By Mark St.Cyr
This past Friday the coveted FAANG stocks (e.g., Facebook™, Amazon™, Apple™, Netflix™, Google™ et al) did something every BTFD trader should notice with great concern, if not fear. The reason for it is two-fold, first: the movement came out-of-the-blue, with no distinguishing catalyst other than speculation. (i.e., some will note a downgrade or other event, but to date, these types of warnings or events have done little, if anything, over the past.) And second: It happened on a Friday leaving a suddenly stunned BTFD cohort to parse and stew trying to comprehend just what, and more importantly: why it happened.
Because, said differently: It was a total “WTF just happened?” trading day for all too many.
These have been rare over the last few years, but that doesn’t mean what it may portend should be ignored, let alone, forgotten.
Anyone who’s traded, or been around, before 2008 will tell you (as in when market didn’t need quote marks) you don’t suddenly have a reversal in an amalgamation of specific stocks; especially the market leaders; in multiple percentage movements; seemingly out-of-the-blue; while the rest of the market appears disconnected – unless something’s changed.
It was clearly evident Friday that something had. Now the questions arise as precisely: What? And again, maybe more importantly: Does it persist?
That “something” needs to be known, if not, buying any dip going forward will just be an exercise (and painful one) of nothing more than “trying to catch falling knives.” Or, might I dare say – “It’s different this time.” And not in a good way.
I know there are a lot of people right now thinking: “And here they come! The clock is right twice a day doom and gloom Cassandras’ trying once again to prove Ms. Little correct – again!”
In some ways there’s a valid argument there. However, there’s a distinct difference between “doom and gloomers” as in people who only see the bad side of anything regardless, and people who argue (and have been arguing near blue-in-the-face) the potential negative calamitous effects which are a near impossibility to avoid when both the measured metrics; along with fundamental aspects of business; are adulterated beyond anything considered to be normal or rational, let alone, sustainable. (e.g., central bank interventionism, along with reported government statistical data for nearly a decade.)
So what did happen Friday? I’d like to offer a few possibilities, whether they are or not, is of course, pure speculation. Yet, if I’m even close the ramifications are substantial nonetheless, so here’s my argument…
The “market” (i.e., “market”, my opinion pointing directly to sovereign wealth funds (SWF) in-particular, along with the hedge funds that mirror them) took notice during, and after, the Comey testimony in the U.S. and concluded that any reconciliation going forward between the two parties for passing any meaningful legislation was, by all appearances, D.O.A. At least for the foreseeable future remaining in 2017. But that’s not all.
I also believe they have concluded via their own access to back channels of central bankers that the Federal Reserve is hellbent to raise in June, September, and will continue jawboning calls for reduction of the balance sheet. Regardless of any “data” that should deter.
The only thing which may deter them?: A full, outright, market rout dealing in double-digit % losses.
Why do I say this? Hint: They believe (or at least construe) it all to be political, economic melee be damned. This is now all about power and who controls it. And here’s why…
Regardless of where one stands or leans politically, one thing is self-evident to anyone just following along with any understanding of skullduggery: There is an all out, internal, political war currently taking place to oust the U.S. president Donald Trump by any and all means possible. (please make note I’m talking about the political, not the violent.)
Some believe it to be “The Deep State”, others “The Far-Left”, or maybe “The Fourth Estate”, while others just use the term “Establishment.” Sometimes it appears it’s all the above and then some, depending on the news cycle. And we’re only 6 months into the new administration. We very well could be at a place where to quote an old phrase, “We ain’t seen nothing yet.”
Again, no matter whom, or what one calls it – it’s undeniable. And the Comey hearings showed for all the world to see just how committed this encampment is. WW1 trench warfare seems to be an apt descriptor.
As the hearing showed there was no, nor hasn’t been any, there – there from the beginning. And yet, one would think after viewing the subsequent reporting, or listening to many a politician, that Comey had just nailed the president and impeachment or jail time would be announced at 11, so stay tuned for more details.
It’s been more than stupefying for anyone watching with a modicum of rational thought, regardless of one’s political leanings. But there lies the rub, for again – it showed on full display just how committed the opposition party is. And that spells disaster for anything getting passed legislatively, emphasis on anything.
