Dow futures update from Oct 5th to Oct 30th
Market Update; October 29, 2015
Word Smithing at the FOMC
Beyond the semantics of the FOMC, an objective look at the Fed’s decision tree will be based on weak fundamental data that will continuously kick the can down the proverbial road until there is a threat for inflation to unhinge upwards. The bottom line is the economy is not strong enough to withstand an upward trajectory of interest rates, especially the financial casino on Wall Street. The facts of the matter are the following:
- Weak economic data; labor declining, PMI dropping, durable goods falling precipitously, homes sales considerably lower than expectations with the average prices lower along with overall manufacturing output shrinking.
- Europe skating near recession; China on the verge of meltdown; and Emerging Markets on the verge of a mass credit default.
- Japan overtly buying securities (maybe a proxy for the Fed here in the United States?); China reducing interest rates and lowering reserve requirements; the ECB extending, perhaps ad infinitem, the purchasing of European government bonds (quantitative easing European style).
- Commodity currency countries are suffering both declining revenues due to radically lower commodity prices, demand destruction as the global GDP erodes and the “threat” of higher rates in the U.S. This has also caused considerable disintermediation of investments from these countries into US dollars. The net effect of this disintermediation and “expectation” of higher USD interest rates is these countries are exporting deflation to the U.S. and the U.S. is exporting inflation to these countries … a very bad predicament as the emerging market/commodity currency countries’ economies are being crippled by a two-edged sword; internal inflation and severely depreciating revenues.
- The continuously burgeoning U.S. debt. Just now, Congress has again untied the Administrations and Washington bureaucrat’s hands from fiscal responsibility with another increase (unlimited for two years) in the debt ceiling. Higher interest rates will add to the debt spiral as ZIRP has held the interest on the debt to 6% of the Federal spending (approximately $230B in FYE 2015). This is a massively compounding problem; as both the interest rate and the overall debt increase, the total interest payments geometrically scale higher. For instance, at a 4.0% total borrowing cost (currently the total borrowing interest costs due to the Fed’s purchase of Treasury securities is only 1.2%) and total outstanding debt increasing to $20T, the annual interest payments alone would equal $800B or nearly 4x the current financing costs.
- The “D” word is becoming self-evident worldwide. Deflation is Kryptonite to the Fed and their “targeted” inflation scam of 2%. Increasing interest rates, as discussed above, will only increase the value of the USD at the expense of all commodities, minerals and goods priced in dollars. Therefore, higher interest rates will directly lower the likelihood of the Fed obtaining its magical goal of 2% inflation, but in fact will increase the probability of further disinflation, deflation and debt collapse. Another deleveraging debt spiral will certainly put Ms. Yellen on a respirator as she feverishly pumps the electronic printing press with rapid twitches of her index fingers ballooning evermore the Fed’s reckless balance sheet.
- The Keynesian Fed, led by Marxist socialist Janet Yellen, is deathly afraid of a stock market meltdown. So much so, that we believe the next steps would be either a Negative Interest Rate Policy (NIRP), overt buying of U.S. equity securities vies-a-vie Japan or both. The Wall Street casino and all its financial engineering marvels benefitting the “one-percenters” (stock buybacks, increasing dividends, mergers, acquisitions, leveraged buy-outs, etc.) will crumble in a New York minute once the gravy train of the Federal Reserve interest rate put is removed from the board game. A deleveraging spiral will ensue as the massive “carry-trade” and margined securities tumble back to enterprise values. A 30% plus “correction” would be a minimum expectation.
- Heading into the 2016 election, the Fed will unlikely spoil the Wall Street party and the mirage of economic prosperity given this Fed is the first ever to have all of its appointees rendered by a single American president.
Therefore, expect the wordsmiths to gently massive the language of ZIRP into the future and prepare for well-orchestrated “excuses” to either maintain the current zero interest rate policy and/or to introduce the likelihood of NIRP, equity security purchases or both. Also, please remember that QE (Quantitative Easing) has never ended, as the Fed readily admits, while maintaining the purchasing of new treasury securities and mortgage backed securities with the maturation of their existing monstrous $4T portfolio.
Crude Oil Trade Update: We have exited our position in Crude Oil at $50.56 for now we will sit on the side lines until further notice.
