Monday, September 25, 2017

Monday Morning Chartology

The Morning Call

9/25/17

The Market
         
    Technical

            The S&P (and the Dow) continues its upward march, supported by both moving averages and uptrends across all timeframes.  The assumption at this point has to be that it will challenge the upper boundary of its long term uptrend.  The only problem is that pesky gap open back on 9/11.



            The long Treasury is apparently not worried about higher interest rates.  It remains above its 100 and 200 day moving averages and the lower boundaries of its short term trading range and its long term uptrend.  Notice it is up (yield down) the two days following the Fed meeting.  Meanwhile, short rates are up.  So the yield curve is flattening---pointing at economic weakness.



            The dollar is the mirror image of TLT---below its 100 and 200 day moving averages and the upper boundaries of its short and very short term downtrends.  Also like TLT its pin action (down) the two days following the Fed meeting was exactly the opposite of what you would expect.



            While GLD remains above its 100 and 200 day moving averages and the lower boundary in its short term uptrend, its recent decline suggests that its followers believe higher rates are ahead.



            The VIX continues to get pounded.  It is below all support levels and is nearing its recent bottom.  The question is, will it go still lower?



    Fundamental

       Headlines

            ***overnight, the September Japanese Markit flash manufacturing PMI hit a four month high and PM Abe is said to be considering a 2 trillion yen stimulus package.

                And the September German business confidence came in below expectations; Merkel wins again---sort of.


                The Trump/GOP tax plan was leaked.


       Investing for Survival
   
            Separating the do’s and don’ts of investing.

    News on Stocks in Our Portfolios
 
            Genuine Parts Company (NYSE:GPC) announces that it worked a merger with European parts distributor Alliance Automotive Group.

Economics

   This Week’s Data

            The August Chicago Fed national activity index came in at -.31 versus expectations of +.11.

   Other

Politics

  Domestic

  International War Against Radical Islam


Visit Investing for Survival’s website (http://investingforsurvival.com/home) to learn more about our Investment Strategy, Prices Disciplines and Subscriber Service.




Saturday, September 23, 2017

The Closing Bell

The Closing Bell

9/23/17

Statistical Summary

   Current Economic Forecast
                       
2016 actual

Real Growth in Gross Domestic Product                          1.6%
Inflation (revised)                                                              1.6%                    
Corporate Profits (revised)                                                     4.2%

2017 estimates (revised)

Real Growth in Gross Domestic Product                      -1.25-+0.5%
                        Inflation                                                                         +.0.5-1.5%
                        Corporate Profits                                                            -15-0%



   Current Market Forecast
           
            Dow Jones Industrial Average

                                    Current Trend (revised):  
                                    Short Term Uptrend                                 21193-23762
Intermediate Term Uptrend                     18888-26219
Long Term Uptrend                                  5751-24198
                                               
                        2016    Year End Fair Value                                   12600-12800

                        2017     Year End Fair Value                                   13100-13300

            Standard & Poor’s 500

                                    Current Trend (revised):
                                    Short Term Uptrend     (?)                           2473-2757
                                    Intermediate Term Uptrend                         2251-3025
                                    Long Term Uptrend                                     905-2763
                                               
                        2016   Year End Fair Value                                      1560-1580
                       
2017 Year End Fair Value                                       1620-1640         

Percentage Cash in Our Portfolios

Dividend Growth Portfolio                          59%
            High Yield Portfolio                                     55%
            Aggressive Growth Portfolio                        55%

Economics/Politics
           
The Trump economy is providing an upward bias to equity valuations.   The data flow this week was tilted to the negative: above estimates:  August housing permits, weekly jobless claims, the September Philly Fed manufacturing index and the August leading economic indicators; below estimates: the September housing market index, August housing starts, August existing home sales, month to date retail chain store sales, the September Markit flash services and composite PMI’s, the second quarter trade deficit, August import/export prices; in line with estimates: the September Markit manufacturing PMI.

However, the primary indicators were mixed: August housing starts (-)/ building permits (+), August existing home sales (-) and the August leading economic indicators (+).   Given the overall count, the call is negative.  Score: in the last 102 weeks, twenty-nine were positive, fifty-six negative and seventeen neutral. 

