Morning Report: FOMC day 12/16/15

Stocks are up this morning ahead of the FOMC meeting. The decision should be released around 2:00 EST. Given that this was the most telegraphed rate hike in history, I don’t necessarily expect a lot of volatility around the decision, however the language in the statement could always spook the markets. The consensus seems to be a hike of 25 basis points and very dovish language.

Housing starts increased to 1,173 million last month and building permits increased to 1,29 million. The increase in housing starts was in both single-fam and multi-fam, while the increase in permits was mainly in multi-fam. We still continue to under-build which is just creating more pent-up demand. We are in the seasonally slow period for housing, so I wouldn’t read too much into these numbers.

Mortgage Applications fell 1.1% last week as purchases fell 2,8% and refis rose 1.4%.

The strong dollar is still wreaking havoc on the manufacturing sector. Industrial Production fell 0.6% last month and capacity utilization fell to 77% from 77.5%. Manufacturing Production was flat.

As the Fed begins to remove support from the market, stock market strategists are wondering what will happen to the stock market. Are current market levels a function of the Fed’s stimulus programs or are they supported by earnings and economic fundamentals? I can’t see a gradual tightening cycle collapsing the market, but it will mean that further increases in the market will have to be driven by earnings and economics and you can’t expect to see further multiple expansion. Dividends will become much more important. Here is a chart of the S&P 500 versus the Fed Funds rate over the past 45 years:

Interest rate cycles are long. The bull market in Treasuries started in 1982 or so is probably over, unless the economy rolls over again. The previous bear market in Treasuries ran from the mid-50s through the early 80s.

Note that the other central banks (especially Japan and Sweden) have tried to get off the zero bound, only to see rates fall back to 0% again. If that happens, then what? The Fed would have to raise its inflation target.

The story of Marty Whitman’s Third Avenue downfall. A value investor who simply didn’t fit with the current momentum-investor world. The current liquidity crunch in junk bonds is being attributed to Third Avenue’s Focused Credit Fund, which just put up gates preventing investor withdrawals. Daily liquidity, they promised.

20 Responses

  1. Fristfristfristfristfrist!

    I was listening to Morning Edition yesterday and the reporter’s, er, illuminating comment was something along the lines of “More times than not a problem in the junk bond market doesn’t spread to a problem with the rest of the market. But you never know what will happen.”

    And he gets paid for that. Whatever they’re paying you, Brent, it’s not enough.

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  2. What do you think?

    Whenever the Federal Reserve does start raising rates — whether on Wednesday, as seems likely, or sometime next year — the biggest question will be whether the Fed eventually ends up back where it started—at zero.

    That, after all, is what has happened to every other country that has tried to “lift off” from what economists call “the zero lower bound.” The simple story is that central bankers, who pride themselves on choosing the hard right over the easy inflationary wrong, tend to look for any excuse to end zero interest rates, even if they have to invent one. But raising rates before the economy is ready means you will have to cut them back down to zero in rather short order — which has been the case in Europe, Japan, Sweden and Israel. And it might happen here, considering the Fed looks like it’s going to start increasing interest rates even though inflation is far below its 2 percent target and isn’t really rising.

    From today’s Wonkblog

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  3. netflix has a promo out of house of cards. it’s a campaing ad for Frank Underwood. #FU2016

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  4. That’s even scarier than Sen Cruz or Mr Trump!

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  5. Here’s what I don’t understand, how did Bushco lose the ability to fix elections?

    Do our ATiMers agree that the 2004 election was fraudulent?

    http://dailycaller.com/2015/12/15/john-kerry-thinks-bush-rigged-the-2004-election/

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  6. What do you think?

    Recoveries after asset bubbles are usually protracted, with a bathtub-shaped recovery as opposed to a V-shaped recovery. These are simply different animals and often follow a 2 steps forward, 1 step back pattern.

    If we have another recession then yes, all bets are off and we could end up right back at zero. The dot graph from the FOMC meeting today showed that the FOMC took down their Fed Funds forecasts for 2016 and 2017.

    I don’t really see another recession imminent, but as Warren Buffet says: “It is only when the tide goes out that you find out who has been swimming naked” I doubt someone blows up from a slow, steady rate hike regime, but you never know. I do know that pension funds and insurance companies have been in trouble with low rates and are taking stupid risks to meet their return targets..

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  7. @mcwing: “Here’s what I don’t understand, how did Bushco lose the ability to fix elections?”

    Cuz they never had it.

    “Do our ATiMers agree that the 2004 election was fraudulent?”

    The only evidence of any fraud in the 2004 election is that Kerry wasn’t trounced Mondale-style. Also, he who smelt it dealt it and all that.

    Bushco lost the ability to win elections when they ran Jeb, and it turns out Jeb is a milquetoast me-too politician with his foot so deep in his mouth his instep is in his throat.

    The guy is a terrible political candidate. Makes Christie look Reagan-esque by comparison. I don’t think there is a candidate on the Republican side that can do as much as Jeb! has done to concern/piss-off conservatives and liberals simultaneously, sometimes in the same sentence.

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    • KW:

      it turns out Jeb is a milquetoast me-too politician with his foot so deep in his mouth his instep is in his throat.

      The guy is a terrible political candidate.

      When W was prez I remember hearing over and over from liberals about how the “wrong” Bush got elected and how Jeb was so much smarter and more acceptable.

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      • He had us all fooled

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      • The right Republican is always the one that didn’t run and/or win the election. 😉

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        • KW:

          The right Republican is always the one that didn’t run and/or win the election.

          Or the one that is dead.

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      • You know, they get confused when they are dead. I see liberals, sometimes the same liberals, lament the bygone halcyon days of Reagan when it comes to citing how Reagan raised some taxes or used to work with Tip O’Neil to move legislation forward, and then at some other time characterize Reagan as a senile, doddering, budget-busting criminal mastermind (which involves it’s own cognitive dissonance).

        I’m sure you’re familiar with the stories of certain folks who kept bottles of champagne on hand to celebrate Reagan’s death. And then did so! Yet I think it was less policy or “scandal” than Reagan’s immense popularity and general charisma that made them that angry, and prompted them to hold on to it. When the opposing team has the star quarterback that everybody loves, you hate that guy extra. Beyond your normal hate for the opposing team.

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  8. … President Trump. I just like saying it. It sounds so interesting. And so very, very entertaining. Crossing my fingers.

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  9. I don’t think there is a candidate on the Republican side that can do as much as Jeb! has done to concern/piss-off conservatives and liberals simultaneously, sometimes in the same sentence.

    Kasich.

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    • I don’t think Kasich is as clumsy and poor-performing as Jeb! Perhaps if he had been considered the front-runner before polls started being taken . . . but even when he takes some of his “I’m the moderate” choice stands, he at least sounds serious and calm. Jeb! just comes off, to me, as whiny and petulant.

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  10. Re-post: I enabled comment threading, to see if replies would then be threaded, rather than simply appearing right under the comment they are a reply to (which happens when people reply from the dashboard now, apparently). That seems to be the case. Originally, we vetoed comment threading because of this, but if WordPress is now doing its own half-assed version of this, anyway, I’m not sure I see a good reason not to turn it on.

    Like

    • KW:

      but if WordPress is now doing its own half-assed version of this, anyway, I’m not sure I see a good reason not to turn it on.

      Agreed. Since I read all the comments in the dashboard, and they show up in chronological order even regardless of which post they are on, it doesn’t really matter to me anyway.

      Like

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