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.
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.
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)