OVERNIGHT

The post-FOMC rally didn't last long as stocks as ended a three-day rally, oil continued its drubbing, dropping to it lowest level in seven years, and the carryover wasn't wasted overnight on Asian markets.

Reuters reported Taiwan's central bank cut rates for the second time this year while China's yuan has weakened against the dollar for 10 straight sessions through Thursday, the longest weakening streak on record, after the central bank guided the Chinese currency lower.


From the WSJ : Most Asian markets fell Friday after a strong week, as oil fell to a fresh low since the financial crisis and the rally following the Federal Reserve’s interest-rate rise dissipates. Japan’s Nikkei Stock Average fell 0.6%, Australia’s S&P/ASX 200 slipped 0.3% and South Korea’s Kospi fell 0.5%.

Hong Kong’s Hang Seng Index was down 0.5% while the Shanghai Composite Index rose 0.1%. 

PENT-UP RISKS AND WHAT'S CHEAP

Now that the first interest rate hike from the Fed is being digested, much of the focus shifts to what the media is calling "pent-up risks."

So what are pent-up risks? Well, a simple example might be rent control. Once those controls are loosened, landlords usually hike rents quickly to make up for lost time and revenue. That lost revenue in part stems from inflation or increased costs associated with owning and renting the property.

Yea, we realize their telling us there's no inflation, but that's a relative term. In a recent interview Chicago real estate mogul and billionaire Sam Zell, in responding to a question about how angry Americans are today, an obvious political question, responded:

The American people are extraordinarily angry. The American people are extraordinarily depressed. The last time we had anything like this in my opinion was 1979. [To a statement regarding Trump’s popularity Zell responded]:  It's because you guys are sitting here in New York City and you're not in Des Moines. And you're not in Boulder and you're not all over the country. And you're not seeing the enormous disparity that has existed between you know the coasts and the rest of the country. We have a lot of very unhappy people and I think this election is reflecting it. And I think it will be very dangerous.

Zell's comment, in our view, defines the meaning of the term relative.

Before the big real estate crash a few years ago, when prices were soaring, the standard response to anyone who questioned it, was don't worry, it's mostly bi-coastal. Well, when that Humpty Dumpty came crashing to earth, it was hardly bi-coastal after all.

The WSJ describes some of these pent-up risks today as: 

Historically, inflation was the risk the Fed worried about when it held interest rates low. This time, the Fed would actually welcome a rise in inflation, which has consistently undershot its 2% target. Its greater concern in recent years has been that low interest rates would fuel unsustainable asset bubbles. It has concluded that the boost to employment it achieved with easy policy now would outweigh the potential harm of a bursting bubble later.

This next quote is telling in itself.  It’s a calculated bet. The harm from financial disruptions is much less predictable than from inflation, because it involves linkages that are apparent only under stress.

There's two things in that first paragraph to note: One, like that old saying, be careful what you wish for when it comes to inflation. Second, the trade off for no bubble now but what could be an even larger one later in the name of jobs. Is that really a calucated bet you want to take? Ansd is it the true job of the Federal Reserve?

Betting on the unexpected comes with risks, too. But in our view, the odds for success there are improving all the time. You might want to think about focusing on whatever is extremely cheap today, another one of Zell's known characterisitcs.

We printed the above chart for the second time in a few days for a reason.


 

DOWN IN THE OIL PATCH

Down in the oil patch has really always been about Capitol Hill. It's not often that both sides in a conflict come away winners. But that's what seems about to happen when Repulicans and Democrats finally take down the nation's 40 year ban on exporting oil.

Like most issues of this kind and magnitude, you find unhappy campers on both sides. But the bill looks set to make it through both chambers and get signed into law.

NEW YORK (AP) — The U.S., seemingly awash in crude oil after an energy boom sent thousands of workers scurrying to the plains of Texas and North Dakota, will begin exporting oil for the first time since the 1973 oil embargo. The lifting of the embargo is part of a spending deal expected to be pushed through the House and Senate by the end of the week. Here’s a brief look at why the ban was in place, and the reasons why that ban is now being lifted after four decades.

The end to the four-decade ban on U.S. crude exports was the big prize in the budget battle for Republicans, who saw it as an arcane policy given the nation’s exploding production of oil and natural gas. In return, they agreed to the demand from Democrats for a five-year extension of credits for wind and solar energy producers and a renewal of a land and water conservation fund. Democrats also blocked a push by Republicans to GOP proposals to impede Obama administration clean air and water regulations.

The above article appeared on fuelfix.com/blog/2015/12/16/heres-why-the-u-s-will-export-oil-for-first-time-in-decades.

Early stories suggest big oil will be the winners in the oil pact has. We gave yet to see any about who the big winners in solar and win are.

OVERNIGHT

Well, the Fed spoke and apparently most markets liked what they heard.

