S&P 500’s Best Day since October 2013
Posted by Eddy Elfenbein on December 17th, 2014 at 9:26 pm

Thanks to the Fed’s announcement, today was the stock market’s best day in 14 months. The S&P 500 gained 2.04% for its biggest surge since October 10, 2013. This was the second-best day in nearly two years. The gains were led by the energy sector and small-caps.

In short, things that had been doing poorly did very well today. Between yesterday’s low and today’s high, the Russia ETF ($RSX) gained 27%. Oil rose to $55.81, although it nearly hit $59 earlier in the session.

I think the market had a hard time deciding whether today’s news from the Fed was good or bad. Check out today’s action in the five-year Treasury:

Ultimately, the market fell into the “good” camp. Regarding how long it will be before they raise rates, the FOMC removed the words “considerable time” and replaced that with saying “it can be patient.” Despite the new language, Janet Yellen stressed that there’s been no change in policy. The difference is that we’re now further away from the end of QE, so the length of time is no longer considerable although the date remains the same.

I suppose this can be considered a “dovish” statement, but what strikes me is the distance between the Fed and the market on interest rates. The Fed sees rates at 2.5% at the end of 2016 while the market sees rates at 1.5%. Frankly, I’m on the market’s side. For what it’s worth, Yellen also thinks the slide in oil is transitory.

One note on today’s Cuba news: The CUBA Beverage Company ($CUBV) closed 78% higher today on volume that was 513 times normal. It’s an energy drink company that has nothing to do with the island nation. Yet there are people who still believe in efficient markets.

Today’s Fed Statement
Posted by Eddy Elfenbein on December 17th, 2014 at 2:01 pm

In today’s Fed policy statement, the FOMC removed the words “considerable time” in referring to how long it will take to raise interest rates. The FOMC now says “that it can be patient.” The stock market likes the news. The S&P 500 jumped from 1,995 to 2,010 within a few minutes.

Here’s the statement:

Information received since the Federal Open Market Committee met in October suggests that economic activity is expanding at a moderate pace. Labor market conditions improved further, with solid job gains and a lower unemployment rate. On balance, a range of labor market indicators suggests that underutilization of labor resources continues to diminish. Household spending is rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Inflation has continued to run below the Committee’s longer-run objective, partly reflecting declines in energy prices. Market-based measures of inflation compensation have declined somewhat further; survey-based measures of longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators moving toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced. The Committee expects inflation to rise gradually toward 2 percent as the labor market improves further and the transitory effects of lower energy prices and other factors dissipate. The Committee continues to monitor inflation developments closely.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. The Committee sees this guidance as consistent with its previous statement that it likely will be appropriate to maintain the 0 to 1/4 percent target range for the federal funds rate for a considerable time following the end of its asset purchase program in October, especially if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored. However, if incoming information indicates faster progress toward the Committee’s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Stanley Fischer; Loretta J. Mester; Jerome H. Powell; and Daniel K. Tarullo.

Voting against the action were Richard W. Fisher, who believed that, while the Committee should be patient in beginning to normalize monetary policy, improvement in the U.S. economic performance since October has moved forward, further than the majority of the Committee envisions, the date when it will likely be appropriate to increase the federal funds rate; Narayana Kocherlakota, who believed that the Committee’s decision, in the context of ongoing low inflation and falling market-based measures of longer-term inflation expectations, created undue downside risk to the credibility of the 2 percent inflation target; and Charles I. Plosser, who believed that the statement should not stress the importance of the passage of time as a key element of its forward guidance and, given the improvement in economic conditions, should not emphasize the consistency of the current forward guidance with previous statements.

The Fed’s interest rate forecast (the blue dots) remain largely the same. Only two of 17 members see no rate increase next year. The other 15 do. The median forecast sees rates at 1% by the end of next year, and at 2.25% by the end of 2016.

Big Rebound for Energy
Posted by Eddy Elfenbein on December 17th, 2014 at 1:03 pm

It’s too early to call this a trend, but energy is bouncing back today. The S&P 500 is currently up 21 points, or 1.08%. The Energy Sector ETF ($XLE) is up more than 4.5%.

Stocks Rally Ahead of the Fed
Posted by Eddy Elfenbein on December 17th, 2014 at 10:15 am

The stock market did a big about-face yesterday. Stocks opened lower, then rallied, then gave it all back. On Tuesday, the S&P 500 closed at its lowest level since October 27. The yield on the 10-year bond got as low as 2.05%. There seems to be a good chance it could fall below 2%. In the summer of 2012, the 10-year got to 1.43% which I believe is an all-time low. I didn’t think we could ever get that low again. Now I’m not so sure. Yesterday, oil dropped down $53.60 per barrel before closing at $55.51.

Stocks are up again this morning but it seems much more cautious out there. Energy is leading the way while most of the broader market is up on small gains.

The Fed meets later today. I don’t expect much but they will update their projections. Last time, only two of the 17 members said they expect interest rates to rise in 2016, meaning the central bank will hold its powder dry all year. I’ll be curious if more members feel that way now.

Deflation in November
Posted by Eddy Elfenbein on December 17th, 2014 at 9:08 am

This morning, the government reported that consumer prices fell 0.3% last month. The reason, of course, is the big plunge in energy prices.

The core rate, which excludes food and energy prices, comes in for a lot of ribbing but this is one of those times when it’s important. Food and energy prices can be very volatile and they may not reflect what’s really going on with most consumer prices. The core rate of inflation rose by just 0.1% in November.

