Up and Down Wall Street
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SATURDAY, APRIL 7, 2012
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What the Bard Would Ask Ben
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By RANDALL W. FORSYTH
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Last week, the wind shifted again, after release of the minutes of last month's FOMC meeting, which showed that support on the panel for a third round of quantitative easing had dwindled to just "a couple" of members— from "a few" at the previous confab.
QE or not QE? That is the question.
.
In Hamlet-like fashion, the financial markets have been contemplating the possibilities of further Federal Reserve securities purchases, which central banks prefer to call "quantitative easing"—instead of the less formal but more descriptive term of money-printing.
.
After QE1 was launched at the depth of the financial crisis in March 2009, QE2 was floated at the end of August 2010 by Fed Chairman Ben Bernanke and set sail the following November. While there's no QE at the moment, the Fed is rearranging the deck chairs in its portfolio in what it's calling Maturity Extension Program, swapping shorter notes for longer-term notes and bonds and mortgage-backed securities.
All of these maneuvers were aimed at engineering ultra-low interest rates, which are supposed to provide some steam to propel the thus-far sluggish economic recovery.
.
In the past few weeks, expectations about a new round of quantitative easing, QE3, have switched back and forth with the latest shift of the economic winds.
.
After the March 13 meeting of the Federal Open Market Committee, the wording of the panel's policy statement seemed to lower odds of QE.
.
Then came an unprecedented public-relations blitz by Bernanke, featuring a positive cover story in the Atlantic; a series of lectures to economics students at George Washington University, which were Webcast for the public's perusal; a major policy speech to the National Association for Business Economics on March 26, in which the Fed chief voiced concerns about the strength of the labor market; and finally, an interview with Diane Sawyer on the ABC Evening News the following day.
.
All those appearances provided Bernanke with forums to emphasize his view that the Fed shouldn't be too quick to move away from its ultra-easy policies—a view that had begun to attract increasing opposition from some economists and financial-market watchers as well as some Fed district presidents.
Last week, the wind shifted again, after release of the minutes of last month's FOMC meeting, which showed that support on the panel for QE had dwindled to a just "a couple" of members from "a few" at the previous confab.
.
Global markets cratered in reaction to the prospect of no further monetary juice, with equity markets falling from 1% Wednesday in the U.S. to more than 2% in Europe and Asia, with financials the hardest hit.
.
But the winds reversed again Friday, after the U.S. Labor Department reported distinctly punk employment data for March. But most bourses were shuttered for the Good Friday holiday, except for equities futures trading through 9:15 a.m. Eastern daylight time, 45 minutes past jobs report release, while trading in bonds carried on until noon.
.
While there were relatively few around to hear the proverbial tree fall, the data did send reverberations. Stock futures lost more than 1%, while Treasury yields moved sharply lower to reverse nearly all of the their previous jump, kicked off in the wake of the March FOMC meeting. In other words, sentiment has all but come around full circle in the space of about three weeks.
.
What caused the reversal was news that nonfarm payrolls expanded by only 120,000 last month, far short of the 200,000-plus prognostications, with even more weakness apparent below the surface. Work-week hours edged down, as did aggregate hours worked, which offset the positive impact on pay packets from a 0.2% uptick in average hourly earnings.
.
Philippa Dunne and Doug Henwood of the Liscio Report note that temporary hires shifted into reverse last month, to minus 8,000 from up 55,000, while retail jobs shrank another 34,000 in March on top of February's 29,000 drop.
.
Government employment fell by only 1,000, as the widespread sacking of state and local workers appears to have been halted. Let's see what happens when a new fiscal year begins July 1 in most states, and budgets have to be balanced and deficits closed, again.
.
.
In Hamlet-like fashion, the financial markets have been contemplating the possibilities of further Federal Reserve securities purchases, which central banks prefer to call "quantitative easing"—instead of the less formal but more descriptive term of money-printing.
.
