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Only the Data Can Stop a December Fed Rate Hike
by Scott Brown of Raymond James,
As expected, the Federal Open Market Committee left short-term interest rates unchanged last week. However, the wording of the policy statement was decidedly hawkish, suggesting (contrary to market expectations) that officials are leaning toward a move on December 16. GDP growth wasn’t especially brisk in the third quarter, but that was due largely to slower inventory growth. Domestic demand remained strong, but monthly figures suggest a loss of momentum heading toward 4Q15. Ultimately, the Fed’s decision will remain data-dependent and there are many reports between now and then.
Under the Tuscan Sun
by Jeffrey Saut of Raymond James,
Obviously we are back, back from two weeks in Tuscany with 32 of our best and dearest friends. The group included industrialists, the heads of European operations for two of the largest clothing/shoe companies in the world, an L.A.-based reality TV producer, tax attorneys, the CEO of a large title insurance company . . . well, you get the idea.
Gross Domestic Product
by Scott Brown of Raymond James,
The Bureau of Economic Analysis will report its initial estimate of third quarter growth on Thursday. There’s always plenty of uncertainty in the advance estimate. The BEA does not have a complete picture and will have to make some assumptions about foreign trade and inventories in September. These figures will be revised, perhaps a lot, which is why it is more important to focus on the story behind the numbers.
Back to the Present
by Jeffrey Saut of Raymond James,
On Wednesday of this week (10/21/15), residents of Hill Valley, California are warned to be on the lookout for a flying DeLorean driven by a guy in a white lab coat with crazy hair, and a squeaky-voiced “teen” wearing several layers of out-of-style clothes. If these two are spotted, it is HIGHLY advised that you do not interact with them at all, as doing so could ultimately unravel the very fabric of the space-time continuum. More specifically, whatever you do, please refrain from relinquishing any copy of the Gray’s Sports Almanac (1950-2000 Edition) that you may possess.
The Budget and the Debt Ceiling
by Scott Brown of Raymond James,
Treasury reported a $439 billion budget deficit for the fiscal year ending in September. That sounds like a lot, but it’s 2.4% of GDP, below the average of the last few decades. However, that’s nothing to celebrate, as the retirement of the baby-boom generation will boost entitlement spending in the decades to come. There’s plenty of time to solve that problem, but the federal debt ceiling is a more immediate concern. Congress has just two weeks to work out a deal.
Squiggly Line Cartoons
by Andrew Adams of Raymond James,
In last Thursday’s Morning Tack, Jeff Saut referenced an opinion piece on MarketWatch that was essentially the literary equivalent of someone shooing away a stray dog. The author scoffed at the recent Dow Theory sell signal and laid out several reasons why he believed it to be wrong in this case. And I have no problem with that; we have, after all, also decided to ignore it for now because of the extreme circumstances it took to provide such a signal.
Why Are You So Angry?
by Jeffrey Saut of Raymond James,
Mass layoffs are being announced. The U.S., Central America, South American countries, etc. are all economic disasters. Major currencies are falling and raw materials companies are seeing huge order reductions around the world. Plant production has been reduced to 66% in the first half of 2015; there are fields of idle construction equipment that China is not buying. Look for Korea to dump products into the U.S. Wholesale raw sugar prices dropped from $0.36/pound to $0.11/pound leaving Brazilian sugar cane companies ready to file for Chapter 11.
Employment, GDP, and the Fed
by Scott Brown of Raymond James,
The September Employment Report was disappointing, but not horrible. Some of the recent softening in the pace of job growth may reflect seasonal issues. Stronger seasonal hiring in May and June should naturally lead to more seasonal layoffs in August and September. That is unlikely the only explanation. Concerns about global growth and financial market volatility may have made firms, especially smaller firms, reluctant to hire. Estimate of 3Q15 GDP have been declining, while underlying domestic demand have remained strong.
Nearing Normalization / Shutdown Shuffle – Part 2
by Scott Brown of Raymond James,
Fed Chair Janet Yellen downplayed concerns about the rest of the world and indicated that she was among the majority of Fed officials expected to raise short-term interest rates this year. Meanwhile, while John Boehner’s resignation as House Speaker may signal an agreement on the budget, Congress has moved further away from future compromise.
Go Opposite to Hysteria
by Jeffrey Saut of Raymond James,
Going against the panic plunge of August 24th was pretty easy, especially if you heeded the market’s warning message in early July that Mr. Market was going into a period of contraction. The ensuing post August 24th “throwback rally” was also pretty easy to anticipate. From there, however, things have become much more difficult.
