The great “Fed Fold” is behind us. So who’s the biggest potential loser? My money is on the financials.
Market Roundup
Banks. Brokers. Insurers. You might think financial firms like them would absolutely love “lower for longer” interest rates. But that’s just not the case. Many were secretly hoping the Fed would finally get rates off of zero percent.
It all comes back to profit margins. Banks make money off of interest rate spreads — the difference between what they pay depositors like you and me in interest, and the interest they earn off of loaning that money out. The wider their “net interest margins” are, the more they make, and the more investors flock to their shares.
A lot of money recently poured into bank stocks on the assumption one or more Fed hikes would finally start restoring some margin in the lending business. The instant the Fed folded, shares of rate-sensitive banks plunged. Just look at the intraday reversal in the SPDR S&P Regional Banking ETF (KRE) or some individual bank stocks.
Brokers were also hoping for higher rates because of the positive signal a hike would send about future economic growth, and because higher short-term yields would restore some profitability to their money market fund operations. So it’s no surprise that stocks like E*TRADE Financial (ETFC) fell off the table after the Fed folded.
Lastly, insurers wanted rate hikes to start so they could invest the premiums they take in from policyholders at higher long-term yields. They’ve been suffering because they can’t earn anywhere near enough yield to satisfy commitments made to policyholders several years ago when interest rates overall were higher. Just look at how stocks like Prudential Financial (PRU) and MetLife (MET) are languishing near recent lows.
All told, I’m keeping a close eye on the Financial Select Sector SPDR Fund (XLF) here. It got slammed during the August turmoil, and it bounced back much less vigorously than other sector ETFs and stocks.
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| I think financials are in trouble, so I’m keeping a close eye on the Financial Select Sector SPDR Fund (XLF). |
If the XLF breaks below the $22 level, I think it’s going to be a real problem for the broader market. I would also interpret it as yet another sign that central bankers are losing control of asset prices after six-plus-years of epic intervention and manipulation.
So what do you think? Are financials in trouble now that the Fed folded again? Or are you more sanguine than me? Do you own any bank, broker, or insurance stocks? If so, do you plan to sell them or adding more into recent weakness? Share your view at the Money and Markets website when you have some time.
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Meanwhile, many of you took to the website this weekend to weigh in on the Fed’s latest non-move, and what it means for your investing strategy. To sample just a few of those comments, Reader Dr. Donnie S. said:
“What business does any government, central bank, or policymaker of any country have attempting to control the pricing of stocks and bonds? None! Seems to me we want a stock market with individual stock values, which should be able to move freely up and/or down based on investors’ willingness to invest or divest in certain businesses or commodities.
“Otherwise, why don’t we simply let the central banks dictate how much we can profit or lose by government fiat every day? Maybe a lottery would be better.”
Reader Ted. F. added: “I am beginning to think the Fed is getting gun shy. They are in a ‘damned if you do and damned if you don’t’ spot.
“At some point the Fed will have to start raising the interest rate and I think they need to stop expecting this country to carry other countries on our backs. One of their excuses is the state of the world’s economy, but we need to do what is best for this country. China didn’t consider the effect on their massive currency devaluation on anybody but themselves. The Fed needs to adopt the same attitude.”
Reader D. was even more succinct, summing things up this way: “They say everyone gets 15 minutes of fame. I believe that Janet is trying to stretch hers to 20. When they increase interest rates, her input goes to page 16 (just above the obits). And we will forget who she is.”
As for what to do about the current state of affairs, Reader Books offered this view: “From just an ordinary person of modest means, it seems like it’s time to bail for a while. I sold some mutual funds, and put my 89-year-old mother’s money into something safer. These low rates are murder on the elderly’s savings, but no-percent growth is still better than a 20% or more decline in the stock market.”
Reader DoomStar added the following advice: “I have started again playing inverse volatility ETFs recently at first news that China has begun to cash in their American treasuries.
“I believe most talking heads on the tube are missing the point that $40 billion is being drained monthly from the war chest and the facade can no longer hold up. Ms. Yellen cannot raise rates anytime soon as it is under the thumbscrews of Chinese and the international community — so much for your American sovereignty.”Â
| “This is no market environment for heroics.” |
Thanks for sharing those opinions. As I’ve been saying for some time, this is no market environment for heroics. It’s one where battening down the hatches makes the most sense to me.
