Balance Fuels the Push Higher


Genuine balance in our most recent batch of economic data allowed for markets to pick up where they left off on Wednesday. The DOW, S&P 500 and NASDAQ all gained ground while the 10-year remained unchanged at 2.62%. Weekly jobless claims were significantly better than consensus expectations coming in at 280k versus the 305k that was expected. Importantly, continuing claims dropped even more precipitously down to 2.429 million – in line with lofty expectations. In addition, the Philly Fed manufacturing survey rose to a 3-year high of 21.2.

As if to balance the positives found in the jobless data, housing starts and permits were well below expectations. This could be viewed as a negative or as some would say, “A canary in the coal mine”. I don’t agree. Call me hopelessly positive but I think that the drop in housing starts and permits was healthy pause - particularly after two previous months of gains. I think the markets agreed. In any case multi-family supply has reached pre-crisis levels even if single family homes have continued to languish. Over supply leads to thinner profits and a whole host of other issues for home builders as we know all too well. A modest contraction in supply coming online helps the housing sector maintain equilibrium. The housing sector of the economy is extremely interest rate sensitive and very prone to heightened volatility. Less “vol”  is a healthy data point for the market heading into a QE-less world.

Continuing improvement in labor market conditions and manufacturing expectations were clearly evident in the numbers.  Labor conditions, being the holy grail for Fed normalization should mean that the period between the cessation of QE next month and a shift higher in rates (tightening) should logically be truncated, right? Wrong. On Tuesday Chair Yellen made it clear that any meaningful change in rates is still in the distant future. The operative being the inclusion of “considerable time” in the release. As a result, we find ourselves and markets in a rare time in place where we have artificially low interest rates, an improving economy though the data of late has been uneven, clearly  improving labor market and conditions, and hopes for a healthy Q3 earnings season. The result, another record close for the DJIA.

As I mentioned on Bloomberg Radio with Betty Liu yesterday, I suspect the next directional narrative that markets will lean on will be Q3 earnings set to commence in several weeks.  I have been solidly in the bullish camp for a long time as you know. The paradigm laid out for us remains incontrovertibly positive from an equities perspective.

Look, there are always unexpected themes that crop up to disrupt markets and we are in that season of the unexpected – on the cusp of the conclusion of Q3 and the commencement of Q4. We always have to keep an eye on geo-political threats to stability but that said, those threats have been exceptionally well managed from an equities perspective to date. There have been no small number of market pundits that have  called for the exits for investors as market have climbed the proverbially wall of worry. Save for some minor setbacks over the past several weeks, we have done nothing but build a case for an extension of the cyclical bull market.

The Federal Reserve and Global Interdependence


In a world of globalization and economic interdependence, the dual mandate of the Federal Reserve remains central but also evolving. According to Board of Governors of the Federal Reserve System:

“The Congress established the statutory objectives for monetary policy—maximum employment, stable prices, and moderate long-term interest rates—in the Federal Reserve Act.”

Our economy is influenced by so many forces of a global nature as to make fine tuning those seemingly domestic dual mandates, independent of global influences, nearly unattainable. I think that when most market participants, investors and observers look to interpret Federal Reserve meetings, notes and policy as we will tomorrow, few will focus much attention to include much if any global perspective. Clearly the Federal Reserve’s mandate is limited to domestic concerns but domestic economic concerns rarely evolve or devolve in a vacuum. 

As we all know, our financial crisis  led to the “Great Recession” not only here in the United States but globally. The crisis took on several shapes and morphed into a series of crises around the globe. From the peripheral economic meltdown in the relatively infant Euro Zone to demand destruction in Asia’s export economies. From the worst economic contraction since the great depression in the United states to a housing crisis in both Europe and the United States that was unprecedented. Bank failures proliferated – regardless of national borders. The global banking system was in a state of extreme crisis. It would likely have failed as we knew it had it not been for the unprecedented action taken by the US Federal Reserve and every other central bank around the world.

Unprecedented actions from central bankers around the world ranged from the repeated application of monetary policies meant to effect quantitative easing - flooding the system with liquidity - here in the United States and globally to a series of radical approaches on the part of the ECB in an attempt to contain and combat the potential for a massive multi-nation bankruptcy. A multi-nation bankruptcy that had the potential of bring down the euro Zone. This shift in the level of required central bank coordination at a time of crisis and out of necessity also led to an unprecedented level of global central bank monetary policy implementation coordination to combat it.