Japanese stocks rallied on the news over night even in the face, as Reuters reported, of a worse that expected data on exports for November.

TOKYO, Dec 17 Japanese stocks rallied on Thursday morning after the U.S. Federal Reserve announced a gradual tightening cycle with its first rate hike in nearly a decade, boosting sentiment and risk appetite enough for investors to shrug off worse-than-expected Japan export data for November.

The 3.3 percent fall in exports from a year earlier compared with a 1.5 percent decrease expected by economists in a Reuters poll, but the impact was softened as investors took the U.S. rate hike as a mark of confidence in the world's largest economy.

The Nikkei share average had gained 2.3 percent to 19,483.38 in midmorning trade. 

And Japanese exporters smiled when they saw the yen weaken further against the dollar.

The WSJ noted the following;  The Nikkei 225 was up 2.3% on Thursday morning, after a 2.6% rise on Wednesday. It is one of the best-performing markets in the world this year, rising almost 12%, compared with a flat performance for the S&P 500.

This partly reflects a view among investors that the Fed is doing theBank of Japan’s job for it, by driving up the dollar against the yen. A cheaper yen boosts competitiveness and flatters profits for Japan’s exporters.

This currency effect explains why Japanese equities have tended to outperform when the U.S. tightens monetary policy. In four such cycles since 1994, in the month following an initial rate increase by the Fed, Japanese equities have performed better than any other major market except rival Asian exporter Korea, according to Daiwa.

A dollar now buys 122.6 yen, compared with 121.5 yen at the start of November. But the yen remains stronger than it was in August, when a dollar was worth more than 125 yen.

INFREQUENT BUT PAINFUL RUBS

Given all the turmoil and concern about divergence, this is a no brainer if you're a dyed-in-the MSM conventionality follower.

Take a look at a CRB index chart or read up on the fate of emerging markets since much of this economic mess began. The two in many ways are inseparable, commodities and EM.  So, as the headline on this article from MarketWatch.com reveals, "What the big money is betting on for 2016," is hardly mystifying in the least.

They're simply taking what the market has given them. In short, more of the same. But markets are full of surprises and often quite perverse. We're simply making a point, not criticizing. The term big money is loaded, implying big insights and a certain exclusivity beyond that of the masses.

And that might well be. But big money is not always correct. The recent track record of hedge funds states otherwise, particularly those macro-hinged. But, as a friend likes to put it, there's the infrequent but always painful rub. "Anyone can diagnose a common disorder when it arrives dressed in common, textbook fashion. But a really good diagnostician can recognize it when it shows up dressed for the Mardi Gras."

   As the chart shows, commodities rest at 40-year lows.

marketwatch.com/story/what-the-big-money-is-betting-on-for-2016-2015-12-16

OVERNIGHT

Gold, the notorious non-yielding precious metal, eased upwards after two days of losses to settle at $1,045.85 an ounce. This came after setting a six year low earlier this month in the face of Wednesday's expected rate hike and the strong dollar. Gold prices and a strong dollar are like oil and water; they don't go together.

In other metals copper remained weak as uncertainty about a global recovery anytime soon continues along with what some see as the divergence meme popularized of late by MSM. To say commodities for the most part have been soft is an understatement given the damage in emerging markets this year.

The up move in the Dow carried over to Japanese equities early Wednesday and higher energy prices for the second straight day didn't hurt the cause either.

In other news Tuesday, Argentina's central bank in its first post-election move bumped up interest rates on a tranche of fixed-deposits ahead of what many expect will be a big debasement of its peso.
Freeing up capital controls will likely weaken the official peso exchange rate. Local market sources said they expect the rate to weaken to around 13.5 to 15 to the greenback, versus the current rate of 9.8 per dollar, Reuters reported. 

According the WSJ, Argentina currently suffers from roughly 25% annual inflation, the biggest fiscal deficit in three decades, a shortage of U.S. dollars needed to pay for imports, and poverty that nears 29%. Argentine exporters also say an overvalued currency makes local goods uncompetitive abroad.

RELIEF RALLY?

Here is a chart from marctomarket.com.

It illustrates quite well the Santa Claus rally often seen in December as we noted yesterday.
As the end of 2015 grinds down ( And we think given the recent market behavior it's been a grind for many investors.), the Santa Claus rally that usually happens comes into question again. Will it happen or no? financialspuds.blogspot.com/2015/12/santa-claus-rally.

The chart is an excellent breakdown of the various markets. Now let's see if it happens given tomorrow's Fed action. If investor relief is the order of the day, our guess is it will.
 
 

WHAT IF TIME

What if?

So what if one or a bunch of such questions might be in order for after the Fed's actions tomorrow. Call them 2016 what ifs.

What if next year inflation returns faster and higher than anyone suspects? A long, long shot you say given the current global picture with bottom-searing energy prices, China and all the rest. True, it's a long shot viewed through today's lenses. But what if?

