Great stuff from BTIG’s Dan Greenhaus, whose latest note “Dazed and Confused” perfectly captures the state of play in the market and the economy.
Here’s part of it:
It has been said more times than we can count that investors are confused. Confused as to whether the U.S. is in or entering a recession, confused as to whether the European banking sector is imploding and confused as to what steps are being taken to stabilise the situation. With respect to the United States, further confusion reigns among investors who cannot figure out, if the U.S. does indeed enter a recession, what the policy response will be. Count us among those fretting.
This confusion was not alleviated today with the release of the Fed policy statement. Shortly after 2:15, the market sold off quite hard, going from positive to negative territory in short order. News websites were quickly quoting traders as saying that the negative reaction was because the Fed didn’t provide QE3, it only said interest rates would stay low until 2013. Shortly thereafter though, many of those same websites and news-services were quoting other traders, following the massive rally for U.S. equities, as saying the reason for the reversal was because the Fed hinted at QE3 should the economy weaken further. Confused much?
The truth is that both of these takes are right. The economy is worsening, and likely to get worse according to the Fed, and yet its response was to….continue its existing policy of keeping rates low, only now we know this policy exists until mid 2013. We have to give credit to Jan Hatzius and the economics department at Goldman Sachs who have been saying for many years now that 2013 was the earliest the Fed would begin to hike rates. Now the entire market will shift its expectations and as a result, Treasuries went well bid across the curve while, holding all else constant, equities presumably get more attractive based on discount rates and DDM and a host of other reasons that will be tossed off if indeed we are in, or going into, a recession.
For more on yesterday’s announcement, read this explanation of the “stealth QE3” that was announced.