Markets ignore Euphrates line in the sand

This will be a brief posting today, since I have to remove a large tree limb that came down on my wife’s art studio during Monday’s storm.

As I wrote yesterday, the markets are immune to a sell off despite global events. Monday’s development in the Middle East.

Humans are said to have developed in the Euphrates Valley, well this week we could see the ramping up of our demise in the same region as US-Russian warplanes may be having dog fights over the Crescent of Civilization.

Given this difficult situation where the Pentagon came out and said that US fighters will defend the airspace against all hostile actors, equity markets hit new highs, the VIX, or fear index, almost had a 9-handle and bonds are at very low yields. It’s too strange to be true.

Look no further than the price of crude. At $44 a barrel there is no premium being paid for the unrest in the Gulf Oil states as well as Middle East.

I’ll have more on this as I dig further, but there’s a limb that needs to be removed from the roof.

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No fear or loathing in the markets

Do you recall the days when markets would pull back when there was a terrorist event in the world?

When investors would at least pause when the fired FBI Director was speaking on Capitol Hill about events and conversations with the White House?

Some of these market participants would even sell when the Federal Reserve raised rates. Speaking of the Fed — the ultimate backstop on falling security prices — it said last week it would begin pulling some $2 trillion out of the markets over the next 2 years or so.

What did we get from the markets?  Crickets

These investors used to be called skittish. But they seem to be gone. They have been muscled out by money that seems to know something. There are so many signs that the market is ready for a pull back.

What that something is that the markets know could certainly be helpful to small investors.

However, this is the time market pros say when the “dumb money” comes into the market. Small investors seeing new record highs most days and who have been on the sidelines fearing a repeat of 1987, 2001 and 2008.

I’m of the opinion that you don’t need to catch the last 5% move upwards, when the risk is you could get caught in a 50% downside collapse. It’s not a zero-sum game, you can take some profits and leave some positions for the possibility markets will go higher.

 

Fed’s rate hike hurts the ailing US consumer

I stand corrected. The Federal Reserve raised rates by 0.25 points Wednesday.

However, that does not mean it was correct to do so.

If you look at the US economy right now we have a slowing economy as GDP projections of +3% for the quarter are being pulled back to sub 2%. We also have inflation targets that are well below the Fed’s 2% target. Right now it’s at 1.6%.

The US has credit constriction you don’t have to look any future than look at the retail sector to see that the cost of cash is rising and more difficult to attain.

The growing asset bubbles are no longer the sure-fire collateral for extending credit.

So into this environment, the Fed takes it funds rate to a range between 1% and 1.25%. We already see that the consumer has tapped out on credit card usage with available credit at a years low-level, while outstanding balances hit all-time highs.

Student loan debt also at all-time high levels and mortgages for new and existing homes have been flat to slightly lower as rates rise. Car loans are persona non grata for originations and resale in the market due to low quality (think NINJA mortgages) and high quantity.

So why would the Fed raise rates at this time? To put another bullet in the chamber in case it needs to lower them again. To also tell Wall Street to tighten its reigns on credit and bring the bond market inline with other asset classes.

However this rates rise only affects us on the downside. We will pay more for credit and still get little to no interest on our savings.

And how the markets reacted tells you there is little change in either stocks or bonds. It was expected.

Now the Fed also announced the beginning of a plan to unwind its $4.5 trillion balance sheet. These were toxic mortgages and other troubled assets along with plenty of treasury bills and notes.

Now the Fed reinvest those proceeds as they mature, next year it will pare back the reinvestment according to a schedule that will be phased in.

There are lots to say about this and I will address it in the near future, but let’s just say I don’t believe the unwinding will be able to be pulled off beginning in 2018 for reasons I will address later.

Fangs may lead marts south; BTC heads north of $3K

On Thursday, I wrote about hearing on the street that Friday was going to be a difficult day for stocks.

I then wrote on Friday that futures were not showing any worries from either the James Comey testimony, the English election results nor the possible rate hike this week by the Federal Reserve. However, the headline I wrote was “Nothing to see here, please go buy some FANGs”.

Well the FANGs were the problem. The Nasdaq traded lower by 1.8% Friday as Facebook (-3.3%), Apple (-3.8%), Netflix (-4.7%) and Google (-3.4%).

The selloff came from a Goldman Sachs analyst report saying these and other tech firms’ stock prices are getting overvalued and reaching valuations like the pre-Internet bubble burst.

The pullback should not be too much of a surprise since the Nasdaq is up more than 15% year-to-date, which is double the Dow Jones industrial average’s gains over the same period.


Bitcoin spent much of the overnight trading session above the $3K mark, before pulling back to $2995 by 6AM EDT.

The cryptocurrency is finding strength on each pullback, which for a market technician means there’s a large base being formed. This base is allowing for $80-$100 spikes in daily pricing like we saw Sunday.

Weekends are still the best price appreciation days since the buying does not need any major trading outpost such as London, New York or Hong Kong to execute the trade.

Nothing to see here, please go buy some FANGs

The British voters threw PM Theresa May a big curve ball Thursday in the general election by not giving her Conservative Party the majority she sought, forcing her to seek to form a new government with minority political parties.

Also on Thursday we had ex-FBI Director James Comey testify before the Senate on his firing and the probe into Russia’s influence into the US presidential election.

Neither of these events had an effect on the markets, which is puzzling in the brief and troubling in the longer term.

To say the possible beginning of a presidential impeachment occurring in Washington and equities give you a day where as traders say “was a waste of a clean shirt and car fare,” is astounding.

As I wrote yesterday, market participants that I speak with see Friday as a possible tipping point for equities, looking at the futures market then the tipping point maybe the markets building support instead of falling.

Not to get into high weirdness, but how does the British, US  and global investors see a government crisis in London and Washington as a buying opportunity unless there are bigger buyers to buoy prices?

So let’s see how US markets close today and then we may get an idea of what is to come.