Super Mario to the Rescue, Greek Election, Fed Fun

After four years of doing absolutely nothing to propel the moribund Euro Zone economy, European Central Bank President Mario Draghi (aka Super Mario) finally unveiled the ECB’s version of bond buying last week, where it will buy €60 billion ($68 billion) of bonds a month in an effort to boost stagnant growth and fight falling prices. The ECB will fire up the printing presses in March and will conduct the purchases “until we see a sustained adjustment in the path of inflation.” So although the European version of QE at first seemed half the size of that in the US and UK, the open-ended prospect seemed to quell fears that it was not enough.

While on the topic of Europe, it is worth noting that there is a big election in Greece today, where Alexis Tsipras, the leader of the leftwing, anti- austerity Syriza party is leading in the polls. There are fears that Tsipras might lead Greece out of the euro zone (the so-called “Grexit”), but it now seems more likely that he will seek a restructuring of debt with the Troika (the European Commission, the European Central Bank and the International Monetary Fund).

As a reminder, Greece has suffered through six years of economic contraction, triggered by over-the-top spending, the financial crisis and then exacerbated by fiscal belt-tightening imposed by the Troika. According to Capital Economics, Greek “gross domestic product is now a quarter smaller than it was in 2008. A quarter of the working age population is out of work. Only half of the eligible young have jobs.” Both the Troika and Greece have reason to come to terms, which should prevent a Grexit, at least for now.

Here in the US, the week ahead should be a little less dramatic. The Federal Reserve will conduct a two-day policy meeting, where it is widely expected to maintain its recently adopted language that it “can be patient in beginning to normalize the stance of monetary policy.” With wage growth tepid, no meaningful increase in core inflation and global uncertainty swirling, the Fed is likely to sit still and do nothing.

On Friday, the first reading of fourth quarter growth is due. GDP is expected to increase at a 3.2 percent annualized rate. That would be downshift from the strong 5 percent gain in the third quarter, but would still be a lot better than the 2.25 percent pace of the recovery.

Finally, there was some concern late last week, after the National Association of Realtors released its Existing Home Sales report. While sales accelerated in December, for all of 2014, existing home sales dropped by 3.1 percent from 2013, the first annual decrease since 2010. The problem was a lack of inventory, but as Bill McBride of Calculated Risk points out, “the NAR inventory data is ‘noisy’ and difficult to forecast based on other data.” The good news is that “distressed sales were down sharply - and normal sales up around 7 percent.” With the economy strengthening, confidence building and mortgage rates at 18-month lows, home sales should accelerate in 2015.

MARKETS: Stocks rose, snapping a three-week losing streak and the euro dropped to its lowest level ($1.12) in 11 years.

• DJIA: 17,672, up 0.9% on week, down 0.8% YTD
• S&P 500: 2051, up 1.6% on week, down 0.3% YTD
• NASDAQ: 4757, up 2.7% on week, up 0.5% YTD
• Russell 2000: 1189, up 0.3% on week, down 1.3% YTD
• 10-Year Treasury yield: 1.79% (from 1.84% a week ago)
• March Crude Oil: $45.59, down 7.2% on week
• February Gold: $1,292.60, up 1.2% on week
• AAA Nat'l average price for gallon of regular Gas: $2.04 (from $3.29 a year ago)

THE WEEK AHEAD:

Mon 1/26:

DR Horton, Microsoft, Texas Instruments

Tues 1/27:

3M, Apple, AT&T, Caterpillar, Coach, DuPont, Pfizer, P&G, Yahoo

FOMC 2-day meeting begins

8:30 Durable Goods Orders

9:00 Case Shiller Home Price Index

10:00 New Home Sales

10:00 Consumer Confidence

Weds 1/28:

Boeing, Facebook

2:00 Fed Policy Announcement

Thurs 1/29:

Amazon, Conoco Phillips, Ford, Harley Davidson, Visa

8:30 Weekly Jobless Claims

10:00 Pending Home Sales

Fri 1/30:

Altria, Chevron, MasterCard

8:30 Q4 GDP (1^st estimate)

9:45 Chicago PMI

9:55 U Mich Consumer Sentiment

Did QE Work?

Almost exactly six years ago the Federal Reserve launched an unconventional program of buying bonds to rescue a faltering economy. Since then, the Fed’s balance sheet has ballooned by $3.5 trillion, close to 25 percent on the nation’s gross domestic product. The central bank is expected to announce the end of the program, known as Quantitative Easing, when it concludes a two-day policy meeting this week. So did QE work? To answer that question, we have to review the policy’s two goals: (1) to restore the functionality of markets, which had essentially locked up amid the financial crisis and (2) to boost the economy by lowering interest rates.

There is no doubt that the first round of QE, which began in November 2008 and the second round, which ran from August 2010 – June 2011, eased the strain in markets. According to Joe Gagnon, Senior Fellow at the Peterson Institute for International Economics, QE also “inspired confidence and…it convinced financial markets that the United States wouldn’t turn into Japan, which they were worried about.” The net result is that markets did start functioning more smoothly.

According to a Federal Reserve Board study, those first two rounds of QE also boosted economic growth. The bond buying “raised the level of output by almost 3 percent and increased private payroll employment by more than 2 million jobs, relative to what otherwise would have occurred…the incremental contribution of the program is estimated to grow to 3 million jobs.” Additionally, Bill McBride of Calculated Risk estimates that QE probably lowered interest rates by 0.50 percent, allowing consumers and companies to refinance their higher interest debt, thus reducing monthly payments and improving monthly cash flow.