To show just how polarized, as well as hyper-political everything has become. I’ll use an example that shows what I, and most other business professionals consider as an unwritten, understood, absolute no-no rule for conduct or behavior by any business person. Especially a CEO as prominent along with his firm. e.g., Non-other than Lloyd Blankfein of Goldman Sachs™.
On two separate occasions (here, here) Mr. Blankfein used his own Twitter™ account for the first time and sent one message touting his disapproval of the presidents political action. But then, only a week later, on (wait for it) Friday felt the need to troll and snarked rhetorically, “How did ‘infrastructure week’ go?”
These are two entirely political affairs. The complete tone-deafness, along with appearance, is nothing short of breathtaking for a CEO in his position. Especially when he points out the fact that he “Just landed from China.” It would appear that only one of two things is a play here:
Either he violated the most understood, unwritten rule of business unknowingly? Or: He’s now openly on the “opposition” side and willing to also do “whatever it takes” because he already knows what happens next and believes him, and his firm, will survive (if not profit and prosper) from any economic turmoil which may result.
Think about that very carefully, and come to your own conclusions because if there’s one thing Mr. Blankfein should never be accused of is doing something which he already doesn’t know the coming results. (i.e., Think and apply the many summations touted by Bobby Axelrod of the TV show “Billions” for hints and clues.)
So what happens next? Well, we now move onto the scheduled June FOMC meeting which concludes this Wednesday where the odds of another hike are all but a forgone conclusion. Hence lies another clue or problem.
As I iterated earlier, I’m of the belief that the “market” realized just how far it has run on fumes and quickly noticed there wasn’t a GDP gas pump for as far as the eye can see. Suddenly the stench from all that hard data that’s been languishing in the toilet has become unavoidable. Regardless, of how many next-in-rotation fund managers across the business media try to tell/sell it as some new “eau de toilette” exclusive only to the “buy and hold club.”
Friday also demonstrated what was once the go-to strategy, e.g., buy the f’n dip horns-over-hooves – may in fact now be the most risky play of the “market” as I have warned incessantly. Why? Because the selling; the sector; the names; along with its sheer size and randomness has meaning. And what should also be taken as a prominent indicator is precisely whom was a top buyer in these types of names. Hint: central banks via their sovereign wealth funds or proxies. i.e., The Apis bulls in the ultimate herd.
That’s a distinction that makes a very big difference going forward if indeed it is different this time. And I believe it to be just that. For if they they’ve suddenly become squeamish and begin stampeding? All, and I do mean – all – bets are off. Period.
Let’s remember a few things via recent actions and put them in context, along with presumed fundamental actions that should have taken place and not only didn’t, but rather, had the opposite play out.
Any central bank’s raising of interest rates is fundamentally a tightening event. And yet, with the Fed. raising not once, but twice in 90 days, along with consistent jawboning of more hikes forthcoming, accompanied with balance sheet reduction jawboning: The net effect has been to have had the same effect as a rate cut! This caused even Goldman Sachs™ to ask has the Fed. lost control? (Again, this was why the CEO of the firm using social media to troll the president seems so out-of-place, unless?)
This, along with the Trumpflation/hopium-trade has nullified anything the Fed. has launched since Dec. The “market” has been seemingly wrapped in bubble wrap protecting it from any and all questioning of sanity. Then, the Comey hearing happened. And suddenly what became far clearer than any of the testimony was another undeniable truth: If there was any hope for a possible “pardon” for the release and subsequent passing into law any of the reflation/hopium legislation? All hope was squashed, vividly, and televised.
Now suddenly what the Fed. has on-deck matters. And matter greatly for two reasons in my opinion.
One: The “market” now has to not only take into account that a rate hike on Wednesday is a near certainty. But what is far more troubling: it will be dealing with the combined cumulative effects for sector rotational shifts for not just one, not two, but three rate hikes again – cumulatively – into an absolutely abysmal data noted economy. No longer can it just brush-off all those revisions downward.
And two: The “market” has to account for them now, and in a hurry because, not only has the market acted as if they didn’t matter. It’s acted like the “cavalry” was due at any moment, and it’s now abundantly clear – no one’s coming. The “market” is now completely on its own. Until…
And again there lies that other rub.
