Fed Decision Eve
Equities start the day flat as we drift thru Fed decision eve. Here’s a question: What percent of the population do you think knows that there’s an FOMC decision tomorrow and that they might raise rates for the first time in a decade? I’ll set the O/U at 5. In fact I called my Dad and asked him what a “Fed rate hike” was and he thought it had something to do with credit cards so there you go. You know the problem with this Fed meeting is that everyone is concerned with what’s going on in the foreground. What’s the headline….what’s the decision….what is the immediate impact? But all of that has been priced in, the Fed has telegraphed this hike all year. The wise man knows that the real action is in the background! What’s their guidance for the next hike…what’s the bar going to look like for another 25bps…is this a “one and done” scenario? The phrase “dovish hike” has been tossed around endlessly the past week and that’s exactly what we need to see. “We are hiking 25bps because unemployment is stupidly low and wage pressures are coming but our next hike is orbiting somewhere near Pluto”. Wouldn’t that kind of decision be welcomed with open arms? (I should put the Journey video here but the song is so bad I can’t even take it). I think so but we’ll have to see. Anyway, let’s hope something happens on Thursday because the market truly is ready for it. We’ve been primed for months now, pull the trigger Janet (I still think they wait until Oct or Dec…sigh).
After the open we got a decent rally that took us right back to where overhead resistance is fierce. 1990-1995, man that level is going to be harder to break thru than overcooked garlic bread (they should use it to support building foundations). Let’s put this random daily noise aside for a second and talk beer. Mmmmmm, beer. I walked in this morning to learn that AB Inbev is planning some kind of bid for SAB Miller. Wow…if you thought Time Warner joining up with Comcast and DirectTV was crazy how about every single macro brew being under one banner. Have you ever seen a list of the 20 most popular beers in America? It’s pretty sad, but not entirely unexpected (what is unexpected is Heinenken at #10. Ugh). A merger of these two would bring almost every beer in the top 10 under one company! Will it happen? Who knows, but it makes for great barstool talk. Did you know they make Corona such that it tastes the same both warm and cold? Science! Needless to say all the beer companies were up nicely today including TAP, one of my favorite ticker symbols around. Energy was the other big winner along with materials because, like I said before, when we get these bounces people head straight to misery row to grab stuff that moves. FDX was the big loser after cutting forecasts and warning about “weaker than expected economic conditions”. Sounds like just the thing for a rate hike right? IF you look back at the end of the last cycle FDX was a gradual but constant decliner. Keep your eyes on this stock my friends, pray it didn’t call the top in the middle of this year. By lunch we sat on 1,988, the year in which Roy Jones Jr got unbelievably robbed.
The back half of the day saw us run up to the highs where we halted in anticipation of tomorrow’s festivities. Ok, here is what the market is expecting with what I think would be the reaction. 1) 25bps hike with extremely dovish commentary. Take ‘em up. I think we are prepared for this and it clears the overhang. No more Sword of Damocles. 2) no change with hawkish commentary (a hike is still imminent but not now). This is the status quo and I think we go nowhere. We remain in a tight range until the next meeting. 3) 25bps hike with hawkish commentary. The market isn’t prepared for them to say “we are hiking and could hike again before year end”. That’s the worst case scenario and I think stocks would get smoked. We want option 1 or 2 but I think we get option 2. Status quo and we wait…wait for life to throw us another bone somewhere down the line. Tune in to the recap tomorrow to find out!
Final Score: Dow +84bps, S&P500 +87bps, Nasdaq +59bps, Rus2k +79bps.
News Highlights:
- Succinct Summation of the Day’s events: Market on pins and needles waiting for Fed decision tomorrow. Decent rally right up to resistance. Probably need Dovish hike or non-Hawkish Hold to keep going (can you believe those are real words? Finance is insane).
- You know what? Markets don’t crash when everyone is positioned for it. "Funds are short futures and long volatility at record levels," O'Hara observes. "Typically markets do not crash when everyone is protected."
- Tim Duy, solid Fed watcher, thinks they are on hold: My expectation is that the FOMC statement will give praise to the U.S. economy but cite growing downside risks emanating from the rest of the world as justification for holding rates steady. It will leave the door wide open, however, for a rate hike in October or December.
- If you are a stock market bull do you want a Dovish Hike or a Hawkish Pass? “Personally, I would rather see the rate hike now. Let`s get it over with as the American economy is strong enough to withstand a measly 25bp increase in short rates. Option 1 would leave me start wondering whether the global growth risks that tanked stocks in August are more serious than thought.”
- Why don’t I think of this stuff? What is wrong with me?
- This year there is nowhere to run to baby….nowhere to hide (I actually dig Mowtown). “ I don’t have the exact data, but I would venture to guess that this just about never happens. Heck, even a long-term bond is barely positive on a 1 year basis. If you had told me that China might be falling apart in 2015, emerging markets were falling 25%+ and we’d have a flash crash I’d have guessed that long-term bonds were up 10%+ in that period. But no, even bonds have been suppressed”.
- I wonder if a Trail sign is needed there
- I could watch football there
- Are you joking me…really? Come on
- Merkel says “Don’t Sweat the Fed” But if the they don’t raise Fed funds, no big deal. We wait a little longer. What’s the difference between having zero interest rates for 6.5 years and 7.5 years? Either one would build up enough leverage if the economy had the oomph to absorb it. Watch and see, but in my opinion, it is a sideshow. Watch how the long end behaves, and see if the market reflates. We need more confusion and less concern over what the next crisis is, before any significant crisis comes.
- The US is just starting to tap into a BIG source of dry powder….residential investment. "Bad things do not happen to America when housing is moving up and to the right while Americans are finding jobs," said Dutta.
I got two links for you tonight on the eve of this momentous occasion that like 48 people care about.
The first one is going to make you cringe
The second one is going to make you cry (if you aren’t stone hearted. And it might help if you are a parent)
Have a good night