|Dow||+5.26 to 17,060.68|
|S&P 500||-3.82 to 1,973.28|
|Nasdaq||-24.03 to 4,416.39|
|10-YR Yield||Flat at 2.549%
|Gold||-$12.40 to $1,294.30
|Crude Oil||-$1.02 to $99.89|
Don’t laugh. But I love testimony days — those days when the current Federal Reserve chairman has to go before Congress and explain him or herself.
Some of the representatives and senators don’t know an interest rate from a hole in the ground, so you get to laugh at their questions. Others are so far to the extreme on the “tight money vs. loose money” scale that you know what they’re going to say before they open their mouths.
Heck, I can’t shake the feeling that at least one or two of them secretly get their questions handed to them by New York Times and uber-Keynesian Paul Krugman. Maybe in a darkened parking garage like that scene in All The President’s Men.
Anyway, it was Chairman Janet Yellen’s turn to appear today before the Senate Committee on Banking, Housing and Urban Affairs. She submitted these comments at the outset, and a more detailed full report on policy, inflation, growth, and financial stability. Then the “fun” got started with a couple hours of comments and questioning.
So what are the major takeaways I got from testimony day?
First, Yellen is trying to put the markets on notice that the Fed is increasingly flying blind with regards to policy! She’s trying to straddle the fence between increasingly divergent camps at the Fed, and her comments reflect that. Some policymakers are very eager to keep policy easy to fight unemployment, while others are getting more strident about the need to tighten policy to ward off inflation.
That’s why she said the following:
“If the labor market continues to improve more quickly than anticipated by the Committee, resulting in faster convergence toward our dual objectives, then increases in the federal funds rate target likely would occur sooner and be more rapid than currently envisioned. Conversely, if economic performance is disappointing, then the future path of interest rates likely would be more accommodative than currently anticipated.”
This is a big difference from the autopilot-like policy path we’ve been on for the last few years. Instead of promising to keep rates low forever, regardless of the data, she is moving the Fed to a much more data-dependent world. That means we could see much bigger market moves — in stocks, interest rates, currencies, and so on — when we get key reports, such as the monthly jobs report or the monthly CPI release.
Second, Yellen actually sounded a bit less dovish to me about the policy outlook. She repeatedly talked about signs of economic strength, outside of housing. She also noted that the unemployment rate has fallen sharply, job creation has picked up notably, and that “broader measures of labor utilization have also registered notable improvements.”
Third, Yellen continued to devote more time to topics I’ve harped on for a long time but that she basically ignored many months ago. That includes financial stability and “chasing yield” — taking cheap Fed-provided money and buying every lousy bond issued by every lousy company and high-risk country on the planet just to pick up a few extra basis points in rate.
“This is a big difference from the autopilot-like policy path we’ve been on for the last few years.”
Specifically, she said the Fed “recognizes that low interest rates may provide incentives for some investors to ‘reach for yield,’ and those actions could increase vulnerabilities in the financial system to adverse events.”
Heck, the report that accompanied her comments went so far as to single out smaller capitalization stocks in sectors like biotechnology and social media. It also highlighted the risks posed by overheated leveraged corporate lending and junk bond markets, and noted that the collapse in implied volatility for the S&P 500 was yet another warning sign of dangerous yield chasing.
Yellen implied she won’t raise rates — yet — to prick those bubbles. She claimed that macroprudential measures — like specific, behind-the-scenes warnings from regulators or targeted cease-and-desist type actions — are a better fix.
But the fact she has already shifted from saying nothing to saying a whole lot about these threats … and the fact she hasn’t ruled out using rate hikes if other measures fails … speaks volumes. This is not the Fed of 2010-13.
|The Fed’s Janet Yellen said the Fed “recognizes that low interest rates may provide incentives for some investors to ‘reach for yield,’ and those actions could increase vulnerabilities in the financial system to adverse events.”|
The economy is improving, inflation pressures are building, asset markets are getting out of control, and the market (and increased media attention) is starting to force Yellen and her cohorts to pay attention. That’s why QE is about to die an ignominious death, and why the next surprise after that (for Wall Street, but hopefully not you!) will be much earlier-than-currently-expected short-term rate hikes!
So what does this mean to you as an investor? Let me break it down as simply as I possibly can:
- Dump your long-term bonds, from Treasuries to municipals to high-risk corporate! Bond ETFs and mutual funds with average maturities or effective durations over two to three years look particularly dangerous to me.
