Happy Spring (we earned it!)

 "You know, this is the kind of term it's hard to define, but, you know, it probably means something on the order of around six months or that type of thing."

-Janet Yellen

The new Federal Reserve chairwoman, Janet Yellen, had her first press conference and it was an interesting display of a battle of wills, where both sides blinked. Initially, I felt Yellen worked too hard to convince the Street that the Fed was still its friend, even as the current pace of tapering gets them closer to the real moment of truth - rate hikes. The Fed made it clear that as long as (official) inflation readings are subdued, it is not going to respond to any phony-baloney unemployment rates. Lower rates have been largely a function of a mass exodus from the jobs market all together.

When she was pleading with the market to hang in there, the selling eased and it felt like red arrows could become green, but then something interesting happened. The Fed Chairwoman slipped back to her Brooklyn roots and offered candid comments about a timeline for rate hikes. After promising rates would stay low for a "considerable time," someone asked during the question and answer period 'what that really meant.' Wall Street hated the answer! Her reply "six months" was shocking, which sent the market into a tailspin.

The babies on the Street ran like scalded dogs but really, they were more like spurned lovers.

At this point it is sickening, and to the point where the Fed can only move out of the way. If the economy is coming on, and if there is a chance of a rate hike in about a year that would mean the economy is coming on like gangbusters. It is hard to fathom that the US economy is coming on like gangbusters, especially if we think a 7.0% growth rate for China presages a Great Depression in that country, but at this stage a 4.0% growth would suffice. Break out the confetti and pop the champagne; except this event will be a punch in the gut for the easy money crowd.

I have done a lot of work on this, and the market will dip when the Fed begins to hike rates. However, I do not think it stays down and should be an event, where people are looking to buy weakness and not run for the hills.

Don't Jump!

What would happen if Yellen really reached back to her New York roots? I am talking old-school Brooklyn, not the placid hipster enclave it has become, but the time when everyone knew how to put up their dukes. Those pansies in the canyons of lower Manhattan were never tough. Of course, considering how coddled Wall Street has been, it is no wonder there is very little tolerance for pain or even, near-term hiccups.

Yesterday, a reality check that rates have to move higher in an improving economy saw a knee-jerk versus those infamous scenes of brokers flinging themselves out of windows at the onset of the Great Depression.

There is no doubt that Madame Chairman will study the tape and see where her cavalier honesty shook the fast money crowd. The thing is she may actually decide to go with it for now. If the Genie is out of the bottle, why go through the drama again. Yes, boys and girls, the Fed will have to raise rates and I suspect they will actually drag their feet and allow inflation to get in front of actions. The game of catch up will add tension to the market. (I wrote a piece on how rate hikes impacted the two previous market rallies, and it is available for anyone on the website or ask your representative.)

The actual event is probably further off than Yellen hinted, and I think the Street realized that when the markets regained ground going into the close. On that note: I never make any moves immediately after the Fed decision is released, as I find the remaining two hours of trading a little more emotional than normal. Today's session will give us a better feel for what calmer heads and deeper pockets think about the Fed, and of course that slip of the tongue that opened a trapdoor.

For the most part, yesterday was a typical Fed day filled with drama queens and reactionaries; however,  one thing stood out to me as kind of odd. The Fed offered new guidance for the economic projects and GDP worsened, but unemployment improved...how does that happen? This reverses the notion of a jobless recovery and really buys the Fed all the time they want, since it is completely clear that rates will not budge with deflation being a greater risk than inflation.

Best Case Scenario	2014	2015	2016
GDP	3.0	3.2	3.0
December	3.2	3.4	3.2
Unemployment Rate	6.1	5.6	5.3
December	6.3	5.8	5.3

Can She Control the Troops?

Target federal funds rate at year-end (Percent)	2014	2015	2016
0.25	15	2
0.50		2
0.75		2	1
1.00	1	5
1.25		1	1
1.50		1
1.75			2
2.00		1	3
2.25		1	2
2.50			1
2.75			2
3.00		1	1
3.25
3.50			1
3.75
4.00			1
4.25			1

Right now, everyone at the Federal Reserve is on the same page.  Only one participant thinks the Fed target funds rate should be more than 0.25%. Next year it becomes trickier as doves and hawks fight for influence with other members, a majority of whom may leap up to a consensus of 1.00% or higher.

With GDP at a still pedestrian 3.2%, these members must see a massive return of people to the jobs market and wage increases. That would move us toward a traditional definition of inflation if we get too many people chasing fewer goods and services.

The fact is we are ahead of ourselves and the Fed has a delicate balancing act on their hands.

Janet Yellen is going to have to be tough at some point and the market will correct under her watch, even though it will happen from the weight of Bernanke's genius. When Wall Street throws its big hissy fit down the road, the Fed chairwoman had better do her best
"De Niro" impersonation and stare them down.

 "You must be talking to me...I'm the only one here."

Today's Session

The market still under pressure which is great: I like when weak sisters are shaken out and great stocks get cheaper, although the great names haven't yielded much ground lately.

I like news from Lennar (LEN), as our theme has been the rebuilding of America, coupled with high cap ex spending and mergers designed to handle an improvement in demand.

Comments

When all the resources of the CIA and the NSA can't identify what happened to a $250 to $300 million airplane and its 239 passengers, we know the US is lost in a sea of futility. That's symptomatic, but so are interest rates and potential inflation. Meanwhile, our Prez is a pushover for everybody from Putin to the Syrians, Libyans, Egyptians and Iranians. He's incapable of decisive action like approving the Keystone pipeline, which would promptly send oil prices down and give Putin the kick in the pants that he needs. The real question is: can America survive 3 more years of this? Get ready for a crash. Dennis Howard on 3/21/2014 10:28:26 AM

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