Wall Street Greek: Morning Report: Who's the Chicken?

(Stocks in this article: Nasdaq: DELL, NYSE: TIF, NYSE: MOT, NYSE: COP, NYSE: SPY, NYSE: DIA, Nasdaq: QQQQ, Nasdaq: GSIC, NYSE: MS)

Who does the chicken represent in the illustration here? Is it the Fed, the media or the market? This is a question that must be asked this morning as the Fed appears to be making an about face. Is the Fed making a complete turn in light of market need, or is the media depicting the Fed in this light? There's a little of both ingredients in this soup I believe. While the Fed discusses both sides of the argument, the media highlights what it views news-making. It's not news gathering per se, it's news making.

But what about the market. Is she efficient or not!? If she is efficient, then it should not matter for long what the media announces. The market should figure it all out and interpret it as it should be best understood. This is why, if the Fed surprises the market on December 11th, most of the blame should be directed to the Fed. There is no argument for misinterpretation over extended periods, just miscommunication. The media is powerful though, and influences the great American majority, so the picture can be skewed. But, the picture is only skewed, not altered.

Bernanke's Speech - I listened to Bernanke's address, and reviewed Kohn's speech as well today. In my view, Bernanke was much less dovish than Kohn, and it seems to me far from certain what the Fed will do on December 11th. What seems certain is that the Fed has no intention of an earlier emergency meeting, as some fanatic rumor mongers are whispering about on the Street. The credit market issues are of grave concern, and depending on developments, could require Fed help (whatever it can do along with Paulson and the banks). However, we (including the Fed) have to be careful about confusing fourth quarter bank charge-offs with new problems. Also, we should be careful about completely believing the heads of the banks, who will do what they can to influence Fed action as favorable as possible for their own interests. I believe there's now a 60/40 chance of inaction versus a 25 basis point cut, and I am completely alone in this view. I do believe the Fed could react like a chicken with its head cut off when the stock market panics after the hypothetical inaction I described. Will the Fed act then in order to avoid a knee jerk reaction later? This may occur as well. I believe Bernanke's discussion is being taken for more than its value or intention today. Also, take close note of Kohn's qualification before his speech this week, where he says that his views may not agree with the views of other members of the FOMC Policy Committee. Anecdotal evidence I've seen does not frighten me about the pay performance of SIVs. In fact, pricing, while lower, is not panic button lower. However, I recognize the ledge we walk as well. Remember me in December, but if the dynamic market requires a change in advice, I'll provide it rather than stick to an opinion based on stubborn pride or image concern, like you'll find in corporate boxes. Remember that I am discussing my view on market perception of Fed future action, not on what I believe the economy needs. Stocks will move on perception now, while driven by the economy and Fed support or blunder over the longer term. Offering daily advice requires me to do this, but I do my best to present the long-term view as well. As Cramer says, and I agree, the best investor is omni-aware of the current situation, and not necessarily a buy and hold investor. This conventional strategy suits those best who will not follow broad matters that affect less than long-term price movement. However, there is also value to be added by selling stocks you like for the long-term (on valuation), in order to buy them back cheaper later, or replace them with undervalued ideas.
Personal Income & Consumption - Personal income and consumption both increased at a less than expected pace of 0.2%. No surprise here, as we expect the economy to slow this quarter. The PCE Deflater information within the report offers the data that is market-moving, or could be today. The Fed's favored inflation gauge, excluding food and energy, was up 1.9% over October of 2006, matching the revised higher September figure. This is enough to keep the Fed's attention, but it seems unemployment is rising faster as well. Next week's jobs data will prove critical, in my view.
Credit Market Ailments & Cures - Hank Paulson is reportedly working with banks in an effort to keep ARM introductory rates from resetting en masse for long enough to let the economy stabilize. It sure does seem like a band-aid though, but anything that gives the economy more time to digest things might also allow it and credit derivative markets time to stabilize through other solutions.
Mass Crude Exodus - Fundamental short-term demand factors are being realized finally. We noted here that the price of oil was unsupported, and we recommended exit from the commodity. We were early by a few weeks, as is often the case, but better early than late or never. I see oil dropping precipitously now, perhaps to sub-$80.