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The Fed’s Tightening Cycle and Market Vulnerability

The Economy: The U.S. economy appears to be accelerating from its modest expansion over the past several years. While purists may argue the validity of the numbers that are released, they are the numbers that move markets and investors. After years of insisting that inflation is too low, we may be seeing that monster rearing its ugly head. The Fed’s Beige Book shows inflation increasing across a broad range. Consistent with increasing inflation, the Fed is now warning that higher interest rates are on the way. They have 4 hikes planned for 2018 and are leaving the door open for more. In the meantime, information overload is the order of the day. The actionable news is further confirmation that the Fed is in a tightening cycle. Loans of all types will continue to become more expensive. Those economic sectors that benefited from a decade of low rates may see increasing headwinds as rates continue to ratchet up.

Food for Thought: Stock markets are suddenly a hot topic of conversation. After years of the lockstep rise in global asset values, stocks have shown that they can go down as well as up. But let’s face it, making changes to an investment portfolio is like watching paint dry when compared to wine tasting or hiking Nepal. Sailors know that a rising tide floats all boats … and the reverse is true. The last bear market showed that diversification is no protection when all asset classes are getting crushed. But that message will have to be relearned. The FANGs may be particularly vulnerable. Regulatory issues could loom as Americans are waking up to the privacy/government surveillance/freedom of speech issues posed by big tech and social media. Anti-trust happened to the railroads, big oil, autos and airlines.

Music of The Week: Govi’s “Andalusian Nights”

We Quarterback Money®

The Markets, The Mooch, and More Predictions

The Economy: The news this week has been all about Q2 corporate earnings … with a nod to the Fed’s 2-day meeting and announcement … and of course the Circus on the Potomac. Earnings have been strong with most beating expectations. The FANGS have led the way. Whether earnings justify stock valuations is up to you. Goldman Sachs thinks the market is overvalued with the market PE at 22.1 versus a 10-year average of 16.7. The other side of the coin are those saying, “This time it’s different.” The Fed’s 2-day meeting was a non-event. On Wednesday they announced no change in interest rates with a hazy comment about normalizing the balance sheet. In short the Dovish Fed is firmly committed to doing nothing. The Circus on the Potomac has continued its dazzling performance in the Theater of The Absurd. The Republicans were given a mandate to do something but seem to be incapable. Amazing. The Donald is moving closer to firing Apprentice Jeff Sessions. Sean Spicer is toast and The Mooch is sharpening his knives for future victims. There are no Summer Doldrums.

Food for Thought: As the poker player says, “Read ‘em and Weep.”

The Overvalued Market

This Time Is Different

Einhorn down 4% Q2

David Stockman on Peak Bull

A Bearish Citi Warns

Passive Investing poses risk

Music of the Week: Don Henley’s “Building The Perfect Beast”

 

Post-Election Circus

The Economy: The U.S. economy appears to be accelerating while the global economy turns in mixed numbers. If this divergence continues, it may be the U.S. that serves as the engine of growth that keeps a global recession at bay. While the U.S. anticipates continued acceleration due to Trump tax cuts and fiscal stimulus, the EU faces more economic uncertainty as Italeave and Irexit appear to be set for a vote. Uncertainty is the bane of financial markets as participants postpone decisions until there is greater clarity. The feedback loop can create a self-fulling prophecy. The upheaval in Washington was reflected in a bond market route that is unlike anything we’ve seen in years. Rapidly rising rates would negatively impact large sectors of our economy such as housing and autos. Uncertainty also surrounds the Fed meeting in December. Though financial markets have supposedly priced-in a ¼ percent interest rate hike, animosity between Fed Chair Yellen and President Elect Trump means that all bets are off. I sent you a letter this week in which I discussed protecting your assets in this environment. Please let me know if I can help you with your money.

