Stocks Pause But Are Likely To Go Higher Soon

Markets took a breather on Tuesday, possibly in anticipation of the impeachment vote in the House of Representatives coming on Wednesday, but also not discounting the fact that stocks are once again hitting new record highs.

An appreciation that stocks may have reached untenably high valuations would likely slow down or reverse trends in most markets, but stocks in the era of free Fed money are far removed from anything approaching normalcy. This slow trading will likely last only a day or two at best, for there is money to be made in finding the greater fool, upon whom one can dispose of overpriced assets.

As far as measures of valuation are concerned, one of the best is Robert Shiller's CAPE (Cyclically Adjusted P/E) ratio, which takes the average P/E ratio of a stock over the past ten years, not just the past year or forward year as the simple P/E ratio does. It stands today at 30.60, a level above that of Black Tuesday, the fateful day in 1929 which kicked off the Great Depression.

Shiller's CAPE level, while accurately delineating the high valuation of stocks being bought and sold in today's marketplace, should also not alarm. They've been at, above or near that same level for some time. It might be instructive to note that the highest CAPE reading ever was in 2000, at the peak of the NASDAQ bubble, when the ratio stood at nearly 45.

This one-day bout of sleepiness is probably an outgrowth of being a little bit overextended in some people's minds. They are likely to be changed soon. There still appears to be plenty of room to run.

At the Close, Tuesday, December 17, 2019:
Dow Jones Industrial Average: 28,267.16, +31.27 (+0.11%)
NASDAQ: 8,823.36, +9.13 (+0.10%)
S&P 500: 3,192.52, +1.07 (+0.03%)
NYSE Composite: 13,795.35, +0.20 (+0.00%)

Trade Deal Sparks Rally, Enough for New All-Time Highs

Approaching year end, Monday's trading was like a toast to prosperity.

"New highs all around," was the buzz, even though stocks had taken back half of the morning's gains by the closing bell. Still, it was enough to entertain thoughts of bigger Christmas presents, newer cars, more trinkets and shiny toys for the kids and assorted other trivialities.

Phase one of the US-China trade deal was delivered, with tariffs postponed or to be curtailed by both parties to the agreement and plenty of the details still to be worked out on either side of the Pacific.

The general consensus seemed to be a relief that something concrete was finally emerging from nearly eighteen months of haranguing, harassing, arguing, pointing, posturing and persuading.

China has apparently agreed to double its import of commodities from the US, among other conditions.

Markets were pleased, but not overjoyed. Tuesday, it's back to the grind of watching the Fed and its REPO operations for the year-end "turn," a situation that has more than enough nuance to spark off volatility in either direction. There's definitely a liquidity problem somewhere, maybe everywhere, but most of the participants - the central banks, commercial banks, and primary dealers, have chosen to be pretty much mum on the details.

The Fed will just continue with extraordinary measures with daily injections via purchases and loans through the end of the year and into the next, with announced activities extending through mid-January. How much of this freshly-minted capital gets put to use in stocks is still unknown. There are funding needs and tax payments to be made, but the overall appearance is that the Fed has a handle on it and will continue to monitor it until their overnight and longer term monetary assistance is no longer needed.

And there's the rub. After these auctions, purchases, loans, and repurchases are complete and we're into 2020, will the Fed be able to turn down the spigot to more reasonable levels and eventually turn it off altogether?

That's a query for the future, unanswerable in the present.

At the Close, Monday, December 16, 2019:
Dow Jones Industrial Average: 28,235.89, +100.51 (+0.36%)
NASDAQ: 8,814.23, +79.35 (+0.91%)
S&P 500: 3,191.45, +22.65 (+0.71%)
NYSE Composite: 13,795.15, +97.81 (+0.71%)

WEEKEND WRAP: Trump Charged, Johnson Elected, Fed Throws Money to the Wind

What a week!

Not only was President Trump brought up on impeachment charges of abuse of power and obstruction of congress (whatever that is) by Jerry Nadler's gutless judiciary committee, it came on the heels of a crushing conservative victory for Boris Johnson in England. And that came just after the Federal Reserve's FOMC decided to keep the federal funds interest rate right where it was, at 1.50-1.75%.

All of this happened on Wednesday, Thursday, and Friday. There was little time, in between, for the United States and China to announce, denounce, defer, define, defend, and eventually demystify the outlines of some vague phase one trade deal, which still hasn't happened, but is supposed to, any time, any day now.

So there it was, except for a few details that may have slipped over the transom or under the proverbial rug, like the Federal Reserve supplying $500 billion in liquidity to REPO markets to handle "the turn" from December 31, 2019 to January 1, 2020.

That little nugget came and went. Everybody was too much involved over impeachment and Boris and the trade deal to notice. Such an amount of money just to get from 2019 to 2020? It sounded absurd, spending half a trillion dollars to change the calendar. Remember, there was $700 billion in TARP, back in 2009, and that supposedly rescued the entire global financial system. This amount is more than two thirds of that.

In a related story, Lee Adler of The Wall Street Examiner purports that the Federal Reserve has bought up 90% of the government's issuance of treasury bills, notes, and bonds since September 16, effectively monetizing the debt.

So, this $500 billion of liquidity from the benevolent Fed, is it a precursor of more debt monetization, or simply a safeguard against some hedge fund or larger institution crashing as one year turns to the next? Its hard to say. Like recessions, the world will likely have to wait until after the fact to find out.

