***Special Fed Day Alert. No Rate Hike. No Surprises***

Behavior Models for the Day

As with every Federal Open Market Committee (FOMC) statement day, there is a model for the stock market to follow pre and post announcement. Certain environments have very strong tendencies while others do not. Eight meetings ago was one of the rare times where the models strongly called for a rally on statement day which was correct as well as a decline a few days later which was also correct.

Today, as with most statement days, the first model calls for stocks to return plus or minus 0.50% until 2:00 PM. There is a 90% chance that occurs. If the stock market opens outside of that range, there is a strong trend to see stocks move in the opposite direction until 2:00 PM. For example, if the Dow opens down 1%, the model says to buy at the open and hold until at least 2:00 PM.
The next model calls for stocks to close higher today and rally after 2:00 PM. That is usually a very strong trend, 80%+, however with the Dow sitting at all-time highs with barely a hiccup in two months, the bulls exhausted a lot of energy, similar to what we saw at the last Fed meeting 6 weeks ago. That trend’s power has been muted significantly to less than 50%. That’s not exactly the kind of trend worth trading.
Finally, there may be a trend setting up for a post statement day decline, but there are a number of rally factors that still need to line up.

No Rate Hike & No Balance Sheet Taper Update

The good news is that short-term interest rates will not be moving higher at 2:00 PM. That will likely happen at the December meeting as the economic evidence certainly supports another 1/4% hike with GDP at 3%, unemployment at new lows and consumer confidence at new highs. I also don’t expect any news on the Fed’s plan to taper the size of its balance sheet.
Six weeks ago, I offered that the Fed would announce the cessation of reinvestment of certain instruments, if not all, to the tune of $300 to $500 billion a year. It turned out that my forecast was too aggressive as Yellen’s plan began last month with a paltry $4 billion in runoff and scales up to only $20 billion per month later in 2018.
Velocity of Money Still Collapsing

Below is a chart I have shown at least quarterly since 2008. With the exception of a brief period from mid 2009 to mid 2010, the velocity of money was, is and will continue collapsing. In the easiest terms, M2V measures how many times one unit of currency is turned over a period of time in the economy. As you can see, it’s been in a disastrous bear market since 1998 which just so happens to be the year where the Internet starting becoming a real force in the economy. Although it did uptick during the housing boom as rates went up, it turned out to be just a bounce before the collapse continued right to the present.

This single chart definitely speaks to some structural problems in the financial system. Money is not getting turned over and desperately needs to. The economy has been suffering for many years and will  not fully recover and function normally until money velocity rallies.

It would be interesting to see the impact if the Fed stopped paying banks for keeping reserves with the Fed. That could presumably force money out from the Fed and into loans or other performing assets. It continues to boggle my mind why no one calls the Fed out on this and certainly not Yellen at her quarterly press conference.

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***Special Fed Day Alert. No Rate Hike But Changes to Balances Sheet Announced***

Behavior Models for the Day

As with every Federal Open Market Committee (FOMC) statement day, there is a model for the stock market to follow pre and post announcement. Certain environments have very strong tendencies while others do not. Seven meetings ago was one of the rare times where the models strongly called for a rally on statement day which was correct as well as a decline a few days later which was also correct.

Today, as with most statement days, the first model calls for stocks to return plus or minus 0.50% until 2:00 PM. There is a 90% chance that occurs. If the stock market opens outside of that range, there is a strong trend to see stocks move in the opposite direction until 2:00 PM. For example, if the Dow opens down 1%, the model says to buy at the open and hold until at least 2:00 PM.
The next model calls for stocks to close higher today and rally after 2:00 PM. That is usually a very strong trend, 80%+, however with the Dow up 8 straight days, the bulls exhausted a lot of energy and that trend’s power has been muted significantly to less than 50%. That’s not exactly the kind of trend worth trading.

Finally, there may be a trend setting up for a post statement day decline, but there are a number of factors that still need to line up.

