Will the Fed stick to its rate-hike strategy?

The chase by Frances Horodelski:

What were you doing June 29, 2006, the last time the Fed hiked rates (to 5.2%)? That was the last hike after a series of 17 hikes over two years that moved the rate from 1% to 5.25%. That stair step of increases was followed by a water fall of cuts beginning in September 2007 and ending with ZIRP on December 16, 2008. With great symmetry, seven years to the day, Janet Yellen and the Fed is widely expected to put ZIRP to bed this Wednesday , Dec. 16, 2015.
Last week ended badly, so is it time for some good market news? We’re starting the week with bad news if you’re an oil trader. The price of oil dropped below $35 as the U.S. dollar is strong, the momentum from last week continues and all the concerns with supply continue (Iraq, Libyan peace agreement, etc). According to CFTC data, the commercial shorts are at the lowest level since the Spring while speculative longs are at the lowest levels since January 2013. But the catalyst for a reversal is hard to see (there is no risk premium and remains driven by supply). Natural gas is trading at the lowest level since 2001 (when the low was $1.83, right now the commodity is $1.88) – a reversal here is also hard to see.
Weather remains unusually warm and even when it does get cold later in the week in the North East and in Canada, it couldn’t be called frigid. These are tough times. And another sign of these times is Encana which has “reset” its annual dividend from seven cents/share to six cents/year. Reset is euphemism for slash I guess.
Meanwhile, the world continues to reel from high yield collapse including last week’s closure of Third Avenue’s fund (which was very high yield) and another this morning (Lucidus) which was triggered by a significant investor wanting out in October forcing the fund to wind down. One measure of credit risk (junk yields versus the 10-year) is stressed having risen 437 basis points since June (from 2.21% to 6.585 spread) but still well below five year highs at 8.33% and crisis high of 20.55%.
Last week’s CNN fear/greed index has moved to the highest fear level in a month at 24 – but the index can go to zero. But fear is [palpable. According to one pundit, when the market falls by more than 1.5% on a Friday, 86 out of 90 times, the market is down on the following Monday. Right now, markets are showing green but weakening as I type.
Meanwhile, news continues – especially in the record setting M&A space. Another big deal on the table as Newell Rubbermaid and Jarden merger in a cash and stock deal. Each JAH shareholder will receive $21 cash plus 0.862 NWL. The combination will be a bit of a branded powerhouse with Jarden bringing things like Sunbeam, Coleman, Rawlings, Yankee Candle, Bicycle playing cards and the list goes on. M&A activity so far this year is running at a record $5.5 trillion globally (announced deals). Interesting item on the DowDuPont merger from last week. According to Barron’s, DuPont paid US$500 million to investment bankers on its spin-out of Chemours. Some more suspicious than me suggested that the big chemical merger was more to line the coffers of the bankers than for strategic or shareholders reasons!
Speaking of Barron’s, the 2016 outlook from strategists look for an average year from stocks in 2016 (2200 on the S&P 500). Stocks that were profiled positively include Macy’s, XL Group, Disney. Also a note that the correlation between stocks has risen to 71%-- the highest since 2012. What does that mean? The macro backdrop is more important than the micro and stocks are moving together. So your stock-picking prowess is less important. There is an old adage on Wall Street that suggests just when you need it most, that is when markets fall, diversification helps you the least. We’re in one of the moments. They do end – but I have found that this “tough” time happens when a transition of some magnitude is unfolding just beneath the surface.
We’ll talk transitions with Scotia’s chief strategists this morning and what his 10 themes are for 2016. MKM Partners chief derivatives strategist also uses the term transition in his daily missive. Pivot and transition – watch for these words in the strategy pieces for 2016.
From street research this morning – RBC getting more conservative on Valeant (by reducing the target to $194 from $206 U.S.); Scotia says now is the time to buy Paramount Resources (with a $15 target), BMO upgrades Mattel to outperform from hold ($33 target); Barclays introduced its global stock picks last week that included four names that are Canadian – Suncor, CNQ, Vermillion and Goldcorp (these have been the same Canadian names for some time) and Scotia introduces its 2016 featured stocks list that run from Aecon through to WPT Industrials with 41 names between. Barclays also initiates on two recent IPOs Square and Match Group with outperform.
Stick with BNN as we stick-handle these markets with guests. The futures are now in negative territory and European markets are also lower across the way. From Art Cashin at UBS: “Crude is bothering markets but it's the high yield thing that has the most market risk. Friday's Option Expiration is rumored to be enormous, which could make this a very volatile week. Stay wary, alert and very, very nimble.”
So there you have it.