A kite rises going against the wind; and so to this forecast as we are calling for higher oil prices running contrary to most analysts (Goldman) opinion of much lower prices. However, like the blustery wind lifting a kite, the winds may subside and so too the duration of this forecast. Indeed make no mistake we are not calling for a major bottom (at least not yet); we are only forecasting a trading bottom with initial price targets of 52-55, then 62-65. The most likely time horizon is our first objective (52-55) reached by Halloween and the next target (62-65) by the middle of Q1 2016.
Our reasons are:
- Baker Hughes announces a long string of dropping rig counts as producers are cutting supplies.
- S. oil production has now fallen to 9.1 mpbd (million barrels per day) which is 25% off recent previous highs. Industry forecasts are for production to fall even further to approximately 8.6 mpbd by mid-2016.
- Production has been steadily declining in both Saudi Arabia and Russia despite indications to the contrary.
- Today, the world is less over-supplied than it was a year ago. This is not to say that a global recession may further reduce demand and therefore the supply will remain abundant, but the pressure is now easing. Global macro conditions discounting contraction have been largely priced-in over the past year’s 50%+ drop in crude … global economic stabilization over the near term may re-adjust macro models regarding oil demand. The Joint Organizations Data Initiative (JODI) already is suggesting the demand remains strong in the U.S. and China and a wide variety of other countries
- The dollar has been nudging stronger theoretically making oil less expensive in USD terms … however; oil is climbing higher despite the hurdle of a higher USD. The same inverse indicator is true with oil vs. 30 year US Treasuries.
- Technically speaking, the charts are showing signs of an impending bottom; albeit at this writing, merely near-term. We see support in oil between $42-44 and in RBOB between $1.34-1.35. A closing break of either support zones would threaten our near-term forecast of oil between $52-55 and RBOB between $1.60-1.70
Make no mistake, we are not betting the house on this outcome as we too believe there are issues going forward with central planners, money printing, zero-bound interest rates and political jousting which may include another round of threatening government shutdowns. However, we do like the risk/reward for the near-term upside in both crude oil and reformulated gas products.
Market Update; September 15, 2015
FOMC Rate Forecast
In arguably one of the most foreshadowed FOMC meetings with regards to the Fed’s decision to obtain “liftoff” from ZIRP (Zero Interest Rate Policy), the odds remain a “pick-em” with nary 48 hours till launch … or not.
There are four major options that the FOMC will consider and render their collective decision. They are:
- They do nothing. The Fed remains data dependent siting softness in recent domestic economic releases and global financial conditions deteriorating with emphasis on China, Brazil and the European Union. The immediate and short-term expectations would be positive for the risk-trade with equities bid, the USD offered, bonds flat to down and energies flat to up. There is a high probability of the risk-trade losing momentum and reversing depending upon concerns shifting during, or immediately after, the Yellen press conference beginning one-half hour after the rate announcement. Those concerns may center on why the economy, after 6+ years of ZIRP, is not stable enough to withstand even a nudge off of “free money”. The emphasis may quickly revert to the equity market turmoil in Asia and the global currency wars emanating from those countries dependent upon commodity resource revenues. We place the odds of doing nothing at 50% with a more likely “liftoff” occurring in October (see option 2).
- The Fed raises rates. The only reason this may occur is face saving and trying to avoid being labeled as the “boy who cried wolf”. If the Fed does raise rates, expect protracted language indicating that this step should not be perceived as linear going forward. The Fed will trip over itself to make clear that ensuing rate increases will only be warranted if the data remains robust AND there are signs that their inflation target of 2% is merely stuttering along due to transitory effects of lower commodity prices. They may even indicate that they will not hesitate to reverse trajectories if future data releases weaken and/or global economic conditions continue to deteriorate. IF they do raise rates, expect an increase of the Fed Funds rate by only 1/8th of a point (12.5 bps) to the high-end of the Zero Bound policy currently in effect, with an increase in the band from 0.00 – 0.25 bps to 0.25 – 0.50 bps. The biggest problem with raising rates is the potential unhinging of the carry trade and risk trades simultaneously, especially if global investors believe that this is the beginning of a much stronger dollar and higher US interest rates. The risk to the Fed is Janet Yellen being ambushed in the following Press Conference (scheduled 30 minutes after the rate announcement) especially if the stock market drops precipitously before, or while, Ms. Yellen is interrogated by an anxious media. We place the odds of raising rates at less than 30% while maintaining a more probable occurrence would be the October FOMC meeting which has no following press conference.
