Capitalogix Commentary 10/18/10 - Are Expectations Priced In Yet

Well, it is possible to dig out of a big hole.

Bernanke Outlines 'Case for Further Action' to Spur Economy Forward.

Fed Chair Ben Bernanke has some ideas about pumping more money into the flagging recovery to get us out of a different kind of hole.  In talks last week, he clearly presents the case for more action.

• He predicts a weak recovery and continued high unemployment.
• Bernanke talks about a mandate-consistent 2% inflation rate -- further emphasizing this idea that the Fed will aggressively target positive inflation.

Barry Ritholz posted a word cloud of the speech.  It speaks for itself.

You can read Bernanke's whole speech here.

According to the WSJ, the Fed sent an even clearer message in its written remarks.  How? Bernanke used italics only four times in the report.  Do those four instances constitute a 'font of wisdom' message from the Fed chairman. Let's look at the message.

First, Mr. Bernanke said the Fed takes its cues from two primary objectives: the "longer-run sustainable rate of unemployment" and the "mandate-consistent inflation rate." He later made clear what the Fed thinks about both right now: Inflation is "too low" and unemployment "too high."

That makes further Quantitative Easing pretty much a given, to the relief of investors who have already priced it in with a 12% surge in the S&P 500 since late August.

However, some commentators (like David Rosenberg) are skeptical about how much of the gain is priced-in already.  His message: Sell the news, Quantitative Easing will do more harm than good.

Market Commentary

Even though stocks are overextended after a seven week run, I have not yet seen compelling evidence of weakness that would signal the start of a correction or pullback.

Nonetheless, I'm watching a few things closely.  For example, we are seeing some negative divergences in the banking and financial sectors.  They have not enjoyed the same success as the rest of the market over the last several weeks, and this may be telling us something.

On the other hand, the Nasdaq 100 Index (comprised of the large capitalization tech stocks) is leading the move higher. The recent strength in this index not only made a new 52-week high last week, it also hit levels not seen since late 2007.  Should the S&P 500 Index follow this leader, the short-term future looks good.

Business Posts Moving the Markets that I Found Interesting This Week:

• Currency Wars Prove Decoupling Is a Myth. (MarketWatch)
• IMF Cuts U.S. & World 2011 Growth Outlook.  (StreetInsider)
• Why Is Wall Street Like a Church? Buffett Supplies The Answer. (InestmentNews)
• Scary Smart: The Next Trillion-Dollar Industry. (Forbes)
• Obama's Fed Nominee Wins Nobel Prize. (TDB)
• More Posts Moving the Markets.

Lighter Ideas and Fun Links that I Found Interesting This Week

• Google's Billionaire CEO Eric Schmidt Sits Down with Stephen Colbert. (Forbes)
• Heavy Drinkers Outlive Non-Drinkers, Study Finds. (Time)
• De-Bunking Urban Myths: At Snopes, Rumors Are Held Up to the Light. (NYTimes)
• Is the 2nd Generation iPad Coming This Holiday Season? (iPadGuide)
• Cyberwar: Implications of the Stuxnet "Cyber-Missile". (Economist & Eset)
• More Posts with Lighter Ideas and Fun Links.

Related articles

• What Bernanke left out (ftalphaville.ft.com)
• El-Erian: What did Bernanke tell us this morning? (ftalphaville.ft.com)
• Fed Is Fooling Itself With Inflation Targets (minyanville.com)