Central Bank Low Rate Policy – a Dud ?

Investor’s first read – Daily edge before the open
DJIA: 18,479
S&P 500:2,181
Nasdaq Comp.:5,259
Russell 2000: 1,255
Friday, September 9, 2016 9:05 a.m.
The European Central Bank (ECB) opted out of any changes to its monetary policy, raising concerns abroad that any further easing is unlikely.
The ECB’s inaction triggered a sell off in global bond and stock markets and lower U.S. stock index futures before the open here.
Yet to come is the meeting of the Bank of England on Sept. 15, Bank of Japan Sept. 20-21, and U.S. FOMC Sept. 21
We are in the later stages of a bull market, driven by investors who have no other alternative but to buy stocks, otherwise defined as momentum.
It has defied time-tested parameters for valuing blue chip stocks and can keep running until the BIG money pulls the plug. I expected that to have happened before this, especially in light of five straight quarters of declining earnings for the stellar S&P 500, and the unprecedented uncertainty of a contentious presidential election.
The August 2015 and January 2016 freefalls came without warning, so the next one can too, since most computers key on the same technical metrics.
If the BIG money is going to pull the plug, it will likely be after a high-volume breakout to new highs.
-Bank of England Sept. 15
-FOMC releases decision on rates at 2:00 p.m. Sept. 21 followed by a press conference at 2:30.
-First presidential debate Sept. 26
-OPEC meets on Sept. 26-28
While the Street is Fed-focused, the following deserves respect.
There is a chance the presidential polls will show a dead heat this month between Clinton and Trump with the possibility that the Libertarian ticket (Johnson/Weld) could act as a the swing factor in several key states, Ohio for one.
If this happens it would inject major uncertainty into the market with the potential of a plunge in prices, and there would be little the Fed can do to stop it.
Not yet considered by the Street is how good is the estimate for a 13% increase in S&P 500 earnings in 2017 ?
Q2 earnings were down 3.2%, the fifth straight quarterly decline, much of it due to the crunch in energy industry earnings. Q3 is projected to mark the sixth straight decline in quarterly earnings with a drop of 2.1%, but Q5 is projected to increase 5.5%.
Oil prices have been falling, which stands to impact earnings of oil and related stocks. The U.S. dollar is strong and can get stronger if the Fed raises interest rates, which will impact multinational stock earnings. The reverse is true if oil prices rebound as a result of OPEC’s meeting, and the dollar weakens if the Fed opts out of a rate increase – stay tuned.
August manufacturing took another hit with the ISM Index slipping to 49.4 from 52 (50 is the growth/no growth threshold).
Labor costs are up while worker productivity is in its longest slide since the 1970s, crunching margins.
Should the contest for the presidency become a toss up, uncertainty on the Street will mount and the stock market will have to find a comfort level at lower prices.
For the time being, the Street is focused on the Fed and its decision to raise or not raise its federal funds rate on the 21st.
The jobs report last week was not strong enough to pressure the Fed to raise rates, nor was the sharp decline in the ISM Non-Manufacturing report yesterday.
Obviously, the Fed would like to log in several rate hikes, but it can’t find sustained justification to do so, the economic reports are too inconsistent.
Suddenly, the Central Bank policy of “ease” is debatable, as the ECB opted out of further accommodation yesterday, sending global bond and stock markets into a tailspin and killing an attempt to rally here.
We are now confronted with a nasty sell off in stock-index futures today, which could threaten major support levels noted below.
This combined other uncertainties, none the least of which is the November election, could trigger a correction in coming weeks.
There have been buyers on every dip since the Brexit sell off in June. This is the most serious challenge the bulls have faced since then. A one-day reversal where the market recoups all of today’s loss would be very bullish.
Otherwise, you need some cash.
SUPPORT “today”: DJIA:18,363; S&P 500:2,166; Nasdaq Comp.:5,226
RESISTANCE “today”: DJIA:18,526; S&P 500:2,187; Nasdaq Comp.:5,276
The risk for over-reliance on Fed policy and low interest rates is that it forces investors to seek riskier and riskier stock and bond investments, which will ultimately result in a bubble burst.