There have been a few couple of criticisms of QE, including that it artificially boosted stock prices because investors were dissuaded from investing in bonds; it penalized savers, who have been staring at zero percent rates on their savings, checking and CD accounts; and it will ultimately lead to rampant inflation and a weaker US dollar.

Despite these concerns, it seems like doing nothing would have been far worse. Sure, stock prices are trading higher than they might have without QE, but where would they be if the economy were stuck in an even lower gear? And yes, savers have taken it on the chin, but hopefully, they were not damaged as much in the downturn because of those nest eggs. And while concerns about potential inflation are always important to consider, there is absolutely no evidence of inflation in the US economy to date – in fact, recent reports point to a slowdown in prices, not an acceleration.

QE may not have been the perfect policy solution, but in an environment where the government was a roadblock (anyone who thinks that austerity would have been the correct policy solution should take a look at how well it has played out in the eurozone), QE was far better than doing nothing.

MARKETS: Investors snapped a four-week losing streak, as earnings took center stage. With 208 S&P 500 companies reporting, the index is on track for 5.6 percent earnings growth from last year, according to FactSet. That compares with expectations for 4.5 percent growth before earnings season started.

• DJIA: 16,805 up 2.6% on week, up 1.4% YTD
• S&P 500: 1964, up 4.1% on week, up 6.3% YTD (largest weekly percentage gain since Jan 2013)
• NASDAQ: 4483, up 5.3% on week, up 7.4% YTD (largest weekly percentage gain since Dec 2011)
• Russell 2000: 1118, up 3.4% on week, down 3.9% YTD
• 10-Year Treasury yield: 2.27% (from 2.2% a week ago)
• December Crude Oil: $81.01, down 1.3% on the week (4^th weekly loss, down 20% from June)
• December Gold: $1231.80, down 0.6% on the week
• AAA Nat'l average price for gallon of regular Gas: $3.06 (from $3.31 a year ago)

THE WEEK AHEAD: With worries about global growth slowing down, investors are eagerly awaiting the first estimate of third quarter growth. The economy likely expanded at an annualized rate of 3 percent, which would be down from the Q2 reading of 4.6 percent, though an improvement from the 2.2 percent pace averaged so far in this expansion.

Mon 10/27:

Amgen, Merck, Twitter

10:00 Pending Home Sales

Tues 10/28:

Dupont, Facebook, Pfizer, Sirius/XM

8:30 Durable Goods Orders

9:00 S&P Case-Shiller HPI

10:00 Consumer Confidence

FOMC Meeting Begins

Weds 10/29:

Hershey, Kraft, Visa

2:00 FOMC Meeting Announcement (no presser)

Thurs 10/30:

Conoco Phillips, GoPro, Kellogg, LinkedIn, Mastercard, Time Warner Cable

8:30 Weekly Jobless Claims

8:30 Q3 GDP – First Estimate

Fri 10/31:

Chevron, Exxon Mobil

8:30 Personal Income and Spending

9:45 Chicago PMI

9:55 Consumer Sentiment

Financial Crisis Anniversary: A Short History of QE

Happy Anniversary! Six years ago this week, the US financial system was brought to its knees. Over the course of seven days, Lehman Brothers filed for bankruptcy; Bank of America said it would buy Merrill Lynch; Goldman Sachs and Morgan Stanley became bank holding companies; the Federal Reserve bailed out insurance giant AIG; the Treasury Department had to insure money-market funds; and the government submitted its first draft legislation of TARP. Yeah, that all happened in one week! Two months after that momentous week, the economic downturn, which started in December 2007, accelerated. In an effort to create liquidity in the bond market and to help rescue the economy from plunging into the abyss, the Federal Reserve took the aggressive and unusual step of buying mortgage backed bonds, and eventually expanded the program to include government bonds.

As a reminder, here’s a short history of the central bank’s bond buying stimulus plan, known as “Quantitative Easing” or “QE”:

• November 2008: The first 15-month period of QE begins with purchases of mortgage securities, later expanded to include Treasury debt
• August 2010: Fed launches QE2 with a defined $600B target
• June 2011: Fed completes QE2
• September 2011: Fed announces “Operation Twist,” which allows the central bank to swap short term Treasuries for long-term ones
• September 2012: Fed launches QE3 and extends its intention to maintain low short-term interest rates until mid-2015
• December 2012: Fed announces that QE3 would be open-ended at $85B/month and that outright Treasury purchases would replace Operation Twist.
• June 2013: Fed Chair Bernanke announces that QE would wind down later in 2013 and would likely conclude by mid-2014, provided that the economy improves
• December 2013: Fed officials began the process of unwinding their bond-buying program by reducing purchases by $10 billion dollars to $75 billion

Six years later, the Fed strategy continues, but the central bank is in the process of unwinding the third version of that bond-buying program. The central bank will conduct a two-day policy meeting this week, where it is widely expected to announce another $10 billion cut, reducing monthly purchases to $15 billion. If you are doing your Fed math (or can subtract), you will quickly realize that QE3 will likely end at the October 29^th meeting.

And just like that, the Fed will have undone its historic policy and will return to its more mundane tool of manipulating short-term interest rates to fight inflation.

Remember way back in March, when Janet Yellen made her first and now-famous snafu? She said that the central bank might start increasing short-term rates “six months” after the conclusion of QE3, which would put the first hike in April of next year. Investors freaked out and sold stocks and bonds, because that time horizon was sooner than previously projected.

Those who think rationally might think, “If the data show that the economy is improving and as a result, the Fed increases short term interest rates, isn’t that a good thing?” You might think so, but so much of the recovery stock market rally has been predicated on zero percent interest rates, which have made equities the most favored asset class.

