Keystone's Morning Wake-Up 9/13/12; FOMC Rate Decision and Press Conference

The U.S. sends warships and Marines to Libya in response to the murder of U.S. Ambassador Chris Stevens and three other Americans. It appears the acts were planned well in advance and timed to coincide with the Anniversary of the 9-11 Attacks. At the same time, on Tuesday, in Egpyt, the U.S. Embassy is mobbed and the American flag destroyed. As Keystone mentioned earlier in the week, the eleven rang true for symbolism considering that 9-11 was eleven years prior, and apparently, the terrorists did indeed plan out their evil deeds to coincide with the anniversary.  The U.S. military will find the culprits and bring them to justice. As always, the general population of any nation are good people, that simply want to have a job and support their family, but it is always a few fanatics that cause all the trouble.

On a lighter note, the iPhone 5 was released. As would be expected, die-hard Applonians profess that it is the greatest thing since sliced bread, while rivals comment that Apple has finally caught up to everyone else.  Interestingly, the diagonal measurement on the new iPhone is four inches, while the Droid is 4.3". The new iPhone5 is lighter, no doubt due to the increased use of aluminum components, but, considering that aluminum is a conductor, one wonders if heat will not become a problem for this new unit.  The important question is if the updates are enough to cause everyone and his brother to run out to buy one? 4G speeds are great but only if you are in 4G territory. When the techie husband mentions that he needs the new iPhone5, the wife, with two screaming kids in tow, will likely tell him to be happy with what he's got, shut up, and get back to work. The Real Household Median Income data is shocking and shows that total family income has steadily dropped from the 2008 Crash thru the present day. If family incomes continue to drop year after year, a new cell phone is not high on the list of priorities for most families.

Today is a huge business and stock market day. Markets are poised to move sharply one way or the other, just like exactly one week ago when the ECB's Draghi stepped up to the microphone to announce his bazooka bond-buying plan. The bullish expectations are off-the-charts. Well over 90% of traders fully expect a QE3 program to be announced in the coming hours. The markets certainly are expecting QE3 since the broad indexes are strongly elevated. The FOMC announcement is 12:30 PM EST, which is 5:30 PM London time, 6:30 GMT. The member forecasts will be provided at 1:45 PM, and Bernanke will conduct a press conference with Q&A at 2:15 PM.

The markets are frozen in place, waiting for a binary outcome, like Rome's Nero signaling the thumbs up, or thumbs down, but instead the action this afternoon may become very jumpy and volatile.  The important aspect for today is QE3, how much, and when, and what, such as the potential purchasing of mortgage-backed securities.  Bernanke may announce an open-ended program instead of a targeted sum such as 300 billion, 500, or even 600 billion, or provide a monetary target that remains open-ended schedule-wise.

What will happen?  The extension of the low rates into 2015 is likely guaranteed, that allows at least a bone to be provided to the hungry markets.  QE3 is trickier.  Bernanke is a student of the Great Depression and fears deflation the most. Deflation leads to years of a sideways, sick, underperforming economy.  Simply look at the lost decade in Japan, now lost two decades, a deflationary event that began in the early 1990's and continues to this day. Imagine if the U.S. fell into this 20-year funk.  The problem with moving forward with QE3, however, is that deflation is not in place, not even disinflation.  Keystone uses the CRB Index as a guide and at 315 or more, there appears no reason for Bernanke to act, this is actually a sweet spot where the Fed would probably prefer the economy to continue on this path for the next several years. Disinflation appears when the CRB drops under 300-ish and deflation is rampant as the CRB drops under 270; we are no where near these levels.  Both QE1 and QE2 were timed and announced to prevent a deflationary spiral (with the CRB at 250-260) but this is not the case now.

Earlier in the summer, the markets and economy were in disinflation and deflation but after Draghi and Bernanke provided lip service promising easy money, the markets are no longer in this deflationary area. Thus, it is a head-scratcher as to why Bernanke would provide anything. His goal is to keep allowing time to heal the economic wounds, he does not mind moderate inflation. Considering that many worst-case scenario's are possible in the weeks and months ahead, why would the Fed use their limited ammo right now? Keystone is only looking for the extension of low rates into 2015, and perhaps a minimalist message concerning QE3. Perhaps Bernanke outlines a general plan but it will have no amounts attached, and no time line, and he will simply say he stands ready to act 'when needed' in the future. The markets will be extremely disappointed if this is the outcome. The markets are expecting a full-fledged half-trillion dollar QE3 package.

The other important aspect is that if Bernanke acts strongly, he will be viewed now and forever more as a lackey to the stock market.  The Fed would lose credibility and be viewed as only existing to support the markets, providing the crack cocaine when the addict wants more. Bernanke may appear meek with a milk toast personality but he is underestimated in this regard. He has demonstrated a fire in his belly before and he may decide to make a strong statement today that the Fed is not a puppet of the markets and the Fed will continue to maintain a perceived reputation of independence.  This would mean a disappontment concerning QE3.  Of course, if Bernanke shows up with the super deluxe QE3 bazooka, he can then follow that up with licking the boots of traders and also washing their cars. Further on, the Fed has been telling Congress to step up their game which hints that Bernanke will want to wait with QE. The Fed can typically leak snippets of information ahead of time if they are going to disappoint markets but this time around, and if the Fed wants to make a statement about not being the markets lackey, no such pre-announcements occurred. Perhaps Bernanke may practice tough love against the junkie traders today.

The economic schedule is active today.  Jobless Claims and PPI hit at 8:30 AM, Natty Inventories at 10:30 AM, and a 30-Year Bond Auction after that. G-20 Finance Ministers meet today and tomorrow. On the esoteric side, markets tend to be weak moving into the new moon, which is Saturday night, about two-thirds of the time.  Broad market direction today is dictated by SOX 393, UTIL 464.31 and VIX 18.25. All three are bullish, if any one turns bearish, the markets will be selling off strongly and Keystone's algorithm, Keybot the Quant, will likely flip short. If the three parameters stay bullish, the market bulls will throw confetti all day long.

For the SPX starting at 1437, if the bulls can simply muster up two points, to punch up thru yesterday's high of 1439.15, the upside will accelerate.  The 2008 intraday high at 1440.24 will fold like a cheap suit and the SPX will head towards a gap fill at 1446. This and higher will be a done deal if Bernanke shows up with his super-sized bazooka.  The bears need to push under 1433 which would cause a downside acceleration to 1429, 1427 and lower to 1424. This will occur if Bernanke shows up with a pea shooter, only promising the low rate extension to 2015 and vague details on a potential QE3 for the future. A move thru 1434-1438 is sideways but with the Fed today, the markets will decide on one direction or the other.

Note Added 9/13/12 at 6:07 AM:  There is trouble at the Yemen Embassy this morning so the Middle East and Northern Africa turmoil continues to ratchet higher. Watch oil today.  Copper is red in the early going.  Traders are losing confidence in China's stimulus plans.