The Machine

Welcome to the machine. And the machine makes stocks go higher. Central banks and governments are working together at all costs from letting the U.S. stock market crash and burn. On Friday we got word that a trade deal with China is underway which means the tariff machine will be dialed down and don’t forget about the Fed. Some big news was announced in a coy manner by Fed Chair Powell in a speech on Tuesday.

As I mentioned in last week’s piece (Fed to the Rescue?), the Fed began injecting liquidity into the overnight lending markets in mid-September to satisfy some “temporary” disruptions in the overnight lending markets. Guess what? On Tuesday, Powell announced these programs would remain in place for the foreseeable future via a purchasing program of T-bills beginning with a $60B block over the next month. This program will continue until Q2 of next year in undisclosed amounts. Powell denied it as the 4th coming of quantitative easing (QE) but the effects are the same – the Fed is growing their balance sheet (and cutting interest rates). I really don’t like how the Fed props up the stock market but it must be respected in that they run the machine.

Let’s take a look at an updated chart of the S&P 500 index. As you can see, the stock market has done very little in terms of upside progress since the January 2018 top (2,875). The very choppy price action over the summer did not result in a large break-down and we had a re-test of the 200 day on October 3rd with an impulsive advance that continued into Friday’s session.

SPX: S&P 500 Index

Despite the slowing manufacturing sector and weakening global macro picture, the machine is oiled up and revving to take-out new all-time highs thanks to the Fed and a new trade deal.

Chart of the Week!

The United States has engaged in over 500 international military interventions since 1776, according to the Tufts Military Intervention Project. In recent years, traditional diplomacy has given way to kinetic diplomacy where the use of military force is substituted for diplomatic relations. One-third of all countries worldwide house U.S. ambassadors, while special operation forces are in 75% of all nations – a testament to how U.S. international relations lead with force.

Economic & Central Banking Snippets 

  • German industrial orders have continued their decline, dropping by 0.6% in August from the previous month and adding to the gloom hanging over the eurozone’s biggest economy. (FT)
  • The Federal Reserve will soon expand its balance sheet with short-term US Treasury bonds in hopes of preventing further disruption in overnight “repo” markets, chairman Jay Powell said on Tuesday. (FT)
  • The headline consumer price index for all items was flat in September from the previous month — the weakest reading since January, the Bureau of Labor Statistics said on Thursday. That missed economists’ forecasts for a 0.1% increase and left the annual figure at 1.7%. Underlying inflation was depressed by a decline in prices of used cars and trucks, clothing, new vehicles and communication. (FT)
  • Despite a contraction in August, GDP growth in the United Kingdom grew 0.3% in the three months to August compared with the previous three-month period, according to data from the Office for National Statistics on Thursday. Economists now expect the economy to have expanded in the third quarter, thereby avoiding a recession. (FT)

Macro Snippets

  • WeWork’s bankers are scrambling to complete a new debt financing package as soon as next week to buy time to restructure after the company’s failed initial public offering left it running short of cash at a faster rate than expected. Two people briefed on the fundraising efforts said the office company’s cash crunch was so acute that it had to raise new financing no later than the end of November. Fitch Ratings downgraded WeWork’s credit rating last week to CCC+, warning that the loss-making company’s liquidity position was “precarious”.
  • Nine top Wall Street banks have announced a new initiative designed to ease the cumbersome process of selling corporate bonds, as the increasing electronification of markets starts to seep into debt issuance. Bank of America, Citigroup and JPMorgan Chase spearheaded the project in early 2018, under the name Project Mars, hoping to prevent third-party technology providers from snapping up the business first. They have since been joined by Barclays, BNP Paribas, Deutsche Bank, Goldman Sachs, Morgan Stanley and Wells Fargo, to form a new company called DirectBooks. Several years after technology came to dominate the way stocks and currencies are traded, corporate debt is now catching up, with more than one-fifth of all trades now conducted on electronic trading platforms. But issuance — the point at which new bonds hit the market — has largely remained a fiddly, paper-intensive exercise.

That is all for now until next week’s Market Update. Thank you for being a subscriber!


Paul J. McCarthy, III

President – Kisco Capital

Paul McCarthy

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