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What Comes Next?
by Scott Brown of Raymond James,
The Federal Reserve has now raised short-term interest rates for the first time in nine and a half years. In the policy statement, the Fed signaled that policy will still be accommodative, that future action will be data-dependent, and that the pace of rate increase is likely to be gradual. None of that should be a surprise.
It's Beginning to Look a Lot Like Christmas . . . Not
by Jeffrey Saut of Raymond James,
Many of you know that around this time of year I journey to New York City for the Christmas tree lighting and the Friends of Fermentation (FOF) Christmas party; this year was no exception. However, it sure did not feel much like Christmas in Manhattan. The temperatures were in the 50s and 60s, so the top coat I brought was never used. Such warm climes brought about thoughts of the much discussed topic, “global warming.”
What to Expect When You're Expecting Uncertainty
by Scott Brown of Raymond James,
Last week, we looked at the Fed’s various policy tools and how the central bank will use them. This week, let’s examine the implications of a Fed rate hike. While a rate increase should be largely factored into the markets by now, the global reaction may be the largest concern for Fed officials.
What to Expect When You're Expecting (a Fed Hike)
by Scott Brown of Raymond James,
It’s anticipated that the Fed will begin tightening monetary policy soon, but many investors may be unfamiliar with how policy will be tightened. Let’s review the key policy tools and how this tightening cycle will differ from previous cycles.
More Money Has Been Lost Reaching for Yield than at the Point of a Gun
by Jeffrey Saut of Raymond James,
A schizophrenic week, indeed, with a ~10 point loss for the S&P 500 (SPX/2091.69) on Monday followed by a 22 point pop on Tuesday and then 23 point decline on Wednesday and 30 point loss on Thursday, capped by Friday’s 42 point rally.
Richard Russell
by Jeffrey Saut of Raymond James,
A couple of weeks ago I wrote a strategy report titled “Friends.” In that report I scribed, “Regrettably, too many of my friends’, and stock market icons’, stories have been lost forever. One of the best writers I ever knew on the Street of Dreams was my friend Barton Biggs (Morgan Stanley). . . . Other deceased notables include: Alan “Ace” Greenberg (Bear Stearns), Henry Singleton (Teledyne), Muriel Siebert, Marty Zweig . . . well, you get the idea.” Today, it is with great sadness that I report another icon passed away last week when Dow Theorist Richard Russell left us.
Forecasting Exchange Rates
by Scott Brown of Raymond James,
Currency forecasting is inherently difficult. Getting monetary policy right can help in the short-term, but beyond three months, you can’t do any better than a random walk. That aside, the strong dollar (along with softer global economic growth) has played a major role in the slowdown in U.S. corporate profits this year. What can we expect for 2016?
Friends
by Jeffrey Saut of Raymond James,
“Friends” . . . except in this case I am not referring to the 1994 TV sitcom, but the true friends I have met over the past 45 years in this business. I thought about this theme two weeks ago as I was sitting in Bobby Van’s, across from the NYSE, listening to great stories from my friend Art Cashin and Eric Kaufman (captain of the sagacious VE Capital), and other members of Friends of Fermentation (FOF). As I listened to Arthur, I could not shake the feeling that these classic Wall Street stories need to be scribed lest they be lost forever.
Fed Up
by Scott Brown of Raymond James,
The agonizing over whether the Fed will begin raising short-term interest rates is unlikely to end soon. A 25-basis-point increase shouldn’t have much of an impact on the economy, especially if the Fed makes it clear that it intends to go slow with further rate hikes. However, the financial markets believe this to be a big deal. So it is. Fed officials have continued to signal that it “may be appropriate” to start in December, but they have also continued to signal that this is not a done deal.
Financial Festival
by Jeffrey Saut of Raymond James,
I first met Minyanville’s Todd Harrison more than 10 years ago. Subsequently the first “Minyans in the Mountains” confab was held in Crested Butte, Colorado. Todd’s Minyanville idea was to create a financial community whose participants would bond over the years and share investment themes, strategy, and investment ideas. Minyanville also tried to advance the financial education of children. The “glue” that seemed to tether everyone together was dubbed “The Buzz and Banter” where all of us could contribute to the ongoing financial blog.
The Job Market and the Fed
by Scott Brown of Raymond James,
The October Employment Report was stronger than expected, but should be seen in its proper context. That is, while October’s payroll gain far exceeded forecasts, it followed softer figures in August and September. The three-month average was moderate. Financial market participants believe that the report makes a December 16 rate hike a lot more likely. However, the Fed had already been signaling that such a move was likely.
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.
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