So how will markets react to higher rates? According to Capital Economics, “The S&P 500 rose by an average of about 5 percent in the six months before the first rate hike in each of the last seven major tightening cycles [1971, 1976, 1984, 1986, 1994, 1999, 2004]…And it also gained an average of about 5 percent in the nine months after the first hike.”

That said, it’s hard to count on the rally continuing indefinitely and although nobody wants to say it, this time is different, since this rate hike cycle follows a once-in-a-generation financial meltdown and large-scale asset purchases by the Fed. Fasten your seat belts…it’s going to be a bumpy ride.

MARKETS: Stock indexes snapped a 5-week winning streak.

• DJIA: 16,987 down 0.9% on week, up 2.5% YTD
• S&P 500: 1985, down 1.1% on week, up 7.4% YTD
• NASDAQ: 4467, down 0.3% on week, up 9.4% YTD
• 10-Year Treasury yield: 2.61% (from 2.46% a week ago)
• October Crude Oil: $92.27, down 1% on the week
• December Gold: $1231.50, down 2.8% on the week
• AAA Nat'l average price for gallon of regular Gas: $3.40 (from $3.54 a year ago, lowest since Feb)

THE WEEK AHEAD:

Mon 9/15:

OECD releases its global economic outlook

8:30 Empire State Manufacturing

9:15 Industrial Production

Tues 9/16:

8:30 Producer Price Index

FOMC 2-day policy meeting begins

Weds 9/17:

8:30 Consumer Price Index

10:00 Housing Market Index

2:00 FOMC concludes/Fed economic projections

2:30 Fed Chair Yellen Press Conference

Thurs 9/18:

8:30 Weekly Jobless Claims

8:30 Housing Starts

10:00 Philadelphia Fed Survey

Alibaba prices its IPO – could be largest IPO in US history

Scotland votes on a referendum on independence, which would break up the 307-year-old U.K. and plunge Britain into a constitutional crisis. Voting concludes at 5:00pm ET

Fri 9/19:

Apple releases iPhone6

10:00 Regional/State Unemployment

Quadruple Witching: simultaneous expiration stock index futures, individual stock futures, stock index options and individual stock options

Sat 9/20

G-20 finance ministers and central bankers meet in Cairns, Australia

Last Economic Blast for Summer

Here’s the good news: there is only one more important week of economic data left before Labor Day weekend -- the last blast for summer occurs this week. The bad news is that given the geopolitical events transpiring recently, the economy may eventually be the least of our problems. That said, investors have continued to take the various global conflicts in stride -- maybe a full week on the economic calendar will get them going. They'll need to shore up their energy before shutting down for August. The fun starts with the government’s first estimate of second quarter growth. After a horrible first quarter, where the economy contracted by 2.9 percent, Gross Domestic Product is expected to show an acceleration to an annualized pace of 3 to 3.5 percent. The rallying cry for the economy is quickly shifting from “2014: The year that growth returned to the US” to “2014: Here’s hoping that second half growth will save us!”

The sluggish first half growth will be front and center for the Federal Reserve, which will conduct a two-day policy meeting this week. It is widely expected that the central bank will announce another $10 billion cut to its bond-buying program, reducing monthly purchases to $25 billion. Officials are also expected to keep short-term interest rates near zero, where they have been since the height of the financial crisis in late 2008. Because there will be no press conference or Fed projections at this meeting, investors will pay close attention to the accompanying statement, which will highlight the Fed’s view on recent economic improvement and accordingly, when the central bank might raise short term interest rates (estimates are for some time in the first half of next year).

Fed Chair Janet Yellen has made clear that her perceptions of a healthy economy hinge largely on a healthy labor market. This week will also feature the July jobs report, which is expected to show continued progress. In the first half of the year, the economy has created an average of 231,000 jobs per month, putting it on track to add more jobs this year than any year since 1999. Economists predict that 225,000 jobs were created in July and that the unemployment rate will remain at 6.1 percent, the lowest level since September 2008.

Of course the labor market is more than just the unemployment rate or the number of jobs created. Whenever I write about the labor market, I receive a bunch of comments that say something like: “Sure the economy is adding jobs, but they are crappy, low-paying jobs!”  Indeed, job creation during the sluggish recovery has been skewed more towards lower wage industries, like hospitality and retail.

But the tide may be turning, according to the folks at Capital Economics, who note “the overall quality of the jobs being created is rising. Based on the mix of jobs added in each sector and the average weekly earnings within those sectors, our calculations suggest that the 1.3 million private sector jobs created in the first six months of this year paid an average of $867 a week. That’s slightly higher than the average of $843 per week that the existing 117 million private sector workers earn. The upshot is that the jobs created this year, have been of a slightly higher quality [than last year].”

Given that wage growth has been stuck at about two percent a year, just about matching the pace of inflation, it is no wonder that consumer spending has been spotty during the recovery. It is imperative to see an increase in take home pay for the average American worker, if we have any hope for a new, faster pace of economic growth to take hold in the second half of the year, and beyond.

MARKETS: Despite Friday’s sell-off on disappointing results from Amazon and Visa, earnings season has generally been better than expected. With nearly half of the S&P 500 having reported, 76 percent have beaten earnings expectations and 67 percent have reported above sales estimates, according to FactSet. Earnings growth for Q2 is growing by 6.7 percent, which is ahead of expectations for 4.9 percent growth as of June 30th. The telecom services sector is reporting the highest earnings growth for the quarter, while the Financials sector is reporting the lowest earnings growth.

