Sunday, September 11, 2016

Rate hike rage?

The number one lagging indicator on Wall Street's daily performance has to be visits to my blog.  Friday afternoon and evening saw a pretty significant spike in visits which means something of interest must have happened :)

There were a number of contributing factors that seemed to get a little downward momentum going:

1) A Fed Governor making statements in support of gradual rate hikes.
2) European bonds selling off a bit
3) Oil prices slipping after another false data reading

However, none of these factors really could be labeled as a cause of a 2.5% sell-off.  I go back to the tried and true "temper tantrum" excuse.  Each time the Fed and other central banks have toyed with the idea of returning to a normal rate environment, the investing community has panicked as a group sold stocks hard and called the Fed's bluff.  With a Fed meeting coming up in less than 2 weeks and despite a tremendous amount of evidence pointing toward economic weakness, the Fed has a 30% chance of pulling a shock and awe move by raising rates.  While, I believe that isn't likely this Fed is about as disconnected from reality as one can be so who knows.  I think Wall Street wants to remind the Fed that their primary objective is no longer inflation control or employment stabilization but rather maintaining the S&P 500 near all-time highs.

The overnight futures look a little lower, however they are already bouncing a bit, but if history is any predictor (it shouldn't be, but it is with today's computer driven mkts), when the markets fall 1.5% or more on Friday, they are also down on the following Monday roughly 90% of the time.

Other interesting tidbits I read this weekend:

* Deutsche Bank posted some observations on the state of the US economy. 
"In the current business cycle, margins peaked at $18,752 per worker in Q4 2014. This compares to a ratio of $16,487 per worker as of Q2 2016. Margins have fallen because corporate profits have declined -6.3% annualized over the past six quarters,"

So what? Maybe companies are actually sharing the wealth a bit, right?  Well, the issue is that every time since WWII that margins peaked and then steadily declined that signaled a recession.  The median number of quarters from the peak of profit margins/worker to the next recession has been 8 quarters.  This would mean Q4 2016 (ie, 3 weeks away) could get very interesting.  If I'm not mistaken, I think some random blogger in upstate NY also said that there is a chance that we'll be in a recession by the time the November elections take place just last week. :)

* One of the issues I have with any state fighting to protect jobs at an aluminum producer (Alcoa in our case in NYS) with additional tax incentives and electricity rate adjustments is that we are fighting an arms race that we can't win.  Consider that since 2010 Chinese aluminum output has DOUBLED, US imports of aluminum jumped from 14% to 40% of total supply and the number of US smelters has fallen from 23 to 5.  China is racing to the bottom of this industry but that doesn't mean we have to follow them down the well. 

In a related story, there was an article this weekend that discusses a massive aluminum stock pile in the Mexican desert. 

"Two years ago, a California aluminum executive commissioned a pilot to fly over the Mexican town of San José Iturbide, at the foot of the Sierra Gorda mountains, and snap aerial photos of a remote desert factory.

He made a startling discovery. Nearly one million metric tons of aluminum sat neatly stacked behind a fortress of barbed-wire fences. The stockpile, worth some $2 billion and representing roughly 6% of the world’s total inventory—enough to churn out 2.2 million Ford F-150." 

6% of the TOTAL Inventory just sitting there ready to hit the market.  It appears that the stockpile has been set aside by a Chinese billionaire in effort to control a flooded market to some degree.


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