No Rate Hike But Balance Sheet Taper…

The good news is that short-term interest rates will not be moving higher at 2:00 PM. That will likely happen at the December meeting. The bad news is that Janet Yellen is going to formally announce the Fed’s plan to begin to reduce its $4.47 trillion balance sheet of treasury and mortgage backed securities. No one will be surprised with that announcement. I say it’s bad news because the economy is finally starting to show some better growth and I have my doubts whether that will be sustainable with even tighter monetary conditions.
Regarding Yellen’s plan, I expect the Fed to cease the reinvestment of certain instruments, if not all, to the tune of $300 to $500 billion a year. On a $4 trillion account, that doesn’t seem like a lot of money but it certainly is in absolute terms. Yellen has also stated publicly that she does not expect a return to its pre-crisis $900 billion, all treasury bill balance for the foreseeable future.
Velocity of Money Still Collapsing

Below is a chart I have shown at least quarterly since 2008. With the exception of a brief period from mid 2009 to mid 2010, the velocity of money was, is and will continue collapsing. In the easiest terms, M2V measures how many times one unit of currency is turned over a period of time in the economy. As you can see, it’s been in a disastrous bear market since 1998 which just so happens to be the year where the Internet starting becoming a real force in the economy. Although it did uptick during the housing boom as rates went up, it turned out to be just a bounce before the collapse continued right to the present.
This single chart definitely speaks to some structural problems in the financial system. Money is not getting turned over and desperately needs to. The economy has been suffering for many years and will  not fully recover and function normally until money velocity rallies.
It would be interesting to see the impact if the Fed stopped paying banks for keeping reserves with the Fed. That could presumably force money out from the Fed and into loans or other performing assets. It continues to boggle my mind why no one calls the Fed out on this and certainly not Yellen at her quarterly press conference.

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Fed to Hike Rates But All Not Well

Model for the Day

As with every Federal Open Market Committee (FOMC) statement day, there is a model for the stock market to follow pre and post announcement. Certain environments have very strong tendencies while others do not. Two meetings ago was one of the rare times where the models strongly called for a rally on statement which was correct as well as a decline a few days later which was also correct. Today, the upside edge is just outside a coin flip and certainly not worth playing based solely on this. While it’s also December option expiration week which has historically added a nice tailwind to stocks, that edge has also been a bit muted by the strength seen on Monday and Tuesday. On the bright side, there could be a strong and playable short-term trend to the downside starting by the end of the week, but we will have to see how the next few days play out.

1/4% Hike Against Mixed Economic Picture

Janey Yellen and her friends at the Fed have done an excellent job of preparing the markets for a rate hike today. I would say that it’s a 95% certainty. The Fed is going to raise the Federal Funds Rate today by .25%. Whether you want to attribute it to the Fed making an independent decision based on the economic data at hand or that Donald Trump’s agenda is assumed to be very pro-growth or that Paul Ryan will be running tax policy or even that stocks have become a bit frothy, short-term rates are going up today and next year.

Looking at what the Fed is supposed to be basing their decision, the economy, we see a mixed bag. Over the past three months, we have created 156,000, 161,000 and 178,000 jobs in the U.S which seems pretty good on the surface. However, that’s 200,000 less jobs than 12 months earlier. The manipulated unemployment rate is down to 4.6% with the real or U6 rate at 9.7%. And while the consumer price index (CPI) has finally started to uptick after percolating for years, it’s hardly hot and worrisome. Our economic output, GDP, is improving and now stands at just over 3% which is also finally good news. I fully expect that to click between 3% and 4% in 2017.

Velocity of Money Still Collapsing

Turning to an oldie but a goodie, below is very long-term chart of the velocity of money (M2V) produced by the St. Louis Fed. In the easiest terms, M2V measures how many times one unit of currency is turned over a period of time in the economy. As you can see, it’s been in a bear market since 1998 which just so happens to be the year where the Internet starting becoming a real force in the economy. Although it did uptick during the housing boom as rates went up, it turned out to be just a bounce before the collapse continued right to the present.

This single chart definitely speaks to some structural problems in the financial system. Money is not getting turned over and desperately needs to. It would be interesting to see the impact if the Fed stopped paying banks for keeping reserves with the Fed. That could presumably force money out from the Fed and into loans or other performing assets.

