Janet, You've Really Stepped In It This Time!

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Includes: DIA, QQQ, SPY
by: Bill Kort

That was the word from a trio of experts (?) Friday on CNBC's Closing Bell. The 'three wise men' were: Guy Adami trader, Art Cashin, Manager of Floor Operations for UBS and CNBC bond maven, Rick Santelli. To a man, they were blaming the current market swoon on the Fed's move to raise the the Fed Funds rate one quarter point.

This is absolutely ridiculous in light of the fact that the markets seem to be marching in lock-step to the decline in the price of crude oil, a decline that not based on a recessionary drop in world-wide demand, but rather on a Saudi, supply-induced glut…a glut that benefits everyone but the producers. But, I digress.

Back to Janet and the Fed stepping in it

Janet, oops!

What a quarter point increase in the Fed Fund rate (equating to a quarter point increase in the prime rate) has to do with the most recent decline is baffling. It adds only a tiny amount to borrowing costs. Even if they raised it a full point, it would only add $10 to the annual cost of borrowing $1000. This will not stop people or businesses from borrowing. If a business project wouldn't fly under this type of increase, chances are it would not be economically viable anyway. If you are borrowing $20,000 to buy a new car, it is an extra $200 per year ($17). Again, they only bumped it a quarter point. The consistent Fed mantra has been future increases will be data dependent. If things turn down in the economy, future increases will be put on hold.

Meanwhile, because of the abject terror this tiny rate increase has created, a direct result of irresponsible media hype, actual longer-term rates have declined. You know, these are the rates that determine consumer mortgage rates and the long-term, borrowing costs of corporations and the Federal Government. In December, when the Fed Funds rate was increased, the yield on the 10-year treasury jumped to 2.36%.

Although the yield jumped, it was still well below the level it attained when it was the tapering of Quantitative Easing that was announced. That was 3.00% in December of 2013. Friday January, 15, 2015, the 10-year closed at 2.0365% (at one point during the day the yield was under 2%) … defying the continual, conventional wisdom that rates would spike, killing the economy. It just has not happened.

Not only did Janet step in it, but December retail sales were awful!

Not a pretty picture.

It is unbelievable how the media refuses to give perspective in their reporting of financial data. For example, December retail sales were reported down 0.1%, pretty much as expected. Now the spin was that this was more bad news, a sign of a weakening economy. Of course, nobody bothered to point out that year-over-year (YOY-Dec '14 vs. Dec. '15) were up 2.2%. You also did not hear much about the fact that Christmas 2015 (Oct-Nov-Dec) sales were up 1.8% vs 4Q2014. Oh yeah, I forgot to mention the tremendous supply-glut-induced drop in gasoline prices, plus continual declines in consumer electronic prices. In both cases, units were up: but to the benefit of consumers, prices were down more. Here is the government report for your perusal.

Oh, I forgot, China also got pummeled on Friday.

Shanghai was down 3.5%. We have addressed China in numerous kortsession posts. Our view is that China is in a government-mandated economic slowdown and a strategic shift away from being an export driven economy to greater consumer orientation. A transition of this nature is bound to have its pitfalls. I believe China makes it. But, even in a worse case, the blowback to our economy would be relatively small. See the 'Back to China' section of the 'The Market's Gonna Do what The Market's Gonna Do'.

The Takeaways

All of the reporting on and media reaction to Friday's market melt-down was made in a vacuum, without context or perspective.

  • They failed to mention oil demand was growing and gave the impression that world economic weakness was to blame, more than the Saudi's flooding the market to punish their enemies and suppress US shale oil production. I saw nothing about the tremendous positive that inures to the rest of the world that consumes oil on a net basis … China being one of those countries.
  • They exaggerated the effect of a tiny increase in rates without pointing out the positive (and unexpected) effect this rate hike has on longer-term rates.
  • The focused attention on one month of negative retail sales without going into the causes - lower gasoline prices, lower (tech-driven) electronic prices. Most importantly, they really failed to state that the Christmas (4th) quarter sales were positive, even in the face of a sharp, YOY decline in gasoline retail store sales (19%).
  • All of the above, pretty unconscionable I think!

But, Janet, you really stepped in it this time! GIMME A BREAK!

What's your take?

P.S. If we open up in a real panic Tuesday morning, it might be a real indication that the worst of this correction may be in the rear view mirror.