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3 Things: Fed Stumbles, Buybacks, Stock Decline
Submitted by Lance Roberts via STA Wealth Management,
The Fed Stumbles
Yesterday, the Federal "inadvertently" released early the minutes of the July FOMC meeting momentarily sending stocks soaring. Well, that was until somebody actually READ the minutes which were less than optimistic. Stocks dove a few minutes later. As Jon Hilsenrath noted:
"The Federal Reserve's next policy meeting is four weeks away, and officials show no clear sign of having settled on a decision about whether to raise short-term interest rates at that time.
Their assertion that they were approaching a rate move might be read as a hint that they saw a September move in the cards, but the minutes showed that officials had wide-ranging views about taking that step and some notable trepidation.
Some also worried about moving prematurely and lacking tools to address downside shocks to the economy, and about downside risks to the economy from developments abroad, particularly China.
There was push back against hesitating. A number of officials argued that a rate increase could convey confidence to the world about the economic outlook and that the Fed needed to move in acknowledgment of the progress the economy had already made toward normalcy."
The admission by the Fed the economy remains far weaker than headline statistics have suggested, was not surprising. It is also the major issue for the Fed as they understand economic cycles do not last forever. Given that we are closer to the next recession than not, the potential risk of hiking rates in a weak economic environment could very well accelerate the onset of a recession. However, from the Fed's perspective if just might be the 'lesser of two evils.' Being caught at the "zero bound" at the onset of a recession leaves few options for the Federal Reserve to stabilize an economic and market decline.
This is particularly problematic given that monetary stimulus programs (QE) have failed to produce any sustainable, organic economic growth. While I have made this point in the past, it was finally admitted by the Federal Reserve itself earlier this week. To wit:
"There is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed inflation and real economic activity. Indeed, casual evidence suggests that QE has been ineffective in increasing inflation."
Of course, if you have been reading my posts over the last couple of years none of this should be of any surprise. The following series of articles have suggested that the realization by the Fed of their precarious position was only a function of time.
Who's Right - Commodities Or Fed (July 22nd)
"As I have suggested previously, Ms. Yellen likely realizes that hiking rates at this late stage of the economic cycle is extremely risky. However, she also understands the danger of being caught in an economic downturn with interest rates near the zero-bound.
Economic indicators, China and commodities (including oil prices) are all suggesting that the Fed should NOT raise interest rates in September."
Fed's Window For Hiking Rates Continues To Close (July 6th)
"While the Federal Reserve clearly should not raise rates in the current environment, there is a possibility they will anyway.
The Fed understands that economic cycles do not last forever, and we are closer to the next recession than not. While raising rates would likely accelerate a potential recession and a significant market correction, from the Fed's perspective it might be the 'lesser of two evils. The problem is that they may have missed their window to get there."
Fed At Risk Of Missing Window To Hike Rates (June 2015)
"The Federal Reserve may have missed their window for hiking rates for the time being. However, as I stated earlier, the clock is ticking towards the next recession and for the Fed this could be a real problem."
4 Charts Why Fed Unlikely To Raise Rates (May 6th)
"Please review the chart on monetary velocity above. This is a major issue for the Federal Reserve, which remains firmly committed to a line of monetary policies that have had little effect on the real economy.
While the Federal Reserve clearly should not raise rates in the current environment, there is a possibility that they will anyway - "data be damned." (Which is ironic for a "data dependent Fed.")
Being caught at the "zero bound" at the onset of a recession leaves few options for the Federal Reserve to stabilize an economic decline. The problem is that it already might be too late."
The Fed is slowly coming to realize that "forward guidance", "QE" and artificially suppressing interest rates does indeed boost asset prices and creates a burgeoning "wealth gap." However, since those programs only affect the top 20% of the population that actually has money to invest, it does little to create real prosperity across the broad economy.
But here is the real question: "If, after six-plus years of economic expansion, the economy is not strong enough to withstand a hike in rates now, when will it ever be?"
The Problem With Debt-Financed Buybacks
I have written previously about the problem of debt-financed buybacks and the potential issue with the markets when that cycle comes to an end. To wit:
"The rush to market (for stock buybacks) suggests a near 'panic' by companies to take advantage of both low rates and investor appetites.
The question that investors need to be asking is: 'what happens when companies inevitability reach 'the end of road?' Importantly, with the Fed determined to begin hiking interest rates, despite weak economic data, the end may be nearer than most are currently expecting."
The always brilliant Dr. John Hussman recently further addressed this important issue.
"The larger problem with repurchases is that debt-financed buybacks effectively put investors on margin. As corporations have borrowed in order to aggressively buy back their stock near the highest market valuations in history, existing stockholders have quietly become heavily leveraged, without even realizing it."