The crisis in many ways pushed monetary policy from silos of national/regional self-interest and moats of regional systemic defense to something never seen before – truly global monetary coordination – for the sake of global economic survival. Policy was crafted for the survival for each nation’s independent system but also for the defense of and prevention of a global systemic collapse. That first step towards truly global monetary coordination brought with it a degree of globally shared responsibility that did not exist previously. I believe it informs Fed policy on some level now in the post crisis era.

We see a Federal Reserve Chair that insists on a level of commitment to accommodation that is increasingly becoming untenable for many observers but not in the light of emerging markets that are under duress and an E.U. that is teetering on deflation.  And I suspect that tomorrow’s all important terminology will leave many observers and the street generally disappointed with the lack of hawkish tone. Markets have long become accustomed to accommodation but increasingly many voices are calling for normalization in rates. I not unlike most on the street, I believe we see that rate environment shift at the close Q2, 2015. Some however are calling for that in 2016. In either case rising rates will be impacted not only by our domestic state of health but also by the global economic regime whether it is highlighted in tomorrow’s release or not.

Tomorrow afternoon with the release of the Fed’s minutes you could look for mention of geo-political and global challenges as a reason for further accommodative monetary stance and suggestion of a push back in the rate normalization time horizon. That would fit into the “shared responsibility” silo I mentioned above but it does not fit neatly into the Fed’s dual mandate. In other words, you will likely not see that. Rather, there will be mention of recent economic data for July and August that has been disappointing from retail sales to industrial production to housing. In a nod to our improving employment landscape the unofficial unemployment report will be mentioned but only in the context of there being significantly more to accomplish in hours worked and the labor force participation rate. Inflation is below target of 2% but close enough to provide a positive narrative.

Rough Patch

Monday, September 15, 2014

OK, so we hit a rough patch Friday. No two ways about it. Even recent leaders fell victim to some profit taking. Loses Friday amounted to a distribution day for the S&P 500 and the NASDAQ as we slipped further – away from all-time highs and those bench marks that had become familiar to traders and investors alike in September. 2000 for the S&P and 17,000 for the Dow Industrials. The S&P 500 closed at 1985.56 - off 11.89 points and the Dow industrials gave back 61.30 to close at 16,987.70. To make matters modestly more urgent, volume on the NYSE rose by 9.33%. Away from the three major equity indices that I reference on a daily basis, the S&P 600 also closed lower – losing nearly 1% on the day.

What made Friday’s trading pattern a bit different than what we have seen in most trading sessions for the previous four weeks was that though we started off negative, we were not able to recoup losses by the closing bell. We were negative all day and on elevated volume. Clearly there was some institutional sponsorship in our trade. The S&P closed  at 1985 or just 1% above its 50 day moving average. I would not be at all surprised to see some follow through selling with a test of the 50 DMA at the outset of the week. A test and a fail. However, not a fail that represents long term damage to our trade higher. It is just that there is clearly a lack of any broad and compelling thesis, this morning, for investors to put more capital to work.

Not only do we find markets suddenly vulnerable to some rather important technical stress, it is not easy to find a sector that represents much in the way of discounted value. As I indicated on Thursday and Friday of last week, markets are trading at a slight premium – which is perfectly acceptable but without further stimulus for a momentum trade higher, we will likely languish. A pause would be in character with how markets have behaved for the past three weeks.

Both European and US equity markets logged weekly loses last week. For the S&P 500, last week’s modest decline was the first weekly loss in five.  European markets are largely unchanged at the moment and US futures are currently trading with a slightly negative bias.

With the S&P trading at a P/E of 18, QE wrapping up next month, potential for geopolitically fueled volatility around every corner and a focus on the wording of the Federal Reserve’s approach to normalization in the offing, many would rather keep their powder dry than take any unnecessary risk before Wednesday afternoon. Directional cues will be found in this week’s data. None of that data is more pressing for investors than the FOMC Meeting which commences on Tuesday morning. The FOMC meeting announcement is scheduled for 2:00 PM on Wednesday. Though much of the balance of the data download we get this week’s very important, look for Wednesday afternoon’s announcement to be the focal point for markets and the source of near term directional stimulus for equity markets.

The S&P 500 volatility Index jumped 3.98% on Friday to close with a 13 handle - 13.31.

Today’s Economic Calendar

8:30 AM Empire State Manufacturing Survey

9:15 AM Industrial Production

Strength in energy and financials lend support


Friday, September 12, 2014

Volume and internals were mixed. The broader market indices closed very close to unchanged. If you had not paid attention through the trading session you might have thought we had an uneventful day. In reality, we spent all of the day retracing our early and sharp selloff - higher. We ended up with a hard fought draw by the closing bell.  

