There’s an old saying: be careful what you wish for…

By the closing bell yesterday, many investors wondered why they had been rooting for Jay Powell to be renominated for Chair of the Federal Reserve. Not only has conventional wisdom swung to the belief that Powell will aggressively remove accommodation, but a parade of top Fed officials also chimed in as well.

Now, the betting is leaning toward two rate hikes by 2022 (and including the July FOMC meeting).

But even though there is supposedly no quid pro quo for the nod, Jay Powell’s statement had everything progressives have been demanding. In addition, he touched on climate change and the modernization of the payments system (guarding against crypto). 

November 22, 2021 Statement by Federal Reserve Board Chair Jerome H. Powell on his nomination by President Biden For immediate release Statement by Federal Reserve Board Chair Jerome H. Powell: Thank you, Mr. President. Mr. President, thank you for this extraordinary opportunity to continue to serve the American people. If confirmed by the Senate, I pledge to do everything within my power to meet the responsibilities that Congress has entrusted to the Federal Reserve. I'm joined today by my wife Elissa Leonard and our three adult children, Susie, Lucy, and Sam and his wife Elyssa. Their love and support underpin and make possible all that I do. I am also grateful to the exceptionally talented and dedicated team at the Federal Reserve, with whom it has been my great privilege to serve over the last decade. My predecessor, Secretary Janet Yellen, left the Fed in a strong position to meet every challenge, and I am thankful for her leadership, her example, and her friendship. When COVID hit our shores, American families and businesses were ten years into a historic economic expansion, with a robust jobs market that was reaching even those who had traditionally been left out. The pandemic, however, brought an immediate and painful recession. Fortunately, American resilience, along with strong policy actions and vaccines that enabled the economy's reopening, cushioned the blows and set the stage for a strong recovery. Today, the economy is expanding at its fastest pace in many years, carrying the promise of a return to maximum employment. Challenges and opportunities remain, as always. The unprecedented reopening of the economy, along with the continuing effects of the pandemic, led to supply and demand imbalances, bottlenecks, and a burst of inflation. We know that high inflation takes a toll on families, especially those less able to meet the higher costs of essentials like food, housing, and transportation. We will use our tools both to support the economy and a strong labor market, and to prevent higher inflation from becoming entrenched. Other key priorities include vigilantly guarding the resilience and stability of the financial system, addressing evolving risks from climate change and cyber-attacks, and facilitating the modernization of the payments system while protecting consumers. I look forward to continuing to work closely with my colleague of the past seven years, Lael Brainard, as the Fed confronts these and other issues. Lael brings formidable talent, a wealth of experience and good judgment to our work. Inside the Federal Reserve, we understand that our decisions matter for American families and communities. I strongly share that sense of mission, and I am committed to making those decisions with objectivity and integrity, based on the best available evidence, in the longstanding tradition of monetary policy independence. Mr. President, thank you again.

There are three things to consider.

1. Tapering is not hiking, and it is going to be tough to hike rates next year.
2. The Fed feels it could easily turn the spigots back on and start buying assets if there is a bump in the economic road.
3. Would Powell and all the other folks to be appointed by President Biden go on a series of rate hikes during an election that could see the incumbent party annihilated?

I still think it’s a long road to rate hikes but expect the herd to react accordingly with conventional wisdom swinging in that direction.

By the Numbers

A more aggressive Fed is good news for value stocks, especially Financials (XLF) and Energy (XLE) names along with Industrials (XLI) and Material (XLB) names. Conversely, growth names gave up a lot of ground.

Energy stocks came on nicely as well.

The biggest gainers were an eclectic bunch led by Moderna (MRNA) with the rise of Covid-19, and Las Vegas Sands (LVS) on the hunch this Covid-19 spike will be short-lived, Nucor (NUE)  on the new/old Fed and Ford (F) as the way for old-school investors to play the electric vehicle (EV) craze.

Moderna	XLV	263.78	+18.91	+7.17%
Las Vegas Sands	XLY	38.26	+2.37	+6.19%
Nucor	XLB	112.85	+6.82	+6.04%
Ford Motor.	XLY	19.39	+1.09	+5.62%

Breadth Gets Worse

I’ve been pointing out the deterioration of the market via internals that are actually getting worse.  For example, there were 554 new 52-week lows on the NASDAQ Composite, and significantly more decliners and down volume than advancers and up volume.

Money rotated into NYSE names, which struggled a lot less than the NASDAQ.

Market Breadth	NYSE	NASDAQ
Advancing	1,541	1,706
Declining	1,842	3,038
52 Week High	135	213
52 Week Low	129	554
Up Volume	2.40B	2.03B
Down Volume	2.05B	3.41B

Isn’t for the Faint of Heart

The action is on the NASDAQ Composite, but it’s a wild ride and not for the faint of heart. It’s one reason I don’t feature many on the Hotline, and most of times I do, I end up regretting it in the short run.

The NASDAQ came into the week +25% for the year. But 89% of the members had been down at least 10% from the year-to-date (YTD) high.

Much more shocking is the average drawdown from the YTD high is 40%. That’s crazy!  Heck, even for the S&P 500, the 18% average drawdown is worrisome.

You cannot use regular 5% stop-losses because most of the time, you will be stopped out, and if you widen those stops to 10 or 20%, you might still be stopped out. And at some point, shortly thereafter, see a surge in the same stock that makes you wish you held.

It’s been really brutal. More so because only 63% of names are up on the year compared to 83% for the S&P 500.

Red Flag Close

The NASDAQ closed at the low of the session on a day that saw a rally above the prior session high and prior session low. The NASDAQ also closed below the trendline.

 

Portfolio Approach

There are no weighting changes this morning.  Yesterday, we closed at position in Materials and added a new position in Consumer Discretionary in our Hotline Model Portfolio.

Today’s Session

President Biden will be announcing the release of 50 million barrels of oil from the strategic petroleum reserve.  The original idea for the reserve goes back to 1944 but was only acted on after the Oil Embargo of 1973 and 1974.  President Ford signed off on it 1975.  Between four facilities, the SPR has capacity of 727 million barrels, but right now there is only 600 million.

Historically, these moves (1991, 2005 and 2011) have only temporarily stalled higher oil prices.

Power Move?

The White House is cheering that this is a coordinated effort with other nations, including China and Japan, but its maddening to portray this as decisive when the United States has the most share in the world.  We are helping China but continue to harm American companies that are being portrayed as profiteers. 

Its seems to me the smarter more muscular approach would be to call off the war with American producers and urge them to drill more while calling off the Wall Street ESG movement.

Country	Million barrels per day	Share of world total
United States	18.60	20%
Saudi Arabia	10.82	11%
Russia	10.50	11%
Canada	5.26	6%
China	4.93	5%
Iraq	4.16	4%
Brazil	3.79	4%
United Arab Emirate	3.79	4%
Iran	3.01	3%
Kuwait	2.75	3%
Total top 10	67.60	72%

Yesterday, Governor DeSantis of Florida asked the legislature there to suspend the state’s tax on gas to ease the pain for citizens.  I wonder if President Biden would consider that since one day in his utopian world, there won’t be any gas tax anyway.

Comments

No gas tax but big brother will want to know where you have been driving so they can see how many miles they can tax you. Kirk on 11/24/2021 8:01:26 PM

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