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Fed Warns of Hike, But Will the Data Allow?

Wednesday, August 5, 2015
Money and Markets
YOUR BEST SOURCE FOR THE UNBIASED MARKET COMMENTARY YOU WON’T GET FROM WALL STREET
You can also access this issue on our website.
Fed Warns of Rate Hike, But Will Jobs, Inflation Data Allow?
Market Roundup
Dow -10.22 to 17,540.47
S&P +6.52 to 2,099.84
NASDAQ +34.40 to 5,139.95
10-YR Yield +0.057 to 2.268%
Gold -$6.80 to $1,083.90
Oil -$0.57 to $45.17

By Mike Larson

I’ve been on “Bloody Wednesday” watch for some time. The term is one I coined to describe the capital markets chaos we typically see when the Federal Reserve even so much as hints at an impending rate hike.

Now there’s this: Over the past week, multiple Fed heads have all but promised the first such tumultuous day is fast approaching.

Fact #1: Atlanta Fed President Dennis Lockhart told the Wall Street Journal late yesterday that “I think there is a high bar right now to not acting.” He cited “positive signals from the employment numbers” and the economic recovery that has followed a lackluster first quarter.

Fact #2: Lockhart’s comments came just a few days after St. Louis Fed President James Bullard strongly hinted at a hike in a previous interview with the Journal. He said “we are in good shape” for a hike at the Sept. 16-17 gathering (which unlike every single other meeting this year technically concludes on a Thursday, even though much of the discussion takes place on day one). The reason? “We had to get [the Q1 slowdown] behind us before we could get to the first rate rise. It is behind us and the outlook remains fairly good for the economy.”

Fact #3: The comments from relative centrists like Lockhart and Bullard dovetail with earlier hints from Chairman Janet Yellen that the days of 0% interest rates are coming to an end.

This week’s job numbers will be a crucial element when it comes to the Fed decision on interest rates.

In other words, the battlefield has been extensively prepped for a hike. The only question is whether the employment and inflation data will permit a hike – which is why the information on jobs that we’re getting this week is so critical.

We learned this morning from the ADP Research Institute that the economy created 185,000 jobs in July. That missed the average forecast for 215,000, and June’s number was revised slightly lower.

But the two industries behind the weakness – energy and manufacturing – are no surprise. They’re victims of the stronger dollar and the oil price downturn, which the Fed will likely mitigate with “open mouth” operations aimed at talking the dollar down. Growth outside those sectors was fairly robust.

Construction added 15,000 jobs, for instance, while service providers boosted employment by 178,000. Job growth was dispersed broadly among small, medium and large businesses, too.

Bottom line: The ADP report likely wasn’t bad enough to derail the tightening push at the Fed. That’s true despite the fact we’ve seen other evidence of tepid GDP and wage growth recently. So be prepared for more market turmoil as Fed concerns grow, Larry Edelson’s cycles converge, and more key sectors and stocks roll over.

Now that you have my take, let me hear yours. Do these very recent Fed comments indicate that the first Fed hike in nine years is finally on the near-term horizon? Or do you think policymakers will kick the can down the road even longer? What impact will that have on bonds? Stocks? Other assets? Hit up the Money and Markets website and weigh in when you get a chance.

Our Readers Speak

In other news, the Apple (AAPL) share drop and President Obama’s climate change plot were the two big topics over at the website overnight.

Reader Mark said the Apple weakness is a sign of broader problems for the stock market. His view: “AAPL is just following the monthly sell signal in place on the broader indexes. Although the Nasdaq held up longer than the S&P 500, it’s now in sell mode, and AAPL will probably help lead it down.

“People may buy it at 15% or 20% down, thinking it’s cheap enough for a ‘correction.’ But odds are the monthly sell signal has shown the end of this bull market, and after a bounce, AAPL will drop through the 20% down level, and trigger lots of stops, which may start the real acceleration to the downside.”

Reader Myron R. added the following personal observation: “I have sold 1/3 of my Apple shares, but Apple still makes up 7% of my portfolio. I am underwater, but will keep holding the shares. Other than that, I am probably 88% cash.”