• DJIA: 16,960, down 0.8% on week, up 2.3% YTD
• S&P 500: 1978, unchanged on week, up 7% YTD
• NASDAQ: 4,449, up 0.4% on week, up 6.5% YTD
• 10-Year Treasury yield: 2.47% (from 2.48% a week ago)
• September Crude Oil: $102.09
• August Gold: $1303.30
• AAA Nat'l average price for gallon of regular Gas: $3.53 (from $3.65 a year ago)

THE WEEK AHEAD: In addition to the highlights mentioned above, the week ahead will feature reports on housing prices, monthly automobile sales, personal income and spending, manufacturing and consumer confidence.

Mon 7/28:

Coach, Herbalife

10:00 Pending Home Sales

10:30 Dallas Fed Activity report

Tues 7/29:

American Express, Pfizer, UPS, Twitter

9:00 Case Shiller home price index

10:00 Consumer Confidence

Federal Open Market Committee begins

Weds 7/30:

Kraft, MetLife, Whole Foods

8:15 ADP Private Jobs Report

8:30 Q2 GDP (1^st estimate)

Federal Open Market Committee concludes

Thurs 7/31:

Avon, MasterCard, ExxonMobil, Conoco

8:30 Weekly Jobless Claims

10:00 Chicago PMI

Senate panel discusses results of a report on "too big to fail" banks (remember that?)

Fri 8/1:

Chevron, Clorox

Automobile Sales

8:30 July Employment Report

8:30 Personal Income and Spending

9:45 PMI Manufacturing

9:55 Consumer Sentiment

10:00 ISM Manufacturing

10:00 Construction Spending

First Fed Meeting of Janet Yellen Era

All eyes will be on the Federal Reserve this week, when the central bank concludes its first two-day policy meeting of the Janet Yellen era. Despite the recent turmoil in some emerging markets, the slowdown in Chinese activity, the events in Ukraine and weaker, weather-related US economic data, the Fed will likely announce another $10 billion dollar cut at this meeting, reducing monthly bond purchases to $55 billion dollars. The two looming risks are China and Ukraine, but neither situation is likely to deter the Fed from acting at the upcoming FOMC meeting. While China appears to be slowing, it is important to note the context: the much larger size of the Chinese economy today, versus double-digit growth in the past, means that 7 percent increases are potentially just as big as those in the 2000’s. Additionally, the Chinese government is actually engineering the slower rate, which means that if growth slows down too much, the government can easily push policy levers in the opposite direction.

With regard to Ukraine, if the situation results in a prolonged diplomatic stalemate, markets are likely to remain subdued. But if there were worsening violence or an escalation to a full-blown trade war, the impact would be more severe.

Regardless of events in China and Ukraine, there is some anticipation that the Fed will discuss the conditions under which it would finally raise interest rates, which have been at 0 – 0.25 percent since December of 2008 (pity the beleaguered savers!) The so-called “forward guidance” is meant to provide investors with a clear understanding of the Fed’s next steps, but one economist’s clarity is another’s murkiness.

The central bank is expected to abandon the quantitative approach that Ben Bernanke first mentioned in 2012. At the time, the then Fed Chief said that when the nation’s unemployment rate dropped below 6.5 percent, it would be a trigger for increasing short-term interest rates. But since that time, the unemployment rate has fallen faster than expected and has now come to be seen as a red herring for the recovery.

At the January FOMC meeting, officials said that they would not raise rates until the unemployment rate has fallen “well past” 6.5 percent, but there is a possibility that the Fed may adopt and communicate a qualitative approach, which would include a wider range of labor market indicators without any set numerical targets. The net effect for all of those savers: Be prepared for rock-bottom rates for at least another year.

This Fed meeting will also feature Federal Reserve projections about economic growth and unemployment, as well as Janet Yellen’s first press conference as head of the central bank.

MARKETS: Further evidence of a slowdown in China, combined with anxiety over Ukraine, pushed down stock indexes on the week.

• DJIA: 16,065, down 2.4% on week, down 3.1% YTD (biggest weekly loss since Jan. 24)
• S&P 500: 1841, down 2% on week, down 0.4% YTD
• NASDAQ: 4245, down 2.1% on week, up 1.6% YTD
• 10-Year Treasury yield: 2.65% (from 2.79% a week ago)
• April Crude Oil: $98.89, down 3.6% on week
• April Gold: 1379, up 3% on week (6th straight weekly rise)
• AAA Nat'l average price for gallon of regular Gas: $3.52 (from $3.70 a year ago)

THE WEEK AHEAD: Aside from the Fed, regional readings on manufacturing and a national report on industrial production are expected to show a modest increase in activity, after much of the severe weather has passed.

Mon 3/17:

8:30 Empire State Manufacturing

9:15 Industrial Production/Capacity Utilization

10:00 NAHB Home Builder Confidence

Tues 3/18:

FOMC begins 2-day policy meeting

8:30 CPI

8:30 Housing Starts

Weds 3/19:

2:00 FOMC announcement/economic projections

2:30 Janet Yellen Press Conference

Thurs 3/20:

8:30 Weekly Jobless Claims

8:30 Q4 GDP (final estimate)

10:00 Philadelphia Fed Survey

10:00 Existing Home Sales

10:00 Leading Indicators

Results of Fed stress tests released

Fri 3/21:

Quadruple witching (simultaneous expiration of stock, stock-index options, stock-index and single-stock futures, which can ramp up trading volume and volatility as investors and dealers scramble to open and close positions.)

