This Week in Barrons – 3-20-2016:
“If the FED says it will do one thing under certain conditions, and doesn’t end up doing it… does it have a credibility problem?” … Steve Liesman of CNBC
I assume last Wednesday you had a darn good reason for flip-flopping on your stance surrounding raising interest rates? When CNBC’s Steve Liesman started off the Q&A session with: “Madam Chair, inflation has gone up the last two months. We had another strong jobs report. The forecasts for GDP have returned to two percent. And yet you stood pat on interest rates … Does the FED have a credibility problem when it says it will do one thing under certain conditions and doesn’t end up doing it? And frankly, if current conditions are not sufficient for the Fed to raise rates, what would those conditions ever look like?”
Honestly, your 261 word jumbled, James Joyceian stream of consciousness, high-end econ-babble answer was completely non-understandable – which is what I assume you wanted. But let’s discuss a couple of myths:
- Myth #1: Many people believe that the Federal Reserve is somehow a Federal Agency - FALSE.
- Myth #2: Many people believe that we actually need a Federal Reserve (a non-elected band of banksters) to oversee the economy – FALSE.
- Myth #3: Many people believe that the United States always had a Federal Reserve – FALSE.
- Myth #4: “Let us control the money of a country, and I care not who makes its laws"…Mayer Rothschild – TRUE (said in 1838).
Ms. Yellen, there’s something inherently flawed when an un-elected group (The Federal Reserve) was created on a holiday evening in 1913 for the purpose of ‘smoothing out economic booms and busts’ – and then not immediately being FIRED for allowing the ‘Great Depression’ of 1929 to occur. Instead, your powers were increased and now you are allowed to conjure up ‘money’ out of thin air, and loan that same money (with interest) to our Government. And most recently lie to the U.S. economy when in December of 2015 – you proclaimed (after the first interest rate hike in 10 years): “If data supports it, there will be 4 additional rate hikes in 2016.” Unfortunately for you, the most recent data confirms that we are running on all cylinders with 4.9% unemployment and less than 2% inflation. BUT we have a problem with your ‘oath of transparency’ to ‘not surprise’ the markets. What kind of transparency do you think you are showing when you (a) lay out a plan for 4 (data-dependent) rate hikes, (b) receive (and brag about) the corroborating data, and then (c) give the U.S. economy the ‘middle finger’ and whisper ‘ha-ha I tricked you’.
So what was it that turned you around? Was it the most recent G20 meeting, where you secretly agreed to keep U.S. policies more in line with what the rest of the global central bankers were doing? After all, Sweden, Denmark, the ECB, Switzerland, and Japan are actually operating with NEGATIVE interest rates. The U.S. is almost alone in having a slightly positive rate. So it would be easy to think that you decided that the U.S. should not hike rates while the world cuts theirs. OR was it when the Obama/Hillary crusade said to you: ‘We're coming into election time, and we want a nice strong market to prove that the our policies are working. You will NOT hike rates or do anything else to cause this market to fall’. I think it was the second option. After all, Obama has slowly been circling the wagons for Hillary. Hillary isn’t getting the support that Obama got, and he’s taken it upon himself to campaign for her and to tell the FED to save the market for her.
My hope was that somehow fiscal sanity would prevail, and our FED would ignore all of the ‘noise’ and hike rates so that millions of savers could finally get a tiny return on their savings. I was hoping that maybe our FED had seen the folly of subprime mortgages and subprime auto loans, and were ready to at least try and clean up their act. But all we saw was a group desperate to save their own jobs, and a President equally desperate to keep the economic illusion alive – one that starts and stops with the stock market. All of the FED members do not support a Republican agenda, and as President Reagan once said: “You gotta dance with the one that brung ya!” Meaning that you will most likely continue to lean Dovish, and keep the market aloft as we head into November.
