Ahead of Wall Street - March 27, 2012

Tuesday, March 27, 2012

Bernanke’s favorable comments from Mondaywill likely linger in today’s trading action as well, even if the consumer confidence and home price data on deck for release a little later turn to be less than exciting. Monday’s market gains reconfirm that the Bernanke Put is a fact of life.

The Fed Chairman clearly indicated the need for a supportive monetary policy stance to help the labor market heal. He took sides in the ongoing ‘cyclical vs. structural’ causes of the nation’s current unemployment problem by favoring cyclical explanations, but acknowledged that the question was far from fully resolved. Bernanke characterized the labor market improvement of recent months as ‘something of a puzzle’ and appeared to be not too convinced of the trend’s staying power.

Following the last FOMC meeting and the overall positive run of recent economic readings, the market appeared to have given up on further quantitative easing. In fact, many in the market had started thinking in terms of an earlier end to the Fed’s low interest rate policy than its declared commitment of late 2014. Bernanke’s Monday comments effectively remove the early exit fears. In fact, in the eyes of the many, the Fed Chairman’s comments leave the door open for the further quantitative easing-type programs in the future. I don’t think the U.S. economy’s current profile warrants additional quantitative easing. Bernanke’s cautious tone on recent labor market gains may have a basis. But his primary motivation may have been to use the Fed’s bully pulpit to reverse the recent uptrend in long-term bond yields. It remains to be seen how successful he turns out to be on that front.

In corporate news, TransCanada Corp’s (TRP - Snapshot Report) Keystone XL pipeline project that has been controversially delayed by a U.S. government review on environmental grounds appears to be faced with a competing pipeline project from Calgary-based Enbridge (ENB - Snapshot Report) and Houston-based Enterprise Products Partners (EPD - Analyst Report). The ENB-EPD project does not face the same level of regulatory scrutiny as the Keystone project as it will mostly be using right-of-way allowances for existing pipelines owned by the two companies. The emergence of this new pipeline project, expected to be operational by mid 2014, does not eliminate the need for more north-south pipeline capacity given increased oil volumes out of Canada’s oil sands and growing shale oil production in North Dakota.

Sheraz Mian
Director of Research