What’s the Plan, Ben?

Select sectors are looking ripe for the picking, no thanks to a lack of guidance from the Fed

   

While Monday’s economic data appeared to placate investors, all eyes remain on Friday’s non-farm payroll report amid an admittedly data-driven Fed seeking a solid employment situation. The consensus for the jobs report is for gains of 163,000, which I suspect is a bit generous.

Looking a little farther afield today, I wanted to pass on an interesting insight on the Fed from Bob Eisenbeis, who is chief monetary economist at Cumberland Advisors, and a former research director at the Federal Reserve Bank of Atlanta.

Eisenbeis noted that since the Fed’s meeting on June 22, credit markets have been in turmoil and the Federal Reserve officials don’t seem to understand why. Several Fed officials have spoken in public forums since then, stating that Chairman Ben Bernanke was also clear when he said that future changes in quantitative easing would be “data dependent.”

One official, Narayana Kocherlakota of the Federal Reserve Bank of Minneapolis, even went so far as to say that he would prefer to consider starting the phase out of QE by using 7% unemployment as a trigger, not the end point.

SPX71 Whats the Plan, Ben?
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However, even saying that much puts too many questions into play, Eisenbeis argues. What is the Committee’s decision as to when the phase-out will begin, and how long will the phase-out process last? What is the trigger? Is there even a trigger? To whom should one listen? Every Fed participant seems to offer their own clarification that muddies the answer, all of which look like a coordinated effort to say, “We aren’t going to change the Fed Funds rate anytime soon.”

This is a messed-up way to communicate, and thus appears to be a major misstep. Eisenbeis points out that what the market really wants to know are the answers to two questions: First, what incoming data will be used to make decisions, and second, how will policy depend upon the incoming data?

He adds that markets need data-driven answers to the kinds of questions that drive investment decisions, and their timing says further that they “will not be satisfied with fuzzy answers, especially fuzzy answers that don’t add up.” A good place to start: Does the Fed expect to cut back Treasury purchases by $5 billion for every 0.1% improvement in the unemployment rate? Or is there some other path in mind?

Bottom line: If the Fed does not have such a plan in place, then it shouldn’t say, “It depends on incoming data.” And all the hubbub of the past two weeks has revolved around bulls and bears duking out this debate in the marketplace instead of hearing firm answers from monetary policy leaders.

Amid this uncertainty, I’m looking to short agricultural chemicals and media stocks, but I’m bullish on regional banks, and I may also recommend new long-side trades in defense/aerospace and gold/copper mining. Splunk (NASDAQ: SPLK) rose nicely after my last recommendation, and I plan to trade some other new, low-priced, small-cap growth stocks in the near future as well.

A word of caution: I feel that with the market being so whippy these days, the best course is to use conservative targets and keep grinding out some 3% to 9% winners until some stability reemerges.

 

InvestorPlace advisor Jon Markman operates the investment firm Markman Capital Insight. He also writes a daily swing trading newsletter, Trader’s Advantage, which aims to capture profits of 15% to 40% and often as much as 100% to 200% in less than 90 days. 

Professional traders and hedge funds make huge profits off volatility.  Now, Jon’s service CounterPoint Options levels the playing field with the first service geared towards helping individual traders make steady, consistent profits with the VIX.  Get more information on Trader’s Advantage and CounterPoint Options today.


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