Dave Moenning

Will “QT” Usher In The Great Bond Bear?

And now it begins – the “QT” era, that is. After spending nine years doing everything it could dream up to keep the U.S. economy from entering a disinflationary spiral, the Fed will officially begin to “unwind” its balance sheet next month.

In an attempt to return both the central bank’s monetary policy and bond holdings back to more normalized levels, Janet Yellen announced yesterday that (a) the current view of the economy and, in turn, the plan for “policy normalization” (aka rate hikes) remains the same and (b) the FOMC will stop reinvesting the interest it receives from its portfolio holdings in October. This means that $6 billion in Treasury Bonds and $4 billion of MBS (mortgage-backed securities) will mature each month. The plan is to then increase that amount by $10 billion a quarter to a maximum of $50 billion a month by October of next year.

The first takeaway here is that the Fed FINALLY feels like it can step away from the life support it has been providing to the economy for nearly a decade. According to Ms. Yellen, “The basic message here is U.S. economic performance has been good.” The Fed Chairwoman added at Wednesday’s press conference, “The American people should feel the steps we have taken to normalize monetary policy… are well justified given the very substantial progress we’ve seen in the economy.”

The plan is to slowly reduce the Fed’s more than $4 Trillion portfolio back to a more reasonable size over the next few years. Instead of continually pumping new cash into the financial system, the Fed wants to get back to “normal” and let markets work on their own. Of course, what this “normalized” level looks like is yet to be determined. And as such, the guessing game for investors about what the Fed plans to do next in the coming quarters is likely to continue unabated.

Getting back to the idea of “QT” or “quantitative tightening” (where the Fed effectively sells bonds on the open market) the key here is that at some point, the Fed will become a net seller of bonds each month. And the bears tell us that this will undoubtedly lead to higher rates, which will slow the economy, hurt profits, yada, yada.

But Before You Panic…

Yes, rates are expected to rise a bit during this process in the coming quarters/years. However, before you run out and start buying those inverse rate ETFs that benefit from rising rates, there are a couple things to understand about the situation.

First and foremost, there are other central banks around the world still employing QE schemes (buying bonds on the open market) every month. For example, the QE programs at ECB and the BOJ are ongoing. Therefore, the demand for U.S. bonds isn’t likely to change dramatically in the near term.

Remember, the U.S. Fed hasn’t been buying bonds for some time now. And from my seat, it was the lack of supply around the globe that led to all the negative interest rates around the world last year. In essence, it was demand outstripping supply (due to the amount of QE happening around the globe) that caused rates to go negative.

So, with demand for bonds now beginning to fall, we can probably expect rates to “normalize” over time – especially in places like Europe, where rates were arguably artificially low due to all the QE.

In addition, we need to recognize that U.S. banks will likely need to step up their buying of bonds on the open market. You see, when the Fed was buying bonds from banks (via the QE program), it paid for the bonds by crediting the reserves banks held at the Fed with newly created money. This allowed the banking industry’s excess reserves to increase – making the banks healthier in the process.

As the Fed’s bonds start to mature and are not replaced, the WSJ tells us that the banks’ excess reserves will start to fall. And since the new banking regulations require banks to hold “high quality liquid assets” to cover short-term outflows during times of crisis, the banks will need to replace the Fed’s bonds when they mature.

So, what are the banks likely to buy in order to keep those excess reserves at healthy levels? Oh that’s right, U.S. treasury bonds and/or high quality MBS. Which, by the way, is exactly what the Fed will be selling.

In my opinion, the bottom line here is that the great bond bear that so many have been expecting for quite some time now may continue to be delayed. Sure, rates may rise a bit. But inflation remains contained – something Yellen referred to as “a mystery” yesterday. The economy isn’t running hot. And the demand for bonds is likely to remain robust. Therefore, I can argue that the catastrophe for bond investors our furry friends are looking for may not be in the cards any time soon.

But, this remains an area to watch closely as the great QE Era morphs into the QT Era.

