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Moving a little too fast

The markets remain Fed led. The theme this week was that we will not see a rate increase until 2016. Why? Well Federal Reserve board members rarely speak with uniformity. But on Monday, a closed day for the bond market, Governor Brainard delivered a stinging rebuff to the “December, when the economy is at full employment” position with a clear description of the asymmetric risk of lifting rates too soon versus too late. Here’s the replay:

“To be clear, I do not view the improvement in the labor market as a sufficient statistic for judging the outlook for inflation…[we] counsel a stance of waiting to see if the risks to the outlook diminish.”

She’s right. Here are the job openings and the quit rates from Friday’s JOLTS (Job Openings and Labor Turnover Statistics) report. Quit rates reflect confidence in finding jobs and confidence remains shaken. Job openings are high and, all things being equal, the unemployment rate should track lower. But it’s not. Which suggests there is still some mending to do on the employment front.

Job Openings and Quits - Total Nonfarm

Three other things caught our eye.

1. Company Earnings: we thought these might be rough. Wal-Mart started the week with a comment about higher expenses. The stock promptly fell 15%. It is now at the same price as it was in 1999. Nestle, a bellwether of global and emerging market growth, saw lower sales in China and India but remains optimistic. A couple of bank posted lower earnings.

2. Downgrades: the normally urbane Moody’s issued a headline “Downgrade Parade Continues”. But opening the report showed no such thing. Yes, there were more M&A related downgrades (when an acquiring company issues debt to close a deal) but way less than the 2007 peak. They also noted balance sheet leveraging is not at any “self destructive” levels. One should hope so. Rates are low and capital access easy.

3. Stocks: stocks are rallying perhaps a little too fast with 65% above their 50-day moving average and 31% above their 200 day moving averages. We would caution reading too much into stock charts but it suggests that the market is highly dependent on meager news. We would like to see the correction consolidate for a while. But then you can’t always get what you want.

Bottom Line: We have the China, Emerging Markets, dollar, global QE and debt ceiling to play out and we may see hard reactions to any big corporate misses in earnings. Stay tuned. No portfolio changes.

--Christian Thwaites, Brouwer & Janachowski, LLC

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