Kenny Polcari’s Morning Thoughts for 9/13/2019

What You Need to Know Today

Things you should know

  • Mkts kissing all-time highs

  • Algo’s gearing up to strike

  • ECB does not disappoint and that puts more pressure on Powell

  • Icahn moves to Miami!

OK – the ECB did not disappoint - they announced a 10 bps cut in rates – taking its rate to NEGATEVE 0.5% - which may have been a bit less than what the most aggressive call was, but he then topped it off with a HUGE new bond buying program that is to start on November 1. This new QE (Quantitative Easing) program will buy $22 billion of Eurozone debt every month and ‘run for as long as necessary’ – I guess that’s about as close as you can get to do ‘whatever it takes’ - the famous line he uttered during the height of the GFC (Great Financial Crisis). By doing so he has committed the new ECB President – Ms. Christine Lagarde – to even more negative rates and a QE program that has no timeline……a place that will prove to be a bit uncomfortable for her – at least initially. We can be sure that when reporters have a chance to corner her – alone – they are going to try and pin her down to a time frame, and what she thinks and will now do as President of the ECB – because that is what they do. So – Let’s see.

Then before the opening yesterday – there was a WSJ story suggesting that the Trump Administration was considering ‘partial settlements’ on the ongoing trade war – and this caused US futures to spike higher…but then after the opening bell as the mkt was surging – word from the WH was – “No Way!” No partial anything and that saw the mkt back off – just a bit – but where there is smoke there is fire – and while they tried hard to kill that rumor – they never really did and so the mkt turned higher yet again……And then Trump took to Twitter to say that “The ECB was trying and succeeding in depreciating the Euro against the VERY strong dollar, hurting US exports.” Putting more pressure on the FED and Jay Powell to cut rates next week.

Don’t forget – the FED is expected to cut – so no surprise – but if there was ANY question about what the next move is – that is absolutely OFF the table now. The only question now is will he announce a new ‘rate cutting cycle’ – which would suggest months of cuts in the year ahead…..or is he going to stand up and say ‘enough is enough’ now. Our rates will now be within the 1.75%/2% band – once again – at historic lows – there is zero reason to push our rates lower from here – in fact – I don’t’ think he should cut rates at all – BUT if he doesn’t do it now – then the algo’s will slaughter the mkt, the WH will lob bombs at FED and the media will parade analysts and strategists around to suggest that the FED is ‘out of touch’….It is a self-fulfilling prophecy……whether we need it or not.

Now there are plenty of people who are on my side of the fence and do not believe that we need a rate cut at all, but because of the way the FED does it today – they float balloons, they test the mkts, the toss out ideas to see what the mkts think and then they ask everyone to come in and lie down – have a Xanax and let’s talk about it – this way NO ONE is surprised and I say that is ‘Bull…t’. The new generation of traders has no idea that in the prior century (the 20th) the FED NEVER conducted themselves like this at all. They would come out on Thursday mornings at 8:30 – they would step up to the podium and make an announcement and then they would turn around and go back thru the door – shutting the door behind them - NEVER asking anyone if they were ok, or if their feelings were hurt, or is there something you want to discuss – etc…..they drove policy and then it was up to the mkts to interpret what that meant – PERIOD – The End!

Ok – Next – so as the day wore on – the mkt traded higher and higher – bringing us to < 1% of the all time highs on the Dow and the S&P as the algo’s apparently forgot all about the chaos they created only weeks ago when the yield curve inverted (for a brief second) causing all the headlines to scream RECESSION and DISASTER and RUN & HIDE etc….it was ridiculous – but it is what it is…..we have allowed the technology to take control…… And then back to the trade rumor that wouldn’t die – the one about a partial settlement – remember that one? Well, apparently Donny has reconsidered his “Absolutely Not’ commentary and instead said ‘we will consider it’ and that was enough to suggest that this ‘cold war’ may be thawing……..By the end of the day the Dow added 45 pts or 0.17%, the S&P was up 8 pts or 0.29%, the Nasdaq was ahead by 25 pts or 0.30% and the Russell which is up 5% this week – gave up less than 1 pt.

This morning – US futures are on FIRE……Dow +108 pts, the S&P + 11, the Nasdaq +30 and the Russell +9 – and if we open at these levels then the S&P and Dow will kiss those highs and force the algo’s into overdrive – because you see the “Momo” guys (Momentum players) are all on board – and in their world – new highs beget new highs and if they can force it then they win……and while it all feels buoyant and exciting – I would caution investors to not go out and just buy anything. In fact – there is plenty of opportunity to make sales on stocks that have made substantial moves and redirect those monies into stocks that have been dislocated and underperformed – It’s the growth vs. value strategy – and we have seen that play out over the past couple of weeks…..the Russell – which is small and mid-cap US centric names – which was way under performing has suddenly lifted her head – rising 5% this week alone, Energy – which has gotten clocked since last October – losing 28% as a group (XLE) has rallied 10% in the last 3 weeks… value investors go on the hunt and the fear of recession and disaster fade. Financials (XLF ETF) which got crushed at the end of the year last year has struggled to get back and is now up ....

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