Thought For The Day:

Don’t cry because it’s over. Smile because it happened. -Dr. Seuss

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of the Tax Reform

      2. The State of the Economic/Earnings Growth (Fast enough to justify valuations?)

      3. The State of Geopolitics

      4. The State of Fed Policy

Wishing you green screens and all the best for a great day,

David D. Moenning
Chief Investment Officer
Sowell Management Services

Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.


Disclosures

The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

David D. Moenning is an investment adviser representative of Sowell Management Services, a registered investment advisor. For a complete description of investment risks, fees and services, review the firm brochure (ADV Part 2) which is available by contacting Sowell. Sowell is not registered as a broker-dealer.

Employees and affiliates of Sowell may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Positions may change at any time.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

Advisory services are offered through Sowell Management Services.

Dave Moenning

Indicator Review: The Table Appears To Be Set For…

Good Monday morning and welcome back to the land of blinking screens. North Korea’s obsession with missiles, the issues of Tax Reform and the Debt Ceiling, and what I call “Fed Expectations” are in focus this week. On the latter, note that, according to Bloomberg, the futures-implied odds of another rate hike in 2017 currently stand at just 40% as many folks contend that the FOMC is more interested in beginning a “balance sheet normalization” plan than hiking rates again soon. However, with both PIMCO and BlackRock publicly talking about inflation hitting the Fed’s 2% target in the near-term after Friday’s better-than expected jobs report, we should probably be on the lookout for the “reflation trade” to make a comeback. Thus, traders will be paying particular attention to every word uttered as Fed officials return to the speaking circuit this week.

But since it’s the start of a new week, let’s focus on our objective review the key market models and indicators and see where things stand. To review, the primary goal of this weekly exercise is to remove any subjective notions one might have in an effort to stay in line with what “is” happening in the markets. So, let’s get started.

The State of the Trend

We start each week with a look at the “state of the trend.” These indicators are designed to give us a feel for the overall health of the current short- and intermediate-term trend models.


View Trend Indicator Board Online

Executive Summary:

  • With the SPX moving sideways for the past three weeks, it isn’t surprisng to see some weakness creep into the short-term Trend Model 
  • Both the short- and intermediate-term Channel Breakout Systems remain on buy signal. The short-term system would flash a sell signal below 2459 and the intermediate-term system below 2405 
  • The intermediate-term Trend Model remains positive. 
  • The long-term Trend Model is also solidly positive. 
  • The Cycle Composite has turned negative and will stay there for some time. 
  • The Trading Mode models continue to suggest the market is in a trending environment.

The State of Internal Momentum

Next up are the momentum indicators, which are designed to tell us whether there is any “oomph” behind the current trend…


View Momentum Indicator Board Online

Executive Summary:

  • The short-term Trend and Breadth Confirm Model slipped to negative last week – albeit by a slim margin. 
  • Our intermediate-term Trend and Breadth Confirm Model remains positive. 
  • After poking its head up into the positive zone for a brief period, the Industry Health Model is back to neutral this week. 
  • The short-term Volume Relationship is technically positive, but the up-volume line continues to trend down. 
  • The intermediate-term Volume Relationship model remains positive. However, the demand volume line is flirting with the low end of a trading range and very close to the lowest point of the year. Any further weakness could cause the line to enter a downtrend. 
  • The Price Thrust Indicator fell back to neutral as the recent momentum was not sustained. 
  • The Volume Thrust Indicator is no negative. 
  • The Breadth Thrust Indicator is also negative.
  • In sum, short-term momentum has faltered.

The State of the “Trade”

We also focus each week on the “early warning” board, which is designed to indicate when traders may start to “go the other way” — for a trade.


View Early Warning Indicator Board Online

Executive Summary:

  • From a near-term perspective, stocks remain overbought. 
  • Stocks remain overbought also from an intermediate-term view. 
  • The Mean Reversion Model is stuck in neutral. 
  • The VIX Indicators remain on sell signals. 
  • From a short-term perspective, market sentiment is now at the low end of neutral. 
  • The intermediate-term Sentiment Model remains very negative. 
  • Longer-term Sentiment readings haven’t budged and the model suggests extreme complacency in the market.

The State of the Macro Picture

Now let’s move on to the market’s “external factors” – the indicators designed to tell us the state of the big-picture market drivers including monetary conditions, the economy, inflation, and valuations.


