Wednesday, August 11, 2010

Did the Fed Mess Up?

Stocks stumbled Wednesday in an apparent rebuke of the Fed's announced plans to start using proceeds from mortgage- and agency-backed principal payments to buy U.S. Treasuries.  In recent trading, the Dow was down 269 points and the S&P was off 2.8% amid notable weakness in big-cap financials like Citigroup and JPMorgan, tech stocks like Intel and industrial names like Ford and GE.

Dan Greenhaus, chief economic strategist at Miller Tabak, and Michael Pento, senior economist at EuroPacific Capital, don't agree on much, but they do agree the Fed's announcement yesterday was a mistake.
"The Fed acknowledged that GDP growth was slowing," Pento says. "However, their symbolic move isn't really going to do much to boost economic growth."  Greenhaus agrees the Fed needs to do more if they really want to boost the economy but notes negative economic data is also weighing on the market today, including:
  • A day after its trade surplus rose to an 18-month high, China reported industrial production slowed in July, as did urban fixed-asset investment.
  • Japan machine tool orders rose a weaker-than-expected 1.6% last month.
  • The U.S. trade deficit rose 19% in June to $49.9 billion, its highest level since October 2008.
The 3% rise in U.S. imports last month is arguably a bullish sign of a recovering consumer, as were the stronger-than-expected results from Macy's. But a higher trade deficit subtracts from GDP because "we don't measure gross domestic consumption, we measure gross domestic product," Pento says. "The fact that consumers are borrowing more to consume more is not something we should cheer about."  Pento also argues the market is weak today because the Fed "put an anchor" around the dollar by announcing its plans for a second round of quantitative easing.

Greenhaus disagrees with Pento on the impact of a weaker dollar - in the short term - setting up a broader debate about the value and utility of government stimulus, which you'll see in an upcoming segment.


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