- The Fed lowers rates or establishes QE4. NIRP (Negative Interest Rate Policy) to succeed ZIRP? Not yet likely, however the Fed’s nanny, Goldman Sachs, has been trying to influence such incantations. Goldman economic generals, past and present, including Larry Summers, Bill Dudley (currently voting member of FOMC) and Jan Hatzius have been beating this drum if for nothing else to move the needle to the “do-noting” option. The pernicious Goldman will stop at nothing to maintain another round of free money including their insidious rant about the “market has done the job for the Fed” siting their preposterous homegrown Financial Conditions Index which proposes that “free money” is too tight of an economic condition. IF the Fed does march to this drummer, than they will likely site the disinflationary effects of the strong dollar causing decelerating wage pressures, disintermediation of global commodity currency countries and export weakness of US multi-nationals. We place the odds of lowering rates or establishing QE4 at less than 5%.
- Leaving rates unchanged while removing (or lowering) the interest paid to banks on reserves held at the Fed. This move could provide a spark to the risk-on trade (higher equities, etc.) AND save face with the more “hawkish” critics seeking liftoff from ZIRP. In theory, this should also provide impetus for the banks to circulate, in the form of loans, some of the $2.7T they are currently holding in reserves at the Fed whilst quietly being paid to do so. The theoretical increased lending would then be circulated throughout the system leading to an increase in the turnover or velocity of money in circulation. This of course would provide upward inflationary pressure which has long been the quest for the Keynesian central planners. The only problem with this theory is that there is $2.7T held in reserves and nary the demand for loans or the risk-taking interest in providing the same. Although this may be the least daunting or best option the Fed can choose, this policy decision is likely to stir a hornet’s nest of volatility as nervous money stands ready to shift in an electronic moment worldwide. We place the odds of this outcome at less than 20%.
We conclude with the sage quip of Yogi Berra; “In theory, theory and practice are the same. In practice, they are not.” Regardless of the well-intended policy decision of this FOMC, the rabbit hole is getting deep and the light above is rapidly losing illumination.
Market Update – September 8, 2015
The Next 10 Days should remain with elevated intra-day volatility across all global equity, currency and commodity based EEM’s. Special notice to Japan, China and Brazil with huge intra-day fluctuations in their equity markets (China & Japan) along with outsized currency volatility (Japan & Brazil).
The FOMC’s wrap up of their September meeting occurs on Thursday, September 17th. Expect the following:
- Nothing as it remains on ZIRP (Zero Interest Rate Policy) with continued opaque emphasis on being “data dependent” yet expecting to move off ZIRP in the coming meetings (October or December).
- 30% chance FOMC moves from ZIRP to “near ZIRP”. This would be done by “lifting” the ZIRP target from 0-25bps to 25-50bps. Fed Fund’s (FF) are currently trading around 15 bps. Possible move to the lower end of the new “near ZIRP” target of 25-50bps with a 1/8 pt. (12.5 bps) increase in the FF rate to approximately 25 bps, or the lower end of the new near ZIRP.
- IF there is any increase in the target FF rate, expect a disclaimer under the banner of “emphasis that the trajectory will NOT be a measured pace of increases, but remain data dependent”. FOMC will likely remain constructive on the US economy, concerned about global currency/equity volatility and belief that the US inflation target of 2% is on track with the current lower levels of inflation only transitory. The FOMC will site the improved job market and potential wage price pressures building. Their employment concerns will come from the vast increase in “new” jobs coming from the service sector and part time employment. They will quietly castigate Congress for their absentee management of the US economy and their dependence on the Fed to do the heavy lifting.
- Commentary about the impending US gov’t shutdown is likely to be mentioned with an admonishment to Congress to avoid such a showdown with the Obama administration. The words will likely fall on deaf Republican ears.
September 17-18th is a Triple Expiration. The biases of these expirations are generally UP. Combined with the FOMC announcement on the 17th will render the SPX especially volatile as traders adjust positions AND close-out large carried positions based on an average Implied Volatility of 30% over the past month.
NASDAQ levels: (current level at 4265)
4290-4300 resistance followed by key area of 4320. A move above 4320, or a close above 4320, should quickly test 4360 and then a possible upside surge to 4431.
4215 support followed by a key support level between 4155-4165. A move below, or close below 4155, might quickly test 4115 with further drops to 4065. Selling pressure below 4065 coupled with the November VX expiration surging above 30 will likely drop the Nasdaq 100 below 3950 within days.