To “Give Up The Ghost.”
Yesterday, Jay Powell ‘gave up the ghost’ in front of the entire world, and with his admission that a soft landing wasn’t his “Baseline case,” the market slumped into the closing bell.
From the start of the cycle, I've been saying that Powell thought he could pull off what some were calling an immaculate move – an ultra-aggressive rate hiking cycle that wouldn’t crush the economy.
Interestingly, Powell was finally banking on a Deus ex machina that would have been immaculate and written about for decades to come (and overshadow his huge ‘transitory’ inflation debacle). Instead, Powell painfully admitted that factors “are outside our control.” His admission sent the market tumbling.
With a stronger Gross Domestic Product (GDP) and lower unemployment projections, the Fed took two cuts off the 2024 table.
I love the idea that the Fed needs fewer rate cuts. I prefer organic growth, but the fact is growth will slow a lot faster, and yesterday’s discussion and reactions will become moot points.
Even before answering the question of a soft landing, Powell gave clues as to why it would be elusive:
Bond yields keep moving higher. Powell ‘gave up the ghost’, and now everyone is scared as hell.
We are suspending the Current Buys in the Hotline Model Portfolio this morning due to market volatility.
Q. Should I sell when a stock is removed from the new buy list?
A. We cover a wide audience and try to make sure everyone is on the same page.
Various Scenarios for taking off new buy list:
Stock Has Rallied
If we like XYZ @$20, and it rallies to $22, the value proposition has changed. There may still be more upside, but we are closer to the target, which allows us the luxury of riding or closing for a gain. But if subs are buying at $22 as well, then we are at square one, which is unfair to those with the lower entry point.
Market Under Pressure
The stock is under pressure along with the broad market - no need to force the issue when we might get a better entry point.
The stock is under pressure for company -specific reasons, which we think are overblown. We have to allow sellers to leave, and stocks to settle, and during that process, it is unwise to ask or allow subscribers to buy during such pressure/pullbacks.
Taking a stock off the new buy list is not an automatic indictment of the stock but a cautionary move we hope will be temporary.
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The street continues to come to grips with “higher for longer” which isn’t really news. The thing is many hoped Powell was going through the motions and maybe it wouldn’t be higher for longer, and instead the Fed would be done with hikes and rate cuts would figure into the equation early next year. That could still happen, but it will take nerve for Powell to hold off with the current inflation bump.
This morning, the Philly Fed came in below consensus with a sharp decline in current general activity.
But it is the continued rebound in prices that caught my attention. Prices paid pipped to 25.7 from 20.8 while prices received edged up to 14.8 from 14.1. Translation: there is limited pricing power these days.
The market has become too reliant on the Federal Reserve, and that is not going to change anytime soon, if ever. But that’s the macro point of view. I believe in owning great companies at discounted stock prices. It’s hard for them to rally when the broad market is in turmoil, but it’s really a gargantuan mistake to sell simply because a stock is down. Especially when it’s a hissy fit, because that is what we are going to see at the open.
The smart move is to clean out names that are fundamentally fractured for cash and be ready to pounce at the very moment you feel like you cannot take it anymore.
In a perverse way, I love markets in turmoil. We must do a lot more handholding, but when the dust settles, it is always rewarding.
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