Market Roundup
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S&P -0.90 to 1,931.34
NASDAQ -47.98 to 4,686.50
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Gold -$7.20 to $1,146.60
Oil +$0.34 to $46.17
Janet Yellen doesn’t look like Darth Vader. But she played the role of the “Fed Empire” mouthpiece late yesterday, striking back against market volatility in a speech in Massachusetts.

Her goal: Stop the dumping of stocks that commenced within minutes of the last Fed policy meeting.

Her strategy: Reiterate that the Fed might actually raise interest rates before the end of 2015 after all, and therefore calm market worries that the Fed “knows something” and that’s why they don’t want to hike.

Her comments: “I expect that inflation will return to 2 percent over the next few years as the temporary factors that are currently weighing on inflation wane, provided that economic growth continues to be strong enough to complete the return to maximum employment and long-run inflation expectations remain well anchored.

“Most FOMC participants, including myself, currently anticipate that achieving these conditions will likely entail an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter.”

Did it work? Were the rebel sellers vanquished by Yellen’s Death Star blast? In the early morning hours, it looked that way. Stock futures took off, Treasury bonds sold off, and volatility futures and the Japanese yen declined, all signs of increased calm.

But biotechnology stocks looked weak almost from the get-go, while the Russell 2000 underperformed. Then late in the day, the entire market pretty much gave up the ghost. Why?

Yellen didn’t tell us anything different late yesterday than she told us a few days earlier.

Because I don’t think I’m the only one who thinks this whole situation is, quite frankly, ridiculous. Yellen didn’t tell us anything different late yesterday than she told us a few days earlier. The only thing that changed in the interim period is that we learned the global economy (See: Chinese manufacturing) and corporate America (See: Caterpillar) is in worse shape than we thought.

My advice to investors like you? If you want your eyes to glaze over, feel free to pore over Yellen’s speech. It’s full of academic language, 35 footnotes, and an appendix that contains plenty of econo-babble passages.

But if you want to make money in this environment, don’t get distracted by these violent, central banker-driven spikes. As I’ve said repeatedly, the markets are no longer “playing nice” with central bank actions for more than brief periods of time. Just look at what happened when European Ce7.6ntral Bank Mario Draghi tried to juice markets earlier this month with a bit of QE Kool-Aid … or when the People’s Bank of China did the same thing this summer … or today, when investors got busy “Sellin’ Yellen” this afternoon.

“Take actions to defend and build your wealth prudently.”

Investors are waking up to the fact these men and women are osing control of investor trust and the real, underlying global economy – and taking matters into their own hands. I don’t see that trend changing, and that’s why I urge you to take actions to defend and build your wealth prudently, too.

So what do you think? Did Yellen succeed in calming volatility with her latest speech? Did you follow her remarks, and do you agree with her conclusions? Or do you think this overly academic stuff no longer matters to investors – for more than an hour or two, anyway?

What is your take on the stock market here? Are we bottoming out or on the verge of a new leg down? Let me know over at the Money and Markets website.

Our Readers Speak

Yesterday’s warning from Caterpillar (CAT) sparked a lot of discussion over at the website about what it means for the economy and stocks overall.

Reader Billy said: “The Caterpillar results are nothing short of very very ominous. If this is not a huge canary in the coal mine (pun intended) that deflation is now just about at the curve in the hockey stick, and ready to really take off, I am not sure what is.”

Reader Ted F. said: “Welcome to the world of diminished expectations. Cat supplies many of the basic key industries. You can’t build until the ground is level, can’t plant crops until the land is plowed, can’t manufacture in basic metals until the ore is dug and moved, and can’t move freight until the train has road power.”

Reader Ron added: “P/E ratios are still frothy since earnings are falling faster than equity prices. So, being short equities makes good sense at this time.”

And finally, Reader Mike S. said: “The market is still way overvalued with the profits that have been baked in because of zero interest rates. It is a false economy. This is not the land of the free when it comes to investing these days. It has been manipulated.

“If the Federal Reserve was a corporation and was audited, people in charge would go to jail. Just like Enron, but worse because they affect the lives of just about everyone.”

Thanks for the insights everyone. My take is that the market decline/central bank intervention/market decline cycle is intensifying and compressing by the day. In other words, the time between sharp drops and central bankers trying to push back against them is getting shorter and shorter.

I believe that’s “end cycle” behavior – and yet another signal that we could be on the cusp of a large dislocation in the markets. The fundamental economic data also tells me we could be facing a sharp, global slowdown, another negative for stocks. So my advice remains the same: Buckle up and prepare for tough times ahead!

I hope you have a good weekend. But if you get a chance, please do set aside a few moments to weigh in on the markets, given all the volatility we’re seeing. Here’s the link where you can.

Other Developments of the Day

●  World leaders and Pope Francis have flocked to New York City for a huge gathering at the United Nations General Assembly. The pope addressed leaders this morning, and top world officials then moved on to discussions and debates over everything from climate change to economic inequality to armed conflicts in Africa and the Middle East.

●  Brazil’s central bank was forced into action after the real currency plunged to yet another all-time low yesterday. It said it might dip into currency reserves to support the real, which earlier slumped to an exchange rate of 4.24 to the U.S. dollar.

But the problems in the world’s eighth largest economy run deep. It’s on track to shrink by 2.7% this year. That would be the worst recession in a quarter-century. Unemployment has doubled in the past year to
7.6%, with no end to the rise in sight.

●  I mentioned recently how the interest rate swaps market was trading oddly, just as it did the last time the credit markets came unglued in 2007-2009. Well, Bloomberg reported late yesterday that those swaps anomalies are getting worse. Does that mean credit stress is rising and we’re getting closer to a significant credit market “accident”? I wonder.

So there you have it. World leaders are trying to come up with solutions to incredibly difficult problems, even as credit markets and foreign economies show signs of increasing turmoil. Want to offer your thoughts on why this is happening and what it means? Good. Head over to the website and do so today.

Until next time,

Mike Larson