Overseas, the data was again quite positive for the EU.  However, the bad news from China keeps on coming.  This week Moody’s and S&P downgraded its credit rating due to its excessive level of debt.

The lead story this week was the Fed’s decision to begin unwinding its balance sheet.  For me, the most important point coming out of the subsequent narrative was how adamant it was that the timetable for completion of normalization was pretty much set in stone. Assuming this is just not more Fed double speak, that means that there won’t be any more of the past ‘on the one hand, on the other hand’ waffling as an excuse to stay accommodative.   More on all this below.

                On the fiscal front,

(1)   the GOP tried to resurrect the overhaul of healthcare and again McCain’s conscience just wouldn’t allow him to vote for it [jerk off].  Aside from keeping the American people saddled with Obamacare, it also eliminates any cost savings that could be applied to tax reform,

(2)   the impact of Hurricane Irma.  This is the second catastrophic natural disaster in the last month.  Estimates from Harvey are now in $150 billion plus range but it appears that Irma’s damage will be less than anticipated---not that it isn’t sizable.  To reiterate, this will add to the deficit/debt and is not an economic plus no matter what the chattering class alleges,

(3)    the GOP is set to announce its tax reform package on Monday.  More below but the bottom line is, if it is not revenue neutral, I fear it will do little by way of stimulating the economy,

Bottom line: this week’s US economic stats were negative, confirming the pattern for the last two years---the economy struggling to keep its head above water.  The question is, has it stopped sinking?  At some point, I would think that the improving European economy would have some positive influence on our own; but for the moment, that is not happening.

Longer term, with the national debt now larger than GDP, I am less confident in my upgrading our long term secular growth rate assumption by 25 to 50 basis points based on Trump’s deregulation efforts.   In addition, any further increase in that long term secular economic growth rate assumption stemming from enactment of the Trump/GOP fiscal policy is also up to question. 

Our (new and improved) forecast:

A now questionable pick up in the long term secular economic growth rate based on less government regulation.  This increase in growth could be further augmented by pro-growth fiscal policies including repeal of Obamacare, tax reform and infrastructure spending; though the odds of that are uncertain.  On the other hand, any expected increase in the secular rate of economic growth could be rendered moot if tax reform (assuming its passes) increases the national debt and the deficit.

Short term, the economy is struggling and will likely continue to do so; though the improving global economy may at some point have an impact.
                       
       The negatives:

(1)   a vulnerable global banking system.  

(2)   fiscal/regulatory policy. 

The Donald continues to exercise control over his mouth which in itself assists accomplishing the Trump/GOP fiscal agenda.  I would make one exception to that comment---which was the hot tongue he laid on North Korea, Iran and Venezuela at the UN this week.  I don’t have a problem with doing it in private; but I worry that making an existential threat to North Korea in public could make a misstep more likely.

      That said the republicans are still trying to move forward with their agenda.

(1)   they attempted to give healthcare reform another try; but failed [thank you again Mr. McCain].  Now whatever cost savings might have been produced by this measure is lost,

(2)   the GOP has promised us a tax reform package this coming Monday.  The major selling point that the republicans keep pointing to is middle income tax cuts with the higher brackets staying current levels.  That this bill will simplify and make the tax system more fair is a big plus.

However, that it will be stimulative---a second selling point---I believe is questionable.  As you know, I keep referring to the Reinhart/Rogoff study that indicates that developed countries with national debt more than 90% of GDP grow at lower secular rates than normal and sometimes don’t grow at all.  With the US at 100% debt to GDP, that suggests that any tax reform will not be as stimulative as it is being sold.  In fact, Secretary Mnuchin has said that the tax reform measure will be revenue neutral assuming a 3% GDP growth.  Since our GDP isn’t even growing at that rate now, if Reinhart/Rogoff are correct, then GDP growth would never reach that level.  The only thing that would grow is the national debt.

(3)   speaking of which remember [a] our leaders just raised the national debt limit which itself is an increase in the deficit/debt and [b] none of this takes into account the money that will be spent repairing the damage from Hurricanes Harvey and Irma.  So whatever the deficit/debt is projected to be now, it will only get bigger as these bills come due.

