MorningWord 7/5/13: The Easy Money Made on the Easy Money Policies May Be Over.

by Dan July 5, 2013 9:19 am • Commentary

MorningWord7/5/13:  I am sorry to tell you people but for the balance of today and throughout the weekend, the financial press is going to debate just what is “good news” for the stock market.  This morning’s non-farm payroll number of 195k gain for June (besting economists forecast of 165k) and the upward revision for May was clearly good news for the economy, but when put in the context of the Fed Chairman Bernanke’s guidance for Tapering of current QE, this data may force the FOMC to come to this conclusion sooner rather than later (you can already hear the Hawkish calls).  Despite the S&P Futures up 1% in the pre-market (they were up the same prior to the data on strength in Asia and Europe while we were closed for the Holiday), the US dollar is rocking, and the yield on the 10 year treasury are telling you all you need to know.  The smart money has suggested that 2.5% was likely a near term threshold on the 10 yr, but it seems to now established that level as a point of support as it tops the June and now 2 year high of 2.7% this morning.

Heck even me the stock and options guy bought into the notion that rates rose too far too fast and tried to pick a bottom 2 weeks ago with the purchase of an in the money July call butterfly in TLT (here), but the price action since the Fed’s June meeting suggests that the fix is in, those who have made easy money “front running” the Feds bond purchases for years appear to be of the mindset that the “easy money”, being made on the easy “money policies” may be over.

For those who are in the camp that good news for the economy is good news for the stock market then today may be one of those days that proves you right that in the face of the Taper, bonds can go down and stocks can go up. But my sense is that this could be a sort of “while the cats away the mice will play” on what is sure to be a low volume holiday Friday.

The U.S. is certainly driving the train at the moment as it relates to the frontrunner for the health of the global recovery, and commentary out of the ECB yesterday (Draghi suggested that rates will stay low for an “extended period”, here) certainly helped bolster the case that Europe while weak on a realtive basis is in good hands with Super Mario.  Obviously the unknown is the increasing potential for a hard landing in China and the continued weakness and political instability in places like Brazil and the Middle East.

As we head into earnings season in the next couple weeks, the strong dollar and weak emerging market demand will likely be a continued theme, and should put pressure on U.S. multi-nationals who have been the massive beneficiaries from a balance sheet management standpoint as the result of low rates over the last few years.  Instead of hiring, building out infrastructure and spending on R&D, they have been borrowing for nearly nothing and buying back shares and paying hefty dividends, which on the share repurchase side has helped to offset earnings declines.

However you want to take this morning’s data, it is just one piece of data, but I was already of the mindset that Mr. Bernanke, while remaining flexible, is very focussed on his and QE’s exit strategy, wich most certainly speaks to higher rates, whether he wants it or not, and I believe in a slow growth earnings environment this should become a fairly sizable headwind for stocks in the months to come.