- Buy some gold or gold miners on pullbacks for protection from inflation and volatility.
- Sell the euro and buy the dollar as our Fed is well ahead of the European Central Bank in terms of how close it is to hiking rates.
What do you think? Are these the takeaways you got from Janet Yellen’s latest remarks? Or do you have a differing opinion? Are stocks the riskiest asset here? Bonds? Something else? Let me know at the Money and Markets comment section.
|OUR READERS SPEAK|
There were a heck of a lot of solid comments and recommendations in the comment section of the website in the last 24 hours. So I want to share as many as I can, since they contain valuable information about gold, stocks, interest rates, and more.
Reader Ken said: “This is a tough time for decision making in the stock market. We’ve had a very good few years, but every time I begin to think about cashing in, and I have sold some stocks, the market takes another step up, like today going back over 17K.
“IMHO, I believe the stock market is fairly safe for the next 18 months at best, but I’m keeping my options open and I’m ready to cash in at the first sign of real weakness.”
On the other hand, Reader John was less optimistic about the outlook for the economy here and abroad. His reasoning: “The level of debt both government and private will continue to weigh down on economic growth. I think everybody knows it’s only a matter of time before interest rates explode. Then EU economies will be back to square one with increased cost of borrowing and interest payments and flat income.”
Reader John R. also weighed in on stocks, saying they’re going up because of rising valuations, but he highlighted the distinct possibility of serious, unexpected declines. His comments:
“Stocks are the only game in town and current prices do not seem to reflect the negative underlying fundamentals. This has been a rising P/E ratio driven market, and I’m in the bearish camp with trailing stops just under the market. There are oodles of potential ‘black swans’ out there which could reverse this market in an instant.”
Finally, Reader Rick said he’s been maintaining a high cash level, but has converted some of his cash into gold and silver investments. And he also notes one other disturbing development, which may play into my recent columns on inflation. His comment:
“My farm ground has gone up about 35 percent in two years. Reminds me of the ’70s prior to inflation skyrocketing. Economy is tap dancing on a razor wire at 300 feet in a heavy wind, but I guess the U.S. is the least-sickest horse in the race for now.”
If you haven’t already weighed in on your fellow investors’ comments, or added your own, I urge you to hop over to the comment section when you have time. You’ll find plenty of valuable information there.
|OTHER DEVELOPMENTS OF THE DAY|
Earnings season is in full swing, with today’s financial stock reports fairly strong. Goldman Sachs (GS, Weiss Ratings: B) said second-quarter profit rose to $2.04 billion, or $4.10 per share on a 6 percent rise in revenue. Improvements in investment banking and its own investment portfolio offset weakness in trading of bonds, commodities, and currencies.
JPMorgan Chase (JPM, Weiss Ratings: A-) also managed to beat expectations, with earnings of $6 billion, or $1.46 per share, beating forecasts for $1.29 per share. But sales fell 3 percent to $24.5 billion amid weaker fixed income trading and lackluster equity derivatives revenue.
Dow component Johnson & Johnson (JNJ, Weiss Ratings: A), for its part, also beat expectations in the second quarter. Earnings per share excluding special items came in at $1.66, above the average forecast of $1.54. Sales rose just over 9 percent to $19.5 billion, topping expectations for $18.9 billion.
On the economic front, retail sales rose 0.2 percent in June. That followed an upwardly revised 0.5 percent gain in May, but slightly missed expectations thanks to some weakness in the auto sector.
A “core” sales reading that goes into the calculation of Gross Domestic Product jumped 0.6 percent after rising 0.2 percent in May. That suggests the first-quarter drop in GDP won’t be repeated in Q2. We also saw a sharp gain in New York-area manufacturing activity, another positive economic sign.
Meanwhile in mega-merger land, Reynolds American (RAI, Weiss Ratings: A-) confirmed speculation that it would acquire Lorillard (LO, Weiss Ratings: A-) in a $27.4 billion transaction. In order to get regulatory approval, they plan to offload several cigarette and e-cigarette brands to Imperial Tobacco (ITYBY, Weiss Ratings: currently unrated by Weiss Ratings) for $7.1 billion.
Reminder: You can let me know what you think by putting your comments here.
Until next time,