Fed Loses "Patient," Wall Street Says, "I'm Cured!"

Wed, Mar 18, 2015 - 1:37pm

Overnight equity and fixed income markets were nearly all higher on the eve of the much anticipated FOMC meeting where they plan to delete an adjective. The early going here saw the market take a dip into the red, with the indices losing about 0.5% in the first hour, before activity slowed leading up to the all-important release of the communiqué and press conference.

The Bulls' Self-Deluding Prophecy

I'd like to take a moment to reiterate where I think we are. Since the Fed began tapering I have been expecting the market to have a nasty spill at some point. As I have said many times, the market is where it is because of money printing by the Fed (and other central banks). That's what drove the stock market to the moon and put rose colored glasses on folks of a bullish persuasion regarding the U.S. economy, and the combination of the optimistic outlooks for stocks and the economy has led to strength in the dollar.

So three major macro conclusions have all been reached based on the premise that Fed money printing has worked. It would appear that folks also believe that not only can the Fed stop printing money, but it will be able to start raising rates and withdrawing liquidity. I and others who think likewise don't believe that is the case. Thus, my shorthand expression has been that there is a game of chicken going on between the S&P and the Fed, fueled by the aforementioned beliefs of the stock bulls, which they will continue to hold until the Fed's actions — or lack thereof — produce a huge break in the stock market.

Overdue Diligence

Just because a big break has not happened along the way doesn't mean that it won't. Timing the ending of markets that have been kited higher by easy money is impossible. It couldn't be done during the stock bubble that ended in early 2000, the bond bubble that ended in 2008, and it can't in this bubble either (especially given the epic size of QE). But it will occur. The question then becomes at what point will the stock market start to sink, and when will expectations for it, the economy, and the dollar all change? As noted, we can't know that in advance, we can only react to change once it occurs.

With that preamble out of the way, once the FOMC news hit, stocks exploded as the Fed's verbiage became much more dovish. The Fed downgraded its economic assessment and raised the bar as to what would cause it to tighten. Thus, versus expectations, in "beat-the-number" parlance, the Fed "missed and lowered." Given the world economy, they may never raise rates, but the change in psychology that that should precipitate (i.e., that the Fed blinked, is trapped, and can’t raise rates) hasn't yet occurred.

Fed Loses "Patient," Wall Street Says, "I'm Cured!"

In any case, the stock market went wild on the news and closed with a gain of about 1% or so. For what it is worth, I sold all my puts (ex some Intel), covered my SPOOs, sold my VXX, and added some gold and miner calls. I may (or may not) reinstitute all the positions soon depending on the action. Just to be clear, I am not advocating that anyone do anything just because I did. I offer this information in anticipation of questions I might get.

Away from stocks, ahead of the FOMC news, green paper was mixed, oil was 3% lower (and traded into the low $42s), fixed income was higher, and the metals were a touch lower as well. In the wake of the Fed announcement, the predictable responses occurred: the dollar was spanked, while bonds, oil, and the metals all popped to the upside.

Positions in stocks mentioned: long INTC puts.

Related:
Interview with Bill Fleckenstein on Shorting the Market

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