As per my note yesterday, the sharp pull back that was registered early came on the back of our second week of disappointing jobs data. On the day the S&P 500 gained 0.1% as did the NASDAQ. The Dow Industrials gave back exactly as much – 0.1%. Volume on the NYSE rose by 0.65% from the previous session while volume on the NASDAQ slipped by 6.4%. It was an unexciting, plodding and consistent trade higher. Our lower opening could well have been the defining trading pattern of the day had it not been for the resurgence of the energy yesterday.

Despite the early morning selloff in the broader market the energy sector powered higher. Some component companies of the S&P 500 energy sector had logged intraday loses in excess of 1% in the early going. By days end however the S&P energy index gained incremental ground (+ 0.1%).

The potential for an oversold rally exists in the oil space specifically in which case we could see further gains triggered in black gold and the energy sector by proxy. If an oversold rally materializes in energy/oil today it will be short lived. It may however act to provide some stabilization to the downdraft in pricing that has rocked the sector and acted as an inhibitor to broader price appreciation in this session of pause.

The S&P 500 also got some support for the reversal higher from the financial sector yesterday - which sprang to life midsession. Regional financials and money center banks caught a bid. Financial money center banks like Bank of America  (BAC) led the charge for the sector by gaining 1.3% on the day.  

Both energy and Financials have acted as a drag on markets since our mid-August punch higher in US equity market pricing. A reversal in fortunes for these two sectors could well lead to support for the market in the event  recent leadership falters as a result of either weaker than expected economic data or stretched valuations.  

We remain locked in a very tight trading range and in a confirmed up trend. The last meaningful follow through day was in mid-August. Since then we have largely been holding onto gains with little fanfare. This lack of trading volume, if it were to continue, can only lead to one thing on the street – headcount reductions.

As I have mentioned recently, markets seemed to be priced to perfection. The S&P 500’s P/E ratio stands at 18.01 and the year to date gain is a healthy 9.65%. In both cases, valuations and performance are ahead of the DOW which boasts a P/E of 15.58 and YTD performance of + 4.62%.

Asian and European markets are net positive. Much of the focus in European markets has been on the Scottish “Yes” vote. If in fact Scotland does votes to secede, the British pound is expected to trade substantially lower. As of this morning, the “No” vote has the edge.

Economic Calendar:


Retail Sales: 8:30 AM

Import Export Prices: 8:30 AM

Consumer Sentiment: 9:55 AM

Business Inventories: 10:00 AM


“Cynicism is what passes for insight among the mediocre.” – Joe Klein

On the Eve of September 11 - My Story

September 10, 2014

We all can recount with vivid detail and deep sadness the horror of September 11, 2001. All of us have our own personal “JFK” moment when it comes to the terror attack that altered much of the American psyche. That moment in our lives when we came face to face with this horrific event. I have written thousands of morning notes and market updates but I have never told this story. My story.

This morning, on the anniversary eve of that September 11th I could not help but mentally slip back to that time and place that changed the course of history. The cool air. The clean bright morning sun light and clean blue sky. Early autumn at its most pristine.

As a young boy I distinctly remember my father taking me to work in New York City. I was wearing my school uniform – penny loafers, navy blazer, grey cuffed slacks, white shirt and maroon/navy diagonally striped tie. On my chest pocket was the insignia of the school I attended along with my eleven brother and sisters. The School of The Holy Child. Dad’s confidence and sure footed walk to the NYSE gave me comfort and a sense of pride. His large hand held mine as I walked briskly to keep pace with him. Shortly after debarking from the ferry that carried us from Hoboken, New Jersey to lower Manhattan I looked to my right. What I saw has remained with me to this day in my 56th year. The largest hole in the ground I had ever seen. It appeared as though a big bomb had been dropped on the earth from outer space. It was DEEP and WIDE. Several city blocks wide in fact. I asked my father what it was. “Son, the World Trade Center is being built on that spot.” I then asked him where all that dirt was going to go. “Son that earth is being moved to build Battery Park.” That was my introduction to that iconic structure. Years later, after the World Trade Center was completed, it became a very familiar part of my daily life. My first job out of college as a runner on Wall Street took me through the mall and subway stations that were housed on its first floor - daily. As a newlywed, my wife and I lived in its shadow – in that very Battery Park that was built with earth that was moved to make way for the first World Trade Center. When we moved to the suburbs, I walked through it every day on my way to work at the New York Stock Exchange. I shopped in it, commuted through it, dined in it and entertained in it.  