Food for Thought: To put a fine point on it, it’s been a week of over-the-tops: First Up, Cornell University hosts a “Cry-In” for students traumatized by the Trump victory. Not a Sit-In. Not a Laugh-In. Not a Love-In. A Cry-In. While 300,000 teenagers serve in our military, the Cornell Masters of The Universe huddle with their barista supplied hot chocolates and bawl. Our take: All you overweened please decamp for Canada immediately. Second Up, Numerous people who were too preoccupied to vote have taken to the streets to protest the “Not My President” Trump election. Our take: You’ve successfully auditioned for The Kardashians. Third Up: This week a San Diego hi-tech entrepreneur threatened Donald Tump in a Facebook post. Facebook! Our take: The Peter Principal confirmed and the Wrath of The Secret Service, Homeland Security and the NSA shall rain down upon you. Kiss any more Venture Capital goodbye forever. The President of the U.S. has an annual salary of $400,000. Trump has announced that he will forgo the salary. Not a word from the mainstream media. The Greatest Show On Earth continues its unprecedented run! … and like you, I patiently wait for common sense and social grace to return to our Great Land. Thanks for reading More Money. If I can help you in any way please contact me at raymond.higgins@higginscapital.com. We Quarterback Money®.

Music of the Week: Tina Turner’s “Twenty Four Seven”

Proverbs 2:1

You’re never too old to learn.

You can’t teach an old dog new tricks.

A word to the wise is sufficient.

Talk is cheap.

Do unto others as you would have others do unto you.

Nice guys finish last.

The squeaky wheel gets the oil.

Silence is golden.

A stitch in time saves nine.

If it ain’t broke, don’t fix it.

Charlatans, Tramps and Thieves

It’s hard to remember when the world of online investment opinions didn’t exist. Nobody knew or cared what the individual was buying or selling. Opinions were reflected in the price of a stock.

But since the late 1990s the internet has fostered an unlimited array of charlatans, cranks, fools and so-called gurus. Today, any idiot can shout his own stupidity. Much of this is nonsense but the noise is deafening to everyone and confusing to many.

There was the need for more information because Wall Street did a miserable job of getting the word out to investors. But, for the most part, the information vacuum that was created has been filled with haters, screamers and shouters. Granted there are some nuggets amidst the garbage, but the effluent predominates.

Blogs, Facebook, LinkedIn, Twitter and the other social media outlets are full of analysis, predictions and cries of pending doom. The vast majority are pointless forecasts. Perma-Bulls and Perma-Bears coexist in the never-ending circus that serious investors avoid. No one remembers their absurd calls. But again, the noise is deafening.

Smart investors know that online opinion is garbage. There’s no accountability, no performance review and no regulation. Caveat Emptor couldn’t be more applicable.

Summertime Ennui

The Economy: Housing posted good numbers this week. Otherwise, the noise remains deafening. Chalk it up to summertime ennui. The international situation remains the same with Greece being lauded for repaying loans with more borrowed money. … used to be called “robbing Peter to pay Paul.” Now it’s called sound fiscal policy. China is again touting its financial markets after 3-weeks of unprecedented intervention demonstrating that open and transparent markets simply do not exist there. Iran was hailed by John Kerry as the new prodigal nation. The Iranian Supreme Leader’s celebratory speech of U.S. friendship was punctuated with shouts of “Death to America.” With the proper spin, these would all make for a great Monty Python movie. As it is, this noise obscures the indications that deflation appears to a be mounting global issue. Multi-year lows in commodities may be confirming  this. Slow growth here and abroad seems to be the order of the day. For many businesses and public agencies this means flat revenue that continues below the 2007 peak.

Food for Thought:  Here’s perspective on the stock market: Google (GOOG) jumped in price last Friday. The jump increased its market capitalization by $62 Billion in one 6 ½ hour trading session. Apple (AAPL) reported earnings yesterday and the stock fell. It lost $50 Billion in value after hours. Facebook (FB) now has a larger market cap than General Electric (GE). Facebook has $12 Billion in revenues and 10,000 employees. GE has $145 Billion in revenues and 300,000 employees. Yep, it’s a rational market.