Nearing Normalization / Shutdown Shuffle
by Scott Brown of Raymond James,
The key line that was added to the Fed’s policy statement suggests a sharper focus on what’s happening in the rest of the world, but let’s be clear. The Fed is not reacting to overseas developments per se, but to what shifting global economic and financial conditions mean for the U.S. economy. In focusing on the Fed’s decision to delay policy normalization, investors have ignored the increased risk of a government shutdown.
It’s Someone Else’s Money
by Jeffrey Saut of Raymond James,
Indeed, due to expensive valuations, lack of revenue/earnings growth, slow GDP, China, politics, etc., the stock market had been in a virtual stalemate paralysis until the middle of July, having crossed above/below “go” so many times the only way to make money was to erect a toll gate at “go” (think the game Monopoly). And no wonder, frustration has reigned through the first six months of the year.
China, the Fed, and Bond Yields
by Scott Brown of Raymond James,
An initial increase in short-term interest rates is apparently still on the table at this week’s Fed policy meeting, but it’s more likely that we’ll see a delay. That may not ease the stock market’s concerns, as officials are expected to remain committed to raising rates at some point in the near future.
Solon’s Warning
by Jeffrey Saut of Raymond James,
Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets is a book by written by Nassim Taleb that discusses the fallibility of human knowledge. Taleb’s main premise is that modern humans are mostly unaware of the existence of “randomness,” believing that random outcomes are non-random. Randomness is the lack of a pattern, or predictability, in events; a random sequence of events that has no order and does not follow an intelligible pattern.
The August Employment Report and the Fed
by Scott Brown of Raymond James,
The August employment figures were mixed. Payrolls rose less than anticipated, but with an upward revision to the two previous months. The unemployment rate fell more than expected, while average hourly earnings ticked a little higher than anticipated – providing the Fed’s hawks some ammunition in arguing for a September 17 rate hike. The Fed is not going to react to any one economic report, but the jobs data fall in line with the broader range of indictors that suggest that slack is being reduced.
DeVoe’s Unprovable but Highly Probable Theories
by Jeffrey Saut of Raymond James,
I don’t claim to be an economist, although I do have a degree in economics. Fortunately, I have forgotten most of the economics I learned at university. Also fortunate is that I work with one of the best economists on Wall Street in the form of Scott Brown, Ph.D., but I digress. For the past few months I have been suggesting the economy was doing better, which has brought about cat calls from many of the negative nabobs. My sense has been that GDP was growing by at least 3%.
Days of Yesteryear
by Jeffrey Saut of Raymond James,
“Return with us now to those thrilling days of yesteryear. From out of the past come the thundering hoof-beats of the great horse Silver. A fiery horse with the speed of light, a cloud of dust and a hearty ‘Hi-Yo Silver’ the Lone Ranger rides again” . . . except in this case we are not referring to the iconic radio/TV show, The Long Ranger as played by Clayton Moore, but last October. I awoke early on October 15, 2014, looking for more news on what had caused the 18 session bone-crushing decline.
China and the Submerging Market Outlook
by Scott Brown of Raymond James,
China’s economic slowdown may not be much of a direct drag on U.S. growth. While U.S. exporters will have a tougher time, the drop in commodity prices should help consumers and domestic producers. However, the country’s difficulties need to be considered in the broader view of emerging market troubles.
The One Percent
by Jeffrey Saut of Raymond James,
I don’t need to defend Mr. Landry. Mr. Landry does just fine on his own. But coming from me – someone who is my own biggest critic as well as a critic of Wall Street – you best realize that Mr. Landry is in the top 1% of people on Wall Street. He is clear, he is concise, and he is right more than he is wrong. AND more importantly, when he is wrong he doesn’t just sit there and fight the tape. He adjusts unlike [many] of the bonehead strategists on Wall Street; stop reading and listening to him at your own risk.
China, the Fed, and Commodity Prices
by Scott Brown of Raymond James,
The People’s Bank of China, the country’s central bank, moved to allow its exchange rate to be determined by market forces. After two sharp declines in the yuan, the PBOC apparently had had enough and declared that the currency adjustment was “basically completed.” The news from China added to uncertainty about what the Fed will do in September. Concerns about the pace of global growth have put downward pressure on commodity prices, which may keep the Fed on hold.
Recession?!
by Jeffrey Saut of Raymond James,
We begin this morning’s strategy report with the aforementioned quote from the business manager of a large commercial sprinkler company, which has 700+ plus contractors nationwide, because his comments are always a good “window” on the economy. To be sure, nothing really big is ever built without a sprinkler system. I also include said quote because there has been much talk over the past few months of slowing economic statistics telegraphing an impending recession.
The July Employment Report
by Scott Brown of Raymond James,
Job growth remained strong in July. The average monthly gain for May, June, and July was 235,000, or 2.82 million at an annual rate. To remain in line with population growth, we need to add about 1.4 million jobs per year. Slack in the job market is being reduced, but a considerable amount remains. How much? The Fed has to consider the pace and plan ahead.
