'After You Get What You Want, You Don't Want It'

by: Bill Kort

This 1920 ditty by Irving Berlin is a perfect descriptor of the punditry corps reaction to: Janet Yellin's post-Fed OMC (Open Market Committee) meeting comments last week; European Central Bank (ECB) policy moves the previous week; subsequent wilting of the dollar; rising oil prices and a more-measured, less-volatile tone in the market. The damsel in distress in my title pines on "If I gave you the moon, you'd be tired of it soon." I mean everything that the bears have been complaining about has reversed and been served up on a silver platter with a very broad five-week up market. And they are still worried.

What did the brainless trust have to say?

Questions, questions …

Actually, they probably are not brainless. They are probably reasonably intelligent people, some of whom carry the misguided impression that it is smart to be skeptical of all things "Stock market." You know, healthy skepticism makes you look more intelligent. Or, they may be conditioned by the tenets of their occupation, 'bad news sells'… 'if it bleeds it leads'. Either way, their pronouncements are usually not very enlightening or useful in the investment decision process.

Bill Griffeth, seasoned CNBC veteran anchor, found the dark lining to the silver cloud of Janet Yellin's post-OMC meeting comments, not that there was anything really negative in those comments. His dark cloud was that the market did not react in a more violent/positive way to Ms. Yellin's comments, indicating the potential for maybe only 2 more rate hikes this year as opposed to four (some now speculate only one). To Griffeth, the market's muted reaction to the Fed was worrisome. Of course, it was similar to the reaction to the ECB's moves the week before. The reaction was initially muted, but then the market took off.

Interestingly, this drop in volatility may be signaling a new (maybe improved) phase for the market. After months of frenetic trading on negative news blips, hedge funds and others that practice this mayhem may be getting the message that this does not work. Hedge fund return numbers in the fourth quarter of 2015, would tend to back this up. They were not good (Smart Money Pain).

Then there was Art Cashin, Manager of Floor Operations UBS Financial Services, who was worried about the recent weakness in the greenback, positing that this might take us into a currency war. Mind you, all last year the strong dollar was a huge headwind for the S&P earnings of companies doing business abroad. At its strongest, it took 1.05 dollars to buy a Euro. Now it takes a little over $1.12. Unbelievable! It is a headwind reversed and this guy is painting it as a looming negative.

So, what's wrong with what's gone right?

  • Fed Policy - Based on the last Fed policy statement, it looks like the Fed is NOT going to raise rates four times this year, everyone was scared and obsessed with this scenario back in December. Our post, "Janet, you've really stepped in this time," details the consternation over the first tick up in the Fed Funds rate. "I went to cash today," posted about a week after "Janet,… ," delves further into the sackcloth and ashes, being spread by the pundits. They were beside themselves over what appeared to be nothing. It appears now to be off the table. Critique: Our economy is weaker than we thought. Weak Europe and Asia are running our monetary policy. Inflation risk is on the upturn (which may be desirable). Ergo, gold, which had become a flight-to-safety story, now looks like it could be in the nascent stages of its inflation hedge appeal. In my humble opinion, lower rates/longer works in favor of the market … PERIOD.
  • European Central Bank Policy, routinely criticized for doing 'too little, too late', changed dramatically two weeks ago. Some termed the last announcement a "BAZOOKA." Part of the new pronouncement is that the ECB will pay European Banks to make loans. And, these payments can apply to refinancing up to 30% percent of their current loan book (see, "What did Mr. Draghi say?"). Critique: Too little, too late … Europe will remain a basket case, a continued drag on the world economy. QE doesn't work. My take: Europe is recovering (albeit slowly), despite what the naysayers lament. These moves will hasten it. More importantly, it will keep downward pressure on US interest rates, as European investors will continue to find our Treasuries very attractive (10-year notes at 1.88% vs. 10-year Bunds .213%).
  • The Dollar - All last year it was too strong, killing exports and the earnings of US multinational corporations. Now, after weakening a mere 6% from its recent highs, it is too weak. As a result, according to Cashin above, bad things could happen. Give me a break!
  • Oil prices - On its way to $20 (or lower) a month ago, West Texas Intermediate (WTI) closed this week just a smidgen under $40 per barrel. It was going to $20 because of two misconceptions: 1) world demand was down (especially China) and 2) supplies were growing. Ex. the new oil coming onto the market from Iran. Both appear wrong. World demand was up last year and it is estimated to be up in 2016. In fact, lower prices may have stimulated demand. According to the American Petroleum Institute (API), "Total petroleum deliveries, a measure of consumer demand, rose 2% in February from a year ago levels, to 19.8 million barrels per day. These were the highest deliveries in eight years. Total motor gasoline deliveries rose 5.2% from February 2015 to 9.1 million barrels per day and were the highest deliveries for that month on record." In this clip, Chevron CEO, John Watson, discusses the reasoning behind his expectation that production will be dropping in the face of this increasing demand. Many have laid market weakness at the feet of falling oil and commodity prices, which they equate to weak demand and recessionary pressures. It continues to look to me like oversupply, which in the oil patch, may be in the process of righting itself. Of course, the bear case: this a flash in the pan.

So, let's see. After we give the bears and punditry all they want, they don't want it … they keep finding those dark linings behind every silver cloud … it is not good enough … heads you lose, tails you lose … whatever. The 'wall of worry' is still very much intact and we should profit by that knowledge.

What is your take?

Disclaimer: The information presented in kortsessions.com represents my own opinions and does not contain recommendations for any particular investment or securities. I may, from time to time, mention certain securities for illustrative purpose, names where I personally hold positions. These are not meant to be construed as recommendations to BUY or SELL. All investments and strategies should be undertaken only after careful consideration of suitability based on the risks, tolerance for risk and personal financial situation.