The Secret Behind Low Rates

Continuing to raise rates, as I have written about over and over, also makes our currency a lot more attractive to foreigners. Remember, money flows where it’s treated best. Since early 2008 here, in Street$marts and on the various financial channels, I have been a devout secular bull for the dollar, even when trillions were being manufactured by the Fed. For years, I sat alone in my bullish house before having company over the past few years. As I have written about, I truly believe that one of the main reasons Yellen and her inner circle don’t want to raise rates is because they are terrified of massive capital flows into the U.S. as the dollar index breaks out above par (100) which is already did and travels to 110, 120 and possibly higher, somewhat like tech stocks did during the Dotcom boom. Below is a chart I continue to show at each FOMC meeting. 120 is the next long-term target.

A soaring dollar would be great in the short-term for all except those who export goods. Our standard of living would go up. Companies with U.S. centric businesses would thrive. Foreigners would buy dollars in staggering amounts at a dizzying pace which I argue would make their way into large and mega cap U.S. stocks. Think Dow 23,000, 25,000 and possibly 30,000.

What’s so bad about that?

Eventually too much of a good thing becomes problematic. In this case, mass dislocations in the global markets would grow and that would almost certainly lead to a major global financial crisis later this decade. Think many elephants trying to squeeze out of a room at the same time. Think crash of 1987 on steroids. Yellen and the other smart people in the room must know this. You may not agree with their thinking and actions, but some of these people are scary smart.

I understand why the Fed is going to raise rates. I truly do. However, given our current mixed economic picture and the weakness, deflation and accommodative stances of central banks elsewhere, I believe that Yellen and her minions are barking up the wrong tree.

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Fed Model Says Rally. A November Surprise from Yellen?

Before I dive into the meat of the article, our market model for today is a plus or minus .50% move until 2 pm and then a rally into the close. Two of our Fed Statement Day (today) models are live and are very bullish with a success rate of 80%. We’ll see how that works out before long.

With the election just around the corner, it would be almost impossible to believe that the Federal Reserve would raise interest rates at the conclusion of their two-day meeting meeting today at 2 pm. And I do not believe they will move on rates. However, I would have thought the same thing about the FBI going public with their restarting the Clinton email investigation. It’s just been the most precedent setting election season of all-time and it’s not over. Who knows what else comes out between now and Tuesday morning?!?!

The surprise from the September meeting was that there were three public dissenters to the vote. That is the highest number I can recall and a shot across the bow for  Chair Yellen that a move, likely in December, is coming. We’ll see what the vote is today. It’s been pretty amazing that there has been almost none of the usual chatter on Twitter or on the financial channels regarding the meeting. Normally, my feed would be lit up with prognostications and commentary and the media would have multiple segments an hour. Hillary and Donald are sucking up all of the media’s bandwidth.

Looking at the employment picture, the economy created 156,000 new jobs in September and 151,000 in August. That’s certainly not an overheating economy nor an economy on the verge of recession. It’s just below warm. While our economy grew at a higher than expected rate of 2.9% in Q3, that wasn’t enough to balance off a weak 1.1% number for the first half of 2016. Additionally, inflation has been well under wraps not only this year, but every year since the financial crisis.

Long time readers know that I have been in the deflation camp since 2007 and remain that way until we have another recession. I offered comments about the economic indicators not because there are any startling revelations, but as another way to support the position I have taken since 2007. At every single Fed meeting since mid-2007 I have been in the accommodative camp, which meant either lowering rates or keeping them as is after they essentially hit 0%. For the record, I am not in favor of negative interest rates for now.

While the crisis has long passed for the economy and financial markets, we are still in a typical post-financial crisis recovery which I have written about over and over and over. Our economy will remain that way until the other side of the next recession, which should be mild and occur by 2019. That means very uneven growth that sometimes teases and tantalizes on the upside and terrifies once in a while on the downside. It’s very frustrating, more so now because we have complete, total and utter dysfunction in government that makes the Fed the only game in town.

As I have mentioned many, many times over the past few years, not only is Janet Yellen & Company taking into account the U.S. economy, but Europe and Asia as well as they debate policy. We may not directly care what happens abroad, but our currency certainly does. I believe the real reason that Yellen and the smart folks in the room are so scared to raise rates is that it would set in motion something I have been discussing since 2008. That is a tech-like blow off in the dollar only seen during the mid 1980s when globalization was only a fraction of what it is today. You can see this on the left side of the long-term chart below.

