Top Gun FP Client Note: The Fed Downgrades The Economy; Cisco Corroborates

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Those words from the Federal Reserve on Tuesday have reverberated across worldwide financial markets over the last two days.  Emphasizing their outlook, the Fed made the decision to reinvest the proceeds from maturing agency bond and mortgage backed securities in treasuries in order to hold their balance sheet steady.

 

The downgrade of the economy marks an important shift in the Fed’s outlook which had been improving over the last year and a half.  On June 24, 2009, they said “the pace of economic contraction is slowing.”  On August 12, 2009, they said “economic activity is levelling out.”  On September 23, 2009, we got “economic activity has picked up following its severe downturn.”  Note the substitution of “picked up” for “levelling out” as their adjective of choice to describe the economy.

 

The Fed used the phrase “continued to pick up” to characterize the economy in November and December 2009.  In their January, March and April statements from this year, they wrote “economic activity has continued to strengthen”.  Bernanke gave a speech on exit strategies in February.  In June, the economic recovery was “proceeding”. 

 

Now, however, the recovery has “slowed”.  “Levelling out”, “picked up”, “strengthened”, “proceeding”, “slowed”.  The Fed chooses its words very carefully.  Businessmen and investors everywhere pay attention to the outlook of the most powerful economic institution in the world.  Hence, we got a shift in sentiment and a reversal of the risk trade.

 

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Following on the Fed, on Wednesday afternoon’s conference call Cisco (CSCO) CEO John Chambers said a number of things that corroborate the Fed.  His customers are worried about the economy and uncertain about the future.  As a result, Cisco is to some extent as well.

 

Chambers comments carry a lot of weight because he has been ahead of the curve in the current cycle.  He was early in recognizing the slowdown when he forecasted “lumpy” US sales going forward in November 2007.  And he was early in recognizing the recovery when he suggested a “tipping point” in August 2009.

 

Cisco shares were off 10% on heavy volume on Thursday dragging the broader market down.

S&P: +0.59%

DJ Total: +1.59%

Top Gun: +2.02%