Capital Market Notes

 Europe Lowers Their Growth Forecast—-3/7/2019

The market is weak today due to the ECB lowering their forecast for growth for 2019.

https://www.cnbc.com/2019/03/07/ecbs-draghi-slashes-growth-forecasts.html

An Interesting Twist from the Fed—-2/20/2019

Almost all the volatility in the 4th quarter was caused by the Fed Chairman and his clumsy language. And some of those comments focused on the “autopilot” program regarding the Fed’s balance sheet normalization and how the Fed had no intention of stopping that program.

Well, today the Fed said they were going stop the program later this year!!!
https://www.cnbc.com/2019/02/20/the-fed-just-released-minutes-from-its-market-moving-meeting.html

What in the world is going on?

First, the Fed rattles the markets saying they aren’t going to stop this program under any circumstances. And then after the market rallies hard to the upside, they say they are going to stop the program.

I see two possible reasons for this change of heart…

1) the Fed has become totally beholden to asset prices and this move helps ensure prices will move higher (note: this is a total 180 degree turn from Fed Chair Powell’s comments late last year)

2) the economy is much worse than market participants realize and this move will help bolster the economy as it slows.

Not sure which one it is, but it is one of the most interesting moves I’ve seen in the markets for quite some time.

After one of the worst Decembers in market history and THE worst Christmas Eve trading day EVER, the market has put up some incredible return numbers to begin 2019. As I type this the S&P 500 is up over 10% year to date…and it is only February 19th!! If you annualize those numbers, you get 103%.

I think it is fair to say that it is highly unlikely that the market will posted gains of over 100% for the year. With this in mind, I expect a pullback at some point in the near future. Maybe after a trade deal with China is inked. Why? Well, it seems that every day we get news that trade negotiations are going well and the market moves higher. Before too long, all the good news could be priced into the market and there will be nowhere to go from there.

Regardless of why the market pulls back, I expect that it will. A 103% return for the market just seems unlikely to me for 2019. Nevertheless, we can have a VERY nice year this year.

Biggest Upside Move in the History of the Dow—12/26/2018

After the worst Christmas Eve trading day EVER, the Dow rallies 1,086 points the day after Christmas to post its biggest upside point move in its history. This move almost doubled the downside move that occurred on Christmas Eve! WOW!!!!!!!!

https://www.cnbc.com/2018/12/26/us-futures-following-christmas-eve-plunge.html

“…fear itself.”—12/24/2018

We are currently living through the worst December since 1931, in terms of returns on the S&P 500. Frankly, other indices are doing worse. But since we all follow the S&P, we will use that as our baseline.

With this type of market performance, emotions can get stirred up. I am certainly not immune to those emotional feelings, but I do have a series of metrics and processes I follow to keep the facts out in front of my emotions. I was going through these processes when I saw clearly what was happening in the markets. When the 4th quarter newsletter comes out, I will talk more in depth about these things. But given the speed of this market sell off, I figured putting together a quick note made a lot of sense.

For starters, on October 3rd the S&P closed at 2,923. The next day it started its decline. And as I type this, it sits at 2,416. That equates to a 17.34% drop in the market. What happened the night of the 3rd to kick start this avalanche of selling? Fed Chair Jay Powell was interviewed by Judy Woodruff. During that interview, he made the comment that “(interest rates) were a long way from neutral.” This implied that the Fed had many more interest rate hikes to go before they reach a stopping point. The market had not priced that in and, therefore, began selling stocks immediately to price it in.

From that point on, several Fed Governors tried to walk that statement back. However, the damage to market psychology was done. The market started to show a little stability before the FOMC meeting last Wednesday. But during his comments after the decision to raise rates, Fed Chair Powell made ANOTHER BLUNDER. This time he was adamant that the automatic program of having $50 billion a month roll off the Fed’s balance sheet wouldn’t be changed, regardless of market conditions. This, of course, spooked the markets again and the sell off intensified.

NY Fed President Williams was then interviewed Friday by CNBC and he beautifully articulated the Fed’s policy regarding the “autopilot” program and how they could, and would, alter it, if necessary. The market responded well to his comments.