Fed officials rarely discuss currencies, but I believe this is something done a lot behind closed doors. Should the dollar take off above 100, which I think is a lock, 110, 120 and even higher become likely and possible. A shorter-term chart is below where you can see the big rally in 2014 and 2015 followed by an 18 month consolidation so far. Once the dollar breaks out to new highs and stays there for a few weeks, 100 or so will become the floor.

dollar

Most of you are probably thinking “so what”. Stronger dollar should equal a higher standard of living. How bad could a strong dollar be? That is true. However, there are all kinds of chain reactions to understand.

A surging dollar would mean a collapsing euro, yen and pound. Along with my long-term dollar and Dow forecasts, I also have predicted the euro to parity against the dollar on its way to sub 80. The pound looks like it will see the 90s with the yen eventually declining another 25-50% from here.

With those central banks easing and/or accommodative, how could they fight back? While exports would benefit, their standard of living would further suffer. Much more importantly, I believe we would see massive capital outflows from much of the world into the U.S. First, this would manifest itself in short-term treasuries. I then believe money would flow into large and mega cap blue chip stocks along with real estate. That would make my longstanding target of Dow 20,000 seem bearish. I wouldn’t rule out 25,000 or even higher under that scenario.

While a stock market melt up would be enjoyed for a time, these massive capital flows and currency collapses would likely lead to historic market dislocations around the globe ending worse than the crash of 1987. In other words, it’s all good until it’s not and then look out as the elephants all try to exit the room at once.

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Key Sectors Holding Up Otherwise Weak Market

Last week, I voiced a little more concern about the stock market as the S&P 400 and Russell 2000 broke to the downside from their trading ranges. So far, they haven’t been able to regain previous levels. Now, we have the S&P 500 and NASDAQ 100 trading at the lower end of their ranges and it looks like stocks have further to go on thew downside before finding more solid footing.

As I have said for months, based on market history, the challenging party needs a lower stock market to have a chance to win. For this election, the number has been 18,000 although the lower the better for Donald Trump. At the same time, I have been using the biotech sector as a bellwether for Clinton’s chances of victory. Interestingly, biotech has been falling sharply since late September which runs counter to the polls and latest email scandal. Of course, fundamentals in the group could be overpowering political models.

On the key sector leadership front, semis, banks and transports have been strong and really holding up the market. Only consumer discretionary hasn’t been cooperating. While utilities have bounced back nicely, staples, REITs and telecom remain laggards which should be good stocks over the intermediate-term.

High yield bonds, which have held up very well are now under modest pressure, another small concern. Although stocks have struggled, treasury bonds are not providing the expected safe haven, even though commodities have also been hit. Adding it all up, you have a bit of a liquidity problem in the markets as it appears investors are building cash positions for now.

The Fed begins a two-day meeting today and it would be a complete shock if they raised rates tomorrow. However, given the political landscape and events of the past few days, nothing can be rules out!

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I Screwed Up

Yesterday, I said that all of our Fed related trends were muted to less than 60% accuracy. That was wrong. One of our best Fed systems said there was a 78% likelihood that stocks rallied. I didn’t realize this until well after 2pm when it was too late to email and take advantage.

What a powerful response to the Fed not raising rates and issuing a more hawkish statement, exactly what I and most others predicted. I did find it laughable that a number of pundits like Bill Gross and Danielle DiMartino Booth thought that Yellen & Co. could hike rates yesterday. You can add those folks to the clown parade with George Soros, Stan Druckenmiller, Carl Icahn and the rest who continued to call for the end of the world.

Anyway, one thing that did surprise me was the number of dissenters, three, in the voting. I did not see that many coming. I figured there would be one. That tells me that more voters in that room would have raised rates if Janet Yellen didn’t have such strong conviction to leave them alone. Since the next meeting in November is less than a week before the election, I don’t think November is on the table. That puts December squarely in focus for Yellen & Co. to hike, something I am vehemently against. If that happens, it will be a full year in between hikes, making this rate hike cycle the gentlest glide path in history.

