What a week to be away on vacation. I’m not a huge fan of vacations, but it was an amazing trip. I wish I could have chimed in more. Although, it seems that with the sharp declines and vulnerable nature of the market after key support finally collapsed, options were limited. Some shorts and ETF short hedges would have helped to mitigate the pain. The fact of the matter is that the wild swings experienced last week can trigger stops for long and short positions.

The disconnection by the numbers:

There are so many numbers to churn and consider when trying to understand the depth of the sell-off, and to measure risk - the total stock market capitalization of $6.72 trillion in the Wilshire 5000 since late September.

For all the hand-wringing about the impact of tariffs, the fact is corporate profits are at levels never seen before; more than likely, we could be looking at another record quarter.

• $4.1 trillion in corporate profits (2Q & 3Q)
• $11.0 billion tariffs collected through early December

US Quarterly corporate profits

State of the Economy & Future Rate Hikes

Consumer spending increased at a faster rate than income and key inflation data used by the Fed, Personal Consumption Expenditures (PCE), edged up slightly, but is still manageable. Meanwhile, there are continued signs of caution from corporate America as non-defense capital goods Ex-aircrafts slumped -0.6%. 

Consumers are carrying the load, even lifting the Michigan Sentiment reading above consensus with only 12% of respondents mentioning the recent stock market swoon. People are still pumped about their jobs and higher wages.

Phony Fed

John Williams, head of the New York Fed, went on national TV Friday in a half-hearted attempt to quell the panic. It didn’t work.

Of course, consumers aren’t alone in ignoring the stock market. The Federal Reserve is sticking with a game plan that completely ignores the plunge in household wealth. What’s so remarkable about all of this is the Fed used the notion of triggering a so-called virtuous cycle of optimism and opportunity by lowering rates to zero and then implementing a myriad of never-seen-before actions.

Back then, the Fed wanted the stock market to rally and for home prices to rebound. Now, with both under duress, it’s no big deal. This Cool Hand Luke approach to communicating with the public has been a disaster. One has to wonder when the Fed gets worried or feels it might be important to speak plainly to the public.

President Trump and the investing public should be upset because it’s not the level of rates, but the rapid increases and determination to continue. The numbers speak for themselves:

• 9 rate hikes since Trump was elected
• 126 months without a rate hike before Dec 2015

Banks Sinking

The sector has been the biggest disappointment of 2018, and things are only getting worse for big banks. Something isn’t right. I’m looking into Collateralized Loan Obligations (CLOs) and other instruments that could be the latest ticking time bomb the industry has created. Yesterday, Steven Mnuchin met with the heads of big banks, and released a statement on their soundness; the meeting itself seems odd, especially against 2018’s performance:

• Bank of America (BAC) -20.8%
• Citigroup (C) -32.5%
• Goldman Sachs (GS) -37.2%
• JPMorgan Chase & Co (JPM) -37.2%
• Morgan Stanley (MS) -28.2%

Regional banks haven’t fared much better. Last week, no exchange-traded fund (ETF) absorbed the loss of the KRE Regional Banking Index.  Assets under management declined 13.2%.

Shutdown

When I was in Europe, I checked the headlines, and I was surprised to see financial headline writers talk about the impact of the government shutdown of the market. I don’t think there is any correlation other than more headlines that make everything a would-be Constitutional crisis.

General Mattis was in the job longer than three Secretaries of Defense under President Obama, who also fired Mattis. All the noise is deafening, and we must respect the plunge, but we also must live for these periods. This is when you have opportunities that can deliver outside gains.

Merry Christmas, and God Bless

Portfolio Approach

I have a lot of work to go through positions in the model portfolio and single out opportunities. I have asked for everyone to have more cash than usual. If you don’t, contact your rep or research@wstreet.com.

Communication Services	Consumer Discretionary	Consumer Staples
2	2	1
Industrials	Materials	Real Estate
3	4	0
Energy	Financials	Health Care
1	1	1
Technology	Utilities	Cash
1	0	4

Today’s session

Futures have been trading in a wide range this morning.  Dow futures were down close to 230 points overnight but have since cut their losses, although they are still indicated to open lower.  Markets will be thin today, lets see if Santa can pay a visit to Wall Street.  A “Santa Claus rally” would be a rally covering the last five trading days of the year and the first two of the new year. 

  

Comments

Thank you again for your commentary. Donald L Johnson on 12/24/2018 10:24:36 AM

It is telling that even my most defensive DUK is selling off. Joe McGee on 12/24/2018 10:47:08 AM

What's going on in the markets smacks of something truly odious - perhaps even illegal. There are forces controlling the market for the gain of a very few - The rest of us are pasties in their schemes. What do I see? Dems don't give a damn about the middle class, obviously neither does the Fed. If anything, they may have found the weapon that will eventually wreck industry. Then they can blame Trump, defeat him in 2020 and orchestrate a socialist government takeover with the oligarchs like Soros, Bezos, Buffet, et. al. controlling all life in America and further enriching themselves. So, let me say it while I still can: Merry Christmas to you and yours and I wish you all God's blessings in 2019. Francine Paino on 12/24/2018 11:09:34 AM

Couldn't agree with Francine more. The President should fire the Fed Chair today. David G Howley on 12/24/2018 1:37:47 PM

The disconnect between the stock market and the american economy may be due to the outward facing connections of the stock market with the rest of the world... America is the only free market capitalist game in town... So even if America does well, it is not enough to bolster the entire global market for the stock market to improve at the same pace... Andrew B Newallo on 12/24/2018 3:50:53 PM

Francine, you are on point! Happy Holidays while we all can. (you forgot Zuckerberg) IG on 12/24/2018 6:46:46 PM

Charles thanks for your hard work and optimism. I do not fully understand why the market has been so bad this month in relative terms worst December since 1931. Like many people tonight I will have trouble sleeping. I am not selling but not buying either. Like many tonight I need some hope. Larry Hayes on 12/24/2018 9:08:04 PM

Charles, glad you had a vacation, you deserve a long paid one, But, now , we need to get back to Charles PAYNE rallies. Seriously, mrkt rallied for a week while you were on air, but gone for days and look at the mess the Democrats and fed made. ...Agree fully with the earlier posts, but were the USA, & CONFIDENCE IS BACK AGAIN. We are having a killer retail xmas, stocks are at firesales oversold prices, and we have been doing excellent. Life is great INVEST long, it's only a loss if your scared and sold.. buy incremental stock prices in this mrkt, even if it goes lower, long term, mrkts are going up. Merry CHRISTMAS Charles PAYNE, FBN. Merry CHRISTMAS president Trump. 2019 is going to be a bull market. J on 12/26/2018 1:51:20 AM

Daniel, Thank you so much. I'm back catching up and did a lot of work on Christmas. Please read the morning commentary and look for more succinct hand holding. On that note there is amazing confidence in America and by Americans is surveys but mostly in action including Christmas shopping this year. One positive is this isn't based on fundamentals and historically these kind of sell offs create amazing opportunities. My worst fears: People sell great stocks that will rebound People hold all stocks even those with shakeir fundamentals People hold but refuse to buy until the market comes back Charles Payne Charles Payne on 12/26/2018 6:18:20 AM

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