After rallying 224 points on the Dow Industrials yesterday afternoon, stocks gave up the ghost into the close, finishing down 253. That clearly raises the risk the Yellen rally will prove to be just like the Draghi rally we had several days ago — a one-hit wonder followed by lower prices.
But that’s only the most obvious warning sign. There are plenty of less-obvious things going on that you shouldn’t ignore. Start with China. The country’s currency dropped overnight for the 10th day in a row, the longest devaluation streak in eight years.
The yuan is now the cheapest since June 2011, a sign of ongoing capital outflows and worries about the domestic economy. Since it was China’s initial devaluation in August that set off a stock market panic here, the fact the yuan is undercutting those panic lows is worth mentioning.
And how about the commodities market? You don’t need me to tell you that stocks have generally been paying close attention to what’s happening in oil. So it’s worth noting that crude barely bounced yesterday along with stocks, then fell to as little as $34.63 a barrel today.
|What the Fed giveth, the Fed taketh away; the rally fails on day two.|
Gold also gave back every penny and then some of its post-Fed gains, while silver and copper pulled back noticeably. If commodity traders were as optimistic about growth post-Fed as stock traders supposedly are, you wouldn’t see that happen.
Finally, let’s talk bonds. No market on the planet should be as sensitive to a Fed rate hike as the interest-rate market. But it’s behaving exactly the OPPOSITE as a lot of mainstream commentators might have expected.
Long-term yields are actually falling, even as very short-term yields are holding steady. The 2-year was basically unchanged, while the 10-year dropped five basis points and the 30-year fell seven points.
That means the yield curve is continuing to flatten like a pancake here. And that’s a sign bond traders are nowhere near as optimistic about growth or future inflation as Yellen says she is.
Bottom line: The Fed optimism that was so evident yesterday evaporated today. But going forward, what do you expect will happen?
Are we set up for a run into year-end and beyond? Or are investors whistling past the graveyard? Which stocks should be bought in the wake of the Fed move, and which should be sold? And do you have any thoughts on the bond market’s reaction to the Fed?
You know where I stand. Now, let me know your answers to these questions below.
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Boy, did the latest interest-rate move by the Fed get chins wagging online. Let me try to get to as many relevant comments as I can.
Reader $1,000 Gold took an optimistic view of the future, saying: “The Fed dot plots call for 1% per year over the next three years, which is 25 basis points four times per year. That would put us on schedule for a recession in 2018 or 2019 — which means we’re good to go until then, right?”
Reader Don also said concern over risky bonds is overblown in the wake of the Fed move: “Why all the worry about junk bonds? That’s what they are. Anyone who buys them takes the risk. It is ridiculous to waste tears on the people that buy them.”
But Reader Chuck B. warned that the initial “hike euphoria” may not last, saying: “So the markets liked the rate hike — until they have time to think about it, and the half-promise of more to come. That might not go down so smoothly.
“It is a promise of higher costs for money borrowed in mortgages, car loans, and otherwise. That won’t do much for the kinds of businesses we need to create prosperity for all.”
Reader D. said the Fed has started the rate-hiking process too late, offering this view: “Rates should have been raised in 2011 at the latest, and there should never have been a QE3. While the Fed is determined to put a brave face on things, they did this for political reasons — their credibility is at stake, as is the credibility of those highly questionable GDP and jobs numbers of the last three years.
“The likelihood of more hikes is low, and I doubt we’ll see another Fed hike before 2017. It’s much more likely we’ll have a recession first.”
Reader Bruce echoed that theme as well, saying: “The Fed move is woefully late and several dollars short. To raise rates when the economy and the credit markets are starting to show great strain is madness.
“What a tragedy we can’t turn back the clock several years. All we can do now is batten down the hatches, raise even more cash, and use inverse ETFs to help reduce the damage because 2016 may well be very ugly.”
I appreciate the comments, even if I don’t agree with all of them. I agree with the view that the Fed should have started the rate-normalization process a long time ago. Two-year note yields bottomed all the way back in May 2013, a sign investors were starting to price in potential hikes a long time ago even as the Fed kept dragging its feet.
Now we’re almost seven years into an economic expansion/bull market, and there are signs the cycle is turning. Indeed, the reason I focus so much on junk bonds and the behavior of the riskiest corners of the credit market is because that’s where you get “early warnings” of future problems elsewhere.
Think back to the 2007-09 crisis. It wasn’t Citigroup (C) or Bank of America (BAC) that came apart at the seams first. The first lender collapse/bankruptcy was actually a company called Ownit Mortgage Solutions, in December 2006. Stocks ignored it.
Then in February 2007, the larger mortgage company New Century Financial collapsed. Stocks noticed, and stumbled, but then the market climbed for several more months. Only in October 2007 did we finally peak for good, then begin the long, sickening slide lower.
This is a different cycle, and a different time. Housing isn’t at the center of this credit maelstrom. Energy and other commodities are. The biggest debt excesses aren’t in home loans. They’re in risky takeover and buyback loans.
But the pattern is still somewhat similar — with the worst, riskiest loans and lenders getting hit first, and the credit problems slowly migrating up the food chain. It doesn’t guarantee the same outcome as we saw several years ago, but it is a reason for caution in my book.
Whether you believe I’m on track or not, the important thing is that you share your thoughts online. It will make us all better investors. So please do take a minute to comment below.
On the economic front, initial jobless claims dropped 11,000 to 271,000 in the most recent week. But the December Philly Fed index came in ugly, dropping to -5.9 from 1.9 in November. That missed expectations by a mile, and was also the second-worst reading (behind this September’s) since February 2013.
The private equity firm Cerberus Capital Management is spending around $600 million to buy a stake in Avon Products (AVP). It will buy around 17% of the parent company, and 80% of its North American operations, as well as put three of its members on Avon’s board of directors.
The troubled cosmetics company’s shares have been on a long slide lower since early 2013. They fell from around $24 to around $2.40 during that time.
Drugmaker AstraZeneca (AZN) said it would buy 55% of Acerta Pharma for around $4 billion to gain access to an experimental cancer drug the firm is developing. “Acalabrutinib” could generate sales of as much as $5 billion per year if regulators approve it to treat leukemia, lupus, and blood cancers.
Speaking of drug companies, the CEO of Turing Pharmaceuticals, Martin Shkreli, was arrested this morning. He personifies all that critics hate about expensive pharmaceuticals because his firm bought a very old drug and preceded to hike the price to $750 per pill from $13.50. The federal charges stem from his work at a different drug company called Retrophin.
Do you think Shkreli got his just desserts? What about the Avon deal … will it save the storied company from oblivion? How about the latest economic data? Should we be worried about the slowdown in manufacturing, or encouraged by the jobs figures? Share your thoughts below.
Until next time,
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