The Fed Put Is Still Very Much In Place

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The Fed Put Is Still Very Much In Place
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In his Daily Market Notes report to investors, while commenting on the Fed put, Louis Navellier wrote:

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Q3 2021 hedge fund letters, conferences and more

After A Tough Year, Odey Asset Management Finishes 2021 On A High

For much of the past decade, Crispin Odey has been waiting for inflation to rear its ugly head. The fund manager has been positioned to take advantage of rising prices in his flagship hedge fund, the Odey European Fund, and has been trying to warn his investors about the risks of inflation through his annual Read More

Omicron owns the headlines today.

Will it make the Fed (Jerome Powell speaks to the Senate Banking Committee this morning) change their tapering plans? Will it slow down holiday mall traffic?  Will it postpone travel plans?  Will it subdue reopening momentum significantly? Will people project that this might be the first of a long series of breakthrough variants and alter long-term plans?

Mind The Treasury Yields

While all this sounds a bit extreme, one only need look at the deep drop in US Treasury yields - the biggest market in the world - in the face of well-known inflation generating material negative yields to see that the market is very concerned by the Omicron development.

In the trenches, the pullback in Treasury yields and fears of potential lockdowns finds tech in the green since the pre-Omicron November 24th, while Industrials, Energy, and especially Banks have been hit hard, down in the mid-single digits. This is clearly postponing the seasonal melt-up many people were positioned for, but hopefully will not cancel it.

If by this time next week the medical gurus have concluded that existing vaccines are "sufficient" and/or the Omicron virulence is milder than the current Delta variant, the market should bounce strongly.  Conclusions the other way could weigh heavily on the current bullish outlook for 2022.

Fed Put In Place

Such uncertainty will likely push some people to the sidelines who want to lock in the strong gains they've already booked for 2021. In the big picture the Fed "put" (support) is still very much there as is fiscal support from Congress waiting in the wings, if needed. Unless Omicron turns out to be a very nasty variant, this will soon be seen as a buying opportunity, and desensitize investors to the inevitable occurrence of future variants.

Overall, markets always tend to react first and research second, so they panic from time to time. Anytime there is an abrupt market sell-off like this, I go to Morningstar.com and check the ETF spreads to see if they have widened relative to their Intraday Indicative Value.

Sure enough, there was an abnormally wide ETF spread after the opening on Friday for iShares Select Dividend ETF (DVY), the bellwether ETF that I usually check first, since it is the ETF that abruptly fell almost 35% intraday back in August 2015 during a “flash crash.” The good news is that even though the ETF spread widened for DVY on Friday, trading in the ETF appeared orderly, so I do not think there is any imminent risk of another flash crash.

Reaction vs Research

Another overreaction has been in energy. With new travel restrictions, oil use will be down, but the Biden Administration, as well as Britain, Japan, India, and South Korea, have all followed China by releasing crude oil from their strategic reserves in a coordinated attempt to push down crude oil prices. The White House said, “The president stands ready to take additional action, if needed, and is prepared to use his full authorities working in coordination with the rest of the world to maintain adequate supply as we exit the pandemic.” But much of Europe is locking down again, so demand should moderate soon.

In the meantime, Americans are spending up a storm with all the money that the Fed has pumped into the system. Black Friday deals are everywhere, and retailers are expected to remain super-aggressive with promotions through Cyber Monday. As a result, I am expecting a very strong holiday shopping season.

Heard & Notable

An animal shelter in Los Angeles is applying astrological traits to its dogs in the hopes of matching them with a compatible human, increasing foster applications submitted to the shelter by 120%. The dogs are assigned a star sign based off their personalities. Source: Reuters

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