In retrospect, last week looked easy to handicap but the reality was quite different. You’ll recall we had a sequence the prior week where the market dropped briefly on the hypothesis the Fed would extract its phrase, ‘considerable time.’ Here’s what I had to say about it in Tuesday night’s Short Term Update to clients.
“I can’t base tomorrow’s action on whether the Fed takes those two words ‘considerable time’ out of the mix or not. I don’t know, if I did, it might be insider trading, right? All I can tell you is I hope they don’t take it out because it would mean the smartest financial people in the world (according to some) have learned absolutely nothing from history. Perhaps last week’s ‘leak’ was a trial balloon just to see how the market would react. I’ll tell you this; the market is smarter than the Fed. The mass mind of us all knows darn well we are reproducing 1937 right now. Do you think Janet Yellen owes any allegiance to Obama? If so they don’t take those words out until after the election. Am I being a little cynical? Perhaps but I am trying to leave no stone unturned. I’m still in the camp that believes the market stays elevated this month. So while I have no idea what the Fed will say personally I would lean into the camp where they leave things exactly the same this time. I can’t believe these Fed heads would be that dumb to threaten to raise rates right now. That means I’m still looking for a bullish outcome.”
How could you possibly live without this analysis?
Have you been watching the PBS documentary on the Roosevelts? In the episode concerning the late 1930’s they make a point to state that Roosevelt himself may have become a little too overconfident. By 1936, due to political backlash they slowed down the New Deal stimulus programs to a grinding halt. The result was a deep recession in the depression known as Great Depression II which lasted nine months. According to the Ken Burns people the economy finally started turning back up when Roosevelt unleashed a second round of stimuli into the economy.
Last week was strange as we had conflicting data in the housing market. Home builder confidence went through the roof while new housing starts fell sharply. According to the National Association of Home Builders Wells Fargo Housing Market Index the reading hit its highest level in nine years; with a reading of 59 (anything over 50 is good). September was the 4th month in a row the index rose. At the same time the Census Bureau reported that new housing starts in August fell sharply, a 14.4% drop off the revised July rate. New building permits also dropped in July.
Traders are understandably vexed. Don’t get me wrong, confidence is similar to sentiment where Roosevelt said the only thing we have to fear is fear itself. But Roosevelt wasn’t dealing in bubbles. Do you think it’s just a tiny bit possible home builder’s confidence could be misplaced? According to socionomic theory the business community has its highest level of optimism right near the end of the business cycle and their lowest level is obviously just as the market is turning up. That’s why the stock market always climbs a wall of worry. I’d be more concerned about the drop in new housing starts then any builder’s confidence reading five years off the bottom. Remember I told you about the Scottsdale Realty Whiner’s Index? My wife works in the beauty business and had a number of real estate clients in those days. In July 2007 (when the Russell topped) deals stopped going into escrow and the ones that were in escrow found a way not to close. We’ve seen this script before.