My bottom line on this issue: [a] if the fiscal agenda doesn’t get enacted, it is not bad news.  The result would be continued gridlock and historically, that has been good news.  However, it would mean that the potential economic benefits from tax reform and infrastructure spending would not occur and [b] even if tax reform and infrastructure spending do happen but further increase the deficit spending and the federal debt, that would be a negative, in my opinion.

(3)   the potential negative impact of central bank money printing:  The key point here is that [a] the Fed has inflated bank reserves far beyond any comparable level in history and [b] while this hasn’t been an economic problem to date, {i} it still has to withdraw all those reserves from the system without creating any disruptions---a task that I regularly point out it has proven inept at in the past and {ii} it has created or is creating asset bubbles in the stock market as well as in the auto, student and mortgage loan markets.  

This week’s big news was the FOMC meeting, following statement and the subsequent Yellen press conference.  The key takeaway is that Fed will begin unwinding its balance sheet next month.  I hit this subject hard in our Thursday Morning Call, so I won’t be repetitious except for the conclusions:

[a] I was wrong about the Fed remaining dovish.  It has apparently decided that it has dallied too long, that there is no miracle that is going to save it and so it is time to bite the bullet and begin normalizing its balance sheet---which, of course, officially extends its perfect record of never correctly managing the transition from tight to easy money,

[b] even more surprising, Yellen seemed adamant in stating that the unwind of QE was a firm commitment and not likely to be altered by short term economic considerations---meaning, it now runs the risk of staying too tight too long just as it stayed too easy too long.  That said, this crew’s history is to waffle at the slightest hint of economic weakness.  So healthy skepticism seems appropriate,

[c] it used an improving economy as the reason for the start of the transition.  As you know, I have long held that {i} the Fed economic model was broken and it never had a good grasp on what was really occurring in the economy.  Yellen as much as admitted that in saying that the Fed couldn’t figure out why inflation was so low---news flash the economy isn’t as strong as you believe.  The point being that I see no reason to assume their image of an improving economy is anymore valid today than in the past, and [ii] no matter that, unwinding QE has never been about the economy but rather fear of a Market hissy fit. 

This latter point is a key to my Market outlook---when QE starts to unwind, so does the mispricing and misallocation of assets.  That thesis is about to be tested. 

In other central bank news, the Bank of Japan left its monetary policy unchanged.  Plus Bank of England’s director Carney walked back his hawkish statement of last Friday---as I feared would happen.  The $64,000 question is, has the Bank of England, the Bank of Japan and the ECB been waiting for the Fed to begin the great transition to normalized monetary policy before following suit? 

(4)   geopolitical risks:  Trump fell back to his old ways this week, threatening to destroy North Korea and to withdraw from the Iran nuclear arms agreement.  In response, both parties ramped up their own rhetoric, with North Korea threatening to test a hydrogen bomb in the Pacific. 

The latest from Syria (medium):

My opinion hasn’t changed: I have no problem conveying this message in private; but publicly, it raises the issue of saving face and hence could lead to a misstep.

This story isn’t over and there remains a decent probability of an unpleasant outcome. 

(5)   economic difficulties around the globe.  This week:

[a] the September EU flash manufacturing and services PMI’s were above forecasts; August UK retail sales were strong; German PPI was in line,

[b] August Japanese exports were well ahead of expectations,
 
                  [c] Moody’s downgraded China’s credit rating.

Our outlook remains that the European economy is out of the woods.  But the stats out of China the last three weeks discourage any thought that it might be a candidate for removal from the ‘muddle through’ scenario.

            Bottom line:  our near term forecast is that the US economy is stagnate though there is a possibility that the improved regulatory outlook and a now growing EU economy may halt any worsening.  Further, if Trump/GOP were to pull off a (near) revenue neutral healthcare reform, tax reform and infrastructure spending on a reasonably timely basis, I would suspect that sentiment driven increases in business and consumer spending would return. 

To be sure, Trump’s drive for deregulation and improved bureaucratic efficiency is and will remain a plus.  As you know, I inched up my estimate of the long term secular growth rate of the economy because of it.  But I fear that thesis is about to be tested if the congress passes non-revenue neutral tax reform---however, simpler and fairer it may be.


