WEEKEND WRAP: QE Is Back and Here To Stay

As can be easily shown by the numbers below, Friday's little blood-letting brought markets close to break-even for the week, that being the most likely outcome for stocks in the near-term and over the past 21 months.

Bullish and bearish arguments can generally be tossed to the trash heap at this juncture. Many funds will be soon closing their books on 2019, with a pretty fair profit baked in and the ugly returns from 2018 fading fast into the distance.

On the funding issues at the Fed and primary dealers, some are already calling it a crisis. In a nutshell, on October 1, the entire overnight lending facility nearly froze up and the Fed has been lending to the primary dealers, buying back their collateral for cash, at a frantic pace.

What many are calling, tongue-in-cheek "not QE" is exactly QE, on steroids. The Fed has to buy up more securities than the Treasury department can issue, thus, they'll be buying up foreign debt (read: at negative interest rates), in what can only be seen by any cogent observer as backdoor currency destruction.

What the Fed doesn't want to reveal is that they will have to continue doing Temporary Open Market Operations (TOMO) and Permanent OPO (POMO) well past the second quarter of next year, which they have already admitted to being their current forecast timetable. By June of next year, at the end of the second quarter, the Fed will probably be sopping up $100 billion per month, and that's a conservative estimate.

The overarching objective is to keep the current expansion (Ponzi scheme) going, so that the stock market continues toward and beyond new all-time highs and bonds continue to lower in yield. The problem, ultimately, is that it cannot go on forever, but negative interest rates will likely take care of that, reducing the monetary base to a point at which the Fed and central bankers around the world will have run out of options.

Then, it will be the average citizen who pays the price for experimental Keynesian economics, or, as a former president used to term it, "voodoo economics."

Stock up on canned goods. Great for the holidays and essential during catastrophes.

At the Close, Friday, October 17, 2019:
Dow Jones Industrial Average: 26,770.20, -255.68 (-0.95%)
NASDAQ: 8,089.54, -67.31 (-0.83%)
S&P 500: 2,986.20, -11.75 (-0.39%)
NYSE Composite: 13,006.64, -32.59 (-0.25%)

For the Week:
Dow: -46.39 (-0.17%)
NASDAQ: +32.50 (+0.40%)
S&P 500: +15.93 (+0.54%)
NYSE Composite: +73.73 (+0.62%)

Peaceful Markets Lulling Bulls and Bears Alike into Complacency

Stocks had no direction whatsoever on Thursday, same as many of the sessions from the past few months.

There doesn't seem to be any momentum in either direction, but, as the old adage says, "never short a dull market." This being the middle of third quarter earnings season, there will likely be action on the names which are reporting, though moves during such a period are often discounted as mere knee-jerk reactions.

Everything else, bonds, precious metals, oil, also seems to be in a state of suspended animation. Volatility has been wrung out of markets, which is probably a positive, since there are fears of a repeat of last October, when stocks were battered. This being a non-prime election year, perhaps a significant period of calm might be beneficial.

If you think it's easy to write about nothing, the above sentences should prove that it's not.

At the Close, Thursday, October 17, 2019:
Dow Jones Industrial Average: 27,025.88, +23.90 (+0.09%)
NASDAQ: 8,156.85, +32.67 (+0.40%)
S&P 500: 2,997.95, +8.26 (+0.28%)
NYSE Composite: 13,039.23, +44.34 (+0.34%)

IMF Warns Pension Funds, Insurers, Shadow Banking On Overvalued Stocks

At last, some honesty.

The International Monetary Fund (IMF) and World Bank, holding its week-long annual meeting in (where else?) Washington, DC from October 15-20, has issued a report about stock valuations and the dangers faced by pension funds, insurers, and institutional investors.

Because low interest rates in many parts of the world are cause investors to reach for yield, the IMF sees inherent risk of overvaluation and imprudent borrowing as potential pitfalls should an economic downturn occur.

Their solution would be for more stringent regulation and closer monitoring of large institutional investors and so-called "shadow banking" outlets like insurers and non-bank financial companies. Obviously, the chiefs at the IMF have not read their history well enough, as there's ample proof that during ties of loose monetary policy, central bankers have a tendency to look the other way, fall suddenly into deep sleep, or simply miss obvious signs of trouble developing.

Famously, leading up to the Great Financial Crisis, then-chairman, Ben Bernanke, dubiously opined on May 17, 2007, "The subprime mess is grave but largely contained." A year later, the global economy was in tatters, fending off complete collapse.