View External Factors Indicator Board Online

Executive Summary:

  • The Absolute Monetary model remains at the low end of the positive range. 
  • On a relative basis, our Monetary Model suggests conditions have improved to moderately positive 
  • Our Economic Model (designed to call the stock market) hasn’t moved and is currently moderately positive. 
  • The Inflation Model continues to fall in the neutral zone. This suggests inflation pressures are trending down. 
  • Our Relative Valuation Model is neutral but edging back toward undervalued (note the correlation of this to the improvement in the monetary models) 
  • The Absolute Valuation Model remains VERY negative.

The State of the Big-Picture Market Models

Finally, let’s review our favorite big-picture market models, which are designed to tell us which team is in control of the prevailing major trend.


View My Favorite Market Models Online

Executive Summary:

  • The Leading Indicators model, which was briefly neutral a while back, is now solidly positive. 
  • The Tape continues to struggle and is back to neutral. The fact that the indices are near all-time highs and this model is neutral really says it all – leadership is narrow. 
  • After briefly turning positive, the Risk/Reward model slipped back to neutral last week. 
  • The External Factors model remains ever-so slightly positive.

The Takeaway…

Let’s see… the trend and momentum models have weakened, the market remains overbought, sentiment is overly positive, and the historical cycles suggest a meaningful decline could begin any day now. However, the bigger-picture/external factors models remain constructive and suggest above-average gains. As such, one could argue that stocks are “set up” for a corrective phase. Thus, if the bears can find a negative “trigger” they could be in business for a while. But given the macro backdrop, buying the dips still makes sense here.

Publishing Note: My wife and I are closing on and moving into our new home this week. As such, I will publish reports only if time and energy level permits.

Thought For The Day:

The four most dangerous words in investing are: This time it’s different. -Sir John Templeton

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of the U.S. Economic Growth (Fast enough to justify valuations?)

      2. The State of Earnings Growth

      3. The State of Trump Administration Policies

      4. The State of the Fed

Wishing you green screens and all the best for a great day,

David D. Moenning
Chief Investment Officer
Sowell Management Services

Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.


Disclosures

The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

David D. Moenning is an investment adviser representative of Sowell Management Services, a registered investment advisor. For a complete description of investment risks, fees and services, review the firm brochure (ADV Part 2) which is available by contacting Sowell. Sowell is not registered as a broker-dealer.

Employees and affiliates of Sowell may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Positions may change at any time.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

Advisory services are offered through Sowell Management Services.

Dave Moenning

No Surprises

As expected, the FOMC said little that was new in the release of yesterday’s post-meeting policy statement. Yes, there were the obligatory tweaks to the first paragraph regarding current economic conditions and some very modest adjustments to the committee’s view on inflation. And yes, there was a discussion about starting to wind down the Fed’s $4.5 Trillion balance sheet. But all in all, the statement was a non-event from a market perspective.

On the inflation front, the statement said inflation measures “have declined” and are “running below 2%.” Analysts quickly compared/contrasted this to last month’s assessment, when it said inflation had “recently declined” and was “somewhat below” 2%. Such is life as a Fed-watcher!

Although the changes were subtle, some analysts opined that this month’s characterization of inflation suggests the Fed views inflation as more entrenched and less transitory than it did in June.

The main event in the release, which wasn’t really new, was the statement that the FOMC expects to implement its balance sheet normalization program (i.e. the selling of bonds the Fed holds) “relatively soon.” The general consensus among the Fed-watchers I follow is that the “normalization” will begin at the conclusion of the next FOMC meeting on September 20. The expectation is the Fed will announce that starting in October, it will gradually decrease its reinvestment of principal payments from its securities holdings, in accordance with its previously released Policy Normalization Principles and Plans. And if all goes according to plan (insert hearty chuckle here), the Fed’s “balance sheet” would be back to “normal” in four or five years.

Based on the aforementioned “principles and plans” offered up so far by Yellen’s crew, Ned Davis Research took a look at what the wind down of the Fed’s balance sheet might look like. Although the Fed has not given anyone an exact end target for their plan, NDR expects the Fed “will shrink its balance sheet until the total securities held is the equivalent of 10% to 12% of GDP, or by roughly $2 trillion.”  This means the Fed’s balance sheet wouldn’t “normalize before 2021 or after 2022, assuming no recession, of course.

