It was a nice bounce for a market yesterday, but it was still obviously shaken by the unknowns on trade and the Federal Reserve. As I pointed out in Tuesday’s Afternoon Note, the buy on dips crowd waited for the first rally attempt to fizzle, then jumped in as the Dow slipped into the red. If those buyers hadn’t emerged, the index could have closed down 300 points, as the masses are still in a wait-and-see mode.

Each S&P 500 sector except Energy finished the day higher near the high of the session.

S&P 500 Index	+1.30%
Communication Services (XLC)	+1.45%
Consumer Discretionary (XLY)	+1.52%
Consumer Staples (XLP)	+0.90%
Energy (XLE)		-0.12%
Financials (XLF)	+1.61%
Health Care (XLV)	+1.29%
Industrials (XLI)	+1.51%
Materials (XLB)	+0.12%
Real Estate (XLRE)	+1.24%
Technology (XLK)	+1.66%
Utilities (XLU)	+1.25%

While market breadth improved, 52-week milestones underscored the risk of being in the wrong stock(s).

• NYSE: new highs 73, new lows 179
• NASDAQ: new highs 49, new lows 213

The Federal Reserve’s Greta Garbo Moment

An op-ed in the Wall Street Journal yesterday brought together all four living former chairs of the Federal Reserve to take on the Trump administration and plead for independence.

Paul Volcker, Alan Greenspan, Ben Bernanke, and Janet Yellen wrote that the central bank and its leader should be allowed to serve without political pressure.

“It is critical to preserve the Federal Reserve’s ability to make decisions based on the best interests of the nation, not the interests of a small group of politicians”

In other words, the Fed just wants to be left alone.

I get the Federal Reserve feels its independence is critical to doing its job. However, it’s arguably the most powerful entity in the world with very little accountability. Moreover, the Fed shouldn’t be above criticism.  In a world of greater scrutiny, where anyone can rate any business on Google, Facebook, Yelp, travel on Trip Advisors, local businesses on Angie’s List, and movies on Rotten Tomatoes, the Fed should get more scrutiny.

Fed’s Tentacles

I’m worried the Fed has failed Main Street too often, especially assessing and managing risk into the Great Recession. They have been rewarded with more responsibilities, including:

1.The overview of the Federal Reserve System

• The Federal Reserve performs five key functions to promote the health of the U.S. economy

2. The Three Key System Entities

• Board of Governors
• Federal Reserve Banks
• Federal Open Market Committee

3. Conducting Monetary Policy

• Promote maximum employment, stable prices, and moderate long-term interest rates

4. Promoting the Financial System Stability

• Monitors the financial system for a healthy economy for U.S. households’ communities’ and businesses.

5. Supervising and Regulating Financial Institutions and Activities

6. Fostering Payment and Settlement System Safety and Efficiency

7. Promoting Consumer Protection and Community Development

That brings me to the timing of this Op-Ed. Everyone’s talking about it, but it deflects from the story no one is talking about; the next power-grab. The Fed is setting up a payments system that will compete with private business.

Fed to Create Payments System to Speed Money Transfers Move will provide a public option to another real-time network built by big banks

The Fed voted 4 to 1 to go through with this but one dissenter, Fed Vice Chairman for Supervision Randal Quarles states: “I do not see a strong justification for the Federal Reserve to move into this area and crowd out innovation when viable private-sector alternatives are available.”

I don’t like all the tweets about the Fed, but they need to be called out from time to time, and more importantly, they need to be more transparent and accountable.

Earnings Parade

Some huge earnings winners after the close with strong initial reactions:

• Microchip Tech (MCHP): +3.3%
• Guardant Health (GH): +23.2%
• Solaredge Technologies (SEDG): +16.5%
• Match Group (MTCH): +16.4%
• Weight Watchers (WW): +14.2%
• GW Pharma (GWPH): +12.2%
• Hertz Glo Hldg (HTZ): +7.4%

The biggest company releasing results was Disney (DIS), which reported record revenue.  However, the acquisition of Fox impacted EPS negatively. 

It’s been an amazing year for Disney movies, but not without costs.   Moreover, with high expectations comes the responsibility to clear them. 

The company posted revenue of $20.25 billion missing consensus of $21.4 billion and earnings of $1.35 against consensus of $1.74.  It was a monster miss.

• Media revenue $6.71 billion +21% operating (op) margins slipped to 32% from 36%.
•  
• Parks revenue $6.58 billion +7% op margins held 27% from 27%.
•  
• Studio revenue $3.84 billion +33% op margins 21% from 25%.
•  
• Consumer $3.86 billion from $827 million lost $533 million.

The shares rebounded a bit after announcing the bundling of ad-supported Disney+ and HULU would be priced at $12.99 a month, but the stock is still down over 4% in the pre-market.. 

 

Portfolio

Communication Services	Consumer Discretionary	Consumer Staples
1	3	1
Energy	Financials	Healthcare
1	2	1
Industrial	Materials	Real Estate
2	3	1
Technology	Utilities	Cash
2	0	3

Today’s Session

The plunging 10-year treasury yield, along with increased talk of doom and gloom, have pushed equities lower this morning.  The pace of the decline is unsettling.  The direst assumptions are irresponsible, but it is par for the course these days and not driven by a desire to help or inform investors.

Be that as it may, obviously testing lows is generally part of the recovery process for the market and taking them out is always worrisome.  Fundamentals are still solid, and valuations have become inexpensive, but short term emotions coupled with slowing economy, feckless Fed and adjustments for long term trade war are going to pressure the market beyond fundamentals. 

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