Morning News: December 17, 2014
Posted by Eddy Elfenbein on December 17th, 2014 at 6:54 am

Irish Lawmakers Open Probe Into Banking Crisis

Slowdown in China Bruises Economy in Latin America

Why Russia Is Destroying Its Own Economy

Gold Trades Above One-Week Low as Investors Weigh Fed to Russia

Bond Investors Are Skittish Over Emerging Markets

Diesel Deregulation, Gas Price to Have Positive Impact on Oil Companies

Fed Likely to Signal Rate Hike on Track Despite Global Woes

Gross Backs Krugman View of Fed on Hold in World of Lowflation

Uber CEO Says Company Wants to Make Rides Safer

Uber Says Only Some Employees Have Access to `God View’

Coolpad Announces Strategic Partnership with Qihoo 360

Oil Firms Supply Fuel to SpiceJet on Cash Payment

Joshua Brown: RIAs Will Take a Third of the Wealth Management Biz by 2018

Joshua Brown: Another Lying Paper Trader

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Express Scripts Reaffirms 2014 Guidance
Posted by Eddy Elfenbein on December 16th, 2014 at 9:30 am

Express Scripts ($ESRX) just released a statement saying their CFO Cathy R. Smith will be leaving soon. The company also reaffirmed their guidance for 2014. ESRX expects full-year EPS of $4.86 to $4.90. This is the same guidance they offered in October. At the time, ESRX narrowed it from the previous guidance of $4.84 to $4.92 per share. That translates to Q4 earnings of $1.36 to $1.40 per share.

The Ruble Crashes
Posted by Eddy Elfenbein on December 16th, 2014 at 8:51 am

Despite the Russian Fed’s dramatic rate increase, the ruble’s fall continues. The Russian currency dropped another 20% today. That’s on top of the huge fall this year. This is getting out of hand. At one point, the ruble was going for 80 on the dollar.

The currency market seems especially concerned about a mysterious bond offering from Rosneft, a major Russian oil company. The company is run by one of Mr. Putin’s old buddies from the KGB.

It’s still not exactly clear what happened, but this is my best estimate. In effect, Rosneft is using the Russian Fed as their personal piggy bank.

What happened is that Rosneft went on a buying binge, snapping up smaller rivals. Now they’re in debt which they can’t rollover due to sanctions. So Rosneft floated a 625 billion ruble bond which was bought by…someone, we’re not sure who. It was most likely some of the major state banks. The banks then deposited the bonds at the CBR in exchange for loans. That’s one large indirect way of the CBR printing rubles and giving them to Rosneft. This news did not go down well.

This is what’s referred to as monetizing debt (printing currency to pay for debts). The hitch is that you’re not really paying anything off; you’re just displacing it. You’re going to pay one way or the other, and this time it was in the form of a much lower currency.

Morning News: December 16, 2014
Posted by Eddy Elfenbein on December 16th, 2014 at 7:36 am

Weak Private Sector Growth Data Pushes Euro Zone Yields to New Lows

3 Banks Fall Short in Bank of England Stress Test

Ruble Continues Its Decline in Russia, Despite Interest Rate Increase

Dubai Stocks Lead Gulf Markets Lower as Oil’s Plunge Deepens

Shale Veteran Takes On Argentina’s $6 Billion Shortfall

When Will Short-Term Interest Rates Rise?

Will Low Oil Prices Affect The U.S. Fed’s Decisions?

U.S. Industrial Output Surpasses Prerecession Peak

Halal Beef Supplier Vows to Contest Fraud Charges

Repsol Agrees to Buy Canada’s Talisman for $8.3 Billion

Riverbed Technology Accepts $3.6 Billion Takeover Bid

Fallout for the S.E.C. and the Justice Dept. From the Insider Trading Ruling

Korean Air Facing Sanctions For Urging Employees to Lie About Nut-Rage Case

Cullen Roche: Can A Central Bank Always Create Inflation?

Jeff Carter: What’s A Position Limit?

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Russia Raises Rates 6.5%
Posted by Eddy Elfenbein on December 15th, 2014 at 10:39 pm

In last Friday’s CWS Market Review, I wrote:

The ruble is looking more like rubble. Russia estimates that inflation will hit 10% next year. The Russian Fed raised interest rates again this week, but the forex market just laughed at them. I don’t blame them. Despite a lot of talk, the Bank of Russia simply isn’t serious about defending the ruble. The BOR raised rates by 1% to 10.5%. Please. If they’re serious, they would have raised rates by 2% or 3%. That’s what needs to be done.

Someone must be listening to me. The Bank of Russia just announced that it’s raising interest rates to 17%. That’s a stunning increase of 6.5%. The increase was announced at 1 a.m. As a rule of thumb, anything done by a central bank in the middle of the night is probably bad news. It’s also probably very important.

Russia is in a classic situation that many countries have faced before. The international currency and bond markets have lost faith in the ruble. Every day it’s been attacked. Until now, Russia has attempted, rather weakly, to defend the indefensible ruble. The defense hasn’t been nearly adequate but they’ve finally taken a tough stand.

These currency wars are characterized by an odd feedback relationship. If the markets have faith in the government, then the crisis ends. If they don’t, the situation worsens and it thereby becomes more difficult for the government to do what needs to be done. It’s not so easy to turn a vicious cycle into a virtuous one. Nearly every government leader since the dawn of time has blamed a currency attack on “speculators,” though I’ll note that these evil speculators have an odd habit on ganging up on currencies that can’t withstand attacks. Funny, that.

Russia is in much better shape than they were in 1998. During the crisis 16 years ago, Russia raised rates to 150%. Make no mistake: The big rate hike is a war on the shorts. Check out the amazing decline in the Russian ETF ($RSX). It’s lost 35% in the last three weeks.