Selective selling of shares of companies whose prospects have changed. And especially those being hit by tariffs and The Trump Thump, i.e. Harley-Davidson.
+ Netflix. Here’s it over the past two years:
Clearly, the market thinks new competition from new streaming video companies (including Amazon) is going to hurt the company. I don’t think so. But the market is telling me I’m wrong. Time to sell more of Netflix.
+ Amazon. Here’s it over the past two years:
Amazon is my largest holding — still. I haven’t sold any. But the sell-off in Amazon has been brutal. Amazon reports after the close this evening. I’m sanguine. But I am guessing. It’s down 19% from its peak this year. Which suggests — based on my Inviolate 15% Stop Loss Rule — I should not be in the stock at present. That’s the problem with not obeying my rule — it’s meant to be inviolate — falling in love with the stock. Stupid, undisciplined me. Love blinds.
I should have obeyed what one of the Baron Rothschilds said: I got rich by selling too early.
They’re stocks, not children.
OK. Where is the market going from here? I suspect down further. Today it should be up. Hence it’s a good opportunity for all of us to trim our positions and go more into cash. Except that at least one stock in our portfolio — Microsoft — should surge this morning. Along with much of the market (but only for today.)
Some observers argue “Don’t fight the Fed.” When the Fed raises interest rates (as it’s doing), that hurts stock prices.
Here’s a piece from Business Insider this morning arguing (obtusely) exactly that:
The secret weapon [low interest rates] that’s kept stocks afloat for the past decade is vanishing — and it’s leaving the market vulnerable to the next big crash
Throughout the nearly decade-long bull market, stocks have relied on a secret weapon of sorts to keep chugging higher following periods of weakness.
One Wall Street expert warns that this ace in the hole is getting less effective, and breaks down what’s causing the shift.
If the secret weapon does ultimately end up vanishing, it could send stocks plummeting.
For the past decade, the Federal Reserve has had the stock market’s back.
If equities experienced a sharp downturn, the central bank could be relied upon to ease monetary conditions. That righted the ship, and the market sailed higher. There’s no coincidence the stock bull market became the longest on record amid these conditions.
That’s because investors have been fully aware of this dynamic the whole time. It emboldened them to add to positions during tough times, and it served as a secret weapon of sorts. They even created a fun nickname for it: the “Fed put.”
But what if the Fed put vanished? To Vincent Deluard, a macro strategist at INTL FCStone, it’s a scary prospect – one that could send US stocks crashing.
“It is rational for investors to buy every dip in the US stock market and cut losses on non-US markets as soon as the going gets tough,” he wrote in a client note. “However, US stocks lose this extraordinary appeal the moment that investors question the Fed put.”
The chart below shows what happens when the Fed put disappears. In the period between 2004 and 2006 – when the central bank was engaged in monetary tightening – Treasuries didn’t rise when stocks sold off.
And since a sustained Treasury rally is needed for investors to get back into equities – since the associated decline in yields makes stocks more attractive by comparison – the premium of US equities over their international counterparts was depleted.
Deluard argues that we’re risking a similar situation right now. In fact, we got a taste of how such a meltdown might unfold over the past few weeks, which saw the benchmark S&P 500 fall in nine of 11 days. The skid totaled 7% at its darkest depths.
The reason is two-fold. First, stocks and bonds have been selling off simultaneously – something that hasn’t happened much in recent history- which has decreased the willingness of investors to step in and buy the dip following spells of weakness.
Second, and perhaps more importantly, is the guidance being provided by newly appointed Fed chair Jerome Powell. Deluard notes that while his predecessors were supportive of the Fed put, Powell’s “simplicity and straight talk paradoxically confuse investors.”
“Markets did not need to test the Fed put in the golden age of Ben Bernanke and Janet Yellen,” added Deluard. “On the other hand, Jerome Powell is still a wild card.”
Perhaps as a result of these two elements, the Fed put has gone into effect more slowly this year than it did following prior sell-offs. Deluard highlights the 10% correction that rocked stocks in early February as the most recent and glaring example of this.
He notes that Treasuries remained under pressure through the end of February before rallying. That helped save the day for stocks – and validated the Fed put – but it was a long time coming, at least relative to past occurrences.
Deluard worries that without a sustained rally in Treasury prices, the efficacy of the Fed put could be destroyed. After all, the entire crux of modern portfolio theory is that stock market risk can be diversified with long-term Treasuries.
If traders are unable to rotate in and out of both asset classes as their risk appetite fluctuates, it could challenge the core principles that have kept this market cycle going for so long. As it stands right now, Deluard is acutely aware of how rising inflation will hinder the ability of Treasuries to rebound.
“If long-term Treasuries do not rally in the next two months, investors should start considering the horrifying hypothesis that the Fed put may have expired,” he said. “Accelerating inflation would eventually remove the Fed’s ability to save the day.”