"So not only is the equity market at the second most overvalued point in U.S. history, it is also more leveraged against probable long-term corporate cash flows than at any previous point in history. As we observed during the housing bubble, yield-seeking by investors opens the door to every form of malinvestment. The best way to create a debt-financed wave of speculative and unproductive activity is to starve investors of safe return. In 2000 that wave of speculation focused on technology. The next Fed-induced wave of speculation focused on mortgage securities, which financed a housing bubble. In our view, the primary avenue of speculation in the current cycle has been debt-financed corporate equity purchases."
The entire article is worth your time to read.
McClellan - Stocks Set For Decline...Today
Talk about getting your timing right. Via MarketWatch:
"Tom McClellan loves doing what financial advisers tell you not to do. He tries to time the financial markets — to the exact day, if his charts align just right. But bulls should be ready to flee, as soon as this week.
That's because McClellan said his timing models suggest 'THE' top in stocks will be hit some time between Aug. 20 and Aug. 26. He expects 'nothing good for the bulls for the rest of the year.'
But if he's so sure that 'a major price top' is coming, why is he still bullish for his short-, medium- and long-term trading styles?
'If the top is still out in front of you, you don't want to exit yet,' McClellan said. In other words, you don't wear a raincoat today because a storm is coming tomorrow.'"
Good advice.
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Let's see....
Straight up levitation off the lows into the close??
Was my guess too but not today apparently
The idea the FED can front-run a recession by raising half a percent, only to turn around and drop it to zero again in a few months to avert a catastrophe, is fucking ridiculous.
Does the Fed even know where money comes from ___? Or is money just a dream to them, if someone can prove this, it's curtains for the Fed.
Only God and Central Bankers can create something from nothing. They must feel so.........God-like!
Like most, the Fed confuses money and currency. They are not the same thing. Someone should explain that to Yellen. Not that it would make a difference.
It wouldn't make a difference because, as a Berkeley professor said on the occasion of Yellen's appointment: "She's read all the literature." And there you have it.
Sure but WE don't need anymore servings of Fiat Money Fraud from the Fed, the citizens are Fed up with being Fed up. Keep your eyes on the road, not behind your hand.
I have 100k in ORCL stock, 50% margin. which puts my debt/equity at 50%...
but oracle is at .86 debt equity. so my 100k of stock is really 14k of equty and 86k of debt at oracle...
but it's really 7k of equty and 93k of debt due to my margin.
so, I'm not 2 to 1 levered like I thought I was...I'm really 14 to 1 levered due to Orcl debt.
But I also have 7k on my credit card.
so I basically have zero equity in anything and a giant pile of steaming debt crap. sweet!!
(i'll ignore my two car loans and student loans and the pending equity loan to remodel the bathroom)
NOT OFF THE LOWS -324
Time to put away my DOW 17,000 hat.
sorrie charlie
no ramp into the close today
see what the futures do over night..
oil might greese the slide..
My guess too, but dow dropped about 70 points into last few minutes of the close. I pity the dude long stocks.
Did the PPT have the day off today?
It's entirely possible they did try, but failed. At some point, people with money in the markets are going to want to get hold of it. The selling pressures are getting pretty intense now...it's not like a few years ago where they could control a slide because the buyers would come back the next day.
If that's the case then they are really losing control. I sure hope so...
It's entirely possible they did try, but failed. At some point, people with money in the markets are going to want to get hold of it. The selling pressures are getting pretty intense now...it's not like a few years ago where they could control a slide because the buyers would come back the next day.
If that's the case then they are really losing control. I sure hope so...
Seems like Kevin Henry of the Fed is on vacation in the Hamptons.
Yea - my positions finally earned some coin.
Yep and them inverse funds mighty tasty today
my two biggest holdings SPXU and TLT
Tasty indeed
spxs is my horse
The FED is clueless. There is over 20 years of data from Japan that proves that low rates do not work.
They aren't clueless, they are inentionally avoiding anything that even slightly resembles a clue. Everything they should do they either won't or can't do, but they must play only for the sake of the mega-banks till the bitter end.....
Anybody remember that best seller "Yen" from back in 1988 or so? It described how the Japanese were going to take over the world with their management and financial prowess. I'd love to re-read that now just for the howl.
So buying your own stock when it's at a 52 week high with a 30 P/E on borrowed money is not good business??? Sonofabitch! Goddamned online MBA programs!!!!!!
Online MBA programs? You mean overpriced Harvard degree.
The buybacks simply allowed the insiders time to dump lots of shares at the highs.
How many articles have covered this: Low rates encourages malinvestment, like buybacks. Instead of growth investment, like increased productivity or new product development?
The FED low interest rate policy has made the economy more fragile/precarious. Companies used the cheap money to leverage up and line their Officer's pockets. While simultaneously destroying safer, more reliable income investments for our burdgeoning baby boomer retirees. This lack of return on investments has pushed boomers and everyone else into these risky stocks. AND, forced the boomers to work longer to make up for the lack of return. This has further hurt our young population, who can't find a job, b/c the boomers won't relinquish them. Thus, we have a whole generation of debt ladden, over/under educated waiters living at home.
