Hope for brighter days has quickly erupted on Wall Street.
Go figure. All it took was a sizable intraday reversal last Friday to stoke optimism of a fourth-quarter Santa Claus rally. Yep, believe it or not, we have returned to the mindset that bad news on the economy is great news for equities -- in this backdrop, the Fed is able to keep stock multiples inflated even as earnings increasingly get deflated due to souring global economies. But, before breaking out the pompoms, I suggest taking a cold, hard look at the charts below and then thinking about what they say on equities.
Expectations on rate hikes from the Fed have cratered since the spring. Now, not only do futures point to a prolonged period of extraordinarily low rates, but they suggest it will take quite some time before policy normalizes (maybe 2019? LOL). The issue with that rationalization by the market is that it means, I think, horrible things for the U.S. economy. Pick your poison -- horrible things on the economy could mean more companies go out of business due to sluggish consumer spending, large companies get deeply restructured (take note of DuPont, DD, mentioning it will do a "deep dive" into its capital structure under its new interim CEO -- red flag) and healthy levels of inflation that support earnings growth never seem to materialize. That is not exactly an investment backdrop to be thrilled over, rather it's one where multiples deserve to compress and Wall Street has to keep a careful eye that earnings estimates don't become too rosy.
By the way, we will see some more headline-grabbing CEO departures in an environment of low rates seemingly forever. Continuity in management is important, unless the company is operating horribly.
Another worrying sign on this short-term stock buying spree is the direction of Treasury yields. For example, the one-year U.S. Treasury yield, already paltry, has been basically halved since the last Fed meeting. We have been trained post-Great Recession that an easy Fed means a pretty decent U.S. economy, solid emerging markets and easy money to be made in the market. However, that's not the signal being sent by Treasuries -- instead the signal is that investors don't trust the post-Fed meeting bounce in the markets. And why is that so? Well, mostly because there is a growing distrust in the Fed's ability to spur growth on a global basis. I think this is something being eloquently expressed by former Fed Chair Ben Bernanke during his book tour (so weird to see Bernanke do financial media hits).
Want to trust the rally? Then let's see some dumping of Treasuries and slow-growth industrials like IBM (IBM) and Caterpillar (CAT) not be leaders in a Monday market rebound.
Around the Horn
Sign of absolutely horrible corporate governance is: appointing a CEO to a public tech company that is already a CEO at a growing upstart tech company. Such is the case at Twitter (TWTR). I believe Jack Dorsey will have his work cut out for him in driving the type of execution improvements Twitter requires while still overseeing Square. But hey, what do I know -- maybe Dorsey is superhuman and could pull off juggling two CEO jobs.
McDonald's (MCD) all-day breakfast launches today. I don't think this will be a market mover for the stock today, but I could see McDonald's putting out some form of humblebrag press release (Robert Gibbs is the new communications chief) later this week touting the enthusiastic reception to being able to buy cardboard-like pancakes at midnight. In turn, that would spur rumors of the start of a sales turnaround in the fourth quarter. My hopes are not high on McDonald's; the food sucks and many, many others are doing cheap fast food better.
Pay attention to Noodles & Co. (NDLS) today. The company will be following the likes of Panera Bread (PNRA) and Yum! Brands (YUM) in touting efforts to reduce artificial flavors. TheStreet will have the CEO at its HQ around noon, so watch my Twitter feed @BrianSozzi for thoughts right after the meeting. If the stock doesn't get a pop today, I would be concerned -- this new marketing campaign is critical for reviving the company's sales, brand and stock price (stock down 48% year to date). (Twitter and Panera are part of TheStreet's Action Alerts PLUS portfolio.)
