- “Authorized leaks” from the Fed drive up the Dow 300
- Why the Fed is certain to fuel more volatility… and what to do now
- If China’s slowing down, what gives with this chart?
- An update on crude’s “new equilibrium”
- Early warning of a consumer slowdown?… Lemonade stand crackdown in the Hamptons… “bailouts” then and now… and more!
Let’s see if we’ve got this straight: The economic numbers from China overnight were awful. And this morning, the Dow opened up 300 points.
Say what?
Didn’t we just get through three weeks of stomach-churning ups and downs (mostly downs) because it suddenly dawned on everyone that China’s not all it’s cracked up to be?
Anyway, welcome to the unofficial start of autumn. Wall Street’s pros are back at their desks. Retail investors are paying a bit more attention to the news and the market again. It’s a good day to survey the market and economic landscape with the help of no fewer than four of our editors.
The rally today appears to have little to do with China — and nearly everything to do with the Federal Reserve. Or as Jim Rickards tweeted last night…
Let’s back up a bit.
In nine more days, the Fed’s Open Market Committee will grace us with its latest pronouncement on the future of interest rates. For months, conventional wisdom had it the Fed would finally bump up its benchmark fed funds rate from near zero — where the FOMC has held the rate ever since the Panic of ’08.
That expectation began to fall apart during August as the market tumbled, China hit a wall and U.S. economic numbers looked soft.
On Friday, as we noted in real-time, the market tanked because the monthly U.S. job numbers looked just strong enough to make traders second-guess the Fed once again. Maybe they’ll raise the fed funds rate after all, the thinking went.
Then over the long weekend, The Wall Street Journal’s Jon Hilsenrath — the most reliable conduit for “authorized leaks” from the Fed — ran an interview with San Francisco Fed chief John Williams. For much of this year, Williams had said the economy was strong enough that the FOMC would raise the fed funds rate sooner rather than later.
No more. “There are some pretty significant — and I would say have now grown larger — head winds that have developed,” said Williams.
So much for that.
Also over the long weekend, Goldman Sachs chief economist Jan Hatzius reiterated his forecast that the FOMC would wait until December.
So there’s your context for this morning’s 300-point Dow rip. China’s exports in August are down 5.5% from a year earlier? Who cares!
“Our IMPACT system is signaling an early shift in the strong U.S. dollar trend because the Fed is unlikely to raise interest rates in an increasingly volatile market,” says Dan Amoss — who leads our Jim Rickards research unit.
Here’s the backdrop: “Central banks — especially the Fed — have artificially suppressed stock market volatility for several years,” Dan explains.
“QE and zero interest rates made it painful to hold cash. So investors went ‘out on the risk curve,’ bidding up prices of junk bonds and risky stocks. It was only a matter of time until central bank manipulation of investors’ behavior unwound violently…
“In the month of August, investors’ appetite for risky assets suddenly dropped. And because there are few buyers left to take the other side of the trade, sell orders sent many markets into free fall.
“Earlier this summer, volatility was like a spring pushed by central banks into a tighter and tighter coil. Now as we approach the riskiest seasonal period for stocks, and the Federal Reserve is slowly pulling its hand away from that coiled spring, volatility has risen dramatically. The potential energy in the coiled spring is turning kinetic.”
[Ed. note: “Volatility” is the watchword in the run-up to the FOMC meeting a week from Thursday. And it’s in volatile environments that opportunities abound for fast gains using Jim Rickards’ proprietary IMPACT system. If you missed Jim’s urgent video message last week, it’s still timely… and it takes only two minutes of your time to watch.]
As the morning wears on, the Dow’s gains are receding a bit. But it’s still up 1.5% — about 250 points — at 16,346.
The Dow remains in “correction” territory — that is, it’s down more than 10% from its highs earlier this year. But as we write, the S&P 500 and the Nasdaq have clambered out of correction territory.
Gold is holding its own, meanwhile — down a buck at $1,121. Crude is off 2.5%, back below $45.
In the midst of the “China slowdown” chatter, ponder this: Demand for crude oil in China keeps climbing to all-time highs.
China’s oil demand might yet crash… but it isn’t showing up in the numbers yet.
“The graph below is from Platts data and shows China’s demand for oil from the start of 2010 through the end of June 2015,” explains Jody Chudley of our natural resources team. “The blue bars show the oil demand for the first and second halves of each year, and the line tracks monthly demand.
“The monthly demand clearly gradually increases over time, but it is bumpy,” Jody goes on. “What is very clear from the data — in fact, it is the most obvious thing on the chart — is that China’s oil demand in the first half of 2015 reached a new all-time high.”
Not that Chinese demand is doing a thing to support oil prices right now. Crude remains in the “new equilibrium” identified in this space last spring by our Matt Insley.
This morning, Matt checks in with an update. “The U.S. is now the world’s ‘marginal’ or ‘swing’ producer of oil,” he explains. “That is, we’ve got decades of U.S. oil under our soil. And when prices are firm enough to turn a decent profit, production will swing higher.
“From what I’m hearing, the price where producers can make a decent buck is around $60 per barrel, maybe $65. At that price, the juice is worth the squeeze for producers.
“So the outcome is simple: When the price of oil heads above $60 or $65 in the short term, U.S. producers will come into the market. These producers will sell their oil forward. These forward contracts, also called hedging, allow companies to look forward a few months and lock in a price that they’ll receive for their oil.
