This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

The Fed and The Yen

TheStreet Premium Services

A complimentary preview
of Options-Profits Previews

A lot of traders are having trouble making sense of this market. Here are some comments and links that should help us get clearer about what's going on:

1. Here is the Fed tapering argument that everyone is worried about. The Fed will reduce large scale asset purchases (LSAP) if and only if the employment picture shows, in Bernanke's words on May 22, "sustainable improvement". If LSAP is reduced, there will be less demand for risky assets as the supply of higher quality fixed income assets increases. That is, stocks will tumble. The problem with the first step in the argument is that the employment picture has not improved all that much, so expectations of reduced LSAP seem premature.

The Fed didn't adopt the Evans rule just so they could turn around and break it. The problem with the second step of the argument is that, if the economy is strong enough to justify a normalization of Fed policy, then it doesn't necessarily follow that risky assets would suffer. A rebound in wages and continued supply pressure in the housing market could keep the bid under stocks.

2. What about the sharp move higher in real interest rates? Karl Smith mentions that it could be because of a higher risk premium on U.S. bonds. But the dollar is surging, and the attached chart from me shows that implied volatility term structure on bonds hasn't even flattened to new YTD highs. Instead, Karl thinks that the decline in commodity prices could be spurring an increase in domestic U.S. consumption - especially as weaker demand in China puts more supply-side pressure on commodities. ( Modeled Behavior) The retail sales data for May released this morning showed an increase of 0.6%, beating expectations.

3. The selloff in Japan has been widely blamed on weak-hand foreign investors taking profits after a disappointing news cycle; but weekly data from the Ministry of Finance shows that foreign investors were actually net buyers in the week ending June 7. Foreign investors were massive buyers in May, too. ( Marc to Market) Given the continued weakness in Japan, it won't be surprising if the data for this week turns a bit.

4. In the short term, market stresses justify sitting on your hands for the moment. The bid in equity implied volatility -- look at a moving average of the CBOE Volatility Index (VIX), for instance -- is a very noisy indicator over the short term, but historically it has paid to stand aside when demand for protection is this strong.

Skip makes a great point in his note this morning. The central bankers of the world are smart and market-savvy, and you had better be a world-historical genius if you're going to invest based on the thesis that they'll tank the markets in such a clumsy way.

OptionsProfits can be followed on Twitter at

Jared can be followed on Twitter at

EXCLUSIVE OFFER: Jim Cramer's Protégé, Dave Peltier, only buys Stocks Under $10 that he thinks could potentially double. See what he's trading today with a 14-day FREE pass.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
Top Rated Stocks Top Rated Funds Top Rated ETFs