Yes we are back where we started a few months ago – started the shakiest portion of the internal volatility we have been so rudely introduced to in recent months. We like to remind you that we consider this the end stages of the latest monsters – not the beginning. Don’t sigh in relief too quickly as we should get ready for a little more juice.

With the Fed meeting today, recent action shows the markets have returned to the line in the sand we have often referenced. The battle line between a “gee, that was better than we thought” future and a “I told you it was really the end of the world this time” future.

Both sides have plenty of ammunition.

The bulls can point to record mountains of cash, massive selling from fund holders, more massive buying of bonds, solid jobs and record income, fear trades strongly in place, earnings recession not nearly as poor as written, equity P/E’s a little over a fifth of those of bonds – and much more.

The bears can point to the way outside of normal campaign we are seeing for President, oil still in struggles, bankruptcies likely ahead in the energy sector, a few bonds deals could go “poof” and the all important Fed decision today.

If you though we sliced and diced the wording of Fed statements before, wait til you get a load of this…I would not be surprised to have official clairvoyants involved this time out.


Supposedly, the story tells us, the stronger we get versus the world, the more we are supposed to raise rates. The more we raise rates the worse it gets for us competing with the rest of the world. The worse it gets there, the more our earnings will be pinched. Yes, those same earnings Dr. Ed so kindly recently informed us had hit record highs if you watch the tax statements and filings more than the GAAP v. non-GAAP tricks played all day for the traders.

Best Plan?

First – have a plan. It will keep you far from the maddening crowd of emotional reactions. We would argue that the Fed will very likely prep the market for a little less than 4 hikes (what they started the year with) but more than 1 hike (what the crowd has now magically assumed).

Keep in mind, Janet has a long history of getting more of what markets will perceive than most assume. She is well aware of the sheet of ice too many walk on. She is aware of the itchy HFT traders out there. She gets the algo’s keyed to each word she utters.

But….she also wants the market to do a little of her work for her. Hence, don’t fret over what she (or they) says, watch what they do. She can say all she wants about keeping everyone aware of the potential for more rate hikes. The market will do much of whatever her target is afterward.

Steps Forward

If I had to flip a coin – and ini the short-term by the way, it is much like flipping a coin, I would suggest we prep ourselves for a little bit more volatility. Given the odds are high that she will not clearly lay out a plan of only one rate hike this year – or maybe even none as written about Monday – it will more likely be perceived as trouble.

As such, seeing a few days of setback would not be bad. So far, the effort to sell back from resistance (as we covered as likely last week) has been basically unsuccessful. Sure, there has been some red ink and internals have stunk up the joint – but real points lost on the indices have been mild.

I suspect we could see a few more periods of same – with maybe even more points shaved off from the rally – as a test of endurance. Nerves are still shot so most of the sellers have dissipated. Likely not all though so we can bet there are a few left – ready to leave at any whiff of “trouble” in paradise.

Lesson at Hand

I am still mystified as to why so many will choose a 10-year bond at 1.8% (still miles ahead of our global competitor’s debts) which will go nowhere in value for a decade, over a company like Dupont – earning more than twice that in dividends – with dividend growth of about 7% and over 50 years of increases. On top of that, one will struggle to find a ten-year period where Dupont did not rise in value.

That noted, the fact that it seems so much easier to choose the 10-year bond is a clear sign of how much real, deeply-embedded fear still exists in our markets today. If you ever wonder how afraid, just remind yourself of the $8.2 TRILLION in cash earning nothing – and the trillions more on balance sheets.

As shown in charts earlier this week, our problem is not cash, liquidity or wealth. All of those are at record, all-time highs. Our problem is a monster much more secretly shrouded and far more damaging.

It is defined with terms like “prudence” and “hedging” and “careful” and “safety”….all used to cloak the same menace: f.e.a.r.

So Today….

The Fed meeting and announcement will be one more thing to add to that fear pile. It will be one more thing to make us all stay back on our heels, fearful of a future that is far brighter than understood. We will remain afraid of what we are told is a slowdown but is more of a shift. We will stand in darkness when we should simply realize a baton is being passed.

Much we know of will change. Most for the very positive. Some things will fall by the wayside – like horses and buggies did years ago – or fax machines more recently.

In Summary:

Get ready for another smaller bout of chop – and a few setbacks. Pray they come. I suspect we are in one of those places again where once we beat these latest monsters, it will likely be quite some time before we get more major setbacks to take advantage of.

As stated earlier, the longer you can keep the fear seated front and center for the crowd, the longer the market moves higher in the future.

Consider again the analogy of a lunch stop. The market internals have stunk for many months now. Indeed, one can rightfully argue we have suffered through a stealth bear market with many, many stocks improperly damaged in the short-run, demanding we stay focused on the long-term.

I’ll stop rambling now and like the crowd – wait for Ms. Yellen’s magic words. If we don’t get setbacks – keep in mind that it is most likely a sign that the market has already left these fears behind and is set to slowly march higher, surprising most as it usually does.

As a backdrop, I send along again the charts from earlier notes on net worth and consumer health.

A quick glance above shows us that across all fronts, records are being set – even when allowing for the struggles we consistently fret over.

Further, the second chart shows us that while we got ahead of ourselves in the real estate bubble and then fell back off trend in the mortgage debt collapse, the Per Capita Net Worth chart is right back on the same annual increase trend which has been in place since the 50’s.

Debt is in Pretty Good Shape Too!

As much as we hear about all the troubles facing consumers, debt is not nearly as bad as we have seen before. In the mortgage peak years ago, debt was out of whack as too many got loans they should have never had.

Today, as a % of assets in total, household leverage is back to levels seen in the mid to late 90’s! Further as a percent of monthly income, the cost of servicing that debt is back to levels not seen since the 70’s. So, the next time someone utters those fateful words to you, “It’s never been this bad”, just pause and chuckle. Then look for something to buy,

There is more to ponder…

Extremely low Treasury yields are also a good sign that the market is consumed by pessimism, given that the earnings yield on equities is 5.7%.

Choosing 10-yr Treasuries with a yield of only 1.7% in lieu of equities yielding 400 bps more (and considering further that equities have far more upside potential than bonds at this point) only makes sense if one is convinced that earnings will suffer significantly in the years to come.

So far, earnings are down only a little more than 2% in the past 12 months, and almost all of that is coming from the oil patch.

Put another way, the current P/E ratio of the S&P 500 is about 14.5 without the crappy impact of oil’s “collapse”, whereas the P/E ratio of the 10-yr Treasury is 58!

To pay so much for the presumed safety of Treasuries is to have truly dismal expectations for economic growth and corporate profits.

That’s good by the way…..