Getting back to the markets, I was surprised at just how powerfully everything reacted, as if investors were somehow caught off guard. Stocks, bonds, gold and oil all rallied hard post the 2 pm announcement. That’s very unusual behavior in general, but even more so for a Fed day. There aren’t enough instances to make it statistically significant, but typical response has been very favorable beyond the short-term. That’s also confirmed by the recent contraction in volatility pre-Fed meeting.

Sector leadership shifted back to the pre-BREXIT yield chaser leaders of slow growth, utilities, REITs and telecom. Curiously, staples did not follow suit. Banks were on the other end as they sold off on the news and then lagged the rally the rest of the day. I still cannot believe that people positioned for a hike and bought banks in hopes of this. I guess that’s why so many money managers do such a poor job.

High yield bonds also caught fire after 2 pm and this has very positive intermediate-term implications for stocks. The NYSE Advance/Decline Line is now just a good day away from yet another all-time high. Yesterday’s performance is another confirming sign that the markets are long and strong and a bear market or even full-fledged correction is not close.

Finally, Donald Trump is one person who is probably unhappy with yesterday’s lack of Fed action and across the board rally. The recent pullback/consolidation has definitely helped his poll numbers and I believe the only way he can win is if stocks struggle into November.

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Yellen Set to Raise Rates, But…

As the Fed’s Open Market Committee meeting heads into day two, our own trends and systems for the trading day are surprisingly mute. Today typically sees stocks trade in a +.50% to -.50% band until 2 pm before the market gets a shot of volatility. Usually, we see a strong upside bias into the close, but the odds of that are under 60% from the usual 75%+. In other words, the edge just isn’t there today. Tomorrow, Friday and early next week are a different story as a trend or two may trigger to signal lower prices ahead.

Turning to the actual meeting and announcement, the Fed is not going to raise interest rates today. That’s the bottom line. We have heard countless speeches from the various Fed Governors and regional presidents on the need to raise rates or wait, but the truth is that unless Chair Janet Yellen wants to hike rates, it’s very hard to believe that her underlings will actually vote against her. That’s akin to mutiny.

With all that said, however, they are absolutely going to offer some of the most hawkish (supporting higher rates) commentary in years to set the table for a December hike, which gets us well passed the election. I find it impossible to believe that Yellen & Co. would ever consider a rate move the week before the biggest election in four years which is when the FOMC meet next.

So expect no move but strong commentary and a hike in December.

What’s wrong with the economy?

Clearly, the economy is no longer in crisis mode and hasn’t been for some time. Since 2009, I have repeatedly stated that the economy is and will remain in a post-financial crisis recovery until the other side of the next recession. That means very uneven growth that sometimes teases and tantalizes on the upside and terrifies once in a while on the downside. It’s very frustrating, more so now because we have complete, total and utter dysfunction in government that makes the Fed the only game in town.

With my view, people have always asked me if I thought a President McCain or Romney would have mattered economically. The short answer is yes because not only would we not have spent almost a trillion dollars on a failed stimulus plan, but ObamaCare would not have been passed. I am not going to argue the social merits of the program, but almost every economist agrees that it has hurt the economy to some degree. I believe significantly.

Additionally, our tax code is another hot mess that has hurt the economy and the regulation pendulum has swung not back to neutral, but all the way to the other side. We’re not creating businesses. We have severely hindered the entrepreneurial spirit which has always helped kick start the economy after recession. I think a GOP president would have had different results, but wouldn’t have been able to sidestep the full effects of the post-financial crisis recovery.

Should the Fed raise interest rates?

Long-time readers know that I am record since 2008 that the Fed should NOT raise rates until the other side of the mild recession that will follow the Great Recession. The world is a dramatically different place post-financial crisis and we are seeing some of things I was very concerned about start and continue to proliferate, like negative interest rates in Europe and Japan. I do believe that Yellen & Co. will hike rates in December which is absolutely the wrong move.

Against the problems abroad, we have seen more of the uneven growth I mentioned already. One month (May), the employment report is recessionary and the next two months it’s hot and higher rate supportive. GDP still behaves like it’s stuck in quicksand and inflation remains below the Fed’s 2% target.

What concerns the smart people?

As I mentioned several times before, I believe the real reason that Yellen and the smart folks in the room are so scared to raise rates is that it would set in motion something I have been discussing since 2008. That is a tech-like blow off in the dollar only seen during the mid 1980s when globalization was only a fraction of what it is today. You can see this on the left side of the long-term chart below.