The reality is you can’t really raise rates, stop buying bonds, stop buying mortgage back securities, or shrink the money supply – because if you did, the FED led recovery would quickly send the economy in to a recession. Having lost the economy, the stock market is now your economy. Your job is to keep the stock market propped up at any cost – as it is the only part of the economy that you can control. But that begs the question – can you rig the stock market forever?
- 4.9% of the population is unemployed as long as you don’t count the 100 million are not in the workforce and the 50 million on food stamps,
- 50% of all of the hires during this recovery are part-time workers, with bartenders and waitresses making up the majority,
- All of the consumer indicators fell last month: consumer sentiment fell 1.9%, economic conditions fell 1%, and economic expectations fell 2.4%,
- Last month retail sales fell, inflation rose 2.3%, average hourly earnings fell 0.1%, and average weekly earnings fell 0.5%, and
- Our industrial sector is showing numbers lower than in 2009.
I was ready for our FED to announce another quarter point hike in June. But, I also believe that when the global community couldn't convince them otherwise, Obama/Hillary stepped-up to the plate and told them not to do anything ahead of this election that would harm the stock market – otherwise – they’re fired. But this still begs the question: Is our FED capable of pushing the market to new highs? I don’t think so. Japan and the ECB both have negative rates and their major index and the DAX are still 3,000 points below their respective 2014 highs. So, keeping rates ‘equal to or less than’ zero does NOT seem to keep stocks moving higher.
Now, directly following the FED announcement on Wednesday, the dollar index dropped like a rock – helping to drive the equity, bond, and commodity markets higher. I’m wondering:
- How much of our equity rally is based upon recent strong earnings and fundamental expectations versus the FED’s more dovish stance?
- If the U.S. dollar can find a bottom and begin to rebound?
- If the U.S. dollar continues to fall (effectively lowering prices on U.S. goods overseas), should we expect a significant reduction in the number of multi-national earnings warnings going forward?
Unfortunately (once again), this all comes down to the FED and not real economics or fundamentals. After all, the big run up from February’s lows came on the heels of 2 things: 1st the FED played the oil futures market, and rescued oil prices. This allowed the banks to renegotiate some of the completely underwater fracking and drilling loans that were imploding on bank’s balance sheets. And 2nd we had just come through a period of record stock buy backs. Corporations are still taking advantage of borrowing money at zero and buying back their own stock – all with the goal of boosting their own stock price and dramatically increasing their own executive’s compensation packages.
For example: during the past 7 weeks private investors have pulled money out of stocks in record numbers. Last week alone, investors sold $3.7B worth of stock. But in what can only be called ‘almost’ record numbers, corporations bought back their own stock in numbers not seen since 2007. The S&P estimates that in this quarter alone, almost $165B worth of corporate buy-backs are in the works. Therefore, all of the private sector selling (to exit the market) was met directly by corporate buying.
But here's the rub, for the next 6 weeks – companies (going into their earnings quiet period) are not going to be able to buy back their own stock. My feeling was that if Ms. Yellen had talked about hiking rates in April or June, coupled with the ending of corporate buy-backs – we were set-up for a substantial fall. Now with Ms. Yellen waffling on her rate hikes and her dovish tone – we’ve got a split field. Do we go higher on the heels of a quiet FED – OR do we trade sideways and down because the biggest buyer in the market isn't going to be there?
I think we go sideways and lower. We may pop higher for another day or two, but I don't think we will rally with enough volume required to break us out of the substantial overhead resistance that exists starting at 2050 on the S&P. In the past couple of weeks, we've come up over 220 S&P points (with Janet’s ‘about face’ giving us the last 40 points). We are over-bought, over-extended, over-priced and desperately in need of a pull back. Between the most incredible Political season of my life, and the ‘End-game’ situation of our economy, there's certainly no shortage of excitement lately. Take care and be safe.
