Fed minutes due Wednesday afternoon, but numbers provide little excuse for increasing interest rates. Oil, commodities walloped again. Short squeeze ahead? UPDATING: As of 2:05 p.m. EDT.
WASHINGTON, Aug. 19, 2015 – Today’s column will be on the short side as we, along with everyone else, await today’s Fed meeting minutes, which are likely to tell us precisely nothing, just the way it’s been for the last quarter or two.
The Fed is, on one hand, chomping at the bit to “normalize” rates once again at higher levels, all the better to get productive sectors of the economy back on track as opposed to the Cloud-Cuckoo Land they’ve been in since, oh, 2008 or so. On the other hand, serial fiscal disasters—China, Greece, the Eurozone, Brazil, now perhaps Thailand—keep smacking earnings and averages, preventing the Fed’s desired-for 2+ percent inflation rate from happening. That, in turn, provides little justification for “normalizing” those interest rates.
UPDATING: According to CNBC, “The Federal Reserve Open Market Committee declined to raise rates at the July meeting. However, market participants will be looking for clues from the minutes to determine the likelihood of a September rate hike, for which CME traders had been assigning a 46 percent probability. RBS said futures pricing after the minutes release cut that probability to 36 percent, with the higher likelihood now coming in January.” Why so cautious? The Maven now cuts that probability to zero percent for the remainder of 2015.
This mindless thrashing was occurring because, due to overly draconian new banking rules under Dodd-Frank, most of that money was either sitting in bank vaults to cover Fed “stress tests” or was being borrowed at nearly zero interest rates by corporations to buy back stock and create the fiction that their profits were increasing by artificially goosing earnings per share (EPS) by factoring said earnings into fewer and fewer shares.
Worse, the administration’s vaunted $1 trillion stimulus during Barack Obama’s disastrous first term was a union payoff and did zero to encourage corporate plant and equipment investment or put the legions of unemployed Americans back to work.
The chickens are coming home to roost, at last, and we are seeing that our much-vaunted “recovery” since the initial Great Recession debacle has been smoke and mirrors, courtesy of ever more clever accounting.
Making matters worse today is the continuing hit commodities are taking due to that fact that, historically at least, no one appears to be using raw materials to make anything. It’s all made worse, oddly, by the fact that the American fracking boom has exposed “peak oil” doomsayers as the clueless clowns they always were. The world is apparently so awash in oil that no one even knows what to do with it anymore, except, apparently, short it and every oil-related stock that ever existed.
Check out this chart we found over at ZeroHedge, and you’ll see what we mean.
The chart, of course, illustrates Wall Street’s currently most shorted stocks. Oil and related stocks are, in fact, so over-shorted that we can be increasingly confident of three things:
- The volume and intensity of short selling occurring in oil and related stocks is at least in part why they’ve gone down so fast and hard;
- This sector is or shortly will be so over-shorted that even a minor short-squeeze will turn into a rout for those greedy hedge funds and HFTs that have been shorting the dickens out of oil and its friends; and
- When it happens, this short squeeze will quickly turn into a route, rocketing oil and associated stocks upward at breathtaking speed.
Zero presents some convincing evidence via information from Bank of America (symbol: BAC) that its investors are already starting to make heavy purchases, betting on a bottom in the oil sector.
We shall see. Oil is taking a beating again today, down nearly 5 percent early Wednesday afternoon at $40.71 bbl. for West Texas Intermediate (WTI). Breaking our own $40 bbl. bottom estimate could cause a final, violent washout before the short squeeze fun begins. We shall see.
As far as the Fed is concerned, even after this morning’s happy talk about housing starts, when all is said and done, the Consumer Price Index increased only 0.1 percent in July—hardly evidence of rampant inflation, which remains decently below the Fed’s 2 percent annual target. A big part of this is due to the drop in oil, which is having a positive ripple effect on any business whose profits are heavily affected by fuel prices.
While a short squeeze in oil could change this equation, we’ll just have to wait and see. Our guess is no hint of a September rate increase by the Fed. Or maybe not even in December. Then again, official Washington remains clueless on most things, so if the Fed tries to re-create the same mistake it made in 1937, we wouldn’t be terribly surprised, either.
We’ll post a short update to this article once we read and digest the Fed minutes, due out at 2 p.m. EDT today, just 30 minutes from now. Although rest assured: all the bankers, hedge funds and HFTs already know what’s in them and we’ll see what that does to the market about 15 minutes before they’re released to peons like us.Click here for reuse options!
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