Fed officials rarely discuss currencies, but I believe this is something done a lot behind closed doors. Should the dollar take off above 100, which I think is a lock, 110, 120 and even higher become likely and possible. A shorter-term chart is below where you can see the big rally in 2014 and 2015 followed by an 18 month consolidation so far. Once the dollar breaks out to new highs and stays there for a few weeks, 100 or so will become the floor.

Most of you are probably thinking “so what”. Stronger dollar should equal a higher standard of living. How bad could a strong dollar be? That is true. However, there are all kinds of chain reactions to understand.

A surging dollar would mean a collapsing euro, yen and pound. Along with my long-term dollar and Dow forecasts, I also have predicted the euro to parity against the dollar on its way to sub 80. The pound looks like it will see the 90s with the yen eventually declining another 25-50% from here.

With those central banks easing and/or accommodative, how could they fight back? While exports would benefit, their standard of living would further suffer. Much more importantly, I believe we would see massive capital outflows from much of the world into the U.S. First, this would manifest itself in short-term treasuries. I then believe money would flow into large and mega cap blue chip stocks along with real estate. That would make my longstanding target of Dow 20,000 seem bearish. I wouldn’t rule out 25,000 or even higher under that scenario.

While a stock market melt up would be enjoyed for a time, these massive capital flows and currency collapses would likely lead to historic market dislocations around the globe ending worse than the crash of 1987. In other words, it’s all good until it’s not and then look out as the elephants all try to exit the room at once.

As I end this piece, I need to take my usual shot at Fed Governor Lael Brainard who has blatantly and publicly embarrassed the Fed’s supposed political independence by contributing to Hillary Clinton three times. Everyone knows the two are buddies, but did it have to publicly pollute the Fed like that? Will anyone be surprised when Brainard is chosen to succeed Jack Lew at Treasury or Yellen at the Fed?!?!

A full Street$marts with canaries in the coal mine are due out next week. As I write about all the time on www.investfortomorrowblog.com, I care much more about the markets’ reaction to the news over what the news actually is. Keep a close eye on what leads and lags from 2:30 to 4 pm today.

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Not so Special, Special Fed Update

Let me begin this special FOMC update by saying that all three very short-term markets trends based on the Fed’s meeting ending today have lower probability of success this week although there may be a sign pointing to lower prices by the end of the week. Stay tuned.

Without a crisis like 2008, Janet Yellen & Co. will find it tougher and tougher to discuss an interest rate hike during the heat of the political season. While the Fed is supposed to be apolitical, we all know that couldn’t be farther from the truth. It has even become blatantly public as Fed Governor and Clinton family buddy, Lael Brainard has donated to three times. Want to guess who would be Hillary’s treasury secretary or successor to Yellen?!?!

Anyway, here we are again; six weeks hence from the last meeting with the world not ending after the vote to BREXIT. Stocks are at all-time highs and the employment picture improved dramatically in June. While the economy is not back to trend growth, it’s certainly stable and able to withstand a rate hike. However, the Fed heads have been very quiet this month, very unusual if a rate move was being seriously considered. As such, the markets are expecting no hike today with a bit more positive (hawkish) statement from the FOMC.

Long-time readers know that I am record since 2008 that the Fed should NOT raise rates until the other side of the mild recession that will follow the Great Recession. The world is a dramatically different place post-financial crisis and we are seeing some of things I was very concerned about start and continue to proliferate, like negative interest rates in Europe and Japan.

As I mentioned several times before, I believe the real reason that Yellen and the smart folks in the room are so scared to raise rates is that it would set in motion something I have been discussing since 2008. That is a tech-like blow off in the dollar only seen during the mid 1980s when globalization was only a fraction of what it is today. You can see this on the long-term chart below.


Fed officials rarely discuss currencies, but I believe this is something done a lot behind closed doors. Should the dollar take off above 100, which I think is a lock, 110, 120 and even higher become likely and possible. A shorter-term chart is below where you can see the big rally in 2014 and 2015 followed by an 18 month consolidation so far. Once the dollar breaks out to new highs and stays there for a few weeks, 100 or so will become the floor.


