This column is my opinion and expresses my views. Those views can change at a moments notice when the market changes. I am not right all the time and I do not expect to be. I disclose all my positions clearly listed on the page, and I do not trade my account on the stocks spoken of in this column unless fully disclosed. If that does not work for you stop reading and close the page. Do not bother me or harass me.
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Stocks Are Going Higher and Yields Are Going Lower – The Daily Rundown
MICHAEL KRAMER AND THE CLIENTS OF MOTT CAPITAL OWN DIS, TSLA, AND NFLX
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Wacky Wednesday
As my four-year-old keeps saying today is Wacky Wednesday, yes it sure is. I had the unfortunate pleasure of having to take my 4-year old daughter to the doctor, for pink-eye no less! What time could the doctor get us in? 2 pm! Perfect timing! Anyway, so I missed most of the action after the FOMC statement. By the time I got out of the appointment at 2:30, I had noticed a few things going on that didn’t make a whole ton of sense. First, I saw yields on the 10-year falling, along with the U.S. dollar. Hmm. Without knowing what the verbiage was in the release, it felt like the Fed must have signaled something about rates not rising as fast or as much as the market had expected. Stocks and the banks sold-off around 2:45 ish.
2:45 Was When Everything Changed
The WSJ had a wonderful blog running for Powell’s press conference, so I took the time to check it. At about 2:45 Powell commented not about the future interest rates, but about the future of inflation. Noting that “Inflation seems to be fairly nonreactive to changes in slack,” he said. “It’s a world of strongly anchored inflation expectations. That’s not just our forecast.” So looking at the chart we can see that things got wacky at that moment.
It was at 2:45 when banks stocks fell.
It was at 2:45PM when rates fell.
It was at 2:45 when the dollar got wacky.
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It isn’t all that different from what we have spoken about here regarding indications that inflation will remain low for some time and that is not likely to run away as market participants have often feared. The Fed projects the PCE to stay around 2% through 2020.
It also likely means rates on the long-end of the curve are likely to stay low and it is bad news of the banks. Anyway, enough with the banks. I’m sick of the banks. They are the disappointment the sector of the year. Oh, have you notice that earnings estimates for the banks for this coming quarter are falling.
Bullish for Equities
Make no mistake if inflation stays low, other than that it is bad news for the banks, it is good for the rest of the stock market. It is bullish for the broader equity market. I don’t know how else to say it. I do not expect the sell-off today to last. It is good news for growth stocks because low longer-term rates are support of multiple expansions and higher PE valuations.
By the way, the Fed has basically no influence on the long-end of the curve. So, just because the Fed is raising the short-term rates it doesn’t mean all rates are rising. The long-end of the curve is driven by inflation expectations and economic growth.
Follow Bonds and Currency Markets
I’ll tell you what if you get confused at all by what you hear on TV or what the stock market is doing, turn to the bond and currency markets. They are better at getting this stuff right, then the equity market. A dollar that is dropping and interest rates that are falling happen because due to two scenarios: that the central banks around the globe will raise rates at a faster pace than the US or that inflation expectations will remain low, and interest rates here the US are likely to not rise as quickly in the future.
Unless the US is going into a recession, and the rates are falling because of a recession, lower long-term rates are better for stocks.
Intel (INTC)
Moving on to Intel, we can say the stock has failed to break out. I’m sorry, but this just not working out, and the stock is heading lower, to $44,80, and we will have to hope and pray that it stops falling at that point. Perhaps $44.80 is the point when shares turn higher, but at this moment, now is not the time.
AMD
AMD is undoubtedly taking a new path, but still lower.
Netflix (NFLX)
Netflix broke out today rising above $375. I think and I hope this break out doesn’t fail like the others. If it does fail, then I believe there is a clear path higher to around $395 to $400.
Tesla (TSLA)
Tesla broke out today as well, and I see a path for the stock to rise to about around $335 for now.
Disney (DIS)
Disney is the victim of a failed break out too, now it is trying for a second time to break out. I think this time the break out happens and we see the stock climb back to the 2015 highs.
That is it!
-Mike
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Michael Kramer is the Founder of Mott Capital and the creator of Reading the Markets.
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Mott Capital Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future.
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