Central bankers are getting more and more desperate, but having less and less of an impact — something that dramatically raises the risk of markets taking a serious tumble soon. Once stock prices start trading more in line with where the bond, currency, and other markets suggest they “should” trade, then I might get interested in doing some aggressive bottom-fishing. But we’re nowhere near those levels yet.
Any other comments you’d like to add? Then here’s the link to the Money and Markets website where you can do so.
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 German automaker Volkswagen (VLKPY) got hammered overnight after reports that it deliberately tried to sabotage tests that measure the pollution produced by its so-called “clean diesel” engines. The company reportedly installed “defeat devices” designed to deliver positive results at the time of emissions testing. But in actual road driving, the engines would produce much more pollution. Volkswagen shares plunged 20% in German trading.
Chinese President Xi Jinping will arrive in the U.S. tomorrow for a landmark state visit. But analysts don’t expect Jinping and President Obama to make much headway resolving economic and political issues. Our two countries have been butting heads on cybersecurity, economic and trade policy, construction of military bases in the South China Sea, and more.
European chipmaker Dialog Semiconductor (DLGNF) said it would buy California’s Atmel (ATML) for around $4.6 billion. The move is just the latest in the chip industry, with Dialog eager to add Atmel’s industrial semiconductor business. The price represents a 43% premium to where ATML closed Friday.
Bloomberg picked up a theme you read about here first in my Money and Markets column a couple months ago: The Federal Reserve (and its counterparts overseas) are out of financial booze to spike the punchbowl. The article notes that the U.S. Fed, the European Central Bank, the People’s Bank of China, and others are failing to goose asset prices with their latest moves to ease policy … a huge trend shift from the past six-plus years. Invest accordingly.
What do you think China will accomplish in its visit here? What about the Fed — is it truly out of bullets? Do you anticipate we’ll see more merger activity, and if so, what other industries besides semiconductors might be impacted? Let me know your thoughts on these or other topics using this website link.
Until next time,
Mike LarsonÂ
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
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The Fed is no longer an independent agency that looks at only 2 things; employment and inflation. They have added politics, foreign affairs and currency wars to their mandate. This is so stupid. We have a chance to beat China and japan at their own game as well as teach the Saudi’s a thing or two about manipulating the price of oil. If they would have raised rates 50 basis points and then another 50 basis points next month China, Japan and Saudi Arabia would have to sell more and more treasuries which would be scoffed up by the rest of the world looking for yield. All they are doing now is helping them prop up their economies on the backs of the U.S. middle class and seniors who can’t get a return without risk. They are also keeping their balance sheet so high so they can give back 100s of billions to the treasury so King Barack can say “look how the deficit is decreasing”. They also know that there is no easy way out, especially if the economy does decline and we go into recession.
Sounds good, but you have it backwards. The Fed balance sheet refers to money they owe, not money they have. They owe all the money because they have “printed” it, and things must balance out. Furthermore, any money they get from bonds they bought maturing (I.e., money they get from the U.S. Treasury) is being reinvested via the purchase of new bonds. It’s worth remembering that the Fed and the Treasury are separate agencies.
Housing market declines, stocks are up 125, makes no sense. You couldn’t get me to take a risk in this market if you held a gun to my head. You’d just have to go ahead and shoot me.
So Xi Jinping is arriving in the U.S. on Tuesday, (in Silicon Valley). That may tell you what he considers important in this country. He won’t be in Washington ’til Friday. Will anyone even care? Can he compete with Pope Francis? LMAO!!
Again, China is making a fool out of America. Obama’s friends want the value of the dollar to drop but the market is moving in the opposite direction. If U.S. corporations are losing money, gee that is too bad. They voluntarily moved production over seas. So now the little lady at the FED arrives are money printing decisions according to China’s economy. How wonderful FOR CHINA! She needs to be replaced since she publicly puts China and Europe’s interests ahead of American retirees.
Hi Mike
I agree about the financials. Investors have become use to borrowing for outcomes based on low rates. Increasing rates and declining real values would create a headache for the banks. The Fed banks have brought these inflated values on themselves.
You “agree” about the financials, but say the exact opposite of what Mike said. The point is that financials generally do better with higher interest rates, because the interest rate curve steepens, thereby increasing net interest margins for the financials.
