The market has become infatuated with two words from the Fed: "considerable time." When the market becomes infatuated with a macro view or a view on a company, I tend to look elsewhere for the truth. It almost feels as if the Fed will leave the language unchanged, which would send stocks higher. You may want to nibble on some gold in preparation for this, the thought being that the Fed would spur surprising inflation in 2015. I think there are a host of other things investors need to be watching in the FOMC release and Fed Chair Janet Yellen's press conference. My source for this is the minutes from the prior meeting.
The Fed on the economy and jobs:
Economic activity expanded at a "moderate pace in the third quarte,r" and "labor market conditions improved over the intermeeting period." Given the November retail sales and employment numbers, the Fed will upgrade its assessment of the economy, and likely drop its "considerable time" lingo as a result. It will be very important to see how stocks trade between the 2:00 p.m. release and the start of Yellen's conference. Ideally, I would like to see stocks rise on expectations for a stronger economy in 2015.
The Fed on inflation:
"Consumer price inflation continued to run below the FOMC's longer-run objective of 2%." Part of me believes the Fed will drop "considerable time," because of the low level of inflation. Even inflation gains are moderating in the aisles of Costco (COST) and Wal-Mart (WMT). However, the removal of "considerable time" is likely to be matched with something only slightly less dovish, due to inflationary levels. That means a positive setup for stocks, which is what the market may have been saying, with the mini bounce on Tuesday.
The Fed on factories:
"Industrial production increased briskly in September after having been little changed, on net, over the first two months of the quarter, and the rate of capacity utilization in the manufacturing sector moved up."
"Real spending on business equipment and intellectual property products appeared to have risen at a moderate pace in the third quarter."
The industrial production report this week was pretty good. So, the Fed is likely to upgrade its assessment, modestly, on the industrial production front as well. Doing so may hint at companies coming out with stronger-than-expected capex budgets in early 2015, which could be positive for tech companies that play in the long-lived asset space.
The Fed on corporate inventories:
"Inventories in most industries were about in line with sales." Just a little something I am curious about, given the market crushing on the notion that plunging oil prices means slowing global demand. Unexpected global growth slowdowns would lead to inventories running above sales growth.
Completely random...
I am interested to see if the Fed calls out the crashing Russian economy and heightened volatility in global markets. If they do, it may be seen as dovish, signaling the Fed is ready to intervene in some manner in 2015, should things really hit the fan. That, in turn, could negate any modest shift that is deemed hawkish (such as dropping "considerable time" and not being as dovish as market participants had expected during the Tuesday rally).
Your Daily Task
Do a screen that: (1) uncovers the highest dividend payout ratios in given sectors; and (2) double-check to make sure of the direction of company's free cash flow generation in 2015. If the company has a strong historical dividend payout ratio, and has grown free cash flow nicely this year, it could be a setup for a sizable dividend hike soon. I have been surprised by the strong share buyback announcements this week, specifically the one from CVS Health (CVS).