While there are certainly signs that stocks are overvalued, and those signs have been apparent for a long time, years, in fact, the conceptual framework currently in use by investors is that the Fed and other central banks, fully in control of markets, will not allow any serious decline in equities, particularly in developed nations, and especially int eh United States.

That's the kind of certitude and unabashed frothiness that leads not-so-directly to insolvency, like trying to catch a falling knife.

It's laudable for the IMF to issue such a report and offer potential solutions to problems which may arise, but who's listening?

At the Close, Wednesday, October 15, 2019:
Dow Jones Industrial Average: 27,001.98, -22.82 (-0.08%)
NASDAQ: 8,124.18, -24.52 (-0.30%)
S&P 500: 2,989.69, -5.99 (-0.20%)
NYSE Composite: 12,994.89, -11.15 (-0.09%)

Stocks Remain in Yo-Yo Mode; Bonds Not Being Bid; BofA Takes Charge

Apathetic marketeers managed to bid stocks higher as third quarter earnings season progresses apace. That's a good start, but the yo-yo is in effect, and, no, that's not Sylvester Stallone stuttering. Stocks are generally fluctuating, and have been for the better part of two years, with no discernible direction.

For today's exercise in "what is fake news?" plenty will be said about Bank of America's (BAC) third quarter results, in which earnings per share beat analyst estimates. The bank returned 56 cents per share in the quarter, on expectations of 56 cents.

However (here's the fake news part), earnings were down from the same quarter a year ago, when the bank earned 66 cents per share. The culprit, according to the Wall Street Journal was a one time, $2.1 billion charge related to the coming dissolution of the bank’s payment-processing partnership with First Data Corp.

Well, isn't that special. Note the divergent headlines:

Yahoo! Finance: Bank of America beats profit estimates on stock trading, lending gains

Wall Street Journal: Bank of America Third-Quarter Profit Fell on Charge

Which one should you trust? (Hint: the one without the exclamation point in its name.)

Meanwhile, while everybody was busy reading their 401k statements, the 10-year note has rocketed from a yield of 1.52% on October 4, to 1.77% yesterday. That's quite the move (25 basis points, 1/4 percent), and, further, it un-inverted the yield curve, suggesting that what, exactly? There's not going to be a recession, or, if there's a recession, it will be short-lived and shallow, or, everybody is just front-running the Fed, buying the shorter maturities, or, the market is very confused.

Likely, it's a little bit of everything, but worth commenting upon and watching closely for the next move.

At the Close, Tuesday, October 15, 2019:
Dow Jones Industrial Average: 27,024.80, +237.44 (+0.89%)
NASDAQ: 8,148.71, +100.06 (+1.24%)
S&P 500: 2,995.68, +29.53 (+1.00%)
NYSE Composite: 13,006.04, +109.82 (+0.85)

Stocks Flatlining In Advance of Bank Earnings

In the most recent Weekend Wrap, the flatlining of stocks over the last 21 months was discovered and discussed, but Monday's trading amplified the condition, with stocks stuck in a narrow range throughout the session.

The Dow Industrials traded in a range of 125 points for the full day, but, after the first half hour, the range was no more than 100 points in either direction. The same range-bound condition was true for all the major indices. Trailing into the close, the three majors (Dow, NAZ, S&P) were all down by less than 0.15 percent.

This was likely due to the observance of Columbus Day, which saw the bond market closed, though the lingeing effects of so much central bank tinkering must be playing on the minds of more than a few seasoned traders.

While markets are unlikely to completely seize up, there is the potential for individual stocks to go bid-less for extended periods. Market volume and breadth has been on the skinny side of thin, to say the least. Volatility has been wrung out, except for the occasional algo bounce directly tied to the up and down, on and off trade disputes between the United States and China. This false narrative moves markets, but not in any consistent pattern except for that of a knee-jerk.

The week ahead will feature third quarter results from the banking sector, sure to add some dynamism to an otherwise flaccid affair.

At the Close, Monday, October 14, 2019:
Dow Jones Industrial Average: 26,787.36, -29.23 (-0.11%)
NASDAQ: 8,048.65, -8.39 (-0.10%)
S&P 500: 2,966.15, -4.12 (-0.14%)
NYSE Composite: 12,896.22, -30.70 (-0.24%)