Most of you are probably thinking “so what”. Stronger dollar should equal a higher standard of living. How bad could a strong dollar be? That is true. However, there are all kinds of chain reactions to understand.

A surging dollar would mean a collapsing euro, yen and pound. Along with my long-term dollar and Dow forecasts, I also have predicted the euro to parity against the dollar on its way to sub 80. The pound looks like it will see the 90s with the yen eventually declining another 25-50% from here.

With those central banks easing and/or accommodative, how could they fight back? While exports would benefit, their standard of living would further suffer. Much more importantly, I believe we would see massive capital outflows from much of the world into the U.S. First, this would manifest itself in short-term treasuries. I then believe money would flow into large and mega cap blue chip stocks along with real estate. That would make my longstanding target of Dow 20,000 seem bearish. I wouldn’t rule out 25,000 or even higher under that scenario.

While a stock market melt up would be enjoyed for a time, these massive capital flows and currency collapses would likely lead to historic market dislocations around the globe ending worse than the crash of 1987. In other words, it’s all good until it’s not and then look out as the elephants all try to exit the room at once.

With so much more still to say, I need to hit the send button without comments much about the stock market. As you know, I pounded the table hard at the BREXIT lows, May lows and February bottom to buy stocks for a run to new highs. That’s worked out well. The market is pausing to refresh here and that’s not a bad thing. Until proven otherwise, weakness should be bought.

Leadership is changing from the defensive utilities, staples, REITs and telecom to more aggressive sectors like semis, software, materials and discretionary. Even the “left for dead” banks and biotech are starting to show signs of life. Don’t underestimate this as a sign of fresh leg higher in the bull market.

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***Special Fed Meeting Update & The Continuous Loss of Credibility and Clue***

Six weeks later and it’s Groundhog Day all over again! Or is that deja vu all over again?!?! It matters not. I began my Fed day comments with this in April.

“The Federal Reserve Open Market Committee concludes their two day meeting with an announcement at 2 pm that interest rates will not change today. That’s what the markets are expecting. There has been all kinds of hot air coming from several Fed officials that rates need to rise now, but Chair Janet Yellen has been on the other side, sticking with her more accommodative stance. It would be very hard to believe that the majority of voting members would overtly vote against their chair.”

Before I get into the meat of this issue, I want to mention three independent studies surrounding FOMC meetings. All three short-term studies conclude that stocks are supposed to rally here. One is a one day trade. One is a two day trade and one is a three day trade. Their accuracy has been 70-90%.

Fed Officials and Wall Street Lost Credibility Again
For four weeks, we continually heard from the Fed heads and pundits that Yellen & Co. will definitely raise interest rates on June 15. Goldman Sachs, Merrill Lynch, UBS and the endless parade of analysts on the financial channels. It was a certainty. The Fed heads prepared us over and over and over again through their speeches. They publicly wanted to hike rates. They needed to raise rates. They thirsted and craved higher rates.

They were out of their collective minds and the word “quack” now comes to mind.

With the blink of an eye, one weak employment report and a June rate hike is all but off the table. And almost as fast, those same pundits and analysts are now forecasting with certainty that the Fed will stand pat at 2 pm on Wednesday. Did they forget about the vote across the pond on June 23 for the UK to exit the Euro? There was no way Janet Yellen was going to raise interest rates before then.

How fast can you say, total lack of credibility???

Leave Rates Alone
Since late 2008 I am on record all over the place saying that the Fed should unequivocally not raise interest rates until the other side of the next recession after the Great Recession. Since then and every moment after, I have firmly stated that the recovery would not be and is not your typical sharp snap back. Rather, it is a post-financial crisis recovery which is uneven, tantalizing, teasing and once in a while terrifying. They do not happen all that often around the world, but the path is very clear.

This is not new news for you, my loyal readers, nor is it new for anyone paying even the slightest attention to the real world. For years, I was convinced that the economy and markets could not handle higher rates. I am still not convinced. However, over the past year and a half, a few new reasons became clear.

WHY???

