Market Roundup
Dow +125.61 to 16,510.19
S&P +8.94 to 1,966.97
NASDAQ +1.73 to 4,828.96
10-YR Yield +0.08 to 2.21%
Gold -$4.90 to $1,133.20
Oil +$1.69 to $46.37
The great “Fed Fold” is behind us. So who’s the biggest potential loser? My money is on the financials.

Banks. Brokers. Insurers. You might think financial firms like them would absolutely love “lower for longer” interest rates. But that’s just not the case. Many were secretly hoping the Fed would finally get rates off of zero percent.

It all comes back to profit margins. Banks make money off of interest rate spreads — the difference between what they pay depositors like you and me in interest, and the interest they earn off of loaning that money out. The wider their “net interest margins” are, the more they make, and the more investors flock to their shares.

A lot of money recently poured into bank stocks on the assumption one or more Fed hikes would finally start restoring some margin in the lending business. The instant the Fed folded, shares of rate-sensitive banks plunged. Just look at the intraday reversal in the SPDR S&P Regional Banking ETF (KRE) or some individual bank stocks.

Brokers were also hoping for higher rates because of the positive signal a hike would send about future economic growth, and because higher short-term yields would restore some profitability to their money market fund operations. So it’s no surprise that stocks like E*TRADE Financial (ETFC) fell off the table after the Fed folded.

Lastly, insurers wanted rate hikes to start so they could invest the premiums they take in from policyholders at higher long-term yields. They’ve been suffering because they can’t earn anywhere near enough yield to satisfy commitments made to policyholders several years ago when interest rates overall were higher. Just look at how stocks like Prudential Financial (PRU) and MetLife (MET) are languishing near recent lows.

All told, I’m keeping a close eye on the Financial Select Sector SPDR Fund (XLF) here. It got slammed during the August turmoil, and it bounced back much less vigorously than other sector ETFs and stocks.

I think financials are in trouble, so I’m keeping a close eye on the Financial Select Sector SPDR Fund (XLF).

If the XLF breaks below the $22 level, I think it’s going to be a real problem for the broader market. I would also interpret it as yet another sign that central bankers are losing control of asset prices after six-plus-years of epic intervention and manipulation.

So what do you think? Are financials in trouble now that the Fed folded again? Or are you more sanguine than me? Do you own any bank, broker, or insurance stocks? If so, do you plan to sell them or adding more into recent weakness? Share your view at the Money and Markets website when you have some time.

Our Readers Speak

Meanwhile, many of you took to the website this weekend to weigh in on the Fed’s latest non-move, and what it means for your investing strategy. To sample just a few of those comments, Reader Dr. Donnie S. said:

“What business does any government, central bank, or policymaker of any country have attempting to control the pricing of stocks and bonds? None! Seems to me we want a stock market with individual stock values, which should be able to move freely up and/or down based on investors’ willingness to invest or divest in certain businesses or commodities.

“Otherwise, why don’t we simply let the central banks dictate how much we can profit or lose by government fiat every day? Maybe a lottery would be better.”

Reader Ted. F. added: “I am beginning to think the Fed is getting gun shy. They are in a ‘damned if you do and damned if you don’t’ spot.

“At some point the Fed will have to start raising the interest rate and I think they need to stop expecting this country to carry other countries on our backs. One of their excuses is the state of the world’s economy, but we need to do what is best for this country. China didn’t consider the effect on their massive currency devaluation on anybody but themselves. The Fed needs to adopt the same attitude.”

Reader D. was even more succinct, summing things up this way: “They say everyone gets 15 minutes of fame. I believe that Janet is trying to stretch hers to 20. When they increase interest rates, her input goes to page 16 (just above the obits). And we will forget who she is.”

As for what to do about the current state of affairs, Reader Books offered this view: “From just an ordinary person of modest means, it seems like it’s time to bail for a while. I sold some mutual funds, and put my 89-year-old mother’s money into something safer. These low rates are murder on the elderly’s savings, but no-percent growth is still better than a 20% or more decline in the stock market.”

Reader DoomStar added the following advice: “I have started again playing inverse volatility ETFs recently at first news that China has begun to cash in their American treasuries.

“I believe most talking heads on the tube are missing the point that $40 billion is being drained monthly from the war chest and the facade can no longer hold up. Ms. Yellen cannot raise rates anytime soon as it is under the thumbscrews of Chinese and the international community — so much for your American sovereignty.”

“This is no market environment for heroics.”

Thanks for sharing those opinions. As I’ve been saying for some time, this is no market environment for heroics. It’s one where battening down the hatches makes the most sense to me.

Central bankers are getting more and more desperate, but having less and less of an impact — something that dramatically raises the risk of markets taking a serious tumble soon. Once stock prices start trading more in line with where the bond, currency, and other markets suggest they “should” trade, then I might get interested in doing some aggressive bottom-fishing. But we’re nowhere near those levels yet.

Any other comments you’d like to add? Then here’s the link to the Money and Markets website where you can do so.

Other Developments of the Day

●  German automaker Volkswagen (VLKPY) got hammered overnight after reports that it deliberately tried to sabotage tests that measure the pollution produced by its so-called “clean diesel” engines. The company reportedly installed “defeat devices” designed to deliver positive results at the time of emissions testing. But in actual road driving, the engines would produce much more pollution. Volkswagen shares plunged 20% in German trading.

● Chinese President Xi Jinping will arrive in the U.S. tomorrow for a landmark state visit. But analysts don’t expect Jinping and President Obama to make much headway resolving economic and political issues. Our two countries have been butting heads on cybersecurity, economic and trade policy, construction of military bases in the South China Sea, and more.

● European chipmaker Dialog Semiconductor (DLGNF) said it would buy California’s Atmel (ATML) for around $4.6 billion. The move is just the latest in the chip industry, with Dialog eager to add Atmel’s industrial semiconductor business. The price represents a 43% premium to where ATML closed Friday.

● Bloomberg picked up a theme you read about here first in my Money and Markets column a couple months ago: The Federal Reserve (and its counterparts overseas) are out of financial booze to spike the punchbowl. The article notes that the U.S. Fed, the European Central Bank, the People’s Bank of China, and others are failing to goose asset prices with their latest moves to ease policy … a huge trend shift from the past six-plus years. Invest accordingly.

What do you think China will accomplish in its visit here? What about the Fed — is it truly out of bullets? Do you anticipate we’ll see more merger activity, and if so, what other industries besides semiconductors might be impacted? Let me know your thoughts on these or other topics using this website link.

Until next time,

Mike Larson