One-on-One with Mohamed El-Erian

It’s not every day that you are fortunate enough to interview a world-renowned economist, but that’s just what happened to me last week. I sat down with Mohamed El-Erian, the soon-to-be former CEO of PIMCO at LinkedIn’s FinanceConnect 2014. Over the course of nearly an hour, El-Erian outlined his thoughts on the global economy, Federal Reserve policy (and new chairwoman Janet Yellen) and what ordinary investors should be doing right now. The good news is that El-Erian believes that for Main Street, 2014 will be a better year than 2013. The bad news is that while the recovery continues, the economy faces three major issues: a debt overhang from the boom and bust, a labor force that requires re-tooling and an outsized reliance on households to drive growth. The combination has pushed the US towards what he calls a “T-Junction”: As the economy approaches the intersection, it can veer in one direction, where the system will continue to heal; or in the other direction, where growth remains low and consumers and the government remain under pressure due to heavy debt loads. El-Erian put the odds of either outcome at a sobering 50-50.

When I asked about the nation’s debt problem, he responded with four potential solutions: (1) Grow our way out (the best case) (2) Default (see: Detroit) (3) Austerity (see: Europe) and (4) Rely on “artificial stimulus” from the Federal Reserve (see: US from August 2010-present). El-Erian acknowledged that while the first solution would be the best, it requires participation from lawmakers. Without Congress, the Fed’s monetary policy has become the next, best solution, at least in the short-term.

The problem with the Fed’s current policies, according to El-Erian, is that as we move further from crisis mode, the cost and risk of highly accommodative policy outweigh the benefits. In other words, it’s one thing to rely on zero percent interest rates and bond buying to normalize markets amid a financial upheaval, but five+ years later, the risk of asset bubbles exploding becomes more threatening than the potential that the wealth effect will further boost economic growth.

On the positive side, El-Erian believes that Janet Yellen is up to the task of unwinding the policy she helped create. He said that she was not only a “qualified economist” with “a passion for policy,” she was also “caring, gracious and inclusive.” That said, the removal of liquidity from the system is bound to create more volatility for investors and he warned anyone with money at risk in the markets to “Come up with a plan for the worst-case scenario,” and determine which mistake you can avoid making, because “Volatility plus human nature means you are going to do the wrong thing at the wrong time.”

MARKETS: Investors chalked up weak data to the severe weather and drove stock indexes to their best week of the year. Emerging markets, where much of the winter turmoil began, are up 6.9 percent since the Feb. 3 lows.

• DJIA: 16,154, up 2.3% on week, down 2.5% YTD
• S&P 500: 1838, up 2.3% on week, down 0.5% YTD (+5.6% since Feb 3 lows)
• NASDAQ: 4244, up 2.9% on week, up 1.6% YTD (Highest close since 7/17/00)
• 10-Year Treasury yield: 2.75% (from 2.68% a week ago)
• Feb Crude Oil: $100.30, up .4% on week
• April Gold: 1318.60, up 4.4% on week
• AAA Nat'l average price for gallon of regular Gas: $3.39 (from $3.64 a year ago)

THE WEEK AHEAD: After the day off, a fresh round of data from the nation’s real estate market is due. The pace of activity is expected to slow, with sales likely dropping by over 5 percent from year-ago levels. Part of the fall-off is likely attributable to the current goat - bad weather, though housing experts note that the slowdown should be expected, because last year’s rapid pace is simply not sustainable.

Economists are trying to determine the effect of the severe weather on the economy. While most statistics are adjusted to strip out normal seasonal patterns, a challenge arises when winter weather is much worse than normal, like the recent spate that the nation has experienced. Economists believe that Q1 growth is likely to drop by an annualized 0.3 percent to 2.2 percent. The good news is that after the weather returns to normal, consumers might unleash pent-up demand, helping to spur a marked improvement in overall economic activity.

Mon 2/17: US MARKETS CLOSED FOR PRESIDENT’S DAY

Tues 2/18:

Coca-Cola, Herbalife

8:30 Empire State Manufacturing Index

10:00 NAHB Housing Market Index

Weds 2/19:

Tesla

8:30 Housing Starts

8:30 PPI

2:00 FOMC Minutes

Thurs 2/20:

Groupon, Hewlett-Packard, Nordstrom, Wal-Mart

8:30 Weekly Jobless Claims

8:30 CPI

10:00 Philadelphia Fed Survey

Fri 2/21:

10:00 Existing Home Sales

Sat 2/22

G-20 finance ministers meet in Sydney, Australia

Dow and S&P Reach Milestones: Bubble Fears Arise

The Dow pierced the 16,000 level for the first time ever - and perhaps more impressively, it made the jump from 15,000 to 16,000 in just six months. The S&P 500 poked above 1800 in less than 4 months after taking out 1700. To put the rapid rise into context, after first reaching 1500 in March 2000, it took the broad index 13 years to reclaim that level. For tech fans, the NASADAQ recently touched 4,000, a level not seen since September of 2000. Although the economy has improved and corporate profits continue to surpass expectations, the Federal Reserve is responsible for the lion’s share of the stock market’s move higher over the past year. Without low short-term interest rates (0 to 0.25 percent since December 2008) and $85 billion worth of monthly bond buying, it’s hard to build a case where stocks would be at these levels.

But we are where we are. The S&P 500 is up 26 percent this year and has risen by 166 percent since the March 2009 lows, which means that bubble fears are arising anew. The bears point to troubling signs, including: ordinary investors are finally buying back in -- money is pouring into stock mutual funds and exchange-traded funds at the highest rate in four years; investor sentient has become almost uniformly optimistic; borrowing to purchase stocks is at record levels; and the main gauge of investor fear is low. Some warn that taken together, investors are becoming complacent, setting everyone up for a correction, which is a pull-back of more than 10 percent.

But just because a correction could be coming, does not mean you should bail out. If you are a long-term investor with a 15 or 20-year time horizon, there is no reason to alter your game plan – use the new highs to rebalance and keep investing in a diversified portfolio. But if you are the kind of person who simply cannot handle the ups and downs of the stock market, remember that just because stocks are higher, does not make them any safer. Please use caution before jumping back in!

