ISM manufacturing, crashing oil prices hit Thursday markets

Janet Yellen’s case for a September Federal Reserve interest rate hike weakens on Thursday data dump. Thinly traded markets react in confusion as oil tanks.

A protester greets Fed Chair Janet Yellen between innings at Jackson Hole. 2014. (Screen shot from Bloomberg video)

WASHINGTON, September 1, 2016 – The first trading day of September began the same way the last trading day of August closed: down. In fact, as of 11 a.m. EDT, all three major averages—the Dow Jones Industrials (DJI), the S&P 500 and the NASDAQ were all off roughly 0.5 percent, continuing the slow leak in pricing that dominated the end of August trading action.

Two things are at work here. First of all, the lousy, pre-holiday volume is boosting the power of sell orders since potential buyers are either enjoying their final week at the beach or otherwise goofing off in anticipation of a hyperactive post-Labor Day trade. Second of all… well, it’s a little more complicated.

We are still seeing “fear of the Fed” in trading action, given increasing Wall Street worries that Janet Yellen and the nation’s central bank will jack interests rates up another 0.25 percent at their September meeting. Yet in the face of this, Institute for Supply Management (ISM) manufacturing data published Thursday morning shows that the U.S. manufacturing sector experienced a contraction in August after logging in five straight months of rather anemic expansion. “Unexpectedly,” no doubt.

According to a Reuters report published by CNBC,

“U.S. manufacturing contracted last month for the first time since February, as new orders and output plummeted and factories cut jobs.

“The ISM manufacturing index hit 49.4 in August, the trade group said on Thursday. A reading above 50 indicates expansion in the manufacturing sector while a reading below 50 indicates contraction.”

In other words, manufacturing activity—one of the key leading indicators bolstering the Fed’s increasingly weak arguments for raising interest rates—robust for the past 5 months but now backtracking, may again give Washington’s money oracles pause in their seemingly helter-skelter rush to increase the cost of credit, if only a little tiny bit.

The price for gold and silver would tend to corroborate that sense. Moving steadily downward for much of August and increasingly so after the Fed’s mildly bearish (for traders) Jackson Hole comments last week, precious metals have caught a decent bid thus far on Thursday, reversing, at least for today, a slow retreat back to flatline.

The problem is, everything else is down, including preferred stocks, utilities, REITs and other inflation-hedging stocks and investments, continuing the post-Jackson Hole swoon in this area as well. These tend to drop when interest rates are on the increase or perceived to be, as active investors seek to dump more passive income-oriented vehicles in favor of more volatile common stocks as their focus turns from yield to the potential for capital gains.

Causing further issues, the price of crude oil seems to be in free-fall this week after its recent sharp rally to the $50 bbl. range, likely due, according to experts, to a massive short squeeze. Now that this buying power has been at least temporarily removed—short sellers must buy to close out their short positions—oil is spooked by the Fed’s potential interest rate increase as well as uncertainty about OPEC’s next actions, or lack thereof.

A stronger dollar—one result of an interest rate boost—causes the price of crude oil, mostly dollar-denominated—to drop. So would another OPEC meeting that fails to cap output, something that’s highly likely as Iran’s mad mullahs are around and routinely refusing to cooperate.

So: Oil down, gold and silver up, manufacturing down and the Fed’s interest rate hiking resolve uncertain all add up to total confusion for traders and, we’d imagine, even for those headline driven HFT supercomputers.

As we noted in Wednesday’s column, it’s just not a good week to sit at your computer and make informed trades. No strategy works in a slow trading week in which every piece of economic news negates the previous story.

Read also: Labor day: Holiday trading hours for stocks and bonds

Trading diary

We just don’t like the tone of the market this week, even though sentiment could change when traders return from the beach next Tuesday, raring to go.

Our big positions in Allergan Preferred A (symbol: AGN/PRA; your brokerage may use a different one) and Teekay Tankers (TNK) have taken considerable hits this week: AGN/PRA for no real reason in our book except HFT computer stupidity, and the more speculative TNK for cutting its dividend (again) and wallowing in debt, although it’s made steady progress this year in reducing that debt.

We will hold AGN/PRA until it’s redeemed on March 1, 2018 for $1,000 per share, which, along with its current 6-ish percent yield is more than adequate compensation for our travails.

As for TNK, it will probably right itself in the end and restore its once-huge dividend. But that might not happen until 2018, and with the stock now nearing penny stock levels—it’s currently at $2.53 per share and wobbling—it may be best to pare this one down on rallies. We’re convinced it will all work out in the end. But trading discipline dictates that if a given investment is going to be “dead money” for an extended period of time, maybe it’s best to exit all or part of the position and find something with more immediate upside potential.

On the plus side, over a two-day period, we sold our position in the huge, multifaceted investing firm Blackstone (BX) for a 14 percent profit. As for our position in KKR, a similar firm, we’re still holding and currently have a 17.5 percent profit in the position. But, like BX, KKR, too is showing significant weakness, having firmly broken down through its 50-day moving average. So we’re looking, perhaps, to book that profit today before things have a potential to take a turn for the worse.

Other than that, not much in the way of action. This week’s action simply won’t give us a tell, and that makes it a lousy environment for rational decision-making.

We may not offer a column tomorrow unless something earth shattering hits the radar. Most commentary on a week like this tends to be hot air, and we don’t want to add to it.

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Terry Ponick
Biographical Note: Dateline Award-winning music and theater critic for The Connection Newspapers and the Reston-Fairfax Times, Terry was the music critic for the Washington Times print edition (1994-2010) and online Communities (2010-2014). Since 2014, he has been the Business and Entertainment Editor for Communities Digital News (CDN). A former stockbroker and a writer and editor with many interests, he served as editor under contract from the White House Office of Science and Technology Policy (OSTP) and continues to write on science and business topics. He is a graduate of Georgetown University (BA, MA) and the University of South Carolina where he was awarded a Ph.D. in English and American Literature and co-founded one of the earliest Writing Labs in the country. Twitter: @terryp17