Well the Fed pushed off the hike in interest rates. It appears that some of the recent market turbulence has put them on hold.
Of course there are potential holes in our economy but I still think there is enough room to raise rates a tiny bit here. GDP was revised up to 3.9% on an annual rate recently, labor is tight in a few areas and I simply think it is time for the Fed to get on with it and move out of the market.
Others can point to widening credit spreads etc. as an excuse for continued easy monetary policy but you cannot try and rescue every group in the economy forever. At some point, and it may already be happening, the stock market will get more upset that the Fed isn't tightening than when it does.
Anecdotally I have been on a number of conference calls with Homebuilding companies and they indicate that people looking for mortgages are able to get them and that these companies see little loss in their sales from people who cannot get financing. While the Northeast may be suffering, home sales are doing pretty well nationwide.
I know the Fed's biggest challenge in their econometric models is not just to see where the economy is now, but to anticipate where the economy will be 6 to 12 months from now. In anticipating this turn they have to project ahead for such items as consumer and business psychology and behavior. In this way they are essentially trying to slow the train before it gets going too quickly.
Despite my desires to get the Fed out of the economy, I believe the Fed is on hold through the end of the year. This means yours truly will need to listen to more Fed governors and their announcements (a process that does not come close to exciting me).
Eventually rate hikes will come. Just not now.
Beyond the Fed, and when I have nothing better to do, I watch various commodity prices. Of course one of the most talked about has been oil and this leads me to consider oil service stocks.
In checking the most recent Baker Hughes rig count numbers, the United States Rig count is down to 838 from 1931 a year ago. The obvious driver of this drop in rigs is the lower cost of oil brought on by Saudi Arabia and their continued pumping of all even at these low prices.
Of course, at some point, the rig count will need to rise but right now we are over supplied. Bad for the oil producers and good for the consumer and their discretionary spending habits.
I will be watching to see if the oil price stabilizes here but when I listen to the producers and their conference calls they are simply cutting capital spending as fast as possible because they have no visibility on the price of oil going forward. These companies have been securing the hatches for a year now and we may see more bankruptcies in this sector. Some are working to re-negotiate their debt, others have suspended their dividends (e.g. Chesapeake Energy)
My gut says that even if we don't get a larger drop in oil, the price per barrel is likely in a range here between the mid-40s and mid-50s.
If we do get some price stability in oil then I would expect this group to get bid.
Companies
Despite some doom and gloom out there you still see a number of companies executing well and increasing their earnings. The recent Nike earnings announcement showed how successful there strategy is in China.
Homebuilding stocks are doing pretty well as the Home Market Index (source NAHB) stands at 62 this month. This has trended up from a low in 2008 of around 9. A pretty good improvement.
And, as mentioned before, Amazon's earnings were pretty strong in their last release.
The point is here that there are companies that are delivering.
One item I have noticed is that certain sectors that often survive on a little more risk are getting pulled in here. This is consistent with my "valuation" thinking as I mentioned earlier. One such notable sector is the Biotech stocks.
I have no personal beef with this sector and I know there are some great innovations developing, but you can't, forever, have a number of companies that have very few actual sales, operating with negative cash flow trading at premium prices. To illustrate let's check in on one of the larger players in the field: Biogen. You can see from the chart below that some technical damage has been done and it may lead to some further weakness.
