September 30, 2014 — As the Fed’s much maligned QE program winds down — and I fully expect the completion of said program by the end of October, — it’s important to take stock of where we stand. For me personally it’s been an extremely busy month and even busier quarter, but I’m thankful for the work. While the hours have been taxing mentally and emotionally, I remind myself there are still 9.6 million without a Monday to look forward to.
Since 2009 the bull market has caused a great deal of worry and musing, pondering, and ranting that “the market isn’t the economy” and it’s “manipulated by the Fed.” Daily arguments on blogs, news sites, and social media about why the market is up if the economy is “bad.”
Financial institution disgust and outrage remains palpable. Investment banks primary business is to be the middleman and being that often frowned upon middleman by retail investors and financial media alike undoubtably involves being burdened with conflicts of interest… it’s all market fodder in these interesting times we live in.
Some investors want to have their cake and eat it too. A “weak dollar” equates to the US Federal Reserve debasing it, crushing the purchasing power, and a black swan event will no doubt force yields higher; on the flip side a strong dollar (such as the current performance of the USD) will “crush earnings” and the economy.
That said many seeking seed funding have only known an environment where money is readily available and easy to raise. This won’t always be the case. What happens when this changes? Venture capitalist Bill Gurley says all the giddy silicon valley have taken far too much risk and blowing through cash like a profligate Kardashian.
That leaves us with the market.
The year long strong performance of equities can be attributed to liquidity — corporate buybacks, investor leverage, and the highly criticized POMO by the NY Fed desk. The question remains where we’re going – and how we are positioned – in a world which continues to show signs of destabilization, and investor panic about lift-off from zero-bound.
A run-up in stock valuations has made share repurchases less effective. Quarterly buybacks declined year-over-year (-1.1 percent) for the first time since Q3 2012 to $123.7 billion. We are in my view seeing the apex of corporate share repurchases. (Chart via FactSet)
Secondly the NY Fed desk has drastically scaled down POMO. Last September the desk was purchasing $45 billion in Treasury securities over the month to boost excess reserves in the banking system. This month the desk purchased $15 billion in Treasury’s. October 2014 the desk is scheduled to purchase $10 billion and it is widely expected by November for the Fed to stop adding securities to its portfolio — a welcomed sign by many.
The Russell 200 has experienced a “death cross” where the 50-dma crossed below its 200-dma. The index (RUT) has underperformed the broader markets during the quarter. Perhaps crash springs eternal? Either way rising rates and lackluster Q3 results will continue to apply pressure to valuations both SPX & RUT. Market breadth continues to deteriorate paving the way for a new trend in Q4 — stocks pulling back from ATH’s.
Inflation expectations have plunged. European core prices grew at 0.7 percent vs expectations of 0.9 percent — the Euro fell in trading. Consensus expects the first US rate hike to take place at the end of Q2 2015 — I am remaining in the camp of Q1 2016 as in my view a fed hike is not warranted at this time. We aren’t even close to a hike. As the quarter comes to an end we’ll see how earnings play out in the days and weeks ahead.
It’s my view that markets continue to be Fed-dependant, fretting over a single change in FOMC statement wording and overstating just how much monetary policy can accomplish in advanced economies in regards to creating inflation. As market participants continue to be “morally outraged” by events going on in the market and in the world like it or not this is the world we live in.
For better or for worse.