The market’s reaction to the news – or lack thereof – was a yawn. The dollar fell a bit, bond prices rose on the idea that the Fed isn’t in a position to hike rates faster than expected, and the stock market had little to no reaction.

At this stage of the game, the markets seem to believe that the Fed may not even raise rates again in 2017. According to the action in the futures markets, the implied “odds” of another rate hike in 2017 are no better than 50-50. Note that this runs counter to the Fed’s “dot plot,” which suggests there will be an additional increase in the Fed Funds rate before year-end.

For me, the key takeaway is that Ms. Yellen and her compadres have done a pretty good job in terms of communicating their intentions to the markets. And as anyone who has been in this business awhile knows, Ms. Market is not fond of surprises. As such, Yellen & Co. are to be commended for their efforts.

Thought For The Day:

“I’m not telling you it’s going to be easy, I’m telling you it’s going to be worth it.” Art Williams

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of the U.S. Economic Growth (Fast enough to justify valuations?)

      2. The State of Earnings Growth

      3. The State of Trump Administration Policies

      4. The State of Fed Policy

Wishing you green screens and all the best for a great day,

David D. Moenning
Chief Investment Officer
Sowell Management Services

Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.


Disclosures

The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

David D. Moenning is an investment adviser representative of Sowell Management Services, a registered investment advisor. For a complete description of investment risks, fees and services, review the firm brochure (ADV Part 2) which is available by contacting Sowell. Sowell is not registered as a broker-dealer.

Employees and affiliates of Sowell may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Positions may change at any time.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

Advisory services are offered through Sowell Management Services.

Dave Moenning

The Next Big Worry? Well, Never Mind…

A couple weeks back, I opined that the next big problem for the stock market might revolve around global central bankers changing their monetary policy tune on a coordinated basis. The idea was simple. Stocks have enjoyed the benefits of capital creation via global QE programs since the crisis ended in early 2009. The key has been that when banks print money, the cash must go somewhere. And the bottom line is that a fair amount of the freshly minted QE capital consistently found its way into the U.S. stock and bond market.

The worry is that the majority of the world’s central bankers (save Japan, of course) looked to be ready to reverse course. Instead of creating capital, the plan now is for banks to begin to “normalize” their balance sheets. In English, this means the banks plan on selling trillions of dollars of the bonds and funky securities they accumulated to help keep the global banking system afloat over the last eight years.

The thinking is that although no central banker in their right mind would intentionally overwhelm or surprise the markets, a globally coordinated plan to sell bonds would become a massive headwind for the bond market. And the end result is that rates would be expected to rise – maybe a lot. Especially if the inflation that the central bankers have been striving for begins to materialize – or perhaps starts to run hot. Or if all those macro hedgies decide to front-run the Fed by doing some selling of their own.

While this outcome may sound a lot like the plan the bankers have been hatching for some time now, the problem is that the global economy was assumed to be strong when the bankers began to sell. And the big fear has been that the US Fed, the BoE, the ECB, etc., would “miss” on this element and wind up inducing economic weakness – maybe even a recession – in the process.

Recall that last month, investors had begun to worry that central banks around the world were actually turning hawkish. If one connected the dots, it appeared that this might even be a coordinated effort. For example, a string of Fed officials publicly stated they they would be in favor of hiking rates at a faster pace than currently projected by the “dot plot.” In addition, Bank of England officials openly called for an increase in interest rates. And then Super Mario (aka ECB President Mario Draghi) suggested that his bank might need to scale back its monthly bond-buying program. Oh, and the Bank of Canada joined the fray by hiking rates for the first time in seven years.

The bond market definitely noticed as the yield on the U.S. 10-year climbed about a quarter of a percentage point in short order. On a chart basis, it appeared that the 10-year yield was about to break out, a move that technicians said was important. As such, it appeared that rates were on the precipice of something big.