The Market-Disciplined Investing
         
  Technical

The indices (DJIA 22349, S&P 2502) had a mixed day (Dow up, S&P down), though both closed near the flat line.  Volume inched higher; breadth weakened further.  Both remain above their 100 and 200 day moving averages and are in uptrends across all time frames. 

The VIX (9.6) was off slightly, leaving it below the upper boundary of its short term downtrend, below its 100 and 200 day moving averages.  It is now below the lower boundary of its long term trading range, drawing near its former all-time low (8.8).  The question as to whether or not the VIX has bottomed is about to be answered.

The long Treasury rose, finishing above its 100 and 200 day moving averages (both support) and the lower boundaries of its short term trading range and its long term uptrend.  It is also up both of the two days following the hawkish conclusion of the FOMC meeting.  On the other hand, yields on shorter term maturities continue to increase, meaning that the yield curve is flattening.  Historically, that has pointed to a weakening in the economy---not the consensus view right now and certainly not in line with the reasons the Fed gave for the start of its balance sheet unwinding.

The dollar declined, remaining in short term and very short term downtrends and below its 100 and 200 day moving averages and in a series of seven lower highs---also indicating the dollar investors are not persuaded that a stronger economy/higher rates are on the way. 
           
GLD continued to fall, but still ended above its 100 and 200 day moving averages (both support) and the lower boundary of a short term uptrend.

Bottom line: long term, the indices remain strong viz a viz their moving averages and uptrends across all timeframes. Short term, they are above the resistance level marked by their August highs, meaning that there is no resistance between current price levels and the upper boundaries of the Averages long term uptrends.

On the other hand, all those gap openings from two Monday’s ago still need to be closed. 

Finally, TLT and UUP investors are not supporting the stock boy’s or the Fed’s scenario of an improving economy/higher rates.

I remain uncomfortable with the overall technical picture.
           
Fundamental-A Dividend Growth Investment Strategy

The DJIA (22349) finished this week about 70.9% above Fair Value (13074) while the S&P (2502) closed 54.9% overvalued (1615).  ‘Fair Value’ may be changing based on a new set of regulatory policies which could lead to improvement in the historically low long term secular growth rate of the economy (depending on the validity of Reinhart/Rogoff); but it still reflects the elements of a botched Fed transition from easy to tight money and a ‘muddle through’ scenario in Japan and China.

The US economic stats continue to reflect sluggish to little growth.  

On the fiscal front, the electorate was once again be robbed of the benefits healthcare reform and with it any cost saving that could be applied to tax reform.  The GOP tax reform proposal will be presented on Monday.  Early indications of its provisions suggest that will make our system fairer and simpler.  However, right now we don’t know how the numbers are going to work.  And until we do, the thought that it will create a marked improve in the long term secular growth rate of the economy may very well be wishful thinking. 

Not that it will have no impact; but the assumption that the US could be back on track for a 3%+ growth rate is probably incorrect based primarily on the fact that the national debt now equals 100% of GDP and it is about increase.  Remember, (1) the debt ceiling has just been raised [meaning additional debt financing], (2) Harvey and Irma repair are expenses not in the current budget [meaning additional debt financing] and (3) at the moment, the GOP tax reform bill appears not to be revenue neutral, i.e. it will require additional debt financing.  That means the supply/demand dynamics in the bond market is about to change.  In addition, the new bond buyers will have a completely different motive for buying [earn a return] than the Fed [expand the liquidity in the financial system].  At the risk of being repetitious, that is all bad news if Reinhart/Rogoff are correct. 

In any case, I believe that Street estimates for economic and corporate profit growth are too optimistic based on the improving economy, fiscal reform narrative.  And when it wakes up from this fairy tale that could, in turn, lead to declining growth expectations as well as valuations.  The question is when; and more important from a Market standpoint, given investor proclivity for interpreting bad news as good news, whether they will even care.  I can’t answer that latter issue except to say that someday, bad news will be bad news.

That said, fiscal policy is a distant second where it comes to Market impact.  The 800 pound gorilla for equity valuations is central bank monetary policy based on the thesis that (1) QE did little to help the economy but led to extreme distortions in asset pricing and allocation and (2) hence, its unwinding will do little to hurt the economy but much as the severe perversion of security valuations are undone. 