On a weekly basis, the Dow has gained in seven of the last 10 weeks. The S&P was up nine of the last 10, the NASDAQ moved higher nine of the last 11, and the Composite Index finished higher nine out of the last 10 and this week closed at an all-time high, proving, once again, that it's folly to fight the Fed.

As a footnote to the coming week, the full house is expected to vote on articles of impeachment on Wednesday.

At the Close, Friday, December 13, 2019:
Dow Jones Industrial Average: 28,135.38, +3.28 (+0.01%)
NASDAQ: 8,734.88, +17.56 (+0.20%)
S&P 500: 3,168.80, +0.23 (+0.01%)
NYSE Composite: 13,697.34, -0.06 (-0.00%)

For the Week:
Dow: +120.32 (+0.43%)
NASDAQ: +78.35 (+0.91%)
S&P 500: +22.89 (+0.73%)
NYSE Composite: +109.05 (+0.80%)

Britons Vote In Conservatives As Boris Johnson Rides Populist Landslide To Majority

"We broke the deadlock, we've ended the gridlock, we've smashed the roadblock - we did it!"

Those were the words Britain's Boris Johnson used to describe his his Tory party victory in Thursday's UK general election, as the conservative party was swept into power with a commanding majority in the House of Commons, crushing the liberal Labor party and others.

Johnson's resounding message during the campaign was to "get Brexit done," and it appears the path is now clear, nearly four years after the general population voted in a referendum to leave the European Union. With not all of the districts reporting, the conservatives hold 364 seats to Labor's 202. 325 votes are needed for an outright, one-party majority and the Tories have it.

The size of the majority was of a magnitude not seen since the 1980s when Margaret Thatcher ruled over decade of conservatism. Some of the Labor seats that were lost had been voting for liberals since the 1930s. The sweep and scope of the landslide is historic.

Johnson, party leader and Prime Minister, has been pushing for a resolution to the Brexit problem over the past six months and finally was pushed into a general election, a move that eventually backfired on his opponents and has now paved the way for Britain to regain its independence and restrain or reverse the liberal spending and immigration policies that the country so desperately needs.

This election, viewed on a global basis, is an extraordinary victory for conservatives and working-class populism, mush as Donal Trump's election in 2016 was in the United States. The wave of populism just got another boost, sending the worn-out, fear-ridden policies of the left screaming for cover.

Even as the results were being tabulated Thursday night in Great Britain, voices of the losing liberals were heard using words and phrases such as "devastating," "disastrous," and "dangerous for our country," to describe the stunning victory for the right, with the general public sending a loud mandate to fix what's broken and move on.

No doubt, the liberal politicians will moan and wail, just as they have in the United States, but, in the end, the handwriting is on the wall. People want less government intervention into their lives, less meddling, and more positive, clear-headed solutions.

While many in America will have little understanding of the importance of the British elections, they send a clear message and make the case for Trump in a very distinct way.

Here is Johnson's victory speech:



At the Close, Thursday, December 12, 2019

Dow Jones Industrial Average: 28,132.05, +220.75 (+0.79%)
NASDAQ: 8,717.32, +63.27 (+0.73%)
S&P 500: 3,168.57, +26.94 (+0.86%)
NYSE Composite: 13,697.41, +117.48 (+0.87%)

Fed Holds Rates Steady; Repo Madness Debunked

There was little reaction to the final FOMC policy decision of 2019, as the Fed chose to stand pat on the federal funds rate, adding that they expected to be no rate movement at all in 2020.

Keeping rates fixed for the next 12 months may be wishful thinking, but it also may be a level-headed approach, since, after all, 2020 will be an election year, the country has been through all manner of pain and suffering for the past three years, and a bit of stability would surely be welcome to many.

Coming from the Fed and the sobering mellow intonations of Chairman Jay Powell, the calming effect on not just markets, but society as a whole may provide a soothing tonic. With steady interest rates, businesses can plan with more confidence, individuals can maintain their standards of living and maybe balance their budgets for a change. It's a welcome relief.

At the press conference, Chairman Powell fielded one question on the intriguing REPO malaise, but didn't express any kind of apprehension or surprise. Perhaps the whole thing has been a little overblown by various pundits and press people. One article in which the Repo scare is debunked by Jeff Snider at Alhambra Partners suggests that there never was a reason to be worried about a market crash or any other unforeseen, nasty event in the first place.

So, as the holiday season continues apace, the Fed has apparently managed to calm the markets, albeit temporarily, but with an eye toward the future. If there are no interest rate changes in the coming year, that would be a feat worthy of high praise toward an institution - the Federal Reserve - that is normally the butt of jokes and the object of roundhouse criticism.

If, come late December 2020, the federal funds rate remains at 1.50-1.75%, we can call it a "Christmas miracle." For now, we can temper our optimism, relying on the scattered and unpredictable nature of world events and markets to prove the Fed wrong.

At the Close, Wednesday, December 11, 2019:
Dow Jones Industrial Average: 27,911.30, +29.58 (+0.11%)
NASDAQ: 8,654.05, +37.87 (+0.44%)
S&P 500: 3,141.63, +9.11 (+0.29%)
NYSE Composite: 13,579.92, +34.62 (+0.26%)