Even if new milestones don’t really mean too much, I am happy to use them as an opportunity to remind you to review where you stand, create a target allocation and force yourself to rebalance according to your goals.

Here's what smart money has known forever--the quicker you learn these rules, the better:

Don’t let your emotions rule your financial choices. There are two emotions that tend to overly influence our financial lives: fear and greed. At market tops, greed kicks in and we tend to assume too much risk. Conversely, when the bottom falls out, fear takes over and makes us want to sell everything and hide under the bed.

Maintain a diversified portfolio. One of the best ways to prevent the emotional swings that every investor faces is to create and adhere to a diversified portfolio that spreads out your risk across different asset classes, such as stocks, bonds, cash and commodities. (Owning 5 different stock funds does not qualify as a diversified portfolio!)

Avoid timing the market. Repeat after me: “Nobody can time the market. Nobody can time the market.” One of the big challenges of market timing is that requires you to make not one, but two lucky decisions: when to sell and when to buy back in.

Stop paying more fees than necessary. Why do investors consistently put themselves at a disadvantage by purchasing investments that carry hefty fees? Those who stick to no-commission index mutual funds start each year with a 1-2 percent advantage over those who invest in actively managed funds that carry a sales charge.

Limit big risks. If you are going to make a risky investment, such as purchasing a large position in a single stock or making an investment in a tiny company, only allocate the amount of money you are willing to lose, that is, an amount that will not really affect your financial life over the long term. Yes, there are people who invest in the next Google, but just in case things don’t work out, limit your exposure to a reasonable percentage (single digits!) of your net worth.

Ask for help. There are plenty of people who can manage their own financial lives, but there are also many cases where hiring a pro makes sense. Make sure that you know what services you are paying for and how your advisor is compensated. It’s best to hire a fee-only or fee-based advisor who adheres to the fiduciary standard, meaning he is required to act in your best interest. To find a fee-only advisor near you, go to NAPFA.org.

For those who want to protect their portfolios against the eventual rise in interest rates, you may be tempted to sell all of your bonds. But of course that would be market timing and you are not going to fall for that, are you? Here are alternatives to a wholesale dismissal of the fixed income asset class:

Lower your duration. This can be as easy as moving from a longer-term bond into a shorter one. Of course, when you go shorter, you will give up yield. It may be worth it for you to make a little less current income in exchange for diminished volatility in your portfolio.

Use corporate bonds. Corporate bonds are less sensitive to interest-rate risk than government bonds. This does not mean that corporate bonds will avoid losses in a rising interest rate environment, but the declines are usually less than those for Treasuries.

Explore floating rate notes. Floating rate loan funds invest in non-investment-grade bank loans whose coupons “float” based on the prevailing interest rate market, which allows them to reduce duration risk.

Keep extra cash on hand. Cash, the ultimate fixed asset, can provide you with a unique opportunity in a rising interest rate market: the ability to purchase higher yielding securities on your own timetable.

Week ahead: Will Yellen Pump or Pop Bubbles?

Is Janet Yellen a bubble pumper or bubble popper? That’s what some lawmakers wanted to know when the presumptive heir to the Fed Chairmanship appeared before the Senate Finance Committee last week. Considering that the S&P 500 is up 166 percent from the March 2009 lows, some are worried that the Fed’s aggressive monetary policies are far more responsible for boosting stocks than the recovering economy and improving corporate profits. To her credit, instead of pulling out the Greenspan/Bernanke mantra of “we can’t identify bubbles, but we will clean up after they burst,” Yellen said that nobody, including any of the fed officials, wants to go through another 2008 again. While she does not currently see evidence of a bubble-like environment “that threatens financial stability…I think it is important for the Fed, hard as it is, to attempt to detect asset bubbles when they are forming.”

Senator Bob Corker (R-TN), who is no fan of the Fed, Bernanke or the current central bank policies, asked Yellen whether she would have the guts to prick a bubble. Yellen said that the central bank could let the air out of the bubble by employing regulatory measures, like restricting leverage, and, if necessary, it could raise interest rates. Corker interrupted her and asked the money question: With a bull market raging, would you have the mettle to use these unpopular measures? “I believe that I would,” Yellen said. “I believe that is the most important lesson learned from the crisis.”

Bubble popper it is!

The rest of the Senate appearance was pretty much what you would expect: a defense of the monetary policy that Yellen helped create. She said that the Fed’s bond buying program had “made a meaningful contribution to economic growth and improving the outlook” and said that when there has been progress in labor market, the Fed would reduce its purchases.

As the confirmation process continues, investor attention will shift to the current chair, Ben Bernanke this week. He will deliver a major speech on Tuesday night, which along with the release of the minutes from the last policy meeting could contain clues about future central bank actions. Specifically, everyone wants to know whether there are specific metrics that would lead to a change in policy.

While the central bank maintains that the current game plan is necessary, there are risks to the strategy. At every meeting, Fed officials weigh the benefits of quantitative easing (QE) versus the costs, which include managing a ballooning balance sheet and the threat of higher inflation in the future. The Fed’s purchase of mortgage-backed and treasury securities, has so far left the central bank holding $3.86 trillion in assets. Defenders of the policy say that the Fed can simply sell those assets in the future, but doing so could mean absorbing significant losses, since the Fed would likely be selling as bond prices were falling. In theory, the Fed has other policy options, but they have never been tested, which makes economists a bit nervous about their efficacy.