And another Reader Mark had this to share: “I made the mistake of buying in at $126 after the last little rally a couple of weeks ago. It immediately started to drop after I bought in, and I held my breath until this last session, where I set a stop loss at $115. It sold at $114.90. I’ll watch it and see what happens but with the China thing and all the spooky talk, I am too nervous to buy back in right now.”

A handful of readers took a bigger-picture view, though, with Reader Stuart A. lauding the Apple Watch and saying investors should stay focused on the longer-term outlook. His take:

“One of the problems with predictions and expectations is the super-short memories we have. When the first iPod or first iPhone hit the markets, no one was sure what they would ultimately turn into. Because they were so successful, the predictions were (I think) overly enthusiastic for now.

“By the time the new software update and version two of the watch comes out, I think people will know more, understand more of what it does and does not do, and how it can fit into your life if that is something you wanted in the first place.

“The next several months of legal maneuvering will be so interesting to watch.”

“I’m sure Apple will be fine, and more incremental advances will come along for the Watch and for the other products Apple makes as well. Considering that Apple was left for dead more than once in its history, they seem to have figured things out fairly well.”

Thanks for all the input. Personally, I get worried when more market “generals” start breaking down – especially when they are in formerly hot sectors like technology. It’s just another reason why I’m getting more cautious in my investing approach at this stage.

As for the latest regulations impacting the electric industry, Reader LKH said: “Obama’s climate plan did not go far enough because it still includes increasing drilling for oil and gas all over America’s land and water, in the face of the public health, environmental, and yes, economic devastation it brings.

“Also, there is the idea that somehow developing and using truly renewable energy is going to be expensive, that using renewables is expensive, and that it will ruin the job market. All of these are nonsense. Renewable energy is already more cost-effective in the long term for consumers, and as the scope grows, it will be so for major suppliers as well.

But Reader Jim countered that: “By every metric you use, renewable energy is an expensive, impractical joke. Pure pie in the sky. It would not survive for five minutes without wasting billions of taxpayer dollars on subsidies and tax credits. Some day in the Ray Bradbury future we may go solar, but that is several decades away. The world will rely on fossil fuels for at least the next fifty years.”

If you needed any more evidence how contentious this plan will be, these diametrically opposed comments provide it. That’s why the next several months of legal maneuvering will be so interesting to watch. Also, if you haven’t added your voice to the debate yet, here’s where you can do so.

Other Developments of the Day

BulletWalt Disney Co. (DIS) has been one of the most reliable performers in the market over the past several quarters. But it stumbled today in the wake of somewhat disappointing third-quarter earnings.

Net income jumped 11% to $2.48 billion, or $1.45 per share, in the quarter. But revenue trailed estimates at $13.1 billion. The entertainment and theme park giant also said that more “cord cutting” by consumers who can live without traditional cable TV service would hurt growth at its ESPN division.

BulletThe field is set for Thursday’s first Republican debate. Fox News restricted participation in the prime time debate to the top 10 candidates based on recent polling, which meant less-popular ones would have to settle for an earlier 5 p.m. forum. Everyone from Donald Trump to Gov. Chris Christie will now be on stage for the royal rumble.

BulletWill China’s yuan join the small club of “reserve currencies,” at least in the eyes of the International Monetary Fund (IMF)? A decision is coming later this year, and it’s unclear which way the IMF will vote. The IMF has lingering concerns about China’s willingness to further open its stock and bond markets to international participation, and to accept full exchange rate flexibility, according to a recent staff report.

BulletI don’t drive a Land Rover. But I’ve always thought the company’s Evoque SUV was pretty cool looking. Apparently, the Chinese agree. China’s Jiangling Motor is rolling out a new “Landwind” model this week. And in an amazing, complete “coincidence,” it looks the same and sounds the same as the real thing, even as it carries a price tag of only $21,700 – 66% less.

So what do you think of copycat Chinese products, or the country joining the exclusive club of nations with official reserve currencies? How about the Fed’s latest comments? Do they increase the chance of a September rate hike? Will you be watching the GOP debate? Let me know what you’re thinking about these or other stories at the website when you have a chance.

Until next time,

Mike Larson

Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
The investment strategy and opinions expressed in this article are those of the author's and do not necessarily reflect those of any other editor at Weiss Research or the company as a whole.

For more information and archived issues, visit www.moneyandmarkets.com.

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