WASHINGTON, March 18, 2015 – As we await the initial answer in the Federal Reserve Bank’s latest missive (scheduled to be released Wednesday at 2 p.m. EDT), it’s hard to parse this market. Stock market averages opened down Wednesday morning, but only moderately so, given the opining this morning by the Fed’s (unofficially) designated media spokesman, Wall Street Journal financial reporter Jon Hilsenrath.
According to Hilsenrath
“The Federal Reserve is about to inject uncertainty back into financial markets after spending years trying to calm investors’ nerves with explicit assurances that interest rates would remain low.
“Ahead of their policy meeting that ends Wednesday, Fed officials have signaled they want to drop the latest iteration in a succession of low-rate promises—a line in their policy statement pledging to be ‘patient’ before deciding to raise rates.
“The move could be a test for investors. In theory, less-clear-cut interest-rate guidance from the Fed should lead to more volatility in financial markets. That’s because investors will be left less certain about a key variable in every asset-valuation model: the cost of funds.”
Just two hours after we wrap up this article (it’s Wednesday noon right now), we’ll have at least an interim answer for two pressing questions:
- What, if anything, will the Fed’s new magic word or words be?
- How will investors react?
The cognoscenti, of course, already know both answers and are front-running the market to the downside as we try to crank this piece out.
Candidly, the nonsense verse of Lewis Carroll keeps popping into the Maven’s head whenever he takes a look at the current state of the stock market. What comes to mind today is this pithy comment by the Walrus to the Carpenter:
“‘The time has come,’ the Walrus said,
‘To talk of other things:
Of shoes—and ships—and sealing-wax—
Of cabbages—and kings—
And why the sea is boiling hot—
And whether pigs have wings.’”
Actually, the Maven has slightly altered the second line above to make an important point. It is indeed time to talk of “other things” besides obsessing on the Federal Reserve Bank which, in the end, is being forced to act and react against the forces it created in 2007-2009 and beyond in attempting (with great success, actually) to save the entire U.S. banking system from a massive crash, the magnitude of which would make 1929-1934 look like Sandbox 101 in kindergarten.
The problem is, only the financial system—including banks, remaining S&Ls, insurance companies, mortgage lenders and the like—and its fat cat owners have benefitted in any material way from the relentless price increases that have boosted market averages to historical highs, at least if you forget net inflation. (That’s still there, BTW, in case you’ve stretched to afford a Kansas City strip steak at pre-markdown prices lately.)
As for everyone else: if you happen to be a fair-haired boy in management, you’re likely still okay as well. But if you’re a real estate agent, in the building trades, in what’s left of our industrial base, a lower-level manager, or a kid just out of college, it’s another story.
Contrary to all the happy talk we’re hearing, mostly from an administration that’s desperate to lie about its lack of accomplishments, the average American is still stuck in the same grinding rut he was in late 2007 when it all started to implode.
We could write a book about this. But the bottom line is, while financials have been more or less “fixed” now and while the rich have resumed getting richer, much of the rest of America has begun to feel they’ve traded places with 1960s Mexicans and Chinese. They’re going nowhere, are still saddles with enormous debt that no one will refinance, and so use any monetary stroke of luck to pay that debt down.
As a result, great economic engines like mildly recovering housing, have yet to create the economic momentum the middle class really needs to avoid becoming the lower class.
And to that end, at some point, the Fed’s grand experiment must end. It’s saved the financials, but has also artificially propped the stock market for years at unrealistic PE ratios. It’s encouraged companies to finance massive stock buybacks via bonds at ridiculously low interest rates, while, at the same time, not investing in R&D and mortgaging its future to increase the value of its corporate officers’ stock options.
Without getting interest rates somewhere near normal, the Federal Reserve’s ongoing policy also continues to bilk retirees out of the value of their 401(k)s and IRAs, forcing them to dip into much-needed savings to make ends meet. That’s a road to disaster that only higher interest rates can begin to address.
All this might have been less of a problem over the years if Congress had ever done anything about it, as former Fed Chair Ben Bernanke cautiously and constantly urged them to do.
But Harry Reid’s Senate was firmly dedicated only to actions that made Republicans look bad at every turn. Aside from jamming through the still-detested Obamacare legislation through the Senate (with a Nancy Pelosi assist in the Democrat-controlled House) and giving a new one trillion dollar handout to public employee unions disguised as a “stimulus” measure, Reid’s Democrat-controlled Senate sat on everything else, lest the Republican win a round or lest the Democrats have to go on record voting for anything.
As a result, Congress effectively ceased to function, given President Obama his most cherished wish: the (alleged) ability to rule by fiat since Congress was no longer doing its job, which it wasn’t. We continue to live with these results today, as Reid still has enough Democrats to prevent the new Republican Senate majority from passing anything anyway. The Senate will likely remain Filibuster Central until after the 2016 elections. As always, it’s lefty Democrats that constitute the real party of “No.”
In this environment, we return to the market. Stock’s problem gaining traction today and likely for all of 2015 this: Addicted to zero interest rates for nearly a decade, how will financial systems react when the punchbowl is taken away, however gradually?
Today’s trading tips
Right now, either high-frequency traders (HFTs) are front-running the system by loading it with sell orders, or the bears are really in control. The Maven’s portfolio is actually up a bit as he writes this, which is strange. And that’s including his much reduced holdings in the oil patch, which are exclusively in “downstream” (refinery) stocks, namely Calumet (CLMT) and Kinder Morgan (KMI).
With oil down big again today, reaching record lows in the current cycle ($42.29, down $1.18 per bbl. of West Texas Intermediate [WTI]), you’d think these companies would get clobbered, at least a bit. But even Royal Dutch Shell (RDSA), one of few remaining vertically-integrated producers is up a buck today. What gives?
Frankly, we don’t know. It doesn’t seem to make any sense, unless these companies and their investors know something we don’t, as in this oil market is being manipulated and will spring back shortly. But irrational stuff like this is dominating, and it’s hard to figure out what to do except hold everything we have and wait until 2 p.m. when the great unwashed get to hear from the Fed what Jon Hilsenrath and the elites already know.
We plan to issue a short followup report later today when the smoke clears. But right now, buying or selling anything may very well be the wrong move.