What if the Fed is forced out of its analysis-paralysis straight jacket of these past several years and  forced to hike rates several times separated by very short intervals? There are a few what if here. Read both articles to find out more.

What if that doesn't happen and the Fed follows an orderly rate hike pattern as the economy returns to so-called normal? Again, read both articles to learn more.

What if as some are suggesting and Fed Chair Yellen recently offered it will be good to get a rate hike under the belt to show the economy is doing well turns out to be wrong?

fortune.com/federal-reserve-interest-rates-raise
barrons.com/articles/how-to-invest-when-the-fed-raises-rates

ADJUSTED YEARNINGS

 
 Some people call it cooking the books. Others call it gilding the Lilly. We call it human behavior.

What do you do when you want a different result from the one you got? Well, some would say if you're a rationale (whatever that means in these days), intelligent human being, you change or alter your behavior.

And that's what this WSJ story is about, "'Adjusted' Earnings Cloud Results."

What's adjusted earnings? Well, back in the halcyon days of dot-com as the Journal notes, one huge tech company practically everyone has heard of and is still around today reported beating its earnings for 14 straight quarters by one penny. That's adjusted earnings. The stock price did what any Wall Street veteran would expect in what became famous as the "Irrational exuberance" of the time, it went up.

We are not probability or odds experts, but one penny for 14 straight quarters brings up one well known street analyst of the day later reprimanded by the SEC who praised firms publicly but privately named them POSs. That's adjusted earnings.

It's corporate America and Wall Street, Jake.

A financial obfuscation of the dot-com era is making a comeback: Hundreds of U.S. companies are trumpeting adjusted net income, adjusted sales and “adjusted Ebitda.”

These adjusted measures paint a rosier picture of corporate earnings. Without them, third-quarter earnings per share fell 13% for the biggest U.S. companies, according to Deutsche Bank research, instead of falling 0.1% with them.

About one in 10 major securities filings this year used the term adjusted Ebidta—or adjusted earnings before interest, taxes, depreciation and amortization—up from one in 40 a decade ago. About a quarter of earnings-related filings this year included figures that don’t comply with generally accepted accounting principles, or GAAP, as well as more standard measures, according to a Wall Street Journal analysis of 10-K, 10-Q and 8-K filings.

The terms now crop up in quarterly earnings releases and securities filings for companies as varied as Grape-Nuts-maker Post HoldingsInc., chemical company Dow Chemical Co., wireless operator AT&TInc. and hamburger chain Wendy’s Co.

As nearly always, the corporate reason for all this: to help investors understand the balance sheet better.United Technologies Corp. last week was the latest big company to embrace adjusted earnings measures. By adhering to accounting rules, “we’re actually confusing people more than we were helping people understand what’s going on in the business,” said CEO Greg Hayes. “This is a simplification and really allows the investors to more easily understand what the businesses are doing.”

The result, however, is a new yardstick with no standard accounting definition and, often, little comparability to other companies or even other time periods. 

TOMORROW IS ONLY A DAY AWAY

 
 Correlation is a term you don't hear tossed about much today, at least not directly. There is also the Wall Street term negative correlation which is an oblique way of saying diversification.

The move toward globalization is a move away from negative correlation. In short, we're all in the same rub a dub tub. One writer discussing the possibility of a global recovery noted."It's been a rough year for emerging markets across the hoard." Yes, indeed, it has and if one were a good contrarian and felt the global economy was really on the mend, one might dump money there, value trap or otherwise.

A day before the Fed flaps it's huge lips, up or down or steady as she goes, much of the concern is about the global impact of what's been one of the MSM meme, divergence, for months.The world biggest economy hiking rates while other major players take a different direction.

That's one of the major fears surrounding Fed action. That's globalization. That's correlation.
Like that old Vegas saying, "What happens here stays here," no longer applies. It's also what a growing number of EU members are beginning to realize once they got hoodwinked into forfeiting their currencies, customs and cultures to join a monetary union.

The Unites States is linked more than ever before to major players around the world. China's slowdown has hurt other emerging markets. Japan is barely growing. Europe is struggling with low economic growth too. It's been a rough year for emerging markets across the board.

To varying degrees, all that weighs on the U.S. economy and the Fed. The concern is that the Fed's rate hike can cause a boomerang effect: (1) the Fed raises rates, (2) that hurts other economies even more, and then (3) economic woes in developing countries eventually hurt U.S. trade and economic growth.

The U.S. manufacturing sector has already shrunk as a result of the weak global economy and strong U.S. dollar. 

China's efforts, back door or otherwise, to un-peg the yuan from the dollar is about correlation. So the financial globe awaits tomorrow. Keep in mind that correlation is not always causative. The Fed hikes rates and the financial globe collapses. But perception is.

And that's why MSM memes, particularly those they work especially hard, are always dangerous. An example one might want to consider is the MSM and its characterization of Trump.