Speaking of living at home, there isn't a debt slave out there that can afford a home. The retarded FED's low interest rates have only succeeded in driving up the principle on a house b/c the low rates have made these shitboxes so "affordable".
but, hey, we did save the banks with TARP. So, we've still got those zombies around, which is nice.
There's a bulltard who's sure
all that glitters is gold
And he's jawboning a stairway to heaven
When he gets there he knows,
if the markets are all closed
With a word he can get the s&p he came for.
Ooh, ooh, and he's buying a stairway to heaven.
Since Williamson is still employed w/ the FED, he was just providing 'cover' story. They are gonna dump their massive Treasury holdings($2.4Trillion) into the market while, temporarily, driving down import(&oil) prices. If/when they run out of Treasuries to sell, it will get interesting.
This, while maintaining excess reserves.
http://www.federalreserve.gov/monetarypolicy/20150618a.htm
Since Williamson is still employed w/ the FED, he was just providing 'cover' story. I suspect, they are gonna dump their massive Treasury holdings($2.4Trillion) into the market while, temporarily, driving down import(&oil) prices. If/when they run out of Treasuries to sell, it will get interesting.
This, while maintaining excess reserves.
http://www.federalreserve.gov/monetarypolicy/20150618a.htm
JOHN HUSSMAN's commentary this week was one of his best. I encourage everyone to read it at www.hussmanfunds.com
How can we understand this "delusional" behavior by America's top CEO's and CFO's? Sure, they get rewarded with huge bonuses if they expand corporate debt and do stock buybacks. But are operating Boards of these companies, and regular stockholders, so absolutely blind ... that they cannot realize that this is temporary insanity????
IT SEEMS TO ME ... that we're seeing an EXIT BEHAVIOR. CEO's are lining their nests now - and preparing to get out permanently. So their plan is simple ... steal the golden eggs from the Goose, and then let the system crash. It's a plausible scenario.
And I wouldn't be surprised if there are a whole bunch of Hedge Fund managers, and top-level bankers, who are all doing the same thing. Firming up their exit plans.
Yeah, but without the system, those eggs become worthless. That's the problem with fiat...it depends on the system to give it value. So they steal it, then crash the system, meaning they 'have' a bunch of fiat and fiat-dominated assets that are now worthless. As is all the debt they have been depending on for revenue streams.
Apparently they haven't thought this through. Because that plan only works if your 'wealth' has a value outside of the fiat that you are 'crashing'. Since most fiat wealth is not tied to anything tangible, they are left with worthless paper claims on nothing.
Whoa Whoa Whoa. Where's my 3:30 ramp at close? I feel like i've been sucker punched.
good news is the buybacks are getting cheaper
DOW 16000
DOW 16000
DOW 16000
YES WE DID!
WINNING!
Just more fraud from the zombie companies. Buying back shares as it occurs today is often nothing more than stealth shareholder dilution. They buy back the shares with debt issuance loudly proclaim it and then 6 months forward go and award the "leadership" stock options equavalent to a large part of the original buyback, all very quietly claiming the need for competative compensation packages and the like. The net result of all this is nothing more than sneaky shareholder dilution via debt financing.
oil at a 30 handle
will get the party started..
FUCK the Fed - we're circling the fucking drain bitchez!
But here is the real question: "If, after six-plus years of economic expansion, the economy is not strong enough to withstand a hike in rates now, when will it ever be?"
And if they are too scared to raise it ONE QUARTER of ONE percent, what does that say!
Why all the verbiage. Everybody knopws why Bernake did QE. To bail out, then enrich the Banks. If an economic recovery happened, helping the entire economy that would have been good too. It was not a recognized requirement however.
Why waste speace on describing why is has not werked. Use the space to speak of Bernanke prosecution.
I've been telling friends,and my self, who play divedend stocks, take notes on the co's who buyback, get that dividend, sell that stock ,wait six months, and buy it back for half, 2 dividends.
Two ideas to throw into the pot:
Given that zero Fed interest rates are lacking in any historical experience, we should not consider an increase of 0.25 percent in the Fed-influenced short term rate to be a "tightening" measure. More correctly, it should be considered a corrective measure to reduce the abuses and distortions the zero rate has produced.
The concept of a "corporation" is a creation of the commonwealth. The public authority, over a long process of evolution, has created a legal entity called the corporation to enable enterprises to grow and to remove the personal responsibility of entrepreneurs for losses. Logically, the public authority has the right to impose strong and restrictive regulation on the behavior of the corporation to protect the public interest. What has actually occurred is a situation in which corporations have become Frankenstein monsters, turning on their creators and abusing them with their accumulated wealth. Ameliorating this distortion will require the Federal chartering of all corporations over a certain size, applying sanctions for all kinds of destructive behavior, and limiting their use of buy backs, which are a form of theft from its own future prospects, from its employees and from its customers.
where is barney frank when you need him.
What the Fed is doing is working perfectly. Just like Japan and EU.
Everyone is talking about the Fed and not about the size and scope of a bloated government.
Government is choaking the economy and no one is protesting it. Just doing Fed talk...