That thesis is about to get tested with the Fed announcing the unwind of its balance sheet. 

Bottom line: the assumptions on long term secular growth in our Economic Model may be beginning to improve as we learn about the new regulatory policies and their magnitude.  Plus, there is a ray of hope that fiscal policy could further increase that growth assumption though its timing and magnitude are unknown.  On the other hand, we don’t know if the size of the national debt would negate any potential positive. In any case, I continue to believe that the current Street narrative is overly optimistic---which means Street models will ultimately will have to lower their consensus of Fair Value for equities. 

Our Valuation Model assumptions may be changing depending on the aforementioned economic tradeoffs impacting our Economic Model.  However, even if tax reform proves to be a positive, the math in our Valuation Model still shows that equities are way overpriced.

                As a long term investor, with equity valuations at historical highs, I would want to own cash in my Portfolio and would use the current price strength to sell a portion of your winners and all of your losers.
               
                Estimating future market returns (short):


DJIA             S&P

Current 2017 Year End Fair Value*              13200             1630
Fair Value as of 9/30/17                                  13074            1615
Close this week                                               22349            2502a

Over Valuation vs. 9/30
             
55%overvalued                                   20264              2503
            60%overvalued                                   20918              2584
            65%overvalued                                   21572              2664
            70%overvalued                                   22258              2745


* Just a reminder that the Year End Fair Value number is based on the long term secular growth of the earning power of productive capacity of the US economy not the near term   cyclical influences.  The model is now accounting for somewhat below average secular growth for the next 3 to 5 years. 

The Portfolios and Buy Lists are up to date.


Steve Cook received his education in investments from Harvard, where he earned an MBA, New York University, where he did post graduate work in economics and financial analysis and the CFA Institute, where he earned the Chartered Financial Analysts designation in 1973.  His 47 years of investment experience includes institutional portfolio management at Scudder. Stevens and Clark and Bear Stearns, managing a risk arbitrage hedge fund and an investment banking boutique specializing in funding second stage private companies.  Through his involvement with Strategic Stock Investments, Steve hopes that his experience can help other investors build their wealth while avoiding tough lessons that he learned the hard way.








Friday, September 22, 2017

The Morning Call--Stocks can go down?

The Morning Call

9/22/17

The Market
         
    Technical

Surprise, surprise, the indices (DJIA 22359, S&P 2500) can actually decline.  Volume fell; breadth weakened.  Both remain above their 100 and 200 day moving averages and are in uptrends across all time frames. 

The VIX (9.6) fell again (despite a down Market day), leaving it below the upper boundary of its short term downtrend, below its 100 day moving average (now resistance) and below its 200 day moving average (now resistance).  It is now below the lower boundary of its long term trading range, drawing near its former all-time low (8.8).  The question as to whether or not the VIX has bottomed is about to be answered.

The long Treasury was down pennies, but still finished above its 100 and 200 day moving averages (both support) and the lower boundaries of its short term trading range and its long term uptrend.  Conversely, yields on shorter term maturities are rising.  That means that the yield curve is flattening.  Historically, that has pointed to a weakening in the economy---not the consensus view right now and certainly not in line with the reasons the Fed gave for the start of its balance sheet unwinding.

The dollar declined, remaining in short term and very short term downtrends and below its 100 and 200 day moving averages and in a series of seven lower highs. 
           
GLD continues to fall, but still ended above its 100 and 200 day moving averages (both support) and the lower boundary of a short term uptrend.

Bottom line: long term, the indices remain strong viz a viz their moving averages and uptrends across all timeframes. Short term, they are above the resistance level marked by their August highs, meaning that there is no resistance between current price levels and the upper boundaries of the Averages long term uptrends.

On the other hand, all those gap openings among the major indices still need to be closed. 

Finally, the first two days of trading in the major indicators I track following the Fed tightening suggests that its move was pretty much discounted---except for GLD and TLT.  My bet is that this state of affairs isn’t going to last---the operative words being ‘my bet’.

I remain uncomfortable with the overall technical picture.

