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MLR - Premarket Pulse August 23, 2012


Markets turned higher after the Federal Reserve released minutes of the July 31-August 1 meeting of the central bank’s Federal Open Market Committee which showed it was contemplating further monetary "accommodation" in the form of what is commonly known as "QE3" as it was worried about signs of decelerating growth. “Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery,” the minutes said.

The question is whether the economic releases since that meeting, one showing a 163,000 expansion in nonfarm payrolls in July and a pickup in retail sales, among other statistics, have changed anyone’s mind. On Tuesday, the president of the Atlanta Fed there was risk in using monetary policy “too aggressively” to counter problems that need to be fixed on a fiscal level.

The minutes released Wednesday showed two options. The first option is what the markets have been anticipating - a change in the date over which the central bank expected to keep its target range for the federal funds rate between 0% and 0.25%. The current Fed stance is to keep rates at “exceptionally low levels” through at least late 2014. The second option tossed around was “QE3” — or in the words of the minutes, “a new large-scale asset purchase program.” According to the minutes, “many” said such a program could provide additional support for the economy by putting downward pressure on long-term interest rates and making financial conditions more broadly easier.

Indeed, the Congressional Budget Office said Wednesday that the U.S. economy will slide into recession in 2013 if Congress fails to act.

While investors seek to ascribe any market rally to the "hope" of QE, a more substantial, underlying condition may be driving the current rally, and that is potential for big change in the November elections. Thus, while investors are focused on some sort of QE confirmation for a continued rally in stocks, they may be over-looking the "Romney Rally" factor which may be more important to the market than QE in terms of establishing the underlying conditions for a sustained market rally, a "bull market," if you will, going into the end of 2012.


Gold and silver continue to move higher, and our buy signals for gold on Friday of last week and for silver on Monday have borne fruit thus far. Both metals are approaching their 200-day moving averages, and a move above this key moving average would provide additional confirmation with respect to the "staying power" of the current precious metals rally.

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