Isn’t the bank’s loss the utility sectors gain? Jim
As of last week the Fed’s balance sheet had ballooned to $4.5 trillion, yet its total capital had collapsed to just 1.3% of total assets. Think of 1.3% like it’s the Fed’s “net worthâ€.
In order to remain solvent the value of the Fed’s assets must exceed the Fed’s liabilities.
The Fed’s liabilities are the trillions of dollars in currency units that they’ve created, known as ‘Federal Reserve Notes’ and the Fed’s assets are the US government bonds.
The Fed has created trillions of Federal Reserve notes (otherwise known as dollars) and used those same notes to buy US government bonds.
The Fed conjured new money out of thin air and they also created about $3.5 trillion worth of liabilities, the $3.5 trillion worth of bonds they purchased.
So the Fed’s “net worth†hardly budged, and as a percentage of their total assets, their net worth getting dangerously close to entering negative territory?
That is what we know as leveraging… And by any stretch of the imagination, the Fed is dangerously over leveraged.
So who I their right mind would buy bonds which are virtually worthless from the Fed?
Granted, the Fed’s bonds won’t be entirely worthless, unless worthless is defined by “if you can’t sell them they are worthless.â€
Now, Americans (or the world) would of necessity need to be highly optimistic (aka stupid) to believe the $1 trillion remaining of the Fed’s assets in their balance sheet are actually assets when considering the slight-of-hand hanky-panky with the above mentioned notes and bonds.
So, you see, the Fed has no maneuvering room… If they can’t lower interest rates because they’re already at zero basically, and if they raise interest rates they are suddenly insolvent…!
All the bluster and insinuating words were just that, words!
The Federal Reserve is so over-leveraged it has no “policy tools†left to combat a major crisis here in the U.S. or the world.
And I suspect the other central banks in China, Japan, and Europe are in the same sinking boat… So hold your breath!
The Fed holds bonds they bought with created dollars, as you said. But the Fed just holds these bonds until maturity, whereupon they get their money back from the Treasury. Then the Fed uses that money to buy more bonds. If interest rates have gone up, the Fed pays less for the same amount of bonds. This is good for the Fed’s balance sheet. So the Fed itself benefits from higher interest rates. Econ 101.
There’s not enough time left for the Fed to prosper from increased rates in the future…
The devil is already at the door and wants to collect his dues this year, not some year in the future…
That is why right now, today when the Fed needs monetary “tools,” they are leveraged way too much and that is why interest wasn’t raised even 0.25%!
Just go to Zillow and see how many homes are on the market… More than ever before and there is a grand slam housing bubble about to burst real soon.
Banks are not lending because they want to horde their cash, and homeowners want to get out from under debt and rent because renting is cheaper than ownership when you count outrageous property taxes in most states… And those with a little equity have borrowed to pay margin calls, and buy stocks they really could not afford to gamble on.
You got it.
The Fed has created billions of money out of thin air a few times before, to meet some need, but then has retired that money when the need was met. This time they created TRILLIONS, and they have NOT retired them. They are going to come around to bite us all at some time or other.
The Federal Reserve was established by the heads of the major banks at a clandestine meeting on Jekyll Island. It is nothing more than a banking cartel whose sole purpose is the stability and profitability of the mega banks. If Goldman, J. P. Morgan, et. al wanted a rate increase, they would have gotten a rate increase. Apparently holding the rates steady is in the best interest of the banks or it would not have happened. Keep in mind,the Fed does not necessarily have the best interest of ” us folks ” on the agenda since we are not the reason they exist. For a detailed account of the establishment of the Federal reserve, read
” Creature from Jekyll Island ” by G. Edward Griffin
Have a wonderful day to you i miss you Danjo
The Dialog/Atmel deal Mike mentions is typical of deals where European or Asian companies are buying American companies. It is a way for those companies to convert their declining local currencies into Dollars, which – rightly or wrongly – they see as stronger than what the now have. I suppose, when the Dollar inevitably goes into decline, they will simply move those companies to their native countries – and then stronger currencies.
Chuck, I believed (wrongly I guess) that European or Asian investors would begin buying real estate when the writing on the European walls became visible…
That doesn’t seem to be happening at least not yet…
Asian buyers have been very active on the West Coast.