It’s What You Learn After You Know It All That Counts
by Jeffrey Saut of Raymond James,
Some of y’all know that I spent years working as the Director of Research and Director of Capital Markets for a Baltimore-based brokerage firm. Accordingly, I met a number of professional sports folks through the law firm Shapiro & Olander, which at the time were the attorneys of choice for a lot of professional athletes, as well as the firm I used for our investment banking department’s legal counsel. One of the folks I met was O’s manager Earl Weaver.
GDP, the ECI, and the FOMC
by Scott Brown of Raymond James,
Following Fed Chair Janet Yellen’s monetary policy testimony in mid-July, the odds of a September rate hike seemed about even. That doesn’t mean that the Fed’s decision would be a toss-up at the time of the meeting. When the September 16-17 policy meeting rolls around, it should be pretty clear what the Fed will do (or not do). Rather, that policy outlook reflected the uncertainty in the economic data that would arrive between now and the September FOMC meeting. However, just two weeks later, the evidence is pointing to a likely delay.
Jobs, Inflation, and Wage Pressures
by Scott Brown of Raymond James,
In her monetary policy testimony to Congress, Fed Chair Janet Yellen made it clear that the central bank remains on track to begin raising short-term interest rates later this year. However, she gave herself an out, indicating that Federal Reserve officials’ projections of the federal funds rate are “based on the anticipated path of the economy, not statements of intent to raise rates at any particular time.”
Release the Condor!
by Jeffrey Saut of Raymond James,
A long time ago in a galaxy far, far away, there was an advertising company trying to come up with a video commercial to introduce Buick’s new car. After a number of the ad company’s proposals were turned down, they came up with the idea of the car cruising on a road down the side of a mountain with an eagle superimposed flying over it. Buick loved it! There was, however, one problem; you cannot capture, or tame, an eagle. Therefore it was decided to use a condor.
Become Like Water My Friend
by Jeffrey Saut of Raymond James,
I used to love watching the History Channel. Back in the good ole days (which actually weren’t too long ago), it would feature real historical content like documentaries, mini-series, and regular programs dedicated to some of the most interesting moments in which human beings have participated. When nothing else seemed to be on the other 300 stations, I could at least count on the History Channel to help kill a few minutes without killing my brain cells in the process.
The View from the Fed
by Scott Brown of Raymond James,
Federal Reserve Chair Janet Yellen will give her semiannual monetary policy testimony to Congress this week. In the past, this has been an important event for the financial markets. However, Fed communication is a lot more open these days. For example, we have the forecasts of senior Fed officials and the minutes of the June policy meeting in hand. However, there is still scope for financial market participants to learn a bit more.
More of the Same
by Scott Brown of Raymond James,
The U.S. economic data reports have remained mixed, consistent with a moderately strong pace of growth in the near term. The June jobs data suggest that a September Fed rate hike may be a closer call than thought earlier. Meanwhile, Greece’s economy is in tatters. The country has to face the burden of further austerity or the chaos of a euro exit.
The Summer Solstice and Mid-Year Thoughts
by Jeffrey Saut of Raymond James,
Reflecting on the first half of 2015, while littered with geopolitical events, shows very little upside progress for the S&P 500 (SPX/2076.78). In fact, my notes of more than 50 years show no other time when the SPX was never up or down more than 3.5% year-to-date (YTD).
An Important Week for Economic Data
by Scott Brown of Raymond James,
Fed officials have signaled that monetary policy decisions will be data-dependent. Hence, financial market participants will closely examine upcoming economic reports. Data are expected to remain consistent with an improving economy and an initial increase in short-term interest rates by the end of the year.
Pickles?!
by Jeffrey Saut of Raymond James,
I have been traveling a lot recently and this week will be no exception as I am in Victoria, British Columbia currently and am leaving for Vancouver tomorrow. While traveling is exciting and educational, it is also exhausting. Moreover, sleeping in strange beds doesn’t help the exhaustion factor. To be sure, I often find myself suffering from dyssomnia in a fitful sleep accompanied by some pretty strange dreams.
Clarifying the Fed Policy Outlook
by Scott Brown of Raymond James,
There was nothing unexpected in the Fed’s monetary policy statement or in the revised economic projections of senior officials. Chair Yellen covered no new ground in her press conference. However, many investors appear to be unsure of the monetary policy outlook and the implications for the financial markets. So, to clear things up...
The Fed Policy Outlook: Connecting the Dots
by Scott Brown of Raymond James,
Policywise, not much is expected out of this week’s meeting of the Federal Open Market Committee. The FOMC is unlikely to provide a clear signal on the precise timing of the initial increase in short-term interest rates. However, there should be plenty of information in the Fed’s revised economic projections and in Fed Chair Janet Yellen’s press conference.
