It is looking like the stock market turmoil that kicked into high gear last week has rolled over to the current trading week, as concerns about China have continued the sell-off. Aside from the latest economic readings that point to a continued contraction in the China manufacturing economy in June, concern is rising about liquidity in China. While those factors are weighing on the U.S. stock market, the overriding driver of the recent stock market fall was Fed Chairman Ben Bernanke and his “IFy” comments last week. I will have more commentary on that situation further below.
As tends to be the case, the financial media is spinning a doomsday scenario based on a cursory reading of Bernanke’s comments. That’s added fuel to the market’s fall-off fire. But to the trained investor like you and me, when we understand what Mr. Bernanke said, this pullback is likely to be short lived. It also offers an opportunity to buy shares selectively at bargain prices in the coming days.
Before I tell you why that is the case, let me recap the latest economic data because it helps support what I’m going to share with you about the Fed’s policy statement.
Global economic data points to tepid growth ahead. Last week, we received the initial June purchasing managers index (PMI) readings for several key global economies. These data points are key indicators of manufacturing and service demand in each of these territories. I keep a careful watch on them each and every month. I also recap them for you in each monthly issue of PowerTrend Profits.
The June PMI reading for China pointed to a further contraction from May and was not only below the expansion/contraction line of 50, it was also the lowest reading in the last nine months. More worrisome, the orders component that indicates near-term activity also fell month over month. The euro zone reading fared a little better, as its flash June PMI reading suggested a slowing rate of contraction, while the reading for the United States was basically flat with May, indicating a modest expansion. Sifting below the July U.S. figure, however, the news was mixed — orders improved, but that was offset by falling employment and a pick-up in input prices month over month.
Combine this situation with other recent data — consumer spending, industrial production and durable orders, to name a few — and it points to a domestic economy that remains stuck in second, if not first, gear.
Parsing and Understanding Bernanke’s Words. With that reality in mind, let’s move on to what Fed Chairman Ben Bernanke said on Wednesday. Here is a key quote:
“Going forward, the economic outcomes that the Committee sees as most likely involve continuing gains in labor markets, supported by moderate growth that picks up over the next several quarters as the near-term restraint from fiscal policy and other headwinds diminishes. We also see inflation moving back toward our 2 percent objective over time. If the incoming data are broadly consistent with this forecast, the Committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year; and if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around midyear.”
I find that it always is important to parse words from a company’s management team, political figures and, yes, even Ben Bernanke in order to decipher what they are really saying. As I’m sure you’re aware, what is really said can be twisted and shaped in order to spin a compelling headline by the media. I’m afraid that those on CNBC, Fox and others successfully did this once again.
So many IFs in Bernanke’s outlook, it looks like Swiss Cheese. When I read the above phrasings, what jumps out at me are words such as “most likely,” “if the incoming data are broadly consistent with this forecast,” “if the subsequent data remain broadly aligned with our current expectations for the economy” and “in this scenario.” To me, this sounds like the Fed’s course, if the domestic economy continues to improve and remains on pace to actually hit the Fed’s 2014 Gross Domestic Product (GDP) forecast of 3-3.5%, up from 2.3-2.6% this year.
So, IF the economy improves from the current quarter’s GDP reading that is likely to fall in the 1.5-2% range and strengthens even further in the coming four quarters, then the Fed will taper. Based on the data we’ve been getting and I mentioned above, the magnitude of the stock market sell-off during the last few days reminds me of a toddler that has just heard “if you don’t behave you will not get any candy.” Much like the toddler, the market simply heard that the candy was going away and totally missed the IF.
I’m not alone in this view. Given the tepid economic data of late, my view is that Bernanke was premature in sharing his potential taper timetable. Even Federal Reserve Bank of St. Louis President James Bullard agrees with me — “A more prudent approach would be to wait for tangible signs that the economy was strengthening and that inflation was on a path to return toward target before making such an announcement.” Bullard goes on to say that “…the Committee’s decision to authorize the chairman to lay out a more elaborate plan for reducing the pace of asset purchases was inappropriately timed.” It seems Bernanke was hoping the market would pay closer-than-usual attention to what he was trying to say but failed to communicate properly.
My advice to subscribers to PowerTrend Profits and ETF PowerTrader during the last few days has been to remain calm because the reasons we bought the positions we hold remain intact. In some cases, we’re using the weakness to add selectively to our holdings to drive even bigger profits in the coming weeks and months.
New Bankrate.com survey confirms Cash-Strapped Consumer view. A new study has found that more than three-fourths of Americans are living paycheck to paycheck. The study, conducted by Bankrate.com, reports that 76% of those surveyed don’t have enough money in the bank to cover six months of expenses. The study also found that 50% have three months saved, and 27% have no savings at all. This view is a confirming point for my Cash Strapped Consumer perspective. We’ve made some hefty profits by trading Consumer Staples Select Sector SPDR Fund (XLP) and related call options, as well as by investing in McCormick & Co (MKC) and Mondelez International (MDLZ) several months ago. All told, my ETF PowerTrader subscribers made nearly 300% by trading with me on XLP, while PowerTrend Profits subscribers have garnered double-digit percentage gains with MKC and MDZ. With that aspect of my Rise and Fall of the Middle Class PowerTrend intact, and given the recent market pullback, I’ll be looking for additional ways for my subscribers to profit in the coming weeks and months.
To read my e-letter from last week, please click here. I also invite you to comment about my column in the space provided below.
- Watch my recent appearance on The Wall Street Report where I shared my views on the economy and the stock market, as well as offered a new stock pick.
- Each Friday, I’ll be joining The Andrea Tantaros Show to dissect the latest economic and stock market news with Andrea and her listeners. You can listen to that discussion by clicking here.
- I’ll be hosting several panels at FreedomFest this year, which takes place July 10-13 in Las Vegas. More details on the show can be found here.
- I’ll be making a presentation to the Maryland SIG chapter of the American Association of Individual Investors on July 17. Be sure to attend if you’re nearby — more information can be found here.