as a change in policy and trend so trading desks will have all hands on deck come the good doctor’s press conference.
The big news prior to the FOMC this week was President Obama’s comments on the Charlie Rose program that hinted that Bernanke’s time at the FOMC may be up. Arthur Cashin went on to surmise that Bernanke may want to start the tapering on his watch so that his successor does not get blamed. A change in chairmanship could portend a change in policy. If you were Ben Bernanke wouldn’t you want to get out now? The prospect of shepherding this economy through the Federal Reserve balance sheet deleveraging is a daunting and long term task. Just the fact that Bernanke may be leaving will have Wall Street on edge. A word of caution. The market has a way of testing newbie Federal Reserve Chairmen and soon to be Chairwoman if the speculation is correct. The last two Federal Reserve Chairmen were tested within months of taking the job. Alan Greenspan was hit with the 1987 crash soon after taking the helm and Ben Bernanke was hit with the financial crisis.
Volatility continues. We are watching for the VIX to hit at least 20 before things settle down and we believe that would indicate a possible buying opportunity. Summer doldrums have us a bit worried as a lack of volume creates a roller coaster market. Round and round, up and down but you just end up back where you started and a little bit poorer in the process. Late fall 2013 and early 2014 could provide some better entry points. Cliff Asness of AQR and the folks over at GMO both have data out that implies less than stellar returns from these entry points in most if not all major asset classes.
Economic bellwether Fed Ex lowered guidance for 2014 before the opening. Wednesday is the big day with the Fed opining. Hold on to your hats. Market may have already priced in a positive press conference and statement. One thing is for sure markets are thin and nervous. Volatility and downward moves continue in Emerging markets such as Thailand and the Philippines. The unintended consequences of QE are increasing. Japan may have sent markets over the edge with their new policies. Today could go a long way in determining the market’s direction over the next 6 months. The Fed may be seeing that the unintended consequences or the costs of QE are outweighing the benefits.
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A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.