“I love the smell of napalm in the morning”
… Robert Duval as gung-ho, Lt. Colonel Kilgore in Francis Ford Coppola’s classic Vietnam film, “Apocalypse Now.“ In Kilgore’s case it was the “smell of victory” … not so for the market. Since Monday (10/8) it was napalm morning, noon and night for US equities, burning investors and incinerating portfolios. Panic set in bolstered by computer-generated algorithmic trading (if certain pre-determined trigger-points are hit the computer says ‘sell‘ — forget the fundamentals –it sells). I believe we saw that Wednesday and Thursday, coupled with natural (human/institutional investors) sellers. As a proxy for fear the Vix/ fear index (VIX-CBOE Volatility index), closed Thursday (11/11) at 24.98, more than doubling since October 3. Of course, the media was there to stoke the flames.
The downward spiral in equity prices emanated from a much-anticipated quarter point bump in the Federal Funds rate and comments from Fed chair, Jerome Powell, that the US economy was no longer in need of monetary support from the from the central bank and that we needed to get rates back to a more normal level (away from the life support levels created during the financial crisis). On that news the 10-year US treasury note ticked up 25 basis point to a new 5-year high of 3.26%. The previous high occurred in 2013 on the beginning of the taper of Quantitative Easing (QE). In 2013, as is in the present case, the pundits and media were screaming that this was the end of the US economy and market … never happened. FYI, the 10-year closed Thursday at 3.15%, up 15 bps from the 2013 peak … BIG DEAL!
Jim Cramer warns the Fed and fudges on history
Speaking of the media, on October 10, Jim Cramer (of MAD MONEY fame) took his viewers on a stroll down memory lane, recalling his warning rant to the Fed in August, 2007. In the video link (warning rant) Cramer goes off on the Fed for about a four point increase in the Fed funds rate (1% to 5%, May ’04 to June ’07). Cramer was apoplectic, and rightly so (he just did not have a clue as to how bad it would be). He continued to recommend purchase of Bear Stearns almost to the day in March, 2008 when, in financial shambles, it was taken over by J.P. Morgan at $10/share. But he still didn’t get what was going on, because in September ‘08 he doubled down on his Lehman Brothers buy recommendation: “On 9/5/08 with the stock trading at $16 (down from a recommended price of $55.18 per share -11/17/05), on CNBC, Cramer selected Lehman as a “screaming buy” and said things couldn’t get any worse for the company.” Cramer’s rant presaged armageddon, but his adherence to Bear and Lehman seemed to indicate that his rant was more for effect and that he had no clue as to what was coming. Then again, most in the industry had no idea what was coming as a result of the housing bubble, proliferation of derivatives and mortgage-backed securities (backed by no more than thin air). Yours truly was among the clueless.
His new take (Mad Money -10/10/2018). is that the Fed could be taking us down the same path as they did in 2007, raising rates too abruptly with potentially a similar, but not as severe result. Give me a break! Remember between 2004 and 2007 the Fed moved the rates up four percentage points in a 3 year period. The current Fed has moved Fed funds up two percentage points over the past five years. The Fed has been the soul of moderation and data-dependence. Secondly, and most importantly, the ’07 experience pulled back the curtain on the huge world-wide structural problem, the housing bubble, that would have eventually burst, maybe with even more dire consequences if allowed to fester longer. The Fed may have been complicit in expanding the bubble, but the higher rates of ’07 were not the cause of a crisis that never could have been worked off in a prolonged period of low rates. Cramer referencing 2007, whether done intentionally to create fear to generate audience (or not), was like throwing more gasoline on our current market melt-down.
Yields retreat … on to obsessing on US/China trade relations and earnings
By noon October 11, the yield on the 10-year Treasury had retreated to 3.14%, down 12 bps from its Monday high. This looked like a flight to safety after the precipitous drop in stocks we’d seen during the week. The media moved on from worrying about rates, as they had stopped going up, and began to focus on earnings and the earnings season potentially being disappointing. The reason was that several companies, including 3M Corporation had reported disappointing results or given muted guidance. Another negative that took center stage was our continuing trade issues with China, which had clobbered the their market. This appeared to be dispelled by the announcement from the White House that presidents Trump and Xi were examining the potential to meet during the November G20 meetings in Argentina. This sparked a significant rally off the lows set on Thursday.
My Guess is that we could have closed on the plus side Thursday …
had President Trump not initiated a series of media attacks on the Fed and Chairman Powell’s interest rate policies. My guess is if the president were to stop his trade and foreign policy rhetoric, attacks on the Fed and get off Twitter the market would be a lot higher and potentially heading even higher.
T.G.I.F.
They can’t hurt us anymore this week!
On Friday equity markets finally regained their footing with the Dow, S&P and Nasdaq up 1.15%, 1.42% and 2.29% respectively. The 10-year closed the week yielding 3.17%. As I have said before, corrections are very painful, scary and normal. I hate to see the value of my assets marked down by the market, especially in the violent, emotional manner of the last few days. We may have further to go in this downturn. I still believe this to be a correction in a secular bull market. We have lived to fight another day.
What do you think?
The information presented in kortsessions.com represents my own opinions and does not contain recommendations for any particular investment strategies or securities. I may, from time to time, mention certain securities for illustrative purpose, names where I personally hold positions. These are not meant to be construed as recommendations to BUY or SELL. All investments and strategies should be undertaken only after careful consideration of suitability based on the risks, tolerance for risk and personal financial situation.
Someone a lot smarter than I said the market takes the stairs going up but an elevator going down. Let’s watch what happens this coming week . I do believe that a hint of China trade war settlement will come out right before the mid terms to help prop up the markets.
Howard, you cynic… The administration make a comment that might affect the course of the midterm election … never. I totally agree on your ‘Stairs versus elevator’ comment. I also would agree that this particular decline may not be over yet. My comments were made to help those who may be in panic mode over the recent media frenzy on chairman Powell’s commentary or, for that matter, A Chinese trade war.The blog is really about giving information that keep people on an even keel as it pertains to investing. I am not much in the production business. I have found predicting is very difficult. As such, I think the best position is to be invested in a portfolio of quality stocks, regardless of the fearful discourse in the air over in a given period of time. And since the bottom in 2009 the discourse has been mainly fearful. kort sessions began in February 2013. My archive has over 250 posts about what people were saying at any given time during that five-year period. I submit most of it has been negative and fearful. If you were thinking of investing, the rhetoric would have kept you out and if you were invested the rhetoric might make you sell prematurely. The best advice that I wish someone had given me when I started my career was ,just be there.’ Thank you for the comment.