Impatience Is Not A Virtue As Markets Waver, Lacking Conviction

In his 1919 poem, “The Second Coming,” William Butler Yeats wrote:

Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world…

And here we are watching anarchy (albeit a quiet riot kind of anarchy) being loosed upon the financial world as the legions of analysts and commentators overwhelm a little tiny possibility – that of a rate hike by the Fed this week – with a tidal wave of thoughts, words and pounding with hammers.

“It won’t be all that earth-shattering, one way or another!” it makes us want to shout.

“And, it’s always reversible. The road runs both ways.”

One of the inevitable scare comments we’re hearing both in the media and on the physical Street itself is the comparison to the European Union’s central bank raising rates when the economic agglomerate was still on shaky economic ground. (Well, more like quicksand.) Of course the rise in rates hurt the EU relatively sharply, but also relatively briefly.

And, at that point little did anyone know that the European Central Bank was going to do some quantitative easing. The ECB simply did that late in the game.

As we head into the close-in run up to the Wednesday-Thursday meeting of the FOMC, we are seeing a stable to slightly down U.S. dollar, lower U.S. Treasury yields with higher face values, a modest decline in oil (despite the small drop in the greenback), and some good old-fashioned dithering in the equities markets.

U.S. equities are punishing some low P/E ratio stocks and rewarding some higher ones in what seems to be counterintuitive activity. But the low P/E’s are mostly energy related – especially oil stocks – with the exceptions of cash-laden behemoths like Apple (which is up 1.0% today) and runs at about 13X earnings.

Oil is being pressured today by the end-of-season driving drop off, which means less gasoline consumption. In addition, growth in China's fixed investment and factory output missed forecasts in August and that weighed on energy. A recent spate of anemic data from the world's second-largest economy has been raising the chances that Q3 growth there may dip below 7% for the first time since the financial crisis.

The biggest drags on China’s growth are misguided and corrupt real estate development issues. They are far too lengthy to go into in detail in this space. However, there are some solid stock performers away from the Shanghai composite index, especially in Hong Kong, which remains the best model for long-term Asian equities growth.

We believe we are probably looking at a rate cut in China if things don’t turn around there soon. It is not so much the actual slowdown, but the contours of the curves that are describing the slowdown. The rate of growth has decelerated in a whiplash fashion.

We also have the usual doubt about official government data, which we would consider inherently untrustworthy. But there are some measurable data factors that tell us quite a bit about China’s stagnation and declining growth rate.

The August year-over-year growth in energy output was only 1.0%. By contrast, the U.S. growth rate in the sector was almost 3.0%. Weigh it for yourself.

All that being noted, we think the Fed is as worried as the rest of the world about a China-led world contraction in growth. So, to the bitter end, we are saying no rate hike this week. After that, let’s reassess and reconsider October and December.

Wishing you as always, good trading,