From CNBC this morning:
Wall Street should see a triple-digit Dow gain at the open, but that would only make a small dent in Wednesday’s sharp losses that continued a nightmarish October for the bulls and sent the Dow Jones Industrial Average and S&P 500 lower for 2018.
From the New York Times this morning:
Another wave of selling hit the nearly decade-long bull market as investors worried that the ideal climate they have long enjoyed – a surging economy, low interest rates and fast-growing corporate profits – would soon be behind them.
The benchmark Standard & Poor’s 500-stock index shed 3 percent on Wednesday, wiping out its gains for the year. The tech-heavy Nasdaq composite index was down 4.4 percent, and has fallen more than 12 percent since early September.
Markets in Japan, China and Hong Kong matched Wall Street’s drop on Thursday morning trading. In one potentially positive sign, futures markets that track the performance of stocks in the United States rose, suggesting investor attitudes might brighten when Wall Street opens.
Just over a month ago, the S.&P. 500 was up nearly 10 percent for 2018, with expectations that coming quarterly corporate earnings reports – juiced by a generous tax cut and strong economic growth – would keep sending stock prices upward.
It hasn’t worked out that way.
Instead of celebrating quarterly profit and sales numbers that have largely lived up to expectations, investors have zeroed in on potential risks to the economic and corporate profit outlook for the coming year. Rising commodity costs tied to tariffs on imports, expectations that the Federal Reserve will keep raising interest rates, and an economic slowdown in China could all start to bite. And that’s on top of investors’ anxiety about what the midterm elections could mean for their portfolios.
“It was kind of a market that was looking for a reason to have some money come out of it,” said Tony Dwyer, chief market strategist with the brokerage firm Canaccord Genuity in New York. “And it found it.”
The Dow Jones industrial average fell 608 points, or 2.4 percent, on Wednesday. And the Nasdaq has now fallen into correction territory – a decline of more than 10 percent from an earlier peak, which indicates a drop that’s more serious than a garden-variety slump. The S.&P. 500 is down to 2,656.10, more than 9 percent off its recent peak on Sept. 20, meaning it, too, is nearing a correction.
The sell-off has come as political discord has jumped with Election Day less than two weeks away. On Wednesday, the discovery of explosive packages sent to prominent Democrats, including former President Barack Obama and Hillary Clinton, the former secretary of state, as well as CNN, added to an already tense environment.
Some market observers think that investors may be moving to the sidelines before what could be a very close and bitter election.
“I think people just want to clear the decks and get the heck out before the midterm elections, frankly,” said Chris Rupkey, chief financial economist at MUFG Union Bank.
President Trump has repeatedly cited the strong performance of the stock market as evidence of the success of his administration’s business-friendly approach. And as the market has slid lately, he has ratcheted up his criticism of the Federal Reserve’s plan to raise interest rates as economic growth remains strong.
Low interest rates have helped support economic growth and the stock market since the financial crisis 10 years ago. But with unemployment at a 49-year low, the Fed is now raising interest rates, saying it wants to keep the economy from overheating, which could set off inflation. The Fed is expected to raise interest rates again at its next meeting in December.
The rise in interest rates has been particularly painful for some pockets of the markets. Shares of homebuilders are down more than 16 percent this month, as rising mortgage rates have made houses less affordable. Smaller companies – which are heavily exposed to floating-rate debt – have also been hurt by rising rates, which increases the cost of their debt payments. The Russell 2000 index of small-capitalization stocks has fallen more than 13 percent in October.
And the president’s trade war with China has increasingly preoccupied the markets, analysts said. Official numbers released by Beijing last week showed China’s economic growth has slowed to 6.5 percent, its lowest level since 2009.
The slowdown in China, the world’s second-largest economy, could mean falling sales for American companies that export to that market. As large consumers of metal who have invested heavily to gain access to the Chinese auto market – the world’s largest – carmakers are particularly vulnerable to such risks. On Wednesday, Ford cited weak sales in China for falling profits. Company officials said issues surrounding trade disputes – including tariffs on imported steel and aluminum – could cost Ford $1 billion this year.
“What is really happening here is that people are saying, `We just don’t know about trade. We don’t know how that’s going to hit the margins or the earnings streams next year,'” said Michael Purves, chief global strategist at the brokerage firm Weeden & Company.
Mr. Purves said investors were eager for a resolution to the trade dispute and nervous that it could escalate further.
“I think there is a game of chicken going on between Trump and the markets right now,” he added.
On Wednesday, the market tumble snowballed over the course of the day. Technology companies that have driven big market gains were badly battered. Shares in the tech heavyweights Amazon, Microsoft and Facebook all fell more than 5 percent. Netflix fell more than 9 percent after a media report that Apple planned to announce a subscription television service that would go head-to-head with its streaming service.