One group not showing signs of nerves is investors. All of the sudden, Mom and Pop are getting back in the game. According to Strategic Insight, inflows into stock mutual funds and Exchange-traded funds are on track for a total of $450 billion for 2013, which would be more than the last four years’ inflows. Of course, the idea that regular people are jumping back in after 56-month, 166 percent bull-run may mean that the market could be setting everyone up for a correction (a pull-back of more than 10 percent). Then again, the technology bull market lasted from October 11, 1990 until March 24 2000, resulting in a 417 percent gain, so maybe the bull has more upside.

MARKETS: For the sixth consecutive week, the Dow and S&P 500 closed higher and at new all-time nominal high levels.

• DJIA: 15,961, up 1.3% on week, up 21.8% on year
• S&P 500: 1798, up 1.6% on week, up 26% on year
• NASDAQ: 3986, up 1.7% on week, up 32% on year (briefly touched 4,000 for the first time since Sep 2000)
• 10-Year Treasury yield: 2.71% (from 2.75% a week ago)
• Dec Crude Oil: $93.84, down 0.8% on week (6^th consecutive losing week)
• Dec Gold: $1287.40, up 0.2% on week
• AAA Nat'l average price for gallon of regular Gas: $3.21

THE WEEK AHEAD:

Mon 11/18:

10:00 NAHB Builder Index

Tues 11/19:

7:00pm Bernanke speech to NABE

Weds 11/20:

8:30 Retail Sales

8:30 CPI

10:00 Existing Home Sales

10:00 Business Inventories

2:00 FOMC Minutes

Thurs 11/21:

8:30 Jobless claims

8:30 PPI

10:00 Philadelphia Fed Survey

Fri 11/22:

10:00 Job Openings and Labor Turnover (JOLTS)

Dow, S&P Records: What to do now

For the 26th time this year, the Dow finished at an all-time nominal closing record and the broader S&P 500 saw it’s 20th record close of the year. This year, stocks are up about 18 percent – an amazing performance, but (buzz-kill alert) we there is still quite a ways to go to reclaim new highs, when adjusted for inflation: the Dow has to rise above to 15,730 and the S&P 500 has an even steeper climb to over 2,000. Don’t even start to calculate the NASDAQ, which needs to add another 1425 points to get back to the nominal closing high. We all know that Ben Bernanke’s Federal Reserve is responsible for the lion’s share of the stock market’s move higher. Without low short-term interest rates (0 to 0.25 percent since December 2008) and $85 billion worth of monthly bond buying, it’s hard to build a case where stocks would be at these levels. That’s why all eyes have been on Bernanke over the past 8 weeks, as he has tried to explain under what circumstances the central bank would taper its bond purchases.

There will be another chance for a taper-tantrum this week, when Bernanke provides his semi-annual testimony to the House and Senate. That means you have a couple of days to force yourself to rebalance your investment accounts.

Remember that just because stock are up, does not make them safe. If you are the kind of person who simply cannot handle the ups and downs of the stock market, then your inclination is probably to avoid stocks at all costs. But what if you kept your stock allocation to a level where they gyrations didn’t cause you to lose sleep? Maybe a stock allocation of 10 to 20 percent of your portfolio would allow you partially participate over time, but not get your hat handed to you if/when the bottom falls out.

Even if new records don’t really mean too much, I am happy to use them as an opportunity to remind you to review where you stand, create a target allocation and force yourself to rebalance according to your goals.

Here's what smart money has known forever--the quicker you learn these rules, the better:

Don’t let your emotions rule your financial choices. There are two emotions that tend to overly influence our financial lives: fear and greed. At market tops, greed kicks in and we tend to assume too much risk. Conversely, when the bottom falls out, fear takes over and makes us want to sell everything and hide under the bed.

Maintain a diversified portfolio. One of the best ways to prevent the emotional swings that every investor faces is to create and adhere to a diversified portfolio that spreads out your risk across different asset classes, such as stocks, bonds, cash and commodities. (Owning 5 different stock funds does not qualify as a diversified portfolio!)

Avoid timing the market. Repeat after me: “Nobody can time the market. Nobody can time the market.” One of the big challenges of market timing is that requires you to make not one, but two lucky decisions: when to sell and when to buy back in.

Stop paying more fees than necessary. Why do investors consistently put themselves at a disadvantage by purchasing investments that carry hefty fees? Those who stick to no-commission index mutual funds start each year with a 1-2 percent advantage over those who invest in actively managed funds that carry a sales charge.

Limit big risks. If you are going to make a risky investment, such as purchasing a large position in a single stock or making an investment in a tiny company, only allocate the amount of money you are willing to lose, that is, an amount that will not really affect your financial life over the long term. Yes, there are people who invest in the next Google, but just in case things don’t work out, limit your exposure to a reasonable percentage (single digits!) of your net worth.

Ask for help. There are plenty of people who can manage their own financial lives, but there are also many cases where hiring a pro makes sense. Make sure that you know what services you are paying for and how your advisor is compensated. It’s best to hire a fee-only or fee-based advisor who adheres to the fiduciary standard, meaning he is required to act in your best interest. To find a fee-only advisor near you, go to NAPFA.org.

For those who want to protect their portfolios against the eventual rise in interest rates, you may be tempted to sell all of your bonds. But of course that would be market timing and you are not going to fall for that, are you? Here are alternatives to a wholesale dismissal of the fixed income asset class:

Lower your duration. This can be as easy as moving from a longer-term bond into a shorter one. Of course, when you go shorter, you will give up yield. It may be worth it for you to make a little less current income in exchange for diminished volatility in your portfolio.

