BofA: "Has The Fed Become Concerned About The Surge In Stocks?"

In a unexpectedly gloomy note from BofA's Chief strategist David Woo, titled "Sell before it's too late", the analyst writes that this is "a market with risk off written all over it" largely as a result of a string of weaker-than-expected US data over the past week, which "has only strengthened our view that the US economy is losing momentum" and adds that the culprit is the lack of progress in tax reform in Washington.

As Woo explains, the reason for his gloomy economic view is that  companies after companies across the country have been telling the bank lately that they are withholding major decisions on hiring and investment until there is greater clarity on tax reform, which he says "should come as no surprise."

Running a business without knowing what taxes you will be paying, whether interest and labor costs will be tax deductible, how long you have for capital expenditure depreciation is like driving at night without headlights. If you can't see, you slow down ? the increased uncertainty around tax reform has become a damper on economic growth. The data are bearing out this wait-and-see attitude. Core durable goods orders have been flat for three consecutive months and the three-month moving average of nonfarm payrolls slowed in May to the most sluggish pace since the Eurozone crisis in 2012

What did surprise Woo is that against a backdrop of a rolling over economy, the Fed doubled down on its hawkish tone and wonders "what it sees ("solid" job gains, businness fixed investment that "continues to expand", risk to the economy being "roughly balanced") that we do not."

His answer: "Can it be the case that its hawkishness was prompted by something other than its reading of the economy? For example, is it possible that the Fed has become concerned about the recent surge in the equity market, especially tech stocks that has been feeding off low interest rates and low volatility? According to our equity strategists, the P/E of the tech sector (19x) is currently at its highest levels post-crisis while the EV/Sales ratio is at the highest sinec the Tech Bubble"

Woo adds that whether the Fed's hawkiness was indeed intended as a warning shot to tech stocks or not, momentum behind the recent tech rally was already fading even before the FOMC meeting. The fact that large cap active funds have never been more overweight the tech sector in the history of our data and the possibility that there could be a bigger correction ahead make us think that the balance of risks for both US rates and USD/JPY remains on the downside (notwithstanding the Fed's plan to hike one more time and to start shrinking its balance sheet this year).

It's not just tech however, because as the BofA strategist also notes, "the price action in the energy market is also raising a red flag in our eyes. In the face of continued inventory build and increasing rig count (Chart 2), WTI front month contracts fell to a two-month low last week.

BofA's commodity team maintains its view that supply/demand balance points to a deficit of 830 thousand b/d over 2H2017 but is becoming concerned that hedging ratios among North American producers for 2018 are only a quarter of their normal levels. As Woo warns, if WTI breaks below $44 per barrel (it is currently at $44.68), $38-40 levels could be in play.

To be sure, today's hawkish comments by Dudley in light of last week's increasingly disappointing economic data suggest that the Fed is indeed focused on "other things" although if Yellen is hoping to mute the relentless grind higher in stocks, one look at today's market action shows that she and the Fed will both have to try much harder...


Bryan Mon, 06/19/2017 - 09:43 Permalink

The Fed doesn't care about stocks, other than buying them to spend the excess fiat they are printing.  The illusion must be maintained at all costs.

tictawk Bryan Mon, 06/19/2017 - 11:10 Permalink

Can anyone clear the confusion.  It is my understanding that the FED cannot directly purchase or hold equities given that they create fiat credit (credit same as cash).  However it can be argued that the FED's proxies are the ones holding equities.  also I'm not sure if foreign CB's are allowed to purchase equities.  Anyone know for sure?  Can the US Fed purchase equities in foreign countries?  If so, this is one big clusterfuck with CBs purchasing equities in for each other with a wink and a nod. 

In reply to by Bryan

SDShack Bryan Mon, 06/19/2017 - 13:23 Permalink

Unlike Japan, the Fed doesn't have to worry about buying stocks. The Fed through their member investment banks, already OWN the companies, and thus the stock market. The only way companies stay in business now is to generate enough cash flow to pay their debt, that is OWNED by the investment banks. No companies worry about actually making profits, or even growing organically. Companies, and their CEO's and Boards only worry about fuzzy accounting to have enough cash flow to service their existing debt. If they need more cash flow, then just take on more debt to issue more stock, or take on more debt to buy some other company that already is drowning in debt. And if the economy tanks, don't worry, just take on more debt via refinancing your existing debt. The consistent winners in all this are the investment banks. Of course, there is another name for the scam... it's called a Ponzi Scheme, and the Fed has perfected the Infinite Ponzi because they have the printing press. The ultimate goal for the Fed and all investment baks has always been to control all real assets, not by owning stock, but by making everyone debt slaves. The New Feudal World Order is being implemented right before our eyes.

In reply to by Bryan

bigkahuna Mon, 06/19/2017 - 09:51 Permalink

The fed is responsible for the surge. They have not cared at all for a long time now - suddenly they care? They signed the death warrant for the American financial system when they cut interest rates to nil and participated in the bailout of themselves.Woe unto the fed and all banksters - WOE!!!!

Cardinal Fang Mon, 06/19/2017 - 09:55 Permalink

So, bottom line is that gas prices will go higher heading in to July 4.

Taxes will go up.

Crony capitalists will get rich

The Middle East will cause uncertainty

The Democrats will cause grid lock

The banks will profit from all of it.

And the American people will get fucked.

This is just too easy.

Anyone looking to hire a Chief Economist?