But a funny thing happened on the way to the debacle in the bond market. Since that pivotal moment back on July 7, the worries that central bankers were suddenly turning hawkish in a coordinated fashion have fallen – in a fairly large way.

In fact, the yield on the 10-year has retraced more than half of the late-June move, having fallen from 2.4% to 2.25% over the last nine trading days. From my seat, the sudden change in the market mood is tied to the fact that the inflation data that the Fed, BoE, and ECB were banking on has been moving in the wrong direction. Instead of inflation moving above the 2% target, the data has been coming in weaker than expected. In other words, the premise for central bankers moving faster than anticipated just isn’t there.

And while Yellen’s bunch appeared to want to ignore the data and stick to their plan by calling the downtick in inflation “transitory,” they have since come to their senses. Earlier this month, the Fed Chair acknowledged the inflation trend and said the Fed could adjust its rate policy if inflation doesn’t pick up.

Then last week, the ECB also backed off what had been perceived to be a more hawkish stance by delaying any discussion of winding down its bond buying program until the fall.

So, with the central bankers apparently putting aside talk of moving rates faster than anticipated, yields have come down and the fear of the next big problem appears to have receded. And until/unless inflation starts to perk up in a meaningful way, the bears will have to back away from the panic button. Well, for now, anyway.

Thought For The Day:

If you are determined enough and willing to pay the price, you can get it done. -Mike Ditka

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of the U.S. Economic Growth (Fast enough to justify valuations?)

      2. The State of Earnings Growth

      3. The State of Trump Administration Policies

      4. The State of Fed Policy

Wishing you green screens and all the best for a great day,

David D. Moenning
Chief Investment Officer
Sowell Management Services

Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.


Disclosures

The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

David D. Moenning is an investment adviser representative of Sowell Management Services, a registered investment advisor. For a complete description of investment risks, fees and services, review the firm brochure (ADV Part 2) which is available by contacting Sowell. Sowell is not registered as a broker-dealer.

Employees and affiliates of Sowell may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Positions may change at any time.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

Advisory services are offered through Sowell Management Services.

Dave Moenning

The Real Inflation Problem

With Janet Yellen having raised the Fed Funds rate a fourth time last week to a target range of 1.0% – 1.25%, there is/has been an awful lot of talk about inflation. In fact, the current annualized level of inflation (~2%) is being used as justification for the Fed’s plan to return rates and monetary policy to more “normalized” levels.

However, in my opinion, all this talk about inflation is borderline comical and likely just a smoke screen for the Fed’s primary objective – keeping the economy moving forward and out of the deflationary ditch.

The problem is that the Fed’s official mandate doesn’t include keeping GDP growing at a healthy clip. No, the only two tasks the country’s merry band of central bankers have are (1) full employment and (2) stable prices (i.e. low inflation). As such, during the aftermath of the Great Recession, Ben Bernanke and Janet Yellen have been forced to dance around the idea of equating 2% inflation with an acceptable level of economic growth.

Inflation Is Too What?

I grew up in this business in the 1980’s. To be sure, this was a time when investors feared inflation. I was there when Paul Volcker declared war on inflation. The investing industry then spent the next 20+ years worrying that the bad old days of runaway inflation would return. So, pardon me if I find the current fixation on getting inflation back “up” to an acceptable level a little amusing.

Why doesn’t Yellen & Co. just come out and say it; “Hey, our real job is to make sure the economy is heading in the right direction.” And then while we’re at it, perhaps the purchasing power of the U.S. dollar should be brought into the mix as well. After all, the state of the greenback is surely a topic of discussion at the occasional Fed meeting, right?

But alas, the U.S. Federal Reserve is stuck trying to keep the largest, most complex economy in the world rolling down the track by focusing on two simple targets: unemployment and inflation.

The Point…

The key point here (yes, I promise there IS a point coming) is that inflation and inflation expectations are currently trending lower – and have been for the better part of this year. Therefore, raising rates when inflation expectations are in decline would seem to be counterintuitive. Hence my reference to all the talk about inflation being a smoke screen.

Yes, it is true that inflation – according to the Fed’s preferred measures – is currently at or slightly above the 2% target. Yet, it is important to recognize that these measures tend to be a bit “rear view mirror” oriented and the more forward-looking inflation metrics are currently moving down and to the right.

