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Morning Commentary

Irrational Exuberance Part II

By Charles Payne, CEO & Principal Analyst
4/6/2017 9:42 AM
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The market came out the gate like a thoroughbred on Wednesday, the Dow galloping to a 198-point gain on the strength of the ADP jobs report. 

The rally was strong enough to power through a reversal in crude oil after the inventory report and it was strong enough to power through a disappointing Institute for Supply Management (ISM) Service report.

This rally ran into a brick wall. It began to crumble after the Federal Reserve Minutes suggested a more aggressive action to begin to undo emergency accommodation that took the Fed balance sheet to $4.5 trillion from $869.0 billion on August 8, 2007.  The minutes also threw cold water on the stock market rally by suggesting that the bond market has it right (not moving) on the Trump economic agenda, which is not happening this year.  The Federal Open Market Committee (FOMC)’s bottom line includes that:

Nominal Treasury yields increased over the intermeeting period, particularly for shorter maturities. Treasury yields reacted only modestly over most of the period to domestic economic data releases that were reportedly seen as a little stronger than expected on balance. Yields on longer-dated Treasury securities rose late in the period following comments by Federal Reserve officials. Measures of inflation compensation based on Treasury Inflation-Protected Securities were little changed, on net, since the February FOMC meeting.

Broad U.S. equity price indexes increased over the intermeeting period, and some measures of valuations, such as price-to-earnings ratios, rose further above historical norms. A standard measure of the equity risk premium edged lower, declining into the lower quartile of its historical distribution of the previous three decades. Stock prices rose across most industries, and equity prices for financial firms outperformed broader indexes. Meanwhile, spreads of yields on bonds issued by nonfinancial corporations over those on comparable-maturity Treasury securities were little changed.

-FOMC meeting, March 2017

Of course, this all harkens back to those infamous “irrational exuberance” comments by Alan Greenspan in 2006 that temporarily sent the market reeling. Greenspan missed calling the top by more than three years.

I think the Fed made a big mistake yesterday, but it might have been more nefarious than an overzealous need to protect the public from a mean old stock market rally. Last night, on my show, I spoke with Danielle Dimartino Booth, author of the new book Fed Up: An Insider’s Take on Why the Federal Reserve is Bad for America, and she told me the move was political.

I asked if this would have happened under a President Hillary Clinton administration, and her answer was “no.”

For many, the Creature from Jekyll Island is the ultimate power source for a one-world globalist looking to preserve power and wealth for a handful of families. It will be interesting to see how long the market will remain unnerved by yesterday. The Dow suffered a 250 intra-day reversal to the downside.

The market was prepared for two (even three) more rate hikes, but it wasn’t prepared for the Fed to start getting rid of assets in 2017.  (Most keen observers still think 2018 is the earliest that the Fed will dare to reduce its balance sheet.)

The Fed claims they will allow bonds to roll off and not sell securities. Moreover, the FOMC says it would warn markets “well in advance” of reducing the balance sheet.

However, what spooked the market most is the revelation that once the Fed begins to reduce assets, it’s not going to stop – even in a recession.

In addition to the Fed’s nonsense, there is more anxiety about America’s role in Syria and the relationship with Russia after that horrific chemical attack on Tuesday.  

The Fed isn’t modeling for any positive economic impact from the Trump administration, and it clearly thinks the market is making a mistake. The biggest mistake, however, is the Fed’s myopic focus on markets that are self-correcting. Plus, they’re wrong – about everything.

Geopolitics Make A Comeback

UN Ambassador Nikki Haley suggested that America may take action without the UN and President Trump made this ominous statement:  

“My attitude toward Syria and Assad has changed very much, what happened yesterday is unacceptable to me.”

President Trump met with Xi Jinping yesterday; with North Korea looming large, the White House will have to make major decisions on whether or not to push back on the world’s belligerent actors, and perhaps without help from allies.

Today’s Session

Not a lot of market-moving data out this morning, but the initial jobless claims plunged by 25,000 and is in an area last seen in the late 1970s - backdrop for outsized wage improvements.

United States Initial Jobless Claims

Solid earnings from Constellation Brands (STZ) and L Brands (LB) is sending those shares much higher at the start of trading.

It is so ironic that the Fed removing all the excess is not balanced with reality. By Trump's fiscal policy of reducing regulations and taxes, the velocity will turn up and if excess reserves are not removed, we would surely have runaway inflation. However, again looking at the world through Keynesian filters gives no credit for fiscal policy affecting velocity so again they only see the negative. This is why it is highly likely that we will remain on the edge of deflation despite moving into possibly the greatest recovery in velocity of money in recorded history. It's hard not to be Eeyore (woe is me) in Winnie the Pooh with these elitist morons controlling the levers. They have crashed our economy and magnified our problems in the past. In Auugust of 1999 Larry Kudlow was warning of the money supply collapsing causing a crash and I ignored him to my own huge loss. That is when some of the pieces of the puzzle connecting the money supply and velocity really came together for me. Is there anyone out there that can educate these people???

Ray Weldon on 4/6/2017 9:59:38 AM
Thanks for you reports they are great filled with much knowledge from a guy who knows is business, keep it coming.
Great work !!

Robert Parson on 4/6/2017 10:04:59 AM
Thanks for your analysis, Charles!

What is your take on AMD, which is down big today on a downgrade? I assume you are still optimistic about it, since the downgrade doesn't change your analysis. However, the breakdown through the 50 day MA is concerning technically.

BTW, Alan Greenspan's "irrational exuberance" comment was in 1996, not 2006. My how time flies...

Rich Baker on 4/6/2017 10:46:21 AM

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