After QE1 was launched at the depth of the financial crisis in March 2009, QE2 was floated at the end of August 2010 by Fed Chairman Ben Bernanke and set sail the following November. While there's no QE at the moment, the Fed is rearranging the deck chairs in its portfolio in what it's calling Maturity Extension Program, swapping shorter notes for longer-term notes and bonds and mortgage-backed securities.
All of these maneuvers were aimed at engineering ultra-low interest rates, which are supposed to provide some steam to propel the thus-far sluggish economic recovery.
.
In the past few weeks, expectations about a new round of quantitative easing, QE3, have switched back and forth with the latest shift of the economic winds.
.
After the March 13 meeting of the Federal Open Market Committee, the wording of the panel's policy statement seemed to lower odds of QE.
.
Then came an unprecedented public-relations blitz by Bernanke, featuring a positive cover story in the Atlantic; a series of lectures to economics students at George Washington University, which were Webcast for the public's perusal; a major policy speech to the National Association for Business Economics on March 26, in which the Fed chief voiced concerns about the strength of the labor market; and finally, an interview with Diane Sawyer on the ABC Evening News the following day.
.
All those appearances provided Bernanke with forums to emphasize his view that the Fed shouldn't be too quick to move away from its ultra-easy policies—a view that had begun to attract increasing opposition from some economists and financial-market watchers as well as some Fed district presidents.
Last week, the wind shifted again, after release of the minutes of last month's FOMC meeting, which showed that support on the panel for QE had dwindled to a just "a couple" of members from "a few" at the previous confab.
.
Global markets cratered in reaction to the prospect of no further monetary juice, with equity markets falling from 1% Wednesday in the U.S. to more than 2% in Europe and Asia, with financials the hardest hit.
.
But the winds reversed again Friday, after the U.S. Labor Department reported distinctly punk employment data for March. But most bourses were shuttered for the Good Friday holiday, except for equities futures trading through 9:15 a.m. Eastern daylight time, 45 minutes past jobs report release, while trading in bonds carried on until noon.
.
While there were relatively few around to hear the proverbial tree fall, the data did send reverberations. Stock futures lost more than 1%, while Treasury yields moved sharply lower to reverse nearly all of the their previous jump, kicked off in the wake of the March FOMC meeting. In other words, sentiment has all but come around full circle in the space of about three weeks.
.
What caused the reversal was news that nonfarm payrolls expanded by only 120,000 last month, far short of the 200,000-plus prognostications, with even more weakness apparent below the surface. Work-week hours edged down, as did aggregate hours worked, which offset the positive impact on pay packets from a 0.2% uptick in average hourly earnings.
.
Philippa Dunne and Doug Henwood of the Liscio Report note that temporary hires shifted into reverse last month, to minus 8,000 from up 55,000, while retail jobs shrank another 34,000 in March on top of February's 29,000 drop.
.
Government employment fell by only 1,000, as the widespread sacking of state and local workers appears to have been halted. Let's see what happens when a new fiscal year begins July 1 in most states, and budgets have to be balanced and deficits closed, again.
.
Even the one ray of good news, a one-tenth percentage-point downtick in the
unemployment to 8.2%, had plenty of clouds around it. That wasn't caused by more
folks finding work, but a 164,000 shrinkage of the labor force in the household
survey.
.
Paul Kasriel, Northern Trust's chief economist, alerts us that this wasn't because of "discouraged" or "marginally attached" workers who dropped out of the labor force. Even adding them back in, the jobless rate dipped, he points out. Still, the labor-force participation rate dropped 0.1 percentage point, to 63.8%, and the percentage of the population employed slipped to 58.5%. Demographics explains part of that, with baby boomers moving into retirement,including Kasriel in a few weeks!
.
Be that as it may, Bank of America Merrill Lynch economists note that, even while the headline jobless rate is down substantially from the peak of 10% in late 2009, the employment-to-population rate has been flat for the last three years. "Chairman Bernanke has focused on this metric because it gives a better sense of labor-market slack," they write.
.
And for all the apparent collegiality from the airing of diverse views at the Fed, only one vote really counts—Bernanke's—writes Michael Lewis, who heads the Free Market Inc. consultancy in Chicago.
.
