“I love the smell of napalm in the morning” … Robert Duvall as gung-ho, Lt. Colonel Kilgore in Francis Ford Coppola’s classic Vietnam film, “Apocalypse Now.“
In Kilgore’s case it was the “smell of victory” … not so for the market. Since Monday, Oct. 8, it was napalm morning, noon and night for US equities, burning investors and incinerating portfolios. Panic set in bolstered by computer-generated algorithmic trading (if certain pre-determined trigger-points are hit the computer says ‘sell‘ — forget the fundamentals –it sells). I believe we saw that Wednesday and Thursday, coupled with natural (human/institutional investors) sellers. As a proxy for fear the VIX fear index (VIX-CBOE Volatility index), closed Thursday (11/11) at 24.98, more than doubling since October 3. Of course, the media was there to stoke the flames.
The downward spiral in equity prices emanated from a much-anticipated quarter point bump in the Federal Funds rate and comments from Fed chair, Jerome Powell, that the US economy was no longer in need of monetary support from the from the central bank and that we needed to get rates back to a more normal level (away from the life support levels created during the financial crisis). On that news the 10-year US treasury note ticked up 25 basis points to a new 5-year high of 3.26%. The previous high occurred in 2013 on the beginning of the taper of Quantitative Easing (QE). In 2013, as is in the present case, the pundits and media were screaming that this was the end of the US economy and market … never happened. FYI, the 10-year closed Thursday at 3.15%, up 15 bps from the 2013 peak … BIG DEAL.
Jim Cramer warns the Fed and fudges on history
Speaking of the media, on October 10, Jim Cramer of Mad Money fame, took his viewers on a stroll down memory lane recalling his warning rant to the Fed in August 2007. In the video link (warning rant) Cramer goes off on the Fed for about a four point increase in the Fed funds rate (1% to 5%, May ’04 to June ’07). Cramer was apoplectic, and rightly so, but he had no idea how right he was to be that way as he continued to recommend purchase of Bear Stearns almost to the day in March 2008, when in financial shambles, it was taken over by J.P. Morgan at $10/share. The stock was $93 in late February 2008. Cramer’s rant presaged armageddon, but his adherence to Bear Stearns seemed to indicate that his rant was more for effect and that he had no clue as to what was coming. Then again, most in the industry had no idea what was coming as a result of the housing bubble, proliferation of derivatives and mortgage-backed securities (backed by no more than thin air). Yours truly was among the clueless.
His new take (Mad Money -10/10/2018). is that the Fed could be taking us down the same path as they did in 2007, raising rates too abruptly with potentially a similar, but not as severe result. Give me a break! Remember between 2004 and 2007 the Fed moved the rates up four percentage points in a 3 year period. The current Fed has moved Fed funds up two percentage points over the past five years. The Fed has been the soul of moderation and data-dependence. Secondly, and most importantly, the ’07 experience pulled back the curtain on the huge world-wide structural problem, the housing bubble, that would have eventually burst, maybe with even more dire consequences if allowed to fester longer. The Fed may have been complicit in expanding the bubble, but the higher rates of ’07 were not the cause of a crisis that never could have been worked off in a prolonged period of low rates. Cramer referencing 2007, whether done intentionally to create fear to generate audience (or not), was like throwing more gasoline on our current market melt-down.
Yields retreat … on to obsessing on US/China trade relations and earnings
By noon October 11, the yield on the 10-year Treasury had retreated to 3.14%, down 12 bps from its Monday high. This looked like a flight to safety after the precipitous drop in stocks we’d seen during the week. The media moved on from worrying about rates, as they had stopped going up, and began to focus on earnings and the earnings season potentially being disappointing. The reason was that several companies, including 3M Corporation, had reported disappointing results or given muted guidance. Another negative that took center stage was our continuing trade issues with China, which had clobbered their market. This appeared to be dispelled by the announcement from the White House that Presidents Trump and Xi were examining the potential to meet during the November G20 meetings in Argentina. This sparked a significant rally off the lows set on Thursday.
My Guess is that we could have closed on the plus side Thursday had President Trump not initiated a series of media attacks on the Fed and Chairman Powell’s interest rate policies. My guess is if the president were to stop his trade and foreign policy rhetoric, attacks on the Fed and get off Twitter the market would be a lot higher and potentially heading even higher.
T.G.I.F.
They can’t hurt us anymore this week.
On Friday equity markets finally regained their footing with the Dow, S&P and Nasdaq up 1.15%, 1.42% and 2.29% respectively. The 10-year closed the week yielding 3.17%. As I have said before, corrections are very painful, scary and normal. I hate to see the value of my assets marked down by the market, especially in the violent, emotional manner of the last few days. We may have further to go in this downturn. I still believe this to be a correction in a secular bull market. We have lived to fight another day.
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