Jobs, Consumer Spending, Gasoline, and the Fed
by Scott Brown of Raymond James,
Job growth was stronger than expected in May, although figures may have been inflated a bit by the seasonal adjustment. Still, the strong job gains over the last year and the drop in gasoline prices have failed to boost consumer spending as anticipated. Following this week’s retail sales report, we may better understand why. This may have some impact on the outlook for monetary policy, but Fed officials will want to see a lot more economic data before pulling the trigger.
Me, Lord Marlboro, and the Dow?!
by Jeffrey Saut of Raymond James,
Holy cow, somebody must have slipped American Pharaoh a “sugar cube” last Saturday as horse and jockey (Victor Espinoza) made the turn into the withering stretch at Belmont Park and pulled away from the rest of the pack. Hopefully, somebody will feed a “sugar cube” to the stock market this week because it certainly needs it.
Greenbriar Gleanings
by Jeffrey Saut of Raymond James,
I always look forward to reading Frederick “Shad” Rowe’s monthly investment letter to his partners. Shad founded Greenbrier Partners, Ltd. In 1985 and has captained the investment fund ever since. He is known as one of the best “stock pickers” on Wall Street, a moniker that is well deserved.
Profit of Doom?
by Scott Brown of Raymond James,
In its 2nd estimate of 1Q15 GDP growth, the Bureau of Economic Analysis published its preliminary estimate of corporate profits. No surprise, profits fell sharply in the quarter, reflecting the impact of a stronger dollar, adverse weather, and possibly statistical noise and seasonal adjustment issues. Profits are a key driver of new hiring and capital spending. Looking ahead, a lot will depend on currency market developments.
Easy?!
by Jeffrey Saut of Raymond James,
My father first introduced me to Justin Mamis’ work by giving me a few of the books he had written like When to Sell: Inside Strategies for Stock-Market Profits, How to Buy: An Insider’s Guide to Making Money in the Stock Market, and my favorite, The Nature of Risk. Justin penned his last stock market letter at the age of 85 and his work is missed to this day. He was a stock market historian, author, strategist, and a technician’s technical analyst. I quoted him this morning because the stock market this year has been anything but “easy.”
Fun with GDP
by Scott Brown of Raymond James,
The current economic expansion is rapidly approaching its six-year anniversary. Contrary to popular belief, the likelihood of entering a recession does not depend on the age of the expansion. However, there are other issues. In this recovery, average growth in the first quarter of the year has been well below the average of the other three quarters, leading to some doubts about the quality of the seasonal adjustment. Looking ahead, the government will introduce two new gauges with the annual benchmark revisions in late July.
Back to the drawing board
by Scott Brown of Raymond James,
The data reports for April suggest that the second quarter’s anticipated rebound from a weak 1Q15 will fall far short of expectations. We could get revisions, figures for May and June could be a lot stronger, but at face value, the economy has disappointed. However, the Fed is still on track to begin raising short-term interest rates later this year. We should come away with a better understanding of how the Fed sees the situation when the central bank’s two top officials speak later this week.
Crescendo or Consolidation?
by Jeffrey Saut of Raymond James,
The S&P 500 (SPX/2122.73) has basically been locked in a trading range between 2040 and 2100 since early February of this year. Some technical analysts term the subsequent chart pattern a wedge and others call it a rising wedge. While pundits can debate the difference between the two, the important point is which way said chart pattern will be resolved with either an upside breakout, or a downside breakout.
In the Market’s Sweet Spot
by Scott Brown of Raymond James,
Recent economic data reports have reflected a slowdown in growth, but they are not disastrous. The economy continues to improve, but not so much that the Fed will rush to take away the punch bowl. That’s good news for the financial markets.
For trading, not eating!
by Jeffrey Saut of Raymond James,
Trading sardines indeed, except I have seen a lot of folks attempting to trade this market over the past few months all to no avail. What has typically happened is that one day they are able to make some money, but the next day they give that profit back.
Waiting on the Turn
by Scott Brown of Raymond James,
The economy slowed in the first quarter, reflecting a variety of restraints. Most of these should give way, leading to stronger growth in the second quarter. However, Federal Reserve officials and financial market participants will want to see proof.
Being There
by Jeffrey Saut of Raymond James,
Spring has definitely sprung here in Florida as pollen is in the air and raindrops fall on my tin roof with the sound of golf balls. “Tra la! It's May! The lusty month of May! That lovely month when ev'ryone goes blissfully astray,” to steal a line from the play Camelot. But many market pundits are worried about the softening economic reports, prompting me to dredge up my annual missive about the book “Being There” by author Jerzy Kosinski. The story revolves around a simple-minded man named Chance “the gardener,” who knows only gardening and what he sees on television.
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