His March 26 speech reflects "Bernanke's true opinion of the economy, namely that it is likely too fragile to survive without the Fed's helping hand. It also seems to reflect a somewhat delusional view of what the Fed can do. While it can surely help to stabilize a crisis, in the medium-to-longer run, monetary policy determines nominal growth, not real gains."
.
But for the financial markets, QE lowers yields on risk-free government securities and puts investors on a forced march to riskier investments in order to earn a decent return. Some of that has trickled down to housing, where near-record-low mortgage rates have contributed to record affordability, which has produced the barest uptick in building. But the financial markets have been major beneficiaries of central-bank largesse.
.
Ed Yardeni, who heads the advisory firm bearing his name, points out that between the European Central Bank's $1 trillion provision to euro-zone banks and the Fed's Maturity Extension Program announced last September, corporate bond yields have tumbled. U.S. companies around the world issued $1.14 trillion in the first quarter, nearly matching the record $1.16 trillion issued in the first quarter of 2009 as the financial crisis began to ease. "Odds are that a significant portion of these funds will be used to buy back stock," Yardeni writes.
.
Financials have been the big gainers from the lows of last Oct. 3, he adds, "as a result of the latest rounds of central-bank liquidity programs and relatively stress-free stress tests on the banks."
.
But that ignores the unintended consequences of Fed QE, says Lacy Hunt, chief economist of Hoisington Management. The Fed's liquidity expansion lifts stock and commodity prices, but once it's released, the central bank can't control where it goes. Near-term, the pressure is felt in gasoline prices.
.
But, he adds, it doesn't benefit take-home pay, which is showing up in tax receipts. Prior to the latest jobs report, the Labor Department reported an increase of 1.8 million jobs in the preceding five months. But in that span, Hunt observes personal-income tax receipts to the U.S. Treasury are down 0.2% (from last year). "It's an indication of the unproductive nature of the policies, which do not generate income growth," he says. "Real disposable income per household is how we measure prosperity, not [gross domestic product]."
.
Even though QE hasn't produced prosperity, more weak reports like March's jobs data may tip the balance in favor of further Fed moves. In fact, the more dire the data and the financial markets' action, the better the odds for Bernanke & Co. to act. The April 24-25 FOMC meeting probably is too soon. Mark the June 19-20 confab on your calendars as the first likely chance for QE3, although a convenient crisis could do the trick.
.
IF, FOR THE MOMENT, THE STOCK MARKET can't rely on the Fed to supply it with liquid courage (forgive me for repeating a phrase I used in the weekday version of this column at Barrons.com), it will fall to earnings to carry it higher. And earnings will very much be in focus when Alcoa (ticker: AA) kicks off the first-quarter earnings season Tuesday.
.
Barclays Capital strategists Barry Knapp and Eric Slover write that profit margins for the Standard & Poor's 500 companies are estimated to have declined in the quarter just ended, despite falling commodity prices, and reflecting slowing global growth. The same forces that power profits also push up raw-material prices; higher prices correlate with higher earnings. Now, material costs, as tracked by the CEB raw-materials index, have declined substantially—even as energy and refined-product prices sit near record highs.
.
If overall commodity-cost pressures aren't the culprit, margins are under pressure because of the slowing growth outlook, especially in emerging markets, which hurts sales. "Given [that] many S&P 500 companies rely on international markets for incremental revenue growth, we believe this slowdown is reflected in top-line expectations, where growth is expected to slow from about 10% to mid-single digits for full-year 2012." The Barclays team terms this a "mid-cycle slowdown." Investors will be looking for confirmation—or lack thereof—in companies' forecasts with their results.
.
.
Paul Kasriel, Northern Trust's chief economist, alerts us that this wasn't because of "discouraged" or "marginally attached" workers who dropped out of the labor force. Even adding them back in, the jobless rate dipped, he points out. Still, the labor-force participation rate dropped 0.1 percentage point, to 63.8%, and the percentage of the population employed slipped to 58.5%. Demographics explains part of that, with baby boomers moving into retirement,including Kasriel in a few weeks!
.