At what point can one now reasonably assume the Federal Reserve back-peddles on everything it is now touting and actually reinstate QE? Possibly the only “cavalry” that will matter in any sell-off going forward. And I don’t mean jawbone, I mean actually implement it, for that will be the only thing to stave off any protracted sell off, in my opinion.
Yes, St. Louis president reappeared sending soothing tones last month at a mere 2% drop. But those were just words. If another rate hike actually takes place on Wednesday can the Fed. just up and reverse itself and hit the QE button days or even weeks later without calls of policy error emanating from every corner of the economy?
But here’s a far bigger question: Will they even want to? Because a protracted sell-off would be just the thing for the Fed. to sit back and wait, letting the carnage pile up believing the finger-pointing won’t be at them from the electorate – but at someone else. Think about it.
Forget about what the so-called “smart crowd” has been touting as rationalizations for Fed. movements and its efficacy for a moment. Especially that spouted by some Ph.D economics professor or Nobel Laureate. Most of it has been pure drivel and nonsensical to any business person worth-their-salt. Truly consider it knowing what you now know having witnessed as fact, not speculation. Nobody believed in January the Fed. would be onto considering its third hike with near 100% assurance at only mid year let alone ever openly calling for, or considering balance sheet reduction talk. Even Mr. Bernanke openly stated he hoped they weren’t. And yet – here we are.
Back in Nov. 2016 I made the observation and stated why I believed if the Fed. did raise in Dec. it would suggest they were about to unleash a tightening path that was both anathema to current economic metrics supposedly used for a “data dependent” Fed. and had all the appearances of being political nature. Why? Because the economy was continuing to flash red, and the “markets” had begun (once again) to roll over. From the article, “Yellen’s Conundrum: Forestall Monetary Mayhem Or Release Political Pandemonium” To wit:
“Regardless of who wins the election, one thing is certain: the vote that takes place in December within the confines of the Eccles Building cast by a dozen un-elected, Ivy Leagued, academic bankers whose combined real world business experience is near nonexistent (less for that read in some wood-paneled library) will decide monetary policy that will have more implications for not only the U.S., but the world as a whole. Effecting not only the global financial markets, but quite possibly, the entire international political stratum as well. And the new President (as well as every other world leader) will have to adjust to that outcome.
November 8th is only the first-act of this very real, “landmine” infested global drama playing out on the world stage. On December 14th the world will truly witness just how much power has really been transferred to this unelected cohort.”
At the time of making that call, along with commenting in subsequent articles after their December meeting (which I stated they were in fact on that path) most of the financial/business media stated the reasoning as “absurd”, and the calls of no further hiking until next December, or maybe, just maybe, the remote possibility of one late in the year was the most common argument. Why? The “data” clearly showed it was far too weak to absorb another so soon. And what has happened since?
The data has not only deteriorated further, and faster than anyone presumed in December and January, but more importantly – The Fed has raised not just once, but twice, and is looking like the third is coming Wednesday. All against the backdrop that it still intends to openly ponder reducing the balance sheet beginning, maybe, even this year. Something nobody thought remotely possible to even consider just a few months ago, but now?
So here’s the last piece that needs to be addressed, and it goes something like this…
If you’re a died-in-the-hide BTFD bull and are looking at Monday as the next great buying opportunity to buy horns-over-hooves the beloved FAANG trade because its been such a no-brainer in the past. I believe – you aren’t paying nearly enough attention to what may be at play.
Yes, all conjecture on my part, but with that said, no one believed me when I made the case the Fed. would indeed tighten and tighten relentlessly – and here we are. Which leaves the bigger question squarely out front as I stated in the article “Are 401K Holders About To Feel A Savers Pain?” Again, to wit:
“The Federal Reserve has been the sole entity that dictates what any of them are currently worth. And if you don’t like their choices or decisions? Tough. There’s nothing you can do about it. Period.”
If indeed my presumptions prove to be correct then Friday’s first drawing of blood from the beloved FAANG trade will be far from its most serious bite. Or said differently: The pain may only be beginning with the real “chewing” of bank balances or profits yet to begin this Wednesday.
We shall see.