Hi Chuck,
Isn’t this what the Country sees as a benefit? Foreign Investment is what the Government
likes.
I see where Jeb Bush is proposing a tax cut, if he is elected. It would be similar to his brother’s, except more extreme, freeing 15 million lower income Americans from all taxes, and lowering the top tax rate from 39.6%, to 28%. ‘Sounds nice. It would also have corporate taxes fall from 35% to 20%, and it would raise the deficit by some $3.7 Trillion over 10 years (Slate.com). Washington Post says only $1 2 Trillion if wildest growth dreams come true. Who benefits most? Citizens for Tax Justice calculates 53% of the tax relief would go to the top 1%. Bush, himself would pay $800,000 less per year. Hmmm.
I just returned from Hungry, Austria and Germany. They don’t know how to react to the refugees flooding Europe. Hungry knows from it history told to me on my trip beware a another invasion. I do think Europe could implode due to the current situation. You have been warned.
The U.S. welcomed tens of thousands of refugees from Somalia. The largest group self-ghettoized in “Little Mogadishu” in Minneapolis. More than 60 young Somalis have since left the state to join ISIS or other radical groups, recruited on social media. This country has taken in millions of refugees from Europe after WWI and WWII, from Asia after Korea and Vietnam, from other parts of Africa after decolonization upheavals, and is now taking in many from Latin America. Nearly all have, or are in the process of adapting to our culture. Even many Muslims have adapted well, but there seems to be something different about many of the current refugees. They have often learned, or been taught, to hate our culture, and many of them may never adapt. Much of that teaching seems to come from Wahhabist madrassas, sponsored by Saudi oil money. ISIS came from there, along with al Qaida and the Taliban.
But the Press has informed us that they are fine material for the presidency. Maybe it depends on which Wahhabist Madrass they attended…..you know…..kind of like Yale vs. Harvard.
Mike mentions how many bank stock fell sharply after the Fed failed to raise rates. I thought the banks “owned” the Fed. Isn’t that some sort of treason? Is Janet looking for a knife in the back?
I think the Fed’s well is dry, so it doesn’t really matter who owns the Fed… They are likely just as bankrupt as this country…!
Yes, their balance sheet is horrible. They took on a humongous pile of debt in ’08…..not knowing that the pending 2015-2018 crisis will be the BIG KAHUNA. It will make ’08 look like a Sunday picnic. WAVE 3 down is always the worst…it is usually ~3X Wave 1 down. They should have kept their powder dry and some reserves…..they have “nuttin”.
Mike, you asked … “So what do you think? Are financials in trouble now that the Fed folded again? Or are you more sanguine than me? ” Mike I’d tell you, but I’m such a dead on fantastically accurate “contrary indicator” that it just really wouldn’t be fair to everyone else if I told you all what I think.
Samson Resources and Hercules Offshore just filed for bankruptcy protection. Sandridge and Halcon are next. There have been $10.4 billion in defaults already for an 8.5 per cent rate, versus 2.9 last year. Shale firms used 83 per cent of cash flow to service debt last quarter. Bellwether shale firm Continental Resources says it must have $60 oil to regain neutral cash flow. So much for the lean-mean shale drillers weathering the storm. Jim
I saw that in the Permian, rig counts just turned up very slightly. Permian has some of the lowest costs, I believe, and it is too soon to know if the turn-up will last. Other notable areas still show declines, however, even as production increases.
The Permian appears to be the best play. The Cline, Wolfcamp, and others are stacked like a birthday cake. They also have the infrastructure already in place. The survivors will prosper with higher prices. It’s really the same old story. It’s debt that kills a business and unfortunately many of the shale producers pigged out on cheap QE money they can’t pay back. We are hearing rumors that the US, Russia, and the
Saudis are holding informal talks. They are looking for a way for the Saudis to declare victory and cut production. At this point it’s about saving face. The IEA also keeps raising demand figures as well. Jim
Why are you so reluctant to admit that monetary policy alone cannot cure the fact that the worsening maldistribution of income and wealth can no longer be offset by another “dollop of debt” to “goose” the economy? Haven’t you ever heard of “fiscal policy”? Make the rich richer while everyone else is becoming poorer just plain doesn’t work! Forget about economic justice: the economic reality of the dysfuntional and inadequate flow of earned income throughout the various sectors of our economy is the problem that you adamantly refuse to acknowledge! Why can’t you admit the obvious fiscal policy redistribution solution?