Be that as it may, Bank of America Merrill Lynch economists note that, even while the headline jobless rate is down substantially from the peak of 10% in late 2009, the employment-to-population rate has been flat for the last three years. "Chairman Bernanke has focused on this metric because it gives a better sense of labor-market slack," they write.
.
And for all the apparent collegiality from the airing of diverse views at the Fed, only one vote really counts—Bernanke's—writes Michael Lewis, who heads the Free Market Inc. consultancy in Chicago.
.
His March 26 speech reflects "Bernanke's true opinion of the economy, namely that it is likely too fragile to survive without the Fed's helping hand. It also seems to reflect a somewhat delusional view of what the Fed can do. While it can surely help to stabilize a crisis, in the medium-to-longer run, monetary policy determines nominal growth, not real gains."
.
But for the financial markets, QE lowers yields on risk-free government securities and puts investors on a forced march to riskier investments in order to earn a decent return. Some of that has trickled down to housing, where near-record-low mortgage rates have contributed to record affordability, which has produced the barest uptick in building. But the financial markets have been major beneficiaries of central-bank largesse.
.
Ed Yardeni, who heads the advisory firm bearing his name, points out that between the European Central Bank's $1 trillion provision to euro-zone banks and the Fed's Maturity Extension Program announced last September, corporate bond yields have tumbled. U.S. companies around the world issued $1.14 trillion in the first quarter, nearly matching the record $1.16 trillion issued in the first quarter of 2009 as the financial crisis began to ease. "Odds are that a significant portion of these funds will be used to buy back stock," Yardeni writes.
.
Financials have been the big gainers from the lows of last Oct. 3, he adds, "as a result of the latest rounds of central-bank liquidity programs and relatively stress-free stress tests on the banks."
.
But that ignores the unintended consequences of Fed QE, says Lacy Hunt, chief economist of Hoisington Management. The Fed's liquidity expansion lifts stock and commodity prices, but once it's released, the central bank can't control where it goes. Near-term, the pressure is felt in gasoline prices.
.
But, he adds, it doesn't benefit take-home pay, which is showing up in tax receipts. Prior to the latest jobs report, the Labor Department reported an increase of 1.8 million jobs in the preceding five months. But in that span, Hunt observes personal-income tax receipts to the U.S. Treasury are down 0.2% (from last year). "It's an indication of the unproductive nature of the policies, which do not generate income growth," he says. "Real disposable income per household is how we measure prosperity, not [gross domestic product]."
.
Even though QE hasn't produced prosperity, more weak reports like March's jobs data may tip the balance in favor of further Fed moves. In fact, the more dire the data and the financial markets' action, the better the odds for Bernanke & Co. to act. The April 24-25 FOMC meeting probably is too soon. Mark the June 19-20 confab on your calendars as the first likely chance for QE3, although a convenient crisis could do the trick.
.
IF, FOR THE MOMENT, THE STOCK MARKET can't rely on the Fed to supply it with liquid courage (forgive me for repeating a phrase I used in the weekday version of this column at Barrons.com), it will fall to earnings to carry it higher. And earnings will very much be in focus when Alcoa (ticker: AA) kicks off the first-quarter earnings season Tuesday.
.
Barclays Capital strategists Barry Knapp and Eric Slover write that profit margins for the Standard & Poor's 500 companies are estimated to have declined in the quarter just ended, despite falling commodity prices, and reflecting slowing global growth. The same forces that power profits also push up raw-material prices; higher prices correlate with higher earnings. Now, material costs, as tracked by the CEB raw-materials index, have declined substantially—even as energy and refined-product prices sit near record highs.
.
If overall commodity-cost pressures aren't the culprit, margins are under pressure because of the slowing growth outlook, especially in emerging markets, which hurts sales. "Given [that] many S&P 500 companies rely on international markets for incremental revenue growth, we believe this slowdown is reflected in top-line expectations, where growth is expected to slow from about 10% to mid-single digits for full-year 2012." The Barclays team terms this a "mid-cycle slowdown." Investors will be looking for confirmation—or lack thereof—in companies' forecasts with their results.
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