On that morning in 2001 I was in Ireland on a golf trip with seven business partners and associates. Some members of this troupe were exchange governors. Some were specialists. Some ran the largest firms that populated the world of finance and all were members of the New York Stock Exchange. In several cases very critical members for their roles in making markets in Dow Jones Industrial and S&P 500 listing. That day in the early morning we had played Parkland. All was well. Playing golf in Ireland in the early autumn with dear friends. How could things not be well? Little did we know that everything was about to change. Everything. We were oblivious to what was about to occur in our beloved New York City. The horror. Everything changed as dramatically as conceivable when we pulled up to the club house at Tralee. No sooner than we had walked into the facilities, the first plane hit. The laughter stopped. The vision before us was literally unbelievable. We were all speechless. Others that were there at the club house were urgently trying to call home. It seemed as though everyone was trying to call the United States. Virtually no one could get through. We were all completely stunned, panicked and helpless. We did not know what to do. We couldn’t even talk. All of us wanted desperately to be home with our families. Then the second plane hit – live on television. We went from being panicked to being completely emotionally overwhelmed. With few exceptions, these captains of industry were quietly weeping. Each man was alone in his own world. Alone, terrified and introspective.

Then the towers fell.

Our questions about what was going on in New York were too numerous to count. Television coverage provided us with the only information we could use to make decisions about next steps. How do we get back? Were our families safe? As a group our terror and extreme fear of the future turned to action. All air traffic in the western world was grounded. Markets were closed. We knew we had to get back to our families and the United States but we did not know how that could be accomplished. Somehow, some way we simply had to get back as immediately as possible. Within the next 24 hours we heard from the CEO and Chairman of the NYSE, Dick Grasso. He told us we had to return immediately and that the NYSE and US markets had to open on Monday. It was a question of national security and global financial stability. He assured us that he would do what he could to facilitate our return. With Dick’s help we were able to charter a jet that we had located in Dusseldorf, Germany to pick us up in Amsterdam. It took us several days just to get to Amsterdam from Dublin. Once there we immediately boarded the small private jet that had arrived for us. Our journey across the  Atlantic seemed to take forever. We stopped in Iceland to refuel and had our passports checked. We stopped again in Gander, Newfoundland for fuel a thorough security briefing and another security check. On the ground in Gander there were six F-16s with their cockpits open, red lights flashing and engines on. We all knew we were heading into a new world order. We lifted off the ground in Gander with our next scheduled stop being Newark, New Jersey. The flight was short but lasted an eternity. As we approached Newark International Airport, one thing was clear. We were the only jet in the sky – in one of the busiest air traffic corridors on the planet.  We flew past New York City and saw the WTC site in flames and smoke. That seven acre smoldering tract of land was the center of the universe. Lives lost, families destroyed, city blocks gone. We were all emotional. Every one of us was so grateful to be back in the United States. We were grateful but angry. Why? Who? We knew we would get answer at some point but one thing was undeniable for all of us. The world as we knew it had changed.

The next morning we all got to the exchange independently of one another after multiple security checks. We walked past military snipers that lined roof tops, military check points and German shepherds on the street, and through the stench of the rubble. Stench that was thoroughly unfamiliar. Thousands had died in terror. Steel was bent in every direction but largely facing down. Smoke was in every breath and utter fear filled the air. Over the previous night, Dick Grasso had the NYSE hosed down by fire trucks to remove the 6-8 inches of soot and debris that covered every surface of downtown NYC. He also had spot lights on the iconic façade of the Greek style structure and American flags everywhere. It was as if to say to the world that the American free enterprise system would not bend to terror. Our markets would open on time and we would continue to be the financial leader of the world in the face of devastating tragedy. Hearing the opening bell of the New York Stock Exchange that morning was unlike anything I have ever felt. I am tearing up just writing about it. The trading floor was packed. CEO Dick Grasso, Mayor Rudy Giuliani and Senator Chuck Schumer were among those on the podium. We stood shoulder to shoulder in silence at 9:30 for five minutes of silent prayer. There was not a dry eye among those assembled. The opening bell was rung in the members podium and markets rallied.

 We had all lost family members, friends, partners, associates and strangers. There were no strangers that morning and there have been none since among those gathered. For months, Wall Street neighborhood houses of worship were packed.  

It has been 13 years. Every aspect of daily life in America has been affected. The Patriot Act, Homeland Security, and countless other governmental organizations have sprung to life. Security has become the overriding concern of virtually every organization globally. Wars have been fought, hundreds of thousands of lives have been lost, trillions of dollars have been spent. The houses of worship in and around Wall Street are sparsely populated again – as they were before that September morning 13 years ago and Wall street is a shadow of its once dominant self.