Use corporate bonds. Corporate bonds are less sensitive to interest-rate risk than government bonds. This does not mean that corporate bonds will avoid losses in a rising interest rate environment, but the declines are usually less than those for Treasuries.

Explore floating rate notes. Floating rate loan funds invest in non-investment-grade bank loans whose coupons “float” based on the prevailing interest rate market, which allows them to reduce duration risk.

Keep extra cash on hand. Cash, the ultimate fixed asset, can provide you with a unique opportunity in a rising interest rate market: the ability to purchase higher yielding securities on your own timetable.

Week ahead: Earnings, Boomerang Stocks, Bernanke to Capitol Hill

Let's start at the very beginningA very good place to start When you read you begin with A-B-C When you sing you begin with do-re-mi

- The Sound of Music (1959, music by Richard Rodgers, lyrics by Oscar Hammerstein II)

Investors used to think that starting at the very beginning meant examining corporate earnings. After all, buying stock in a company (or through a stock mutual fund) is a bet that the company will increase its ability to earn money over time. Yet there is ample proof that companies are having a harder time making money by selling more goods and services and have instead been relying more on cost containment and financial engineering to meet their earnings objectives.

S&P 500 corporate profits are expected to rise 2.9 percent in Q1 vs. a year earlier, according to analysts polled by Thomson Reuters, which would be a slowdown from 5.4 percent in Q1 and 6.2 percent in Q4. But those diminished earnings are coming on projected revenue growth of only 1.6 percent. “If companies are having a harder time making money, then why is the stock market rising?” asked a caller to my radio show recently. The answer to that question requires that we start at another beginning…or with Ben Bernanke.

In January, I jotted down 7 reasons why the stock market rally could extend well into 2013:

(1) (2) (3) The Federal Reserve is maintaining its low interest-rate policies (including the monthly purchase of $85 billion worth of bonds) until employment improves substantially

(4) Japanese officials have started to address the country’s multi-decade economic stagnation

(5) Europe is no longer on the precipice of disaster

(6) The much-feared hard landing in China never came to fruition

(7) U.S. housing is finally contributing to economic growth

You get the joke…Ben Bernanke’s Federal Reserve is responsible for the lion’s share of the stock market move. Without easy monetary policy in place, all of the other factors would not have boosted stocks to the levels that we are seeing now. Last September, the Fed launched its current round of bond buying (QE3) and also said that it would maintain low short-term interest rates until mid-2015. The announcement and the subsequent December pledge to keep the program open-ended sparked a rally in global equities.

Everything was honky dory until May 22^nd, when during Congressional testimony, Bernanke raised the prospect that the central bank could downshift from its accommodative policies, if economic data were to improve. The subsequent 7½ weeks were volatile for every asset class, with most (bonds, gold, emerging stocks) heading lower. The exception has been the U.S. stock market -- the S&P 500 and Dow Jones Industrial Average tumbled about 7 percent from their intraday record highs in June, before recouping all of those losses and recording a new nominal closing high by the close of trading on Friday.

If the boomerang stock market started its journey with Bernanke’s comments, it makes sense that markets would return home after another Bernanke speech. In it, the Chairman underscored that the central bank would continue to pursue highly accommodative policies for the “foreseeable future,” due to a weak labor market and low inflation. This time, investors took Bernanke at his word.

This week’s key event puts Ben Bernanke back on the hot seat for his semi-annual testimony to the House on Wednesday and to the Senate on Thursday. It is expected that the Chairman will draw a distinction between tapering bond buying, which is likely to begin at either the September or December Fed meeting, if all goes well in the economy; and raising interest rates, which is not likely to occur until 2015. Bernanke and company will have a lot more data to chew on between now and the September 17-18 FOMC meeting, including two more employment reports.

Markets: The risk-on trade was ON…at least for another week. For the 25th time this year, the Dow closed at an all-time closing record. The S&P 500 hit its 19th record close of the year, and the NASDAQ hit its highest closing price since September 2000.

• DJIA: 15,464, up 2.2% on week, up 18% on year (Inflation adjusted high: 15,731)
• S&P 500: 1680, up 3% on week, up 17.8% on year (Inflation adjusted high: 2036)
• NASDAQ: 3600, up 3.5% on week, up 19.2% on year (All-time closing high 5,048 on 3/10/00)
• 10-Year Treasury yield: 2.59% (from 2.72% a week ago)
• Aug Crude Oil: $105.95, up 2.6% on week
• Aug Gold: $1277.60, up 5.4% on week
• AAA Nat'l average price for gallon of regular Gas: $3.58 (up $0.11 in a week)

THE WEEK AHEAD: Bernanke’s testimony and earnings season will dominate. Readings on Retail Sales are likely to show an increase, due to a spike in energy prices and consumer inflation at the core level should remain tame.

Mon 7/15:

Citigroup

China GDP

The trial of former Goldman Sachs employee Fabrice “Fab” Tourre begins. He is charged with misleading investors in a mortgage deal begins

8:30 Retail Sales

8:30 Empire State Manufacturing Survey

10:00 Business Inventories

Tues 7/16:

Goldman Sachs, Coca-Cola, Yahoo

8:30 CPI

9:15 Industrial Production

10:00 Housing Market Index

Weds 7/17:

American Express, Bank of America, BNY/Mellon, eBay, IBM, Intel

8:30 Housing Starts

10:00 Ben Bernanke testifies before House

2:00 Fed Beige Book

Thurs 7/18

Capital One, Google, Morgan Stanley, Verizon, Microsoft

8:30 Weekly Jobless Claims

10:00 Ben Bernanke testifies before Senate

10:00 Philadelphia Fed Survey

10:00 Leading Indicators

Fri 7/19:

GE, Honeywell, Schlumberger