If you haven’t heard the CNBC interview with Curly Haugland – a senior GOP official, moaning about the whole idea of people voting at primaries – it’s definitely worth a listen. In a disgusting display of hubris, he virtually said that people should shut up and "let the party nominate the candidate". He then went on to say that the voting is a dog and pony show, and the Convention will appoint whom THEY determine to be their man. He then said that he didn’t care if millions or even record numbers of people pull the switch for Trump, because the people do NOT have the right to appoint the nominee. Finally when asked: “Isn't the party made up of those millions of people? Shouldn't their desires be heard?" His answer was a definitive – “NO”: http://www.cnbc.com/2016/03/16/we-choose-the-nominee-not-the-voters-senior-gop-official.html
I’m still watch the following indicators:
- The Russell Small Cap Index (RUT) – for general market order flow in the equity markets.
- The Dollar (DXY) – for strength and weakness, with a strong dollar indicating a coming FED rate hike.
- And the Bond Yield (TNX) – the 10-year yield will reflect a FED rate hike expectation. If we see yields move up, then the bond market is expecting a Fed rate hike.
- Long various mining stocks: AG, AUY, EGO, GFI, IAG, and FFMGF,
- Long an oil supplier: REN @ $0.56,
- Long GLD – Apr – Call Debit Spread – 118 / 123,
- Long NKE – Apr – Call – 67.5,
- Long POT – Stock & Apr – Call 20,
- Long SBUX – Apr – Call – 55,
- Sold SPX – Mar4 – Call Credit Spread – 2040 / 2045,
- Long SPX – 2010 – Mar4 / + April Calendar spread,
- Long SPX – 2030 – Mar4 / + April Calendar spread,
- Long SPX – 2050 – Mar4 / + April Calendar spread,
- Long SPX – 1900 / 1925 / 1975 Apr Butterfly
- Sold TEX – Apr – Put Credit Spread – 19 / 20
To follow me on Twitter.com and on StockTwits.com to get my daily thoughts and trades – my handle is: taylorpamm.
Please be safe out there!
Expressed thoughts proffered within the BARRONS REPORT, a Private and free weekly economic newsletter, are those of noted entrepreneur, professor and author, R.F. Culbertson, contributing sources and those he interviews. You can learn more and get your free subscription by visiting: <http://rfcfinancialnews.blogspot.com> .
Please write to Mr. Culbertson at: <email@example.com> to inform him of any reproductions, including when and where copy will be reproduced. You may use in complete form or, if quoting in brief, reference <>.
If you'd like to view RF's actual stock trades - and see more of his thoughts - please feel free to sign up as a Twitter follower - "taylorpamm" is the handle.
If you'd like to see RF in action - teaching people about investing - please feel free to view the TED talk that he gave on Fearless Investing:
To unsubscribe please refer to the bottom of the email.
Views expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest and is not in any way a testimony of, or associated with Mr. Culbertson's other firms or associations. Mr. Culbertson and related parties are not registered and licensed brokers. This message may contain information that is confidential or privileged and is intended only for the individual or entity named above and does not constitute an offer for or advice about any alternative investment product. Such advice can only be made when accompanied by a prospectus or similar offering document. Past performance is not indicative of future performance. Please make sure to review important disclosures at the end of each article.
Note: Joining BARRONS REPORT is not an offering for any investment. It represents only the opinions of RF Culbertson and Associates.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN MANAGED FUNDS. WHEN CONSIDERING ALTERNATIVE INVESTMENTS (INCLUDING HEDGE FUNDS) AN INVESTOR SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS AND OTHER SPECULATIVE INVESTMENT PRACTICES MAY INCREASE RISK OF INVESTMENT LOSS; MAY NOT BE SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investor's interest in alternative investments, and none is expected to develop.
All material presented herein is believed to be reliable but we cannot attest to its accuracy. Opinions expressed in these reports may change without prior notice. Culbertson and/or the staff may or may not have investments in any funds cited above.
Remember the Blog: <http://>
Until next week – be safe.