The Fed tomorrow and Your Weekly Update

The financial media is all atwitter this week with news of the Federal Reserve Meeting announcements scheduled for Wednesday.

Based on many of your recent questions and comments, this week’s Update spells out very succinctly our thoughts on the matter at this time. In addition, you might like to glance over the many other bullet points within the Update—they speak to some very interesting things going on at present.

We thought you might enjoy our current “take”, especially since we’ll soon see the results.

All the best,
Lee and Jeremy


This Week’s Quote:
“Those who have knowledge, don't predict. Those who predict, don't have knowledge” ~ Lao Tzu


JL Davis Thoughts This Week:

By the time you are reading this, the Federal Reserve will likely be confirming their decision in regard to slowing down the record $85 billion monthly bond buying spree. It’s about time, in our view.

Though they could just as easily punt, we expect outgoing Chairman Ben Bernanke to announce “tapering.” It will be his last official function and he’ll likely identify the lower unemployment rate and recent good economic news as reasons for the move. As well, he may indulge in a little “Fed Speak” about when we may see upward ticks in interest rates.

Here’s why we think so.
• Better employment statistics: Last week’s announcement put the most recent three-month average hiring at 193,000 and the jobless rate dropped to 7.0%.
• Congress just found at least a little common ground and approved a limited budget deal that takes another partial government shutdown off the table for now.
• The Fed has leaked the idea of a December tapering multiple times to multiple sources, yet markets have remained relatively stable. The same 10-year Treasury that sharply increased earlier in the year hasn’t moved much since it retreated at that time.

We are long term oriented and as such, though we expect short term stock volatility (it’s happened at the end of every Fed “Quantitative Easing” so far) we also expect stock prices to rebound once the initial negative reaction passes. Our reasoning is simple—strong corporate profits, outsized consumer spending, solid manufacturing numbers, and a better employment picture.

Now… let’s see what unfolds.**


Market Week: December 16, 2013

The Markets

Domestic equities suffered for a second week as end-of-year profit-taking was joined by renewed Fed tapering concerns in light of a budget agreement in Washington and encouraging retail sales. Meanwhile, bond investors seemed to hold their collective breath in advance of the Fed's upcoming meeting as the yield on the benchmark 10-year Treasury ended last week where it began.

Last Week's Headlines

• A bipartisan budget conference committee reached an agreement that could mean the end of congressional budgetary standoffs for two years. The agreement, which was passed by the House, is scheduled to be taken up by the Senate this week. The legislation tweaks the sequester cuts that went into effect earlier this year and makes modest reductions in the U.S. deficit over the next 10 years.
• Five regulatory bodies approved adoption of the so-called Volker rule, which is intended to curb certain banking practices that were partly responsible for the 2008 financial crisis. The provisions prohibit proprietary trading by large banks, put limits on market-making and hedging activities, and limit compensation arrangements that encourage the sort of risky trading that led to JPMorgan Chase's costly 2012 "London Whale" debacle. Banks will have until mid-2015 to comply with the regulations.
• The Commerce Department said retail sales rose 0.7% in November, putting them 4.7% higher than a year earlier. It was the biggest increase in five months and was led by sales of cars and electronics.
• Wholesale prices fell 0.1% in November, according to the Bureau of Labor Statistics. That put the annual wholesale inflation rate for the last year at 0.7%.
• Mary Barra, head of General Motors' global product development group, was named the company's chief executive officer. She is the first woman to become CEO of one of the Big Three automakers.


Eye on the Week Ahead

All eyes will once again be on the Fed this week as it meets for the last time this year.

Key dates and data releases: U.S. industrial production, business productivity/costs, international capital flows, Empire State manufacturing survey (12/16); consumer inflation (12/17); Federal Open Market Committee announcement, housing starts (12/18); home resales, Philly Fed manufacturing survey (12/19); quadruple witching options expiration, final Q3 GDP estimate (12/20).

Data sources: All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. News items are based on reports from multiple commonly available international news sources (i.e., wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: U.S. Treasury (Treasury yields); WSJ Market Data Center (equities); Federal Reserve Board (Fed Funds target rate); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold, NY close); Oanda/FX Street (currency exchange rates). Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indexes listed are unmanaged and are not available for direct investment.

Prepared by Lee Davis** and Broadridge Investor Communication Solutions, Inc. Copyright 2013