FYI | Feb 08 2011
By BTIG chief market strategist Mike O'Rourke
The Equity market continued its slow grind higher during today's trading session. Once again, volume was on the light side. All of the major indices registered new recovery highs, and half of the ten primary sectors and nearly half of the twenty-four key industry groups registered new 52 week highs. On the economic front, the Federal Reserve released the December Consumer Credit data. Consumer Credit expanded for the third consecutive month, which is the first such run since July 2008. Since then, there have only been 3 other months of Consumer Credit expansion. Another sign that confidence is improving within this report was the first positive print for the revolving component representing credit cards since Lehman's failure. Since 1968, Credit Card debt has only contracted in 13% of months, and more than a third of those months are post-Lehman.
.
Credit expansion is one of the keys to the recovery sustaining itself. Considering the way consumer and business borrowing has contracted during the Recession, an expansion of credit is a powerful lever that can fuel both the economy and markets. Such expansion of credit on a consistent basis will lead to the organic expansion of M2 money supply. QE is intended to keep the money supply growing, but it is truly artificial M2 growth. Throughout most of the past few years, M2 growth stayed positive but it was generally anemic in the 1%-2% range. In light of the exorbitant amount of QE, that is remarkably weak. This is the primary reason why we are not (and have not been) in the inflation camp. Our belief is that the environment is one that can produce future inflation, but it is too early for that bet; we have preferred a recovery wager, but both have worked. Without a doubt, the first signs of organic M2 money supply growth are emerging. Year over year, M2 growth has increased to 4%, which is still at the low end of the range of the decade prior to the crisis, but the momentum is toward the upside. This is a very positive development for the economy. That being said, markets like to see balance. Expectations will begin to rise for the Fed to allow organic growth to supplant the artificial growth and that a weaning process should commence.
.
Today, Dallas Fed President Richard Fisher, one of the new voting hawks, said that he will not support any further QE expansion beyond the current $600 Billion Treasury buying program which is set to expire in June. We view Philly Fed President Charles Plosser as equally, if not more hawkish than Fisher. We expect him to express similar sentiments. As we noted, markets like to see balance. Markets want to see the FOMC recognize the improvements in the economy since the program commenced. It is not a reversal of policy that is necessary, just a sign that the Central Bank is anchored in the same reality in which the market is. Otherwise, the speculative forces go haywire; some would say they already have. We believe that is the case only in select areas, not Equities. All one needs to do is watch Chairman Greenspan's defense of the last 5 years of his service and one gets an idea of this disconnect. The key battlefield personifying this debate is the 10 Year Treasury yield, which tested the 3.70% level today. The yield is approximately the same level it was a year ago. While we are not in the correction camp, we suspect the Equity market will run into some headwinds. Either the Fed talk will start noting that the pedal needs to come off the accelerator, or the 10 Year Yield will start asking it to do so. The Fed slowing and stopping QE and a 4% 10 Year is not enough to dissuade us from owning Equities, but it is enough to create some bumps in the road.
The views expressed are O'Rourke's, not FNArena's (see our disclaimer).
Disclaimer: https://btig.com/disclaimer.php