    Fundamental

       Headlines

            Yesterday’s US economic stats were upbeat: weekly jobless claims fell versus expectations of an increase; plus the September Philly Fed manufacturing index and the August leading economic indicators were ahead estimates.

            Overseas, the Bank of Japan left monetary policy unchanged---not unexpected.   Moody’s downgraded China’s credit rating due to soaring debt growth.   Pardon me for mentioning Reinhart/Rogoff again, but if their thesis is correct, then the high growth rate of the Chinese economy may be about to ratchet down. 
           
            ***overnight, the September EU manufacturing and services flash PMIs’ were above forecasts; North Korea ups the ante, threatening to detonate a hydrogen bomb in the Pacific; Kurdish referendum adding fuel to Middle East internecine battles.

            Aside from the expected debates on the meaning of the Fed’s change in policy and the likely results, the big event of the day was another ramp up in sanctions against North Korea.  Unfortunately, the more severe these sanctions get, the more they put the US in a position of confronting Korea’s major sponsors---China and Russia.  The risks of a misstep with these guys has much larger consequences than with the poorest, most backward nation on the planet.
           
            Bottom line: the economy is not as healthy as the Fed’s action would indicate; and the bond market (i.e. the flattening yield curve) is telling us so.  As you know, I have a lot more confidence in the forward judgement of the bond market than the stock market.  As long as bonds are telling me that my forecast is correct, I am sticking with it.

More on investor optimism (medium):

       Investing for Survival
   
            Make your point and get out of the way.
           

    News on Stocks in Our Portfolios
 
            McDonald's (NYSE:MCD) declares $1.01/share quarterly dividend, 7.4% increase from prior dividend of $0.94.

Economics

   This Week’s Data

            August leading economic indicators rose 0.4% versus expectations of +0.2%.

   Other

            Household wealth hits record high (medium):

Politics

  Domestic

  International

           
           


Visit Investing for Survival’s website (http://investingforsurvival.com/home) to learn more about our Investment Strategy, Prices Disciplines and Subscriber Service.




Thursday, September 21, 2017

The Morning Call--Surprise, surprise

The Morning Call

9/21/17

The Market
         
    Technical

The indices (DJIA 22412, S&P 2508) had a somewhat volatile day, most of it around the initial news on the latest FOMC moves (much more below), and ended modestly up, closing again on all-time highs.  Volume rose; breadth continued strong.  Both remain above their 100 and 200 day moving averages and are in uptrends across all time frames. 

The VIX (9.8) was clipped by 4%, leaving it below the upper boundary of its short term downtrend, below its 100 day moving average (now resistance) and below its 200 day moving average (now resistance).  It is now below the lower boundary of its long term trading range, drawing near its former all-time low.  The question as to whether or not the VIX has bottomed is about to be answered.

Even though short term interest rates rose on the FOMC statement, the long Treasury yield declined, suggesting the bond investors believe that the impact of a slowing economy will have a greater effect on long rates than a rise in short term rates.  TLT finished above its 100 and 200 day moving averages (both support) and the lower boundaries of its short term trading range and its long term uptrend. 

The dollar rose, but remained in short term and very short term downtrends and below its 100 and 200 day moving averages and in a series of seven lower highs. 
           
GLD got whacked, ending above its 100 and 200 day moving averages (both support) and the lower boundary of a short term uptrend.

Bottom line: long term, the indices remain strong viz a viz their moving averages and uptrends across all timeframes. Short term, they closed above the resistance level marked by their August highs, meaning that there is no resistance between current price levels and the upper boundaries of the Averages long term uptrends.

On the other hand, all those gap openings among the major indices still need to be closed. 

Finally, the FOMC’s statement had the expected effect on GLD (down) and the dollar (up).  TLT’s pin action suggested bond investors are not as convinced as the Fed that the economy is strengthening.  And equity investors’ initial response seemed to indicate that the Fed action had been well discounted.

I remain uncomfortable with the overall technical picture.
           

    Fundamental

       Headlines

            The sole US stat of the day was August existing home sales which were disappointing.  Overseas, August UK retail sales and August Japanese exports were well above expectations; August German PPI was in line.

            ***overnight, the Bank of Japan left monetary policy unchanged: Moody’s downgrades China’s credit rating due to soaring debt growth.

