Tampering the tapering?

We pivoted Friday, playing off the weak new home sales data, into more interest rate sensitive names.  Blue chip dividend paying stocks, MLPs, bonds in general, utilities, telcos, and tobaccos have all been relative weak players during the last few weeks as the market comes to terms with Bernanke’ and the Fed’s tapering.  Markets will get increasingly nervous about U.S. budget debates in Congress when Congress returns in September.  When next September Congress returns, refreshed, all Hell will (appear to) break loose according to this Forbes article.  There are only 9 legislative days in September, with the end of the fiscal year looming.  The consensus opinion is the Fed begins to taper in September as well.  Though the weaker than expected durables, on top of the plunge in new home sales, put that outlook at risk, it’s the August employment report (due September 6) that will be the final arbiter for policymakers. As long as the jobs data don’t fall out of bed, analysts believe the taper is on. Briefing forecast is for a 160k increase in nonfarm payrolls and a steady 7.4% unemployment rate, which should be sufficient for a start to stepping back on asset purchases. Recent Fedspeak suggests there are several, if not many, on the Committee who would be ok with a taper given diminishing returns. But for credibility’s sake, they will need the cover of a decent employment report. This week could very well could be the last “calm” week for the next few weeks.

Monday August 26^th 

U.S. durable goods order will be scrutinized to assess the economy’s strength. The long-term treasury market had its best day in weeks last Friday.  We and the market will be paying particular attention to the economic data this week to assess the chances of the Fed tampering their enthusiasm for the tapering. It starts off Monday with durable goods. Any disappointment here could ignite further moves from Friday’s contra trend rally in interest rate sensitive names.

Orders for equipment designed to last three years or more provided plenty of fodder for optimists a month ago. June’s figure showed growth of 3.9% versus the previous month, nearly three times the consensus forecast. Numbers for May were revised higher as well. Headline numbers for July, due out Monday morning, are likely to be less impressive. Economists surveyed by Dow Jones Newswires expect a 4% drop.

But that is mainly due to volatile transportation orders. Stripping out transportation and smoothing out the figures to calculate year-over-year growth over the past three months, orders probably expanded by 5.2%. That would be the fastest pace, on that measure, since May 2012.  I’ll be watching Tiffany’s numbers Tuesday morning to help gauge the spending habits of the wealthy.

Tuesday August 27th S&P Case  Shiller index is important because the wealth effect of rising home prices is one of the key legs of the recovery.  Later in the day consumer confidence is expected to show a small rise. Pundits might have this number wrong.  Brown Forman reports before the open Wednesday. Earnings season is over but there are a few reporters this week.  We will pay particular attention to this report.  The company best know by it bourbon whisky should report healthy earnings.  At least that’s what we are banking on with our purchase of stock on its recent pullback.

Wednesday August 28th  Pending home sales will provide more insight into how much the sudden and sharp rise in rates has impacted home sales. William Sonoma reports after the close on Wednesday.  Housing related names like Home Depot and Lowes have been reporting good numbers.  I expect WSM to do the same but no telling on the stock market reaction.  A lot of good news is baked into the group.

Thursday August 29th  European markets have been performing better of late with the idea that Europe is pulling out of its funk.  German consumer confidence will be closely scrutinized.  But the real show begins with a bevy of U.S economic data such as GDP, initial jobless claims, personal consumption, and continuing claims. Two high-profile tech names report after the close,Salesforce and Splunk.  I doubt if we’ll play either of these names, but they will move market sentiment.   Salesforce is not what I call a shareholder friendly company as the insiders are constantly dumping their option grants and 144 stock on the market.

Friday August 30th  the last trading day of the month.  Chicago Purchasing managers and University of Michigan Confidence.  Most traders will want to leave early and enjoy the waning days of Summer but Friday’s Michigan Confidence numbers could be chilling based on recent Walmart, Target and other retailer’s observations. The wealth effect has done nothing to help many Americans whose income growth has not kept pace with the rising cost of living. Friday should be a down day as September is looming large.