• Subscribe
  • Log In
  • Home
  • Daily Diary
  • Asset Class
    • U.S. Equity
    • Fixed Income
    • Global Equity
    • Commodities
    • Currencies
  • Sector
    • Basic Materials
    • Consumer Discretionary
    • Consumer Staples
    • Energy
    • Financial Services
    • Healthcare
    • Industrials
    • Real Estate
    • Technology
    • Telecom Services
    • Transportation
    • Utilities
  • Latest
    • Articles
    • Video
    • Columnist Conversations
    • Best Ideas
    • Stock of the Day
  • Street Notes
  • Authors
    • Doug Kass
    • Bruce Kamich
    • Jim Cramer
    • Jim "Rev Shark" DePorre
    • Helene Meisler
    • Jonathan Heller
    • - See All -
  • Options
  • RMPIA
  • Switch Product
    • Action Alerts PLUS
    • Quant Ratings
    • Real Money
    • Real Money Pro
    • Retirement
    • Stocks Under $10
    • TheStreet
    • Top Stocks
    • Trifecta Stocks
  1. Home
  2. / Investing
  3. / Financial Services

Hey Stock Pickers, the Fed Just Made Your Job a Whole Lot Tougher: Market Recon

Once again, the members of the FOMC appear to be lacking in one area: doing their homework.
By STEPHEN GUILFOYLE
Jun 14, 2018 | 06:57 AM EDT
Stocks quotes in this article: MIK, ADBE, JBL, JPM, BAC, GS

You probably have noticed. The S&P 500 had for the most part worked its way back. All the way back, above 2790. Triple top? Sure, if you omit the semi-ridiculous run seen across the equity space way back in January. Then yes, we have now come this far back, now... three times. Flat line base-building at the top, while experiencing continually higher lows could be taken as a positive.

Take a look at the chart below, gang.

In Your Face!!!

That's a nice chart. Impressive momentum. Unless of course, the Fed gets more aggressive, or tariff talks heat up again. Uh oh. Sorry gang. There's a reason why they hand you a helmet at the same time they hand you the pugil sticks. You're going to get smacked around.

The Fed's Official Statement on monetary policy was as promised, somewhat simplified. Oh, and hawkish, too. No way to take it otherwise. Besides the obvious, which was the rate hike itself, some key parts of that statement have either evolved or been omitted completely.

Immediately, fellow policy nerds will notice that in the Fed's view economic activity was upgraded from May into June, as the descriptive word "solid" replaced the word "moderate." In describing trends in household spending, the Fed went even further. That item has now "picked up." Six weeks ago, household spending had "moderated."

There's one big deletion toward the end of the statement. The expectation that the fed funds rate remains below levels that are expected to prevail in the longer run? Gonzo. Like it was never there.

What does this mean for you, the stock picker? Your job just got that much tougher. But wait. There's more.

The Absurdity of It All

The Fed's economic projections just got stickier. The FOMC now signals two more rate hikes in 2018. In fact, the group's median expectations appear to this mild-mannered trader to be unrealistic over the next three years. In fact, I would go so far as to label the group's different expectations as incompatible with each other.

Once again, the members of the FOMC, despite the change in casting, appear to lack in one thing: doing their homework. For one, as a group, our fearless central bankers' median projection is for a fed funds rate that climbs to 2.4% by year's end, and to 3.4% by 2020. Can they back that up? With anything?

Now, I'm no economist (That's a lie, I actually am an economist, and have held prestigious sounding job titles containing that word at several broker-dealers... shhh), but that might make sense if the group also expected economic growth, and /or inflation to ramp up aggressively at the same time. The group projects no such congruent growth.

For GDP, the FOMC expects to see adjusted growth of 2.8% for 2018, and then see that line dwindle to 2.0% in 2020, and even lower beyond that. For Core PCE, their group expectation is for a mere 2.1% this year, and then they see that number remaining flat for all eternity. In fact, not one dot in this space was above 2.3% on any timeline. Hmm. For non-economics types, this is akin to expecting your team to win the pennant, while also expecting them to lose most of their games.

Simply, these folks as a group, expect to keep raising rates, while not being forced to do so by inflation, and while economic growth simply ebbs after the "transitory" impact of corporate tax cuts become part of the environment? How sad. Try pulling that off in the environment provided by real-world conditions.

The Environment

Back here in the real world, the spread has narrowed further between the Treasury's two and ten-year yield overnight. That particular measure, as I stare out my office window at zero dark thirty, has now dropped to less than 40 basis points. In fact, while I happen to watch that measure of Treasury yield performance very closely, I also happen to notice that the yields afforded by 30-year bonds seems to be collapsing on the yield paid by that ten-year note, and the ten-year in turn appears to be collapsing on the five-year. Just what the heck does that mean?

To me, that means that the market does not see any more long-term consumer-level inflation than does the dot plot. The Labor Department's revelation that real wages are lower year over year may have something to do with that. With any luck the European Central Bank will cause some euro strength this morning, conversely impacting the U.S. dollar in a negative way. Yes, as an American trader who mostly trades American product, I say that selfishly.

Oh, and tough talk on tariffs is also about to make a market impact. According to the Wall Street Journal, the Trump administration is closer to imposing tariffs on tens of billion dollars-worth of Chinese goods, maybe as soon as Friday, unless this chip is useful in bargaining with North Korea.

My Way to Go

The banks seemed hot in the wake of the Fed's policy announcement. Then they cooled. They cooled in a hurry as the yield curve would not play ball. Upward pressure at the short end does not help net interest margins if there is no congruent reaction at the long end. That means that traditional bankers will make less money in traditional business lines. These firms will have to rely upon their other skill sets.

