Automatic for the People

The Fed is stepping out of the picture with a hug and a kiss. On Wednesday, Fed Chair Powell, commented that they may have made a mistake and will hit the brakes on their tightening policy due to concerns that the economy could be slowing. Ironically, just two days later, the jobs report on Friday revealed much better than expected results (see more below) which would have given the Fed cover to maintain their tightening policy. The Fed folded their hand too soon. Thanks for playing, Mr. Powell but the stock market has called your hand. The people at the Fed have reacted in an automatic and predictable fashion to volatility – some day gravity will have its way.

The government shutdown has come to a close and the data is not showing any major damage to the economy. Recent headlines claim the President will likely use emergency monies to fund a border wall so I don’t think a redux of the government shutdown will happen in February. China negotiations are the next shoe to drop from a policy perspective but I think these talks will go on for several months.

Earnings season continues and it wouldn’t surprise me if companies that disappointed get a pass on Q4 performance as the market chalks it up to a Fed induced hiccup. The technicals below are showing a positive picture and the potential for continued upside progress in the coming months is continuing to grow.

What to look for next week:

  1. Durable goods orders on Monday.
  2. A Super Bowl parade.
  3. Market is short-term overbought so a smaller degree pullback is brewing.

Chart of the Week!

Two charts that are highly relevant this week:

Economic & Central Banking Snippets 

  • The economy will grow 2.3% this year and slow to 1.7% in 2020 and 1.6% in 2021, according to a Congressional Budget Office report. The budget deficit is expected to increase to $897 billion for the 12-month period ending in September, compared with $779 billion a year earlier, the report said. (SIFMA/CBO)
  • Italy is officially in its third recession over the past decade, as the GDP report surprised to the downside. (WSJ)
  • Non-farm payrolls increased by 304,000 for January smashing Wall Street expectations for 165,000 jobs. However, the large jump came at the expense of a sizeable revision to December’s number, which was revised lower by 90,000 to 222,000. The unemployment rate ticked up one-tenth to 4% from 3.9%. (FT)
  • The US manufacturing survey conducted by the Institute for Supply Management rebounded in January on the strength of new orders and a decline in prices. The group’s index tracking domestic factory activity climbed to 56.6 last month – a reading above 50 indicates expansion. January was the 28th straight month of growth for the sector.
  • UK manufacturers are stockpiling goods at the fastest rate in three decades as companies brace themselves for the prospect of a chaotic exit from the EU. The UK purchasing managers’ index compiled by IHS Markit/CIPS on Friday showed concrete evidence that stockpiling was becoming widespread – particularly in the food and drink, clothing, chemical and plastics, and electrical and electronics sectors. (FT)
  • A private sector gauge of China’s manufacturing sector in January contracted to its lowest level since February 2016, in the latest sign of economic headwinds hitting the world’s second largest economy. The reading comes as policymakers in Beijing continue to roll out stimulus measures to boost growth. (FT)
  • Sales of newly built homes in the US hit their highest level in eight months in November, in contrast with other reports that have signalled the housing market is cooling. New home sales surged 16.9% in November from the previous month to an annualised pace of 657,000 units, the US Census Bureau said on Thursday. The increase marked the biggest jump since 1992. (FT)

Macro Snippets

  • Whirlpool said Monday it swung to a profit in the fourth quarter driven by higher prices and sales in North America. Stronger prices for its products and fixed cost reduction boosted Whirlpool’s bottom line despite headwinds from tariffs, higher freight costs and raw material inflation, the company said.
  • Apple will gain access to a huge trove of detailed health data as part of a new Apple Watch tie-up with US insurer Aetna. CVS-owned Aetna and Apple have jointly developed a new app called Attain, set to launch in the coming months. Attain will use the Apple Watch to provide personalised recommendations to users, based on both their health history and live data generated by the wearable device, which offers heart-rate monitoring and workout tracking. 
  • California’s largest utility, PG&E, filed for bankruptcy protection as it struggles with billions of dollars in potential liabilities from its role in sparking California wildfires. The process to restructure its debts is expected to be protracted, involving state and federal regulators, with wide-ranging implications for utility customers, fire victims, shareholders and wholesale power providers. According to its bankruptcy filing, PG&E has total debts of $51.7bn and assets of $71.4bn. The filing cited its largest creditors as including the Bank of New York Mellon, Citibank and Bank of America. (WSJ/FT)
  • U.S. sanctions against Venezuela’s oil sector are forcing the country’s Citgo Petroleum, one of the largest refiners in the U.S., to consider bankruptcy as a way to protect its operations amid the battle for political control in Caracas, WSJ reports. Some U.S. refiners have already begun reducing crude processing as crude oil costs have risen following the sanctions and as gasoline margins crashed to their lowest in nearly a decade. (Seeking Alpha)
  • Facebook has become the target of at least three more U.S. state probes into the alleged mishandling of user data, Bloomberg reports. The inquires signal widening pressure on Facebook (FB) following a series of privacy scandals that were sparked by disclosures a year ago of political consulting firm Cambridge Analytica gaining access to data on tens of millions of users. (Seeking Alpha)

That is all for now until next week’s Market Update.


Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.