“In other words, when oil prices creep up to $60 a barrel, and producers can lock in a profit, they’ll sell.”
That’s what happened over the summer. “We’re going to see this same cycle continue to play out,” says Matt, “over the next six-12 months (maybe more.)”
The mighty American consumer is getting more cautious. Or at least that’s our takeaway from the monthly Optimism Index put out by the National Federation of Independent Business.
The headline number was little changed in August at 95.9 — still below its long-term average.
If you’re a longtime reader, you know we also key in on the “single most important problem” part of the survey. As late as 2011, “poor sales” were cited by a quarter of survey respondents. In more recent years, that category has taken a back seat to taxes and regulations.
For much of this year, poor sales were cited by only around 10-11% of the business owners answering the survey. But in August, it popped to 14%. (Taxes remain in first place, at 21%.)
As we’re wont to caution, one month does not a trend make. But we’ll be watching this closely…
While we’re on the subject of small business — or, in this case, a charity — we’re tardy in noting a celebrity lemonade stand crackdown.
Late last month, Jerry Seinfeld’s son Julian set up shop with a couple of friends at a park near the family’s part-time home in East Hampton, New York — at the far end of Long Island. Then the police showed up after getting a complaint from a neighbor about illegally parked cars. (“Newman!”)
Seinfeld and son, and two friends: Note the police cruiser in the background
[Instagram photo by Jessica Seinfeld]
Peddling on village property is illegal, but police didn’t see fit to issue a citation.
The stand shut down, but all was not lost. “Lemonade dreams crushed by local neighbor, but not before raising lots of money for @loverecycled,” wrote Seinfeld’s wife, Jessica, in the caption to the above photo. “Thanks to all of our customers and big tippers!”
Proceeds went to Baby Buggy — Jessica Seinfeld’s charity for families down on their luck.
“It may be harsh bringing up Long Term Capital Management, but how many of ‘us’ can negotiate a ‘bailout’ from the Fed?” a reader writes after we once again recounted Jim Rickards’ role in LTCM last Friday.
“What happened to ‘taking your medicine’? Should have been a bankruptcy in there somewhere.
“What do economists call that? Oh, I think it is ‘rent seeking.’ Using your governmental connections to benefit at taxpayers’ expense.”
The 5: No taxpayers were harmed in the 1998 bailout of LTCM. The big banks bailed out LTCM — mostly so LTCM could cover its losses and prevent a domino effect among the banks’ derivatives trades. LTCM’s principals wound up with 8 cents on the dollar.
Of course, as Jim is wont to remind us, 2008 was different. “Fast-forward to 2008 and this time it was the Feds who bailed out Wall Street,” he told Reuters last year. “Each bailout is bigger than the last. When the next panic happens, it will be bigger than the Fed. And then what are we going to do?”
Jim proceeds to answer his own question at this link.
“I agree with the generally bearish tone in Friday’s 5 from the guy at your ‘trading desk,’” a reader writes.
“Curious: What exactly is your ‘trading desk,’ and what does it do with respect to your advisory services? I mean, I typically think of a trading desk as a full-service brokerage with a website and optional phone you can call to place trade orders. (Surely, I must be mistaken?).”
The 5: No, we don’t execute trades. We’re not money managers. We help people manage their own money, often after they’ve been burned by professional money managers… Heh. But Greg Guenthner and Jonas Elmerraji do specialize in trading, as opposed to long-term investing. And we’re beefing up our trading know-how with the addition of best-selling author Michael Covel to our team — watch this space.
“Along the same lines,” our reader goes on, “this statement from ‘the trading desk’ begins with an understandable and objective analysis – ‘All three major averages remain below their respective 200-day moving averages. That means we have to give choppy and/or lower prices the benefit of the doubt…’ But then it ends in sullen ambiguity – ‘…until the market begins to give us clues that it has repaired the damage.’
“Not sure what that means. I guess it means, ‘Not sure.’ How about something a bit more analytical and objective like a futuristic reference or two to the 200-day or 60- or 50-day MA activities? Or how about a technical reference to bearish or bullish divergence of the RSI? How about some actual understandable ‘…clues… ’ for the future in the same paragraph?
“If your writers can afford to be analytical about chart history (thanks for the free history lesson), then surely they can afford to balance that with the same unambiguous objective written analysis going forward (subscribers do pay for such things — right?). But it was a long week, and I understand if your editorials needed a break.”
The 5: Easy, partner. You’re making the reader’s head hurt. RSI divergences?
But you raise a good point — how do we make some of the intricacies of technical analysis accessible to a smart-but-layman reader? We’re working on it.
In the meantime, please remember our long-standing policy. The analysis you see in The 5 comes to you free. Our most actionable guidance comes at a price…
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. “The unusual volatility that has taken hold of financial markets in recent weeks, resulting in some impressive moves up in asset prices and many more harrowing declines, will be with us for a while,” writes Allianz economist Mohammed El-Erian in the Financial Times.
That’s why we said earlier that now’s an ideal time to jump into Jim Rickards’ IMPACT system. “I’ve specifically designed IMPACT to work better during times of market volatility,” says Jim.
With the Dow moving hundreds of points most days lately, you’d do well to follow this link for an urgent — and brief — video message from Jim.