First and perhaps most important, I do believe that Janet Yellen is keeping the U.S. dollar under her hat. Fed officials rarely discuss currencies, but as I mentioned six weeks ago, I firmly believe that the really smart folks inside the room are worried that future rate hikes with the rest of world easing and/or accommodative with negative interest rates abound, the dollar could pull a repeat of the mid 1980s where it soared to almost 150 on the trade weighted index as you can see below.


Why does this matter?

Let’s say the Fed raised interest rates next month. Would you rather own the dollar where rates are increasing or the Euro where rates are becoming more and more negative each month? Where would your money be treated best?

You can make the same argument in Japan. The Japanese will continue to print and print and print, buy and own almost 100% of their government bond market and force rates well below 0%. Money flows where it’s treated best.

Dollar to Soar
In the short and intermediate-term, more rate hikes from the Fed would fuel another major rally in the dollar at least to the upper end of the trading range that’s been in existence since early 2015 as you can see on the chart below. That would not be bad overall. Sure, companies who export goods would struggle but the rest of the corporate world would do just fine.

The real concern comes once the dollar scores fresh highs and stays there for at least a few weeks. The scenario would quickly turn to the playbook from the mid 1980s but on a much grander scale. I contend as I have since early 2008 that the U.S. Dollar is in a secular (long-term) bull market that will carry the index well above 100 with the Euro first falling below par (100) on the way to collapsing to all-time lows below 80.


Dow Above 20,000

If I am right, we will see massive capital flows from Europe and Asia into the dollar sometime in 2017 or 2018 that will feed on themselves. After dollars are bought, money will flow into treasury bills and notes for those seeking safety. However, similar to the 1980s, I see hundreds of billions and ultimately more than a trillion dollars making its way into blue chip stocks. That’s where my long standing forecast of Dow 20,000 and above come into play. Investors will be partying like it’s 1985 – 1986 again.

Ultimately, as with any and all gargantuan capital flows, severe global market dislocations will appear and we all know how poorly they end. The crash of 1987 was how the 80s dollar boom ended.

Besides the dollar and the upcoming vote by the UK to leave the Euro, few seem to be talking about China. Forgetting about their weakening economy and real estate woes, let’s not forget that the Bank of China responded very decisively to the Fed’s December rate hike by devaluing their currency several times in January and February, adding further stress to the global markets.

Long-Term Rates
Finally (for now), long-term interest rates as measured by the 10 year Treasury note are back down to the 1.6% level as you can see below. That’s getting eerily close to the all-time lows levels of 1.4% seen in 2012. While the Fed controls the overnight lending rate, the market determines most other rates. How “interesting” that the Fed heads would even contemplate raising short-term rates with long-term rates in collapse. This would further serve to flatten the yield curve and damage banks.


I am all the way to the end and it’s time to hit the send button without diving into stock market leadership which has been solidly defensive of late. Both utilities and consumer staples (for full disclosure we own them) recently hit all-time highs as bonds prices rallied. Dividend paying blue chip stocks are in high demand as replacements for “safer” fixed income.

As I write about all the time on www.investfortomorrowblog.com, I care much more about the markets’ reaction to the news over what the news actually is. Keep a close eye on what leads and lags from 2:30 to 4 pm today. For the shortest and most nimble traders, selling long-term bonds, utilities and staples on the Fed announcement may be a good play.

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Fed Day Model and Trend

The FOMC concludes their two day meeting today, surviving the “epic” and “historic” blizzard. The model for the trading day is to see stocks in a plus or minus range of 0.50%, but generally we see mildly rising prices until 2pm and then increased volatility with an upward bias to the close.

The Fed trend is to be long the stock market from yesterday’s close to today’s close based on a variety of historical factors. That trend has an accuracy rate of 77%. Should the market end higher today, it would set up another trend for stocks to be lower tomorrow although not as strong as today’s trend.

Expectations are for the Fed to do absolutely nothing at today’s meeting, but everyone will be parsing the statement for clues that the FOMC will forestall raising rates until late this year or even into 2016. You already know that I vehemently disagree with any rate hike anytime soon and believe that QE should not have ended. I have said this for years, but I will say it again. Our economy and to some degree, our markets, are not strong enough to stand on their own two feet.

We can argue whether we should have QE’ed $5 trillion at all, but once the program began, it has to be seen to its rightful end. I don’t believe the Fed did that.

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