These blunders regarding market liquidity are the biggest thing that is scaring the markets. The markets are worried about another 2008 style liquidity crisis. In fact, there is so much worry that Treasury Secretary Mnuchin reached out to the CEO’s of the 6 largest banks over the weekend to check on their operations. All of them reported no problems with operations or liquidity. This makes total sense because the Fed wouldn’t be tightening monetary conditions if it saw anything less than a robust economy. Furthermore, our current set up is vastly different than it was in 2008. For starters, bank balance sheets are WAY stronger. And, perhaps most importantly, the mark-to-market accounting rules have been done away with.

But, in my opinion, the market’s worries are not based in fact. They are based in fear. We all know the saying, “we have nothing to fear, but fear itself.” Well, we are wallowing in fear right now. And, to be frank, I understand why. We have no effective leadership to quell these fears. For example,

-Our Fed Chair got out in front of the entire world and created a worry about over-tightening in the credit markets by his careless comments.

-The President of the United States, just after NY Fed President calmed markets down about a liquidity event, decided not to sign a spending bill and, therefore, threatened a government shutdown.

-Congress then couldn’t get a spending bill passed that included ample border security to satisfy the President and the government, indeed, shutdown.

-These actions may not be linked in terms of their topic, but they are linked in the sense that they create a sense of uncertainty and worry.

You can add antics like this to a long list of faux pas that haven’t help build a sense of comfort and security in our current leadership. Then when you add in tightening credit markets, you have a market that is running on fear.

Having said that, Warren Buffett is known for saying “Be fearful, when people are greedy. And be greedy, when people are fearful.” And as I look at investment ideas, I haven’t seen so many attractively priced investments in a long time.

BUT…before these cheap investments turn around we probably will need something, or someone, to calm the markets down. Most likely, we will have to play the waiting game.

After his 2nd blunder in 3 months, Fed Chair Powell was saved today by NY Fed Presdient Williams.

President Williams was interviewed on CNBC today around 10:10 am. Up until that time the market was up, but trending lower. As he spoke, the market rallied hard to the upside. As I type this, the Dow is up 370 points. I don’t know if it will hold or go up or go down for the rest of the day. But his comments show the Fed isn’t as clueless as the Fed Chair made them seem.

What did he say that was so magical? He simply said that the Fed will change any and all of its plans depending on market data and inputs from market participants. They will raise or lower rates, if necessary. And they would change their stance on balance sheet normalization when necessary.

Thank you, President Williams!!!

Trump won’t sign spending bill..markets fall AGAIN!!!—12/20/2018

Year-end historically means the Santa Claus rally. NOT THIS YEAR!!!!

Fed Chair Powell ruined the party yesterday and now Trump and Congress are taking it to another level with their fight over border security and the spending bill. Trump wants his wall to be built and won’t sign the spending bill unless he gets it. The government needs the spending bill to remain open.

Long story short…it looks like the government is going to be shut down sometime soon, unless these people can get their act together.

 Fed Chair Proves His Ignorance—12/19/2018

The Fed raised rates today, as expected, and had a slightly more dovish tone regarding their ideas on future interest rates hikes. However during Fed Chair Powell’s press conference, he proved his ignorance about the market’s main concern; the reduction of the Fed’s balance sheet.

The Fed is reducing it’s balance sheet by $50 billion per month. No one is discussing this, but I believe it is the main reason for the market’s downward trajectory. This reduction is a de facto tightening of monetary conditions and is slowing the economy down. This, combined with the Fed raising rates, is a double whammy for slowing the economy.

As I watch the Fed Chair speak, every question he answers concerning the reduction of the balance sheet sends the market lower and lower and lower. He is literally clueless about the major impact this is having. He makes comments like, “its going smoothly” or “it has very little impact.” The fact that these answers push the market lower by 100 points a question, tell me otherwise.

He is the most powerful banker in the world. I sincerely hope he comes to grips with the impact the “quantitative tightening” is having on the economy very soon.