The news wasn’t all bad for tech. Later Wednesday, Microsoft reported results that exceeded analyst expectations, sending its shares higher in after-hours trading. And Tesla shares also rose in after-hours trading after the electric-car maker reported its first profit in two years.
More high-profile results from tech companies are due in the coming days. Google’s parent company, Alphabet; Amazon; and Twitter are scheduled to report results on Thursday. And Facebook’s earnings report on Tuesday will be of intense interest: The company’s report last quarter sent its stock price diving, erasing more than $100 billion in shareholder wealth.
From Art Cashin,
Veteran trader Art Cashin says there’s no panic in the sell-off: ‘It’s not a stampede’
+ U.S. stocks plunged Wednesday but veteran trader Art Cashin said he didn’t witness any panic on the trading
+ “It’s not a stampede. It is a bit of a cascade because they keep breaking levels and that brings in selling,” he says.
+ CFRA’s Sam Stovall says history shows this pullback could be deeper than the one earlier this year.
And finally from Joel Ross, of Ross Rant:
Program trading now constitutes around 80% of daily trading, and when the algorithm sees rising rates, some may be programmed to sell. We do not know what is coded into many of these programs, but we do know that they do account for some, or maybe most of the volatility. If you believe the recent data on the economy, the fundamentals remain excellent, and maybe as good as it has ever been. Just stay calm and do not try to outguess the ups and downs. If you believe the economy is going to remain strong for at least another 3-4 quarters, then subject to the election, the market should remain strong over time. If I am correct that the Republicans hold the House, and pick up 4 or more seats in the Senate, then there will be a rally. If I am wrong, then stay on top of the market and be prepared to possibly do some selling. Keep in mind that all the Dem economists, Krugman, Sommers, Bernstein, and others, were 180 degrees wrong about what would happen if Trump won, which should tell you to ignore all that stuff from those people, especially Krugman who is so far off about just about everything, it is hard to understand how he has any credibility left. Bernstein is just a political hack. Make your own judgments on where the economy and stock markets are going. All the pollsters and media got 2016 completely wrong.
One major indicator of how good things are, is the demand for qualified labor. Everyone I talk to who runs a company or organization, tells me they cannot find anyone to hire. Highly qualified young people who graduated in the last two years, are changing jobs quickly because they can get 15%-20% more salary by just moving to a new company. Anyone looking to hire well qualified people who is not willing to pay up, is not able to hire and is losing good staff. The result in some cases is companies will fail because they cannot fill key positions and so cannot run the company in a way that they can compete effectively. This problem is now impacting non-profits who do not pay well. If you look at new unemployment claims, not only is the number near record lows, but as a percent of the workforce it is barely a rounding error. The job market has never been this good…
Oil prices are back below $70 as expected, and demand from China and other places outside the US is slowing. US shale is now making the US the largest producer in the world since Trump lifted many of the restrictions on shale, offshore drilling, and pipelines. We are no longer dependent on OPEC. That allows us to isolate Iran. With oil prices likely to remain between $65 and $70, inflation will remain lower, as will gas prices. That should help mitigate interest rate increases next year…
If you have not been a paying attention, the Chinese stock market is far down, and possibly headed lower. The recent rally is likely due to the government intervening, but it is unlikely to last. Their economy is now suffering, and it is getting worse. And that is all before the real tariffs go into effect in two weeks. China is in difficult economic shape. The government is beginning to intervene by increasing liquidity for banks and supporting the stock market. But underneath all of that is a slowing economy, and more problems ahead once tariffs kick in fully. Don’t believe the official stats that the economy is still growing at 6.5%. They lie a lot about data. The private data show it is worse. The slowing economy has put a stop to the effort to reduce the massive over leverage, so the problems are just festering for China. Trump is letting them twist in the wind for now, which is exactly the right position to take for now. The US is in good shape for a trade fight, but China is not….
No jokes today. Though the good news is that I just made a small fortune by losing a big one — yesterday. Or some variation on the old, “What’s the only guaranteed way to make a small fortune? Answer: Start with a large fortune.”
Harry Newton, who woke up this morning with an awful head and chest cold. Wheezing and coughing all over the place. His Brazilian friend, Lucas Mendes, emailed “The caravan is running away from brutal poverty brought by the corrupt incompetent government, selfish upper classes and violence from drug dealers. They all look Australian to me. ♥♥. We need workers.” I feel lucky to be here. I have two packages coming from Amazon today. More stuff I don’t need. But I do enjoy opening Amazon boxes. I wonder if this blog lives on the Amazon cloud? I bet it does. I must check today.
Seven days to the end of October. Back in 1929 October begun the stock market crash. And October 19, 1987, it dropped 22% in one day. It hasn’t done that yet, again. October is not fun. But we’re alive and breathing. And that’s good.