What that means to me, among many other slices of the financial industry, is that for some, a volatile environment caused by improved corporate performance coupled with rising rates, and unpredictable inflation should beget trading profits for the competent. If Goldman Sachs  (GS)  does not strut their stuff in this kind of environment, then they are no longer the Goldman Sachs that I grew up despising.

I am long GS equity, and just yesterday I added a June 29 135/142.50 bull call spread to my portfolio. Why am I long a struggling name, and what would be the significance of the expiration date on my spread? I'll clue you in, sports-fans.

At a last sale of $233.83, the shares trade at just 9.6 times forward-looking earnings expectations. That's cheaper than JPMorgan Chase (JPM) , and cheaper than Bank of America (BAC) . Cheap!!

GS stock is down more than 8% on the year, and there are reasons. Cash flow has touched on the negative. Trading, though strong in the first quarter, has not performed as thought. Still, operating margins stand at 46.7%, just a hair below gross profit margins. That's outstanding. The stock trades at 1.2 times book value, far less again than JPM.

Then there's the 1.4% dividend yield. Comprehensive Capital Analysis and Review (CCAR) results are due on June 22 (a week from tomorrow), and June 28 (the following Thursday). I fully expect Goldman to pass these "stress tests" with flying colors. My investment is a bet that the firm at that point resumes their corporate buyback program, and increases its dividend.

You likely will recall that these shares were slapped around in response to CFO Martin Chavez's post-first quarter earnings comment that Goldman would not be buying back any shares in the second quarter. What that means to me is that should upcoming CCAR results change that stance, this stock might just be a coiled spring.

Goldman Sachs (GS)

Price Targets: Moderate: $244, Aggressive: $249

Panic Point: $225

Economics (All Times Eastern)

08:30 - Initial Jobless Claims (Weekly): Expecting 223K, Last 222K.

08:30 - Retail Sales (May): Expecting 0.4% m/m, Last 0.4% m/m.

08:30 - Consumer Spending (February): Expecting 0.2% m/m, Last 0.2% m/m.

08:30 - Import Prices (May): Expecting 1.7% y/y, Last 1.7% y/y.

08:30 - Export Prices (May): Expecting 1.6% y/y, Last 1.5% y/y.

10:00 - Business Inventories (April): Expecting 0.3% m/m, Last 0.0% m/m.

10:30 - Natural Gas Inventories (Weekly): Last 92B cf.

Today's Earnings Highlights (Consensus EPS Expectations)

Before the Open: (MIK) (.38)

After the Close: (ADBE) (1.54), (JBL) (.44)

Goldman Sachs and JPMorgan Chase are holdings in Jim Cramer's Action Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells these stocks? Learn more now.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Guilfoyle was long GS, JPM, ADBE equity; long GS call options; short GS call options; and short JPM put options.

Action Alerts PLUS, which Jim Cramer manages as a charitable trust, is long GS and JPM.

TAGS: Investing | U.S. Equity | Treasury Bonds | Rates and Bonds | Markets | Financial Services | How-to | Newsletter | Stocks | Options

More from Financial Services

Time to Move Into Zillow Group

Bruce Kamich
Dec 4, 2019 12:48 PM EST

The charts of Z look like they can continue higher.

Don't Look for Much Downside on Stealthy JPMorgan Chase

Bruce Kamich
Dec 3, 2019 11:51 AM EST

It's unlikely that JPM has made an important top.

I Got Richer By Going Broke(r)

Paul Price
Nov 26, 2019 7:00 AM EST

Unlike most others, I saw AMTD's huge drop as a buying opportunity, and now look at how it turned out.

Those Who Went For Broke(r) Won

Paul Price
Nov 25, 2019 7:00 AM EST

Buying stocks of Charles Schwab and TD Ameritrade worked out well, after the surge on Nov. 21 when it was announced that Schwab is in serious negotiations to buy AMTD.

'Dance' With E*Trade as It Searches for a Partner

Mark Sebastian
Nov 22, 2019 3:10 PM EST

With the potential TD Ameritrade deal, clearly E*Trade will not be 'talking to Chuck.'

Real Money's message boards are strictly for the open exchange of investment ideas among registered users. Any discussions or subjects off that topic or that do not promote this goal will be removed at the discretion of the site's moderators. Abusive, insensitive or threatening comments will not be tolerated and will be deleted. Thank you for your cooperation. If you have questions, please contact us here.

Email

CANCEL
SUBMIT

Email sent

Thank you, your email to has been sent successfully.

DONE

Oops!

We're sorry. There was a problem trying to send your email to .
Please contact customer support to let us know.

DONE

Please Join or Log In to Email Our Authors.

Email Real Money's Wall Street Pros for further analysis and insight

Already a Subscriber? Login

Columnist Conversation

  • 11:02 AM EST BOB LANG

    Added Some Peleton

    This stock is starting to gain some traction, the ...
  • 01:06 PM EST CAROLYN BORODEN

    MRK and LVS Targets Coming Up

    View Chart » View in New Window »  LVS View C...
  • 12:01 PM EST BOB LANG

    Rolling Up Apple

    Just the other day we added some Apple calls on th...
  • See More

COLUMNIST TWEETS

  • A Twitter List by realmoney
About Privacy Terms of Use

© 1996-2019 TheStreet, Inc., 14 Wall Street, 15th Fl, NY, NY 10005

Need Help? Contact Customer Service

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data & Company fundamental data provided by FactSet. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by FactSet Digital Solutions Group.

TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

FactSet calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.

Compare Brokers

Please Join or Log In to manage and receive alerts.

Follow Real Money's Wall Street Pros to receive real-time investing alerts

Already a Subscriber? Login