So, why then is Yellen fixated on raising rates in such an environment? In short, because it is time for the Fed to get out of the way – and they know it!

In reality, the economy has been strong enough for the Fed to remove the low-rate life support for some time. But due to the silly focus on an acceptable level of inflation, which remained stubbornly low for years, the Fed has wound up with some unintended consequences.

The Law Of Unintended Consequences

You remember the economic version of the law of unintended consequences, don’t you?

Almost everyone agrees that Alan Greenspan’s decision to keep rates too low for too long basically created the mortgage/housing/credit crisis (aka the Great Recession of 2008), which, in turn, led to the worst economic downturn seen in the U.S. since the Great Depression.

So, with rates having been kept at generational lows for nearly a decade now, you can bet dollars to doughnuts that the Fed is likely worried – at least a little – about a repeat and/or the next bubble-induced debacle.

Although bubbles don’t tend to occur when everyone is looking for them, one of the unintended consequences of the Fed’s scheme to get inflation back to their 2% target has been the explosion of student loan debt.

While the official measure of inflation (which is reconfigured from time to time in order to make sure the government can afford to pay those pesky inflation adjustments tied to entitlement programs) has stagnated for nearly a decade, the cost of sending junior to college skyrocketed. And along with the rising cost of college came a massive steaming heap of student loan debt.

The cost of college just kept going up every year because the cost of financing it kept falling. Forget that CPI was uber low for years, college costs kept rising 5%, 6%, and more, year after year. And before you knew it, there was more student loan debt in this country than mortgage debt. Yes, even AFTER the binge of home buying in the mid-2000’s!

The key point is one of the unintended consequences of rates being kept too low for too long is that student loans will now become a macro drag on the economy. Yep, that’s right, instead of your sons and daughters buying cars, TV’s, washing machines, and taking vacations after they’ve graduated college and gotten a job, now they get to pay off that $30,000 – $50,000 loan.

From a macro point of view, the massive amount of student loan debt means lower economic growth for a very long time – perhaps even a decade or two.

So, from my seat, this is at least part of the reason why Ms. Yellen is ignoring the downtrend in inflation expectations and using the magical 2% target in PCE to justify the Fed stepping away. Something that probably should have happened years ago – if the Fed were allowed to focus on the stuff that matters, that is.

Thought For The Day:

Remember, you can choose to enter a peaceful mode at any point of any day…

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of the U.S. Economy

      2. The State of Earning Growth

      3. The State of Trump Administration Policies

Wishing you green screens and all the best for a great day,

David D. Moenning
Chief Investment Officer
Sowell Management Services

Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.

Looking for a “Modern” approach to Asset Allocation and Portfolio Design?

Looking for More on the State of the Markets?


Disclosures

The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

David D. Moenning is an investment adviser representative of Sowell Management Services, a registered investment advisor. For a complete description of investment risks, fees and services, review the firm brochure (ADV Part 2) which is available by contacting Sowell. Sowell is not registered as a broker-dealer.

Employees and affiliates of Sowell may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Positions may change at any time.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

Advisory services are offered through Sowell Management Services.

Dave Moenning

Friday Quick Take: Jobs, France, Buffett and Oil

There are several items in focus this morning including Warren Buffett’s big meeting (as well as his take on both IBM and Apple), the election in France on Sunday (Macron continues to hold a 20-point lead – but strange things have been happening at voting booths around the world lately), the latest move in oil (don’t look now, but oil was trading below $44 this morning based on supply concerns – and remains something to watch), and of course, the Big Kahuna of economic data – the Jobs Report.

The latter is attracting most of the attention at the moment as job creation in April rebounded from the surprisingly weak March reading. According to the Labor Department, the U.S. economy created 211,000 jobs last month, which was above the consensus expectation for 185,000.

Next, the nation’s official Unemployment Rate fell to 4.4%, which was down from March’s reading of 4.5% and two-tenths below analysts expectations of 4.6%. It is worth noting that the current level is the lowest seen since May 2007.

