Thursday trading: Fed decision leaves punchbowl half-empty

After Wednesday’s big rally, Wall Street boots Santa Claus back outside again as shorting and tax loss selling once again take center stage. (UPDATED at market close.)

Is this punchbowl half full or half empty? (Image via Wikipedia entry for "punch bowl.")

WASHINGTON, December 17, 2015 – This column took a brief holiday yesterday to assess the impact of the Federal Reserve’s decision to raise interest rates just an eensy bit at long last. The long-awaited announcement, which brought the Fed’s long “Waiting for Godot” period to an end at last, caused Wednesday’s iffy rally to shift into 5th gear.

One of our investment services,, posted a brief note yesterday that summed up the Fed’s action quite succinctly and well:

“The Fed raised short-term rates a quarter point as expected, but softened the move with a dovish statement. Shorter-term yields in the two to five-year range are moving higher. Stocks are trading higher on the Fed move. The biggest gainers, however, are rate-sensitive stocks that pay dividends.”

That last observation was indeed on the money, as our few, remaining, long-beleaguered holdings in these sectors finally caught a bid. They’re still doing well today, even though Mr. Market, predictably, is piling on the red ink once again, transforming Wednesday’s festive punchbowl into the less than half-full punchbowl we’re seeing today. Same old, same old.

As of the noon hour, the Dow was off about 130, the S&P 500 is down roughly 20 points and the NASDAQ is down a rather unhappy 37 and change. All the averages look to close worse on the day. It ain’t over ’til it’s over. (UPDATE: The widely followed Dow was down 253.05, nearly 1.5 percent. The other major averages followed suit.)

Likely, we have a renewed combination of short-selling and year-end tax loss selling hitting the tape once again after they were blown out by Tuesday’s and Wednesday’s surprise rallies, both of which were likely due to an overdue, oversold short-squeeze. That really makes us wonder why sellers have been so quick to try this game again, but that’s the way it’s been this year. Nothing makes much sense, particularly here in Washington. Election year 2016 is likely to continue this pattern.

But back to the Fed… What did Fed Chair Janet Yellen’s remarks and the latest Fed verbiage really mean? That’s a whole other story. Essentially, the Fed is going to gradually raise interest rates in the hopes of “normalizing” lending, particularly to consumers.

The ongoing problem over the past seven years for the Fed is this: having pumped trillions of printing press dollars into the system, presumably to “re-inflate” the price of assets like real estate, much of this massive injection of dollars has found its way into institutional buy programs and endless corporate stock buybacks financed by the kind of cheap money you and the Maven can’t get.

The result is that many assets have indeed been re-inflated. But that money has otherwise done little that’s useful, like research and development and like refinancing mortgages for little guys who, while they pay their mortgages, quite astonishingly can’t qualify for refinancing at lower rates, which, they’d presumably find easier to pay.

So the Fed is apparently trying to “normalize” things by gradually getting interest rates back to where they just might help out small businesses and the little guy again rather than the 1%-ers. To oversimplify, the Fed plans to do this by effectively raising interbank rates up to a quarter of a percent higher than they currently are, which, over time, will gradually raise interest rates on everything else as the banks pass them along.

We’ve hived off a discussion of the mechanics of this to our companion column. So if you’re curious, when we finish our thoughts, we’ll provide a link here so you can read all about it. But the short explanation is this: it’s all an accounting sleight-of-hand, and if you buy it, it’s as if you believe in the actual Santa Claus all over again.

On other fronts, oil and related companies are back to getting pounded again today, which is giving the market a continuing negative tone over all. Looks like the Santa Claus Rally has gone back into hiding again today. Perhaps, like the groundhog, he’ll peep out again before Christmas to deliver more stock market rallies before the holiday season is over, but one never knows.

Today’s trading tips

Still very few. We have been hosed this week—and particularly today—in our favorite MLP refiner, Calumet (symbol: CLMT). Down almost $3 per share at one point this afternoon, the stock has been absolutely hammered for the better part of December, at first in a trickle, then worse and worse.

Many analysts are still recommending the stock, including Credit Suisse, and price targets remain between $29 and $34 per share, not including CLMT’s outside dividend. But given a variety of reasons, some investors are clearly nervous that CLMT’s refinery cost advantages might not save them during the current quarter.

It’s also crystal clear at this point that institutions are dumping the shares hand-over-fist, particularly today where volume has reached an incredible 1.3 million shares as of 1:45 EDT. We suspect at this point that a lot of this indiscriminate dumping of shares is year-end tax loss selling, given CLMT’s miserable performance in December.

Our own stop loss orders have already dumped most of our CLMT shares for a hefty loss, which we regret. But you have to get out of the way when panic selling like this takes over, and you can never quite predict when that will happen. We’ll live again to fight another day. If it gets low enough, we’ll pick up a few more shares of CLMT to average down.

But right now we’re on hold. The selling panic could possibly be due to some inside info we’re not yet aware of, always a possibility in this market where the wise guys with fast computers and deep pockets always seem to have the illegal inside info that the average trader can never get hold of.

In spite of CLMT’s nosedive, our other refiner, Valero (CLO) is up handsomely today sitting at $72 and change, up over 2 percent. Some of this (CLMT, too) may have to do with Congress’ decision, at long last, to allow the U.S. to export domestic oil once again. That trade that was cut off way back in the Nixon administration to defend against the first Saudi oil embargo by keeping domestic supplies in this country.

Some refineries will benefit more than others from this decision, so that’s how the investment cookie might crumble as we look at refineries and oil heading in to the New Year.

On other fronts, we continue to like banks, given the Fed’s decision. Most investment advisors are pushing the big international banks, but we still like KeyCorp (KEY) and New York Community Bank (NYCB), both of which are fine tuning their ongoing purchases of other banks, which, in both cases, should be immediately accretive to earnings some time in 2016.

Other than these observations and adjustments, we still don’t see any reason to buy in to this market until things settle down. It’s just too dangerous, as we’ve already seen in our not-so-excellent Calumet adventure. But banks and insurance companies are looking better, and even battered utilities are catching a break, so we remain hopeful even though our main portfolio is now 50 percent in cash. Maybe we’ll get some nice after-Christmas markdowns.

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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