Mario Draghi Is One of the All-Time Greats; Watch Him Closely: Market Recon

Somehow, the ECB's Mario Draghi must address tapering QE without causing a spike in the euro.
By Stephen Guilfoyle ,

"Compromise, contrary to popular opinion, does not mean selling out one's principles. Compromise means working out differences to forge a solution which fits the diversity of the body politic." -- Madeleine May Kunin

The Pickle Jar As always, central banking is never too far away from our focus. Thursday, of course, is a European Central Bank policy decision day. Just yesterday, Stanley Fischer submitted his resignation as vice-chairman of the Federal Reserve Bank. What to make of these developments? First, let's look at the ECB. Mario Draghi, partially due to the recent success of several core European economies (Thursday morning's data on German industrial production excepted) finds himself in something of a pickle as consumer level inflation remains stubbornly low across the continent. We had at one point hoped to learn something on the future of monetary policy from Jackson Hole. Draghi -- in fact almost all central bankers -- simply avoided discussing monetary policy at that symposium. Thanks for nothing, gang. Maybe you forgot your purpose here?

What about the ECB's quantitative easing program? The ECB continues to purchase €60 billion($71.9 billion) worth of assets every month. The need to taper these purchases is obvious. Somehow Draghi must address this later on Thursday without causing a spike in euro valuations versus the U.S. dollar as well as other competitors. Not exactly a task relished, but never underestimate this communicator. He is one of the all-time greats when it comes to pushing valuations around with words, and he does not need to act just yet. He only needs to set the stage for something to be put in place later this autumn. This ECB press conference, which is scheduled for 08:30am New York time has the potential to be the market event of the day. Watch the dollar today.

Goodbye to You

Closer to home, we now deal with a key central banker resigning his post ahead of the end of his term. That would be Fed vice-chair Stanley Fischer, who was expected to serve at least until June 2018. What does this do to the current trajectory of monetary policy in the U.S.? Fisher is considered to be mildly hawkish, or at least more so than the chair herself, Janet Yellen. That might not seem like much, but the fact is that he and Yellen obviously respect each other, and work well together. On top of that, Fischer has been an outspoken critic of deregulating the financial industry, which may have made dealing with the president a rather uncomfortable experience. Yellen's term as head central banker is up this February. That, too, is interesting. With Yellen's possible departure, this could leave four of the seven seats on the Fed's Board of Governors open to presidential nomination. Talk about power. The president has made no secret of his preference for a weaker currency, lower interest rates for longer. The progress of his agenda coming in has to this point been confined to deregulation. Filling these posts with similarly thinking personnel could really end up prepping that compressed spring that we spoke of in Wednesday's Market Recon. Of course, Yellen still may have an excellent chance to keep her job should she want it. Bored? You won't be for long.

Deal Maker

Speaking of the president, how key is it that he chose to side with congressional Democrats to push out the government's borrowing limit for three months, while kicking off aid for those impacted negatively by Hurricane Harvey? From my corner, this is a fairly huge development. Let's not forget that this president was a Democrat for most of his life. Let's not forget that this president is a business person first, and has been repeatedly disappointed by the likes of House Speaker Paul Ryan and Senate Majority Leader Mitch McConnell. These two have proven themselves remarkably inept for leaders holding majorities in their respective bodies at advancing any key tenets of their own agendas.

So, the president, who has never really been married to any political ideology, decides to dance with the likes of Chuck Schumer and Nancy Pelosi. Does this mean that he can expect help on tax reform? It does show a willingness to play ball. It does push out the debt limit to Dec. 15, when we will have this fight all over again. It does get aid to those poor folks down in Texas moving ahead of a possible second disastrous storm of this season hitting Florida and the southeast. I see no harm in this "compromise", as long as there is one. Does this improve market stability going into year's end? Probably not, but when do you add risk? When you're up, not when you are down. If this ends up improving this president's relationship with the previously uncompromising left, and lights some kind of a fire to improve performance from the light hitting leadership on the right, then the president will deserve a "well done" on this.

Black Gold?

WTI crude remains above $49 a barrel this morning. We all know that the API data last night showed a smaller than expected build in the space after what happened last week in Texas. The EIA weekly inventory numbers, which will be released at 11am ET, will likely impact Thursday's trade as much as anything else in your universe. The fact that the industry faces a second devastating storm in less than two weeks is certainly a wild card that traders must deal with.

The questions for those who are still long and wrong the energy space are now: "Is this the pop I have been waiting for?" and: "Can I shave more off my energy losses by waiting longer?" Well, gang, you are not alone. I remain long Apache (APA) - Get Report , and I remain long Schlumberger (SLB) - Get Report . These two names -- which are also held in the Action Alerts PLUS charity portfolio -- have been a drag on my P/L (profit/loss ratio) all year. I can only imagine my stellar performance if only these two names were flat on the year. Well, enough of that.