However, there are numerous ways to look at the rate of the unemployed. For example, there is the now-popular U-6 rate, which includes those not actively looking for jobs and folks looking for part-time work. The U-6 dropped to 8.6% in April, which is down from the 8.9% level in March, and the best reading since November 2007.

Another way to view unemployment is to take the number of employed people relative to the population. This ratio rose to 60.2% in April, which is the highest level seen since February 2009.

As usual, there were revisions to the prior two months’ job creation totals. March was revised down to 79K from 98K while February’s numbers went up to 232K from 219K.

On the income front, Average Hourly Earnings rose by 0.3% in April to $26.19 per hour and hourly wages grew by 2.5% on a year-over-year basis.

The Takeaway

What jumps out at me in this report is the “best reading since” numbers. For example, the Unemployment Rate is the best since May 2007. The U-6 is the best since November 2007. And the ratio of employed-to-population is the highest since February 2009.

Thus, it is fairly easy to argue that the jobs market has returned to levels seen before the Great Recession. And as such, the Fed is justified in returning rates to more normalized levels.

In addition, it would appear that the Fed’s view that the weakness seen in Q1 may indeed have been “transitory” as hiring clearly perked up again after March’s hiccup. And from a big-picture standpoint, I believe the idea of the economy rebounding from the usual late-winter swoon is critical to the current market levels and trader narrative. Therefore, we need to continue to watch the incoming data in May/June for signs of confirmation.

Thought For The Day:

Remember that it pays to be open minded (in more ways than one)…

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of Trump Administration Policies

      2. The State of the U.S. Economy

      3. The State of Earning Season

      4. The State of World Politics

Wishing you green screens and all the best for a great day,

David D. Moenning
Chief Investment Officer
Sowell Management Services

Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.

Looking for a “Modern” approach to Asset Allocation and Portfolio Design?

Looking for More on the State of the Markets?


Disclosures

The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

David D. Moenning is an investment adviser representative of Sowell Management Services, a registered investment advisor. For a complete description of investment risks, fees and services, review the firm brochure (ADV Part 2) which is available by contacting Sowell. Sowell is not registered as a broker-dealer.

Employees and affiliates of Sowell may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Positions may change at any time.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

Advisory services are offered through Sowell Management Services.

Dave Moenning

My Take: Fed Will Stay The Course

Although nobody in the game expected Janet Yellen to make any moves regarding rates yesterday and the changes to the Fed’s post-announcement statement required a microscope to identify, this week’s meeting of the FOMC was important nonetheless.

After spending nine years pulling rabbits out their hats in order to keep the economy out of the deflationary ditch, you can bet your bottom dollar that Yellen’s merry band of central bankers would like to return interest rates back to more normal levels. And in case you’ve been living in a cave for the last couple years, you know that the Fed has begun the process known as “policy normalization.”

The problem is that in each of the last two years, Yellen & Co. have been forced to put the brakes on their plans due to what the WSJ called “economic shocks, especially from abroad.” As such, the Yellen has only managed to push out two rate hikes of 0.25% each so far.

While Fed members appear to be bent on raising rates at least three times in 2017, the markets are less than convinced at this stage. For example, according to Ned Davis Research, the Fed Funds Futures are projecting just 1.5 additional rate hikes in 2017. The issue at hand appears to be the lack of strength in the “hard” economic data. And Exhibit A in the argument is that the Fed may have to once again shelve their normalization plans, was the underwhelming Q1 GDP report (which sported a rather anemic annualized growth rate of just 0.7%).

Showing Some Resolve

However, at least at this stage of the game, Yellen’s gang appears undeterred as yesterday’s postmeeting statement remained surprisingly upbeat. In fact, the FOMC statement suggested that the weakness seen in the January-to-March period was “likely to be transitory.”

Perhaps this is due to the plethora of strong “soft” economic reports seen so far this year. Perhaps Yellen is standing behind the inflation data, which has reached the Fed’s target zone. Or perhaps the Fed is looking to boost its reputation by sticking to its guns here. But the bottom line is that yesterday’s statement signaled that Janet Yellen is assuming a “steady as she goes” stance with regard to the path of monetary policy.

