The Fed Holds the Keys

07/12/2012 10:30 am EST


Jack Adamo

Editor, Jack Adamo's Insiders Plus

A lot of the market action is similar to what we've seen during the past couple of years, but the Federal Reserve is increasingly driving this bus, writes Jack Adamo in Insiders Plus.

I was surprised to see our hedges fall more than 6% last week. The S&P 500 dropped 0.5%. Usually that would cause the puts to rise 3% to 5%. I guess the “Bernanke put” is more powerful than the SPY put.

Even after the terrible jobs report, the market has stayed relatively calm, averring that it’s only a matter of time before the Fed steps in to juice the it again. With the election so close, that seems likely.

Once again, the ADP private (non-governmental) jobs report was much better than the official non-farm payroll report. A lot of the job losses were in the Federal government, whereas in the last few years, state and local governments were the biggest losers. In aggregate, they make up a much bigger percentage of employment than the Federal government. I forget the exact proportion; I think it’s on the order of six times larger.

Speaking of forgetting, I said a couple weeks ago that I thought Texas had gone bankrupt during the nineties. I got an irate e-mail from a Texan who said it wasn’t true and that the state has a law that requires its budget to be balanced. I trust his memory on this. My recollection was from a banking analyst's remarks about state governments.

It may have been that the state pension fund went bankrupt. On the other hand, I may have gotten the state wrong, but I’m pretty sure I didn’t. It wasn’t important enough to dig into; it was just an offhanded remark. In any case, my apologies to all the proud Texans out there.

Back to the overall economy—the US manufacturing sector contracted in June for the first time since July 2009, as new demand crashed, according to data released Monday by the Institute for Supply Management. The ISM's manufacturing purchasing managers' index fell to 49.7 last month from 53.5 in May. A reading above 50 indicates expanding activity.

The very important new orders index plummeted to 47.8 from 60.1 in May. It was the first contraction in new orders since April 2009.

The exports index dropped to 47.5 in June from 53.5 in May. The exports numbers are especially important. The weak dollar has boosted our exports in the last few years, and has been about the only strong point in a very weak recovery. But Europe’s sliding economy and measures to weaken its own currency are hurting our exports, and therefore company profits and GDP.

US manufacturers saw price pressures continue to ease last month. The prices paid index dropped to 37.0 from 47.5 in May and 61.0 in April. Lower prices for manufacturers sounds good, unless it’s an indication of deflation. Given the other inputs above, that what it looks like to me.

Of course, every week we see at least one economic indicator that, like a rebellious teenager, refuses to go along with the crowd. Spending on construction projects grew in May to its highest level in nearly two-and-a-half years, pushed by increased homebuilding and other private-sector spending.

In any case, all this theory will fall by the wayside as earnings come out. The recent rally is, so far, not qualitatively or quantitatively different from the one we had in 2010 and 2011. After a terrible April and May, we got brief but strong rallies, only to plunge much lower in July or August.

 I think the fundamental pieces are in place for that again this year. Only the mighty Fed stands in the way. In the meantime, we wait.

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