We do not whine here, and we do not cast blame. We deal with reality, and price discovery. Oil prices have been wildly volatile over the past few weeks. WTI crude is raising its ugly head to the point where some traders are seeing hope in the space. WTI futures have not kissed $50 a barrel since late July, and prices above that level have not been sustained since April. We believe nothing until there is a break, and then also a hold on a re-test at or above that level. Then we look at $52. It is true that if you averaged down effectively in these equities, you can see a possible soft landing from here. What do I think?

If this is your entire ballgame, then I think it wise that you start to lighten up, just in case what you see is indeed just another mirage. If you are in good overall shape, and your better- than-decent performance is simply being weighed upon by this one sector ... as long as you are not overweight the sector, maybe wait. I place myself in that category. I think I may wait at least until earnings season. That gives me another six to eight weeks with my weapon on safe, and my finger alongside the barrel. The break and hold that would get me fired up is around $52. For those who remain skeptical, you can indeed get a decent premium right now for writing call options expiring in mid-October for these underlying stocks. You know how I love raising revenue through the options markets. Sell'em, don't buy 'em. There is always more than one way to skin a cat, kids.

Macro

08:30 - Initial Jobless Claims (Weekly):Expecting 243,000, Last Week 236,000. As consistent as this series has been, the span of consensus range for this week's data is a rather wide 20,000, as opposed to the less than 10,000 that we have become accustomed to. Though not expected to be a driver for increased joblessness, Hurricane Harvey's impact on eastern Texas is likely the cause for some of this uncertainty in expectations. The four-week moving average for this item now stands at 236,750.

08:30 - Non-Farm Payrolls (Q2-rev):Expecting 1.2%, Flashed 0.9% q/q SAAR.

08:30 - Unit Labor Costs (Q2-rev):Expecting 0.4%, Flashed 0.6% q/q SAAR. The reduction that we expect to see for second-quarter labor costs will be welcome news to employers. The big news, however, will be the upward revision to productivity, which will be a direct result of the upward revision that we saw for second-quarter GDP.

10:30 - Natural Gas Inventories (Weekly):Expecting 35 billion, Last Week 30 billion cubic feet. Natural gas spiked (well, sort of) last week, then sold off only to regain the $3.0 level. In truth, this commodity has been remarkably stable for over three months now. Today, we expect to see a 23rd consecutive weekly build reported in this space.

11:00 - Oil Inventories (Weekly):API +2.79 million ,Last Week -5.4 million barrels.

11:00 - Gasoline Stocks (Weekly):API -2.54 million , Last Week +35,000 barrels. The American Petroleum Institute reported a build for the headline crude print as well as a draw for gasoline. It may take a while for the full effect of Hurricane Harvey to work its way through these numbers, but both the build and the draw here were smaller than expected given the widespread shutdowns seen across the refiners. Many experts are still looking for a build in excess of 4.0 million barrels to be reported by the EIA on Thursday for crude, despite last night's data.

12:15 - Fed Speaker: Cleveland Fed Pres. Loretta Mester will speak from Pittsburgh on her outlook for both the U.S. economy, and for monetary policy. Mester has been consistently hawkish for roughly two years now, but does not vote on policy this year. There will be opportunity at this event for Mester to answer questions posed by both the media, and the audience.

19:00 - Fed Speaker:New York Fed Pres. William Dudley will speak tonight from New York City. Dudley, a permanently voting member of the FOMC will cover the economy and his outlook for monetary policy. Dudley, who has said as recently as mid-August that he still favored the idea of one more rate hike this year, will take questions from the media as well as the audience.

19:00 - Fed Speaker:Atlanta Fed Pres. Raphael Bostic is set to speak tonight from Atlanta, Georgia. Bostic, who is the newest district president does not vote on policy until next year. Of late he has seemed concerned with the lingering scars felt by the public in the wake of the financial crisis, and how those scars impact investment decision making.

20:15 - Fed Speaker:Kansas City Fed Pres. Esther George will be in Omaha, Nebraska to discuss her outlook for the U.S. economy. George, who is thought of as perhaps the most hawkish currently serving regional district president, does not vote on policy this year.

Sarge's Trading Levels

These are my levels to watch today for where I think that the S&P 500, and the Russell 2000 might either pause or turn.

SPX: 2490, 2481, 2472, 2462, 2456, 2446
RUT: 1421, 1415, 1406, 1400, 1394, 1387

Today's Earnings Highlights (Consensus EPS Expectations)

Before the Open: BKS (-$0.12), DCI ($0.53), HOV (-$0.01)

After the Close: FNSR ($0.40), SAIC ($0.91), PAY ($0.36)

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At the time of publication, Stephen Guilfoyle was long APA, SLB, although positions may change at any time.

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