We had bubble bursts in January 2000 with dot-coms, and again in 2008 with housing/derivatives. The next one could be the Fed bubble burst when investors get over extended in speculative issues only to find nothing the Fed can do, not even negative rates, can avert and soften the impact of an ugly recession.
Ms Yellen referred to the Fed’s toolkit in her Jackson Hole speech ( Interest on reserves, forward guidance and asset purchases), the implication being the Fed can use these to control future economic cycles. Lot’s of Luck, Ms Yellen.
That event can be months or a year out. Just be aware it can happen, because there will be little warning ahead of time. Prior to that, some nice money can be made, so long as investors watch their back.
Obviously the Fed can only do so much with its lo interest rate policy. What is needed is fiscal spending. Competing for funds will be the military and infrastructure needs ( roads, bridges, tunnels, water and sewage piping, the electronic grid, airports, government and school buildings, dams and waterways, harbors).

On occasion, I technically analyze each of the 30 DJIA stocks for a reasonable risk, a more extreme risk, and an upside potential over the near-term. I add the results of each, then divide by the new DJIA “divisor” (0.14602) to get the DJIA for those levels. This gives me an internal check on the DJIA itself, especially if certain higher priced stocks are distorting the averages.
As of September 2, 2016, a reasonable risk is 17,582 a more extreme risk is 17,353 Near-term upside potential is 18,753.
This market has defied anything I have ever seen EXCEPT that is, near market tops.
News headlines of new all-time highs attracts interest especially from investors who have not participated in this bull market. Likewise, it is forcing investment professionals (brokers, money managers, hedge funds and newsletter writers) to become more fully invested.
It is characteristic of late bull market behavior to prompt talk of a “New Era.”
I have heard the New Era talk before. It comes on stream when the market hits new highs after a long bull run at a time just about everyone concludes the market simply has to go higher and they better jump on board.
I see fundamental and technical signs that warn of a top, but then I started seeing those three weeks ago. It is a matter of how high is high, and a momentum that is self fulfilling.
Bull markets can reach unthinkable extremes when investors stampede into stocks fearing being left behind.
Then too, fear of total ruin at bear market bottoms can trigger panicky selling as investors scramble to salvage what’s left of a portfolio after a 30% -45% plunge.
Major tops and bottoms are marked by extremes. Savvy investors know this. Even so, it is a challenge for any human to resist the urge to chase running stock prices at unreasonable heights, or get chased out after a harrowing plunge in stock prices.
(So far this is not holding up)
The market is tracking a pattern for presidential election years where an administration is in its second term.* The news is bad.
Historically, these markets have declined in Jan./Feb., rallied in March then topped out in early April, plunged in May with brief rallies in June and August and a plunge into October prior to the election.
 STATUS OF MARKET: Neutral – but very, very vulnerable. Expect volatility
 OPPORTUNITY: RISK: Risk high, Profit taking justified.
 CASH RESERVE: 45%. Consider 75% now if tolerance for risk is low.
 KEY FACTORS: Outlook for Q3, and 2016 earnings questionable with strong U.S. dollar.
Note: Source of weekly economic calendar and good recap of indicators: mam.econoday.com.
*Bloomberg.com (Excellent pre-market read)
George Brooks
Investor’s first read
A Game-On Analysis, LLC publication
Investor’s first read, is a Game-On Analysis, LLC publication for which George Brooks is sole owner, manager and writer. Neither Game-On Analysis, LLC, nor George Brooks is registered as an investment advisor. Ideas expressed herein are the opinions of the writer, are for informational purposes, and are not to serve as the sole basis for any investment decision. References to specific securities should not be construed as particularized or as investment advice as recommendations that you or any investors purchase or sell these securities on their own account. Readers are expected to assume full responsibility for conducting their own research pursuant to investment in keeping with their tolerance for risk.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.