BandGap Mon, 06/19/2017 - 09:57 Permalink

You have to first recognize the "problem", then you work towards the "solution" so when the masses suffer you can say you tried to "fix" the problem.This is how our government works.

Silver Savior Mon, 06/19/2017 - 09:59 Permalink

It's not that the stock market is going up it's because it takes more dollars to buy the same thing. The stock market in reality is way down. All that green you see is devaluing dollars. You should be so proud.On the flip side gold and silver are way up minus the manipulation via paper contracts. For years now there has been a silver supply defecit with the remainder coming from reserves which in themselves are tiny compared to gold reserves. 

sbenard Mon, 06/19/2017 - 10:26 Permalink

It's a good thing the US is debt-free, or with these new all-time record highs in stocks, we might think this was another bubble -- even a bigger one than the last! 

Pasadena Phil Mon, 06/19/2017 - 10:39 Permalink

Wrong question. There are 5 companies accounting for about half of the value of the entire "market". The real question is "When is the government going to step in and prevent those companies from owning the other half. Do we not have anti-trust laws in this country? Other than laws that are used to harass law-abiding citizens trying to live free while exercising their constitutional rights, is there any will to enforce the laws that protect us from tyranny, violence, and foreign invasion? Did we just lose a war or something?

decentraliseds… (not verified) Mon, 06/19/2017 - 10:42 Permalink

 Why waste time on this alligator when the swamp’s most critical economic and political problems revolve around the hegemony of a global corporate cartel, which is headquartered in the US because this is where their dominant military force resides. The US Constitution is therefore the “kingpin” of an all-inclusive global financial empire. These fictitious entities now own the USA and command its military infrastructure by virtue of the Federal Reserve Corporation, regulatory capture, MSM propaganda, and congressional lobbying. The Founders had to fight a bloody Revolutionary War to win our right to incorporate as a nation – the USA. But then, for whatever reason, our Founders granted the greediest businessmen among them unrestricted corporate charters with enough potential capital & power to compete with the individual states, smaller sovereign nations, and eventually to buy out the USA itself. The only way The People can regain our sovereignty as a constitutional republic now is to severely curtail the privileges of any corporation doing business here. To remain sovereign we have to stop granting corporate charters to just any “suit” that comes along without fulfilling a defined social value in return. The "Divine Right Of Kings” should not apply to fictitious entities just because they are “Too Big To Fail”. We can't afford to privatize our Treasury to transnational banks anymore. Government must be held responsible only to the electorate, not fictitious entities; and banks must be held responsible to the government if we are ever to restore sanity, much less prosperity, to the world. It was a loophole in our Constitution that allowed corporate charters to be so easily obtained that a swamp of corruption inevitably flooded our entire economic system. It is a swamp that can't be drained at this point because the Constitution doesn’t provide a drain. This 28th amendment is intended to install that drain so Congress can pull the plug ASAP. As a matter of political practicality we must rely on the Article 5 option to do this, for which the electorate will need overwhelming consensus beforehand. Seriously; an Article 5 Constitutional Convention is rapidly becoming our only sensible option. This is what I think it will take to save the world; and nobody gets hurt: 28th Amendment: Corporations are not persons in any sense of the word and shall be granted only those rights and privileges that Congress deems necessary for the well-being of the People. Congress shall provide legislation defining the terms and conditions of corporate charters according to their purpose; which shall include, but are not limited to: 1, prohibitions against any corporation; a, owning another corporation; b, becoming economically indispensable or monopolistic; or c, otherwise distorting the general economy; 2, prohibitions against any form of interference in the affairs of; a, government, b, education, c, news media; or d, healthcare, and 3, provisions for; a, the auditing of standardized, current, and transparent account books; b, the establishment of state and municipal banking; and c, civil and criminal penalties to be suffered by corporate executives for violation of the terms of a corporate charter.    

Russdiamon Mon, 06/19/2017 - 11:00 Permalink

Sure sound like some negative things are cropping up lately. This guy has actually been calling for a drop lately, and it’s not the first time he’s done that kind of thing. Though he’s actually had a good track record of getting it right. I follow him and I definitely recommend others take a loot at what he has to say.

Albertarocks Mon, 06/19/2017 - 11:03 Permalink

BofA: "Has The Fed Become Concerned About The Surge In Stocks?"When an article starts off with a headline asking the readers to answer the author's question, is it worth reading?

khakuda Mon, 06/19/2017 - 12:29 Permalink

Fed is all talk and no action.  If they wanted to prevent a bubble, they wouldn't keep real interest rates negative.  Their actions are causing a bubble.  A couple 25bp increases a year is laughable.

Last of the Mi… Mon, 06/19/2017 - 12:43 Permalink

"The Fed has become concerned about how the surge in stocks LOOKS" There, fixed it for ya. The cat is out of the bag and everyone knows they picked billionaire winners at the expense of 95% of Americans. This is an optic. They're lying shits! The backwardation of a surging stock market and the rest of the economy tanking just looks bad. They did it to themselves.

Blankfuck Mon, 06/19/2017 - 13:01 Permalink

Fed Fucker delight! buy all the fucking dips and party like its 1999! all over again the ponzi creators did it again! With trillions printed off the backs of usa citizens! Fed Fucker delight! Ponzi deight! Banksters delight! CNBC deight!

InnVestuhrr Mon, 06/19/2017 - 17:01 Permalink

Q: Why the abrupt change in FED policy ?A: The deep state has decided that the economy and financial markets MUST crash under Trump's administration.