The Theory Of Theories, Like Blisters That Have Blisters

Every day, fundamentals analysts are called upon to divine the future. So, a theory has to be found for almost everything. Drought? Gold rises. No, wait: drought plus wildfire? Gold falls. It can get a little silly.

However, there are some cyclical movers of markets that border on technical forces but aren’t, of course.

Perhaps the most high profile of this kind of force recently is the “What will the Fed say or do?” school of tealeaf reading. Despite the fact that when the FOMC issues a statement and the chair holds a news conference immediately after each meeting ends, pundits refuse to believe that what is said is… well… what is meant.

The minutes from the July FOMC meeting are due out this week and supposedly this has markets on tenterhooks. It may have fools on tenterhooks or those looking to spook the herd one way or another for fun and profit, but a 25 basis point rise is not going to change much. Heck, two rate rises wouldn’t really hurt much beyond some short-term pain.

Having said that, we’re compelled to tighten our saddle, stick to our guns, and repeat once more that we don’t believe interest rates will be raised at the September meeting.

We feel that data is too spotty for starters. Today, the New York Fed region’s manufacturing report came crashing in like an asteroid hitting the Earth. It was worse than the worst, especially given what expectations were.

New York said that manufacturing activity for the state fell from 3.86 in July to -14.92 in August, the lowest reading since April 2009.

Economists had expected the index to rise to 5.00 this month. (A reading above zero indicates expansion.) So, we missed the mark just a bit.

"Bottom line, this number was terrible and maybe we're about to see the Q3 inventory giveback that was such a lift to Q2," Peter Boockvar, chief market analyst at The Lindsey Group, said in a note. "It was not a good start to the August data and a stronger dollar, weak growth overseas and a still 2% [growth rate in the] U.S. economy doesn't lend itself to a robust manufacturing outlook."

Here is as good a time to speak of oil prices. They’re starting to become seriously problematical, especially since consumers aren’t using the money they’re saving to buy more stuff. But, the really harsh effect of low crude prices is that they depress equities while simultaneously hurting equipment manufacturing, transport and labor. That’s how important oil is to the world economy.

Oil is facing a demand crisis. Into the teeth of that, OPEC, led by the Saudis, is producing heavily in anticipation of even more crude becoming available via Iran, the U.S., Canada, and now, through a series of interesting maneuvers, Mexico. It could be OPEC is predicting a true crash in oil prices.

On the sunny side of the U.S. data street, the National Association of Home Builders index rose one point to 61, the highest level since November 2005. That could push the Fed in another direction, providing at least a bit of a counterbalance to the negative news cited above.

For the day, that bit of housing news was enough to invigorate U.S. equities and the dollar, which should be seeing a more serviceable rise now that the idiocy over the yuan de-val is over (for the moment).

Regarding a Fed rate hike, we would keep an eye on manufacturing; China activity this month/quarter; truth telling in China – especially the chemical explosion in Tianjin; and how emerging markets are doing. Tianjin is important because confidence in central planning in China is at low ebb, seemingly in the space of only a year. The wages of lying is lack of confidence.

The Fed has a lot of constituents throughout the world. While the home front is central, naturally, it isn’t the only one that counts and that is why we include the state of emerging economies as meaningful in the U.S. central bank’s calculus.

We’re wondering if the yuan de-val preempted a Fed rate rise. More thoughts on that as we roll along toward September.

One last comment: It’s uncomfortably hot in the northeastern United States. If you were to walk along the beaches or sashay into the watering holes of the East End of Long Island or Nantucket and Martha’s Vineyard, you’d be tripping over analysts, brokers, investors and random billionaires. Look for a change in tempo and outlook after Labor Day.

There’s a good reason we have lots of lurching about. A lot of short workweeks are adding to the CBOE Volatility Index, which is hovering around 13.

Wishing you as always, good trading,