Reasons To Stay the Course

First up on our list of reasons why Janet Yellen is likely to stay the course for three rates hikes in 2017 AND the start of a campaign to reduce the size of the Fed’s balance sheet by the end of the year is the fact that wage pressures are building.

Most folks think that commodities such as oil and grains are the primary drivers of inflation. But in reality, my work shows that wages are the key driver of CPI. And don’t look now fans, but wage pressures are starting to increase.

For example, the Atlanta Fed’s Wage Growth Tracker moved up smartly in 2016. And then after a drop into the election (likely due to uncertainty over the outcome of the vote) the wage growth tracker is now moving higher again. This has helped push the Employment Cost Index up 2.4% on a year-over-year comparison basis, which is near the upper end of the recent range, as well as the trends of other compensation surveys.

Next up is inflation. The bottom line here is the PCE (the Fed’s preferred inflation measure), which looks to have stabalized around the FOMC’s annualized target of 2%.

Then there is the fact that the stock market is near all-time highs. The first point here is the Fed has publicly voiced its concern about valuations in the stock market. So, if the market were to freak out over higher rates, Yellen has cover to say, “I told you so.” In addition, although the FOMC has been talking about raising rates AND starting to reduce their over $4 Trillion holdings, the stock market is none the worse for wear. Thus, the Fed appears to have a green light to proceed from the stock market.

Finally, and while I will admit this is pretty geeky stuff, the “real Fed Funds rate” (which adjusts for inflation), is currently LOWER than it was when the Fed started raising rates. Therefore, one can argue that the Fed is currently “more accommodative” that it was when the Fed Funds rates was back at 0%.

The Takeaway

So, while the “hard” economic data has been soft and Yellen’s bunch has backed off plans to raise rates due to economic softness in each of the last two years, for now at least, it appears that the Fed has backing to stay the course in terms of normalizing monetary policy. And from my perch, this is a good thing from a big-picture perspective.

Thought For The Day:

Learn to trust in an idea whose time has come…

Current Market Drivers

We strive to identify the driving forces behind the market action on a daily basis. The thinking is that if we can both identify and understand why stocks are doing what they are doing on a short-term basis; we are not likely to be surprised/blind-sided by a big move. Listed below are what we believe to be the driving forces of the current market (Listed in order of importance).

      1. The State of Trump Administration Policies

      2. The State of the U.S. Economy

      3. The State of Earning Season

      4. The State of World Politics

Wishing you green screens and all the best for a great day,

David D. Moenning
Chief Investment Officer
Sowell Management Services

Disclosure: At the time of publication, Mr. Moenning and/or Sowell Management Services held long positions in the following securities mentioned: none. Note that positions may change at any time.

Looking for a “Modern” approach to Asset Allocation and Portfolio Design?

Looking for More on the State of the Markets?


Disclosures

The opinions and forecasts expressed herein are those of Mr. David Moenning and may not actually come to pass. Mr. Moenning’s opinions and viewpoints regarding the future of the markets should not be construed as recommendations. The analysis and information in this report is for informational purposes only. No part of the material presented in this report is intended as an investment recommendation or investment advice. Neither the information nor any opinion expressed constitutes a solicitation to purchase or sell securities or any investment program.

Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Do NOT ever purchase any security without doing sufficient research. There is no guarantee that the investment objectives outlined will actually come to pass. All opinions expressed herein are subject to change without notice. Neither the editor, employees, nor any of their affiliates shall have any liability for any loss sustained by anyone who has relied on the information provided.

The analysis provided is based on both technical and fundamental research and is provided “as is” without warranty of any kind, either expressed or implied. Although the information contained is derived from sources which are believed to be reliable, they cannot be guaranteed.

David D. Moenning is an investment adviser representative of Sowell Management Services, a registered investment advisor. For a complete description of investment risks, fees and services, review the firm brochure (ADV Part 2) which is available by contacting Sowell. Sowell is not registered as a broker-dealer.

Employees and affiliates of Sowell may at times have positions in the securities referred to and may make purchases or sales of these securities while publications are in circulation. Positions may change at any time.

Investments in equities carry an inherent element of risk including the potential for significant loss of principal. Past performance is not an indication of future results.

Advisory services are offered through Sowell Management Services.