Interpreting the Fed Minutes: Nothing but Pillow Talk?

Today’s release of the FED meeting minutes from the September meeting of the minds proved to be one of the more exciting…but does it signal a major trend change or is this just what they used to call “pillow talk?”
There was no mistaking the market’s reading as a whole heap of buyers stepped up to push broader equities higher at 2 p.m. when the minutes were released:


Meanwhile, the FED’s concerns over a rising dollar (which they acknowledge has more to do with global weakness) hit UUP while it was already on the ropes after two weak days:


The real standout for the day was equity precious metals where after a rough third quarter (down 5.08% versus the S&P 500 up 2.53% for a 761 bps spread) it finally found it’s mojo and was up 7.44% although some profit taking (or loss covering) late in the day trimmed the gains.


So what does this mean for your trades? Short term a lot, longer term….probably not much.

Let’s start with the short-term view. Today’s action definitely will help break the trend of on-going weakness as traders get their first positive news from the FED in over two weeks. As you can see from this 3 month chart of the S&P 500, the index has finally broken out of its downtrend pattern on heavier volume signaling a move back to 1980 or at least a consolidation is in the cards with the 50 day MA hanging above us. With the pullback in the dollar and rally in gold, the easy answer seems to be that the party is back on.


But take a look at that chart again and you’ll see that MACD rolling over and the market trying to fight its way to a bottom near the 1940 mark while we have strong support back at 1904.  The Yinzer Analyst’s momentum scores bottomed out recently for the S&P 500 indicating that a bounce of some kind was overdue. And look again at UUP; it’s been heading lower for several days after becoming heavily overbought (rough being a hedge fund hotel) and was due for a pullback anyway. So far, the FED minutes are just an accelerant on an existing market trend.

And what about our friend equity precious metals? Having invested in both the miners and metal (both financially and mentally) I can tell you that the golden goddess is not for the faint of heart because she is fickle with her love. From the recent peak on August 12th to the end of yesterday, GDX was down 24.29% versus the S&P 500 being off .09%. Let that sink in for a moment and then remember that for the month ending 9.30.14, the GDX 3 year annualized return was a -25.78% versus the S&P 500 up 22.05%. Now having said on more than one occasion, “the miners really can’t get much cheaper” (they did), I’m going to say again, they really couldn’t get much cheaper in 2014 as they retraced their entire 2014 advance and were back to the lows of the year where they have strong support.


In other words, don’t wet yourself over the miners just yet. Enjoy a rally that may last a few days and take your profits (or reduced losses) when you can.

Longer-Term View:
So what can we take away from the FED minutes that doesn’t actually involve having to read said minutes? The general viewpoint everyone will be reading tomorrow is that the FED is again leaning dovish, is concerned about the rising dollar and its impact on inflation in the U.S. and weak global growth. What they’ll ignore or at the least gloss over is that the FED is still on-track for raising rates in 2015 and if you look at the colorful charts in the back, several participants now expect rates to be slightly higher in 2015 and 2016 than they did in June.

And yes, the Federal Reserve minutes do show some anxiety about the impact of a rising dollar on inflation but two key points to remember are this:

  1. Ben Bernanke famously acknowledged that QE had a negative impact on the dollar and led to large capital flows to emerging markets, causing unstable conditions and rapid EM currency appreciation. Not only did this not upset him, at the time I felt it was an intended outcome of his QE programs as it slowly helped to restore trade imbalances. I’m sure his successors must have known that ending QE would have the opposite effect, especially with a weaker Europe and China.
  2. The FED’s goal has been to keep inflation above 2% by raising velocity, not be trying to weaken the dollar to create commodity inflation. If you can raise velocity, you’ll raise consumption creating new jobs, raising wages, etc. Call it a virtuous cycle. If you simply devalue the dollar to create inflation (which is way harder than it sounds post gold standard), you’re simply reducing the purchasing power of American citizens as their wages will most likely remain moribund has they have over the last several years.

So is the FED carefully watching developments in the economy, yes. Are they going to backtrack on ending QE, no. So according to the Yinzer Analyst, these minutes are just pillow talk. They’re trying to make the pullback easier to bear without actually obligating them to change policy or really do anything. In fact, according to a survey of primary dealers, most feel that within two years of the first rate increase, we’ll be retesting the zero bound.

To Recap: Is the FED going to push off raising interest rates; not indicated at this time. The Yinzer’s viewpoint: equity markets still need time to consolidate, so enjoy the rally which we’re probably sure to get, take some profits but don’t put everything on red.

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