            Of course, the major focus of investors was the FOMC statement and the subsequent Yellen press conference.  I should start by saying that I was wrong about Fed actions. 

            What were the important points?

(1)   left the Fed Funds rate unchanged. Ok, I thought that would happen,

(2)   suggested strongly that a Fed Funds rate hike would occur in December.  I had doubted that,

(3)   most important, it laid out the schedule for unwinding QE which [a] will start next month and [b] most importantly, Yellen said that it would be adhered to irrespective of short term economic developments.  I did not believe it would lay out a firm schedule and certainly didn’t think it would emphasize the lack of flexibility in unwinding its balance sheet.  The importance of this latter point is that if the FOMC has decided that it is now time to tighten, the risk is that it will continue with that policy for far too long just as it did with easing,

(4)   also of importance, forecasts of future growth and inflation [its dot plot that registers each FOMC member’s individual specific estimates and then calculates the median forecast] has a usually wide spread of expected outcomes, especially in the out years.  That indicates that there is wide disagreement among the members, or dare I say uncertainty/confusion. Of course, we already know this because this group has proven beyond a reasonable doubt that it couldn’t forecast its way out of a wet paper bag.   Indeed, in Yellen’s press conference, she admitted that the Fed had no idea why inflation was as low as it is.  The points here are [a] the Fed’s economic model is broken; the numbers have never matched up to the real economy; so why would they now?  [b] in other words, the Fed’s new found confidence in the economy is meaningless.  Unwinding QE was never about the economy anyway; it was about the Fed’s fear of disrupting the markets.  In short, the economy hasn’t improved to the degree that the Fed would have you believe; the Fed has just decided that it can’t hold off normalizing any longer.


Here is the red lined version of the FOMC statement and the dot plot along with some analysis.

                        More from Goldman and Deutschebank (medium):

            What does this mean aside from the stated obvious?  On the assumption that Yellen et al aren’t jerking us around (again), it means my Fed thesis (QE did little to help the economy so its removal will do little to hurt it; but it spawned the egregious mispricing and misallocation of assets and the destruction of price discovery, all of which will be reversed) is about to be tested---proven right or wrong. 

            To be clear, I thought that the Fed should have started the normalization of monetary policy years ago.  Indeed if there is one thing that I have made clear is that the Fed has never made that transition correctly in all of history and this time, it had waited far too long.  So while it has done what ultimately had to be done, I believe that it just did it too late and now the piper needs to be paid.  When exactly that occurs is open is question, but, in my opinion, the fuse has now been lit.

            How fast it may burn (assuming that it does) could depend on a couple of factors that I have discussed before; but as a reminder:

(1)   the likelihood that any fiscal stimulus will impact economic growth is questionable.  It certainly is no reason for the Fed to start tightening. I have mentioned the Reinhart/Rogoff study numerous times; but if their conclusions are correct, tax reform and infrastructure are not apt to have much impact on growth.  Indeed, to the extent that they further raise the national debt/budget deficit, they will only further negatively impact economic growth and further aggravate Treasury financing problems,

(2)   speaking of which, the debt ceiling has been raised which means the Treasury is going to be coming to market for new money.  Further, any additional deficit spending resulting from the Trump/GOP tax reform/infrastructure agenda will create the need for more new financing.  The Fed not be reinvesting funds will only add to that need. 

On the other hand, the Fed has been a non-price sensitive buyer of Treasuries [i.e. its motive for buying was not to earn a return but to pump money into the financial system].  Meaning that the new buyers will be more price conscious [read lower bidders].  This sudden change in supply/demand plus the alteration of the buy side’s price objectives is something the market hasn’t experienced in eight years and we don’t know how it will react.  It may be totally unaffected.  I don’t believe that will occur; but we just don’t know.

            Of course, the bottom line as to whether I am right or wrong on my QE unwind/ down Market thesis is how stocks perform.  In the end, nothing else matters. 

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Economics

   This Week’s Data

            August existing home sales fell 1.7% versus a slight anticipated rise.

            Weekly jobless claims fell 23,000 versus expectations of a 19,000 increase.

            The September Philadelphia Fed manufacturing index came in at 23.0 versus estimates of 18.0.
           

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