Spot on George…!
Existing policies are creating a kind of neo-feudalism, with the lords and ladies of wealth on top. Obama has done nothing to counter those policies, despite all his talk. Nor have other Democrats. They must be profiting from the policies, the way overseers who managed estates did in the Middle Ages. It is better to manage people than to be managed. That seems to be the motto of the Democratic Party. The Republican motto seems to be “I Own You”.
I looked at a chart of the XLE vs. SPY since Jan 1. The financials SHOULD be more volatile versus the market as a whole and they are…..but not yet overwhelmingly. The numbers are approximately -7.32 vs. -4.42 from my reckoning. I think this will change and I think that there will be big trouble there just as in ’08 but on a MUCH BIGGER SCALE. MY PREDICTION IS BANK RUNS, FAILURES AND COLLAPSES. I also believe that the FDIC will be OVERWHELMED. DO NOT COUNT ON THAT INSURANCE MECHANISM.
Re the hold rate move. It looks to me that we have to take a broad look at the complete role of the Fed. It an important member of of the ruling structure which includes, sections of the USGov like: Treasury, Department of State / foreign policy, Defense, Intel, commerce and trade, and security of domestic and international trade / financial exchange etc. The Fed is a major player on the big political chessboard which strives to protect US interests first and foremost. its decisions are part of a complete empire wide system serving US dominance. Don’t worry if any individual move is hard to read from any one perspective. About now lots of people are connecting the dots and seeing how high the stakes are getting and how determined the ruling group is to protect its own personal dominance in the mix and everyone else is feeling a little vulnerable.
I think the Fed continues to do what they do best; kick the can down the road! They do not want all those rusty cans to pile up before the big event in NOVEMBER 2016. Can you imagine Obama and his Liberals wanting an economy that they propped up with low interest rates to come down on them just before the election? The Fed’s problem is that the demand for cars, houses and other financed purchases gets harder and harder to bring forward as the game progresses. Can anyone tell me what other reason the Fed had to delay a rate increase by now? With the Fed’s tank on empty, it will be interesting to see what Presidential Decrees are made between now and Election Day in the name of the Electorate.
I see that Ben Carson has attracted criticism for saying a Muslim should not be president. Muslims seem to put their religion first, before the needs of people. If a Muslim cannot put PEOPLE’s needs first, then Carson is correct. PEOPLE, after all, created all religions, as a means of enforcing certain standards on themselves. Since people change, and their needs and wishes change, religions must also change, when changes seem warranted, or be abandoned. The Catholic version of Christianity, for example, has, and presently seems to be, changing in it’s interpretation of doctrine, to meet it’s believers needs better. Islam goes strictly by the words of the Quran… as interpreted by various Imams, at least. That might give it room for some liberalization.
I don’t think Islam is as much a religion as it is a political movement. Jim
All religions are basically political in nature, Jim. They are devised to meet the political purpose of controlling a populace in it’s social activities
I saw an item about a small, but well attended tech-conference in California, to do with the expansion of robotics in the fast-food industry. It may not be too long before you go into your favorite Micky-D, speak your order, swipe your card, and your order comes out of a slot a few seconds later, never touched by human hands. What is the investment angle? The $15/hr. minimum wage, so popular with liberal politicians. Why not just eliminate those minimum earners and their politically manipulated wages entirely? You can be sure other industries are looking for ways to do the same thing. A good example of the law of unintended consequences.
TRUMP for President – We need Mr. Trump. He can get all the staff & advice needed on Foreign policy etc, and any other needed areas. Maybe our legislatures will get the idea that we need changes to reflect our Nat’l debt level, and enact meaningful budget reduction and balancing laws. How in hell will our country survive without our legislature doing meaningful changes – ” instead of continuing giving things away just to get themselves re-elected.
TRUMP won’t care if he is re- elected: However with what he will get completed he will automatically be re-elected if he so desires.
“” Spread the word – Trump for President “””
Even if Trump were to be elected, he would be at the mercy of the politicians in Congress. The Dems would naturally oppose him, and the Reps would hate him for beating out the pros. He would have a tough time on both counts. Vote out the career politicians, if you want to give Trump a chance to do something.