The Powell or Trump Put?

Fred Imbert of CNBC reports, Dow ends volatile November with more than 150-point rally on hopes of a US-China trade deal at G-20:

Stocks rose on Friday after a Chinese official reportedly said the U.S. and China are finding common ground on trade ahead of a key meeting between President Donald Trump and Chinese President Xi Jinping.

The Dow Jones Industrial Average rose 200 points while the S&P 500 and Nasdaq Composite gained 0.8 percent and 0.7 percent, respectively.

Reuters reported that a Chinese official said "consensus is steadily increasing" in U.S.-China trade talks. The official added, according to the report, that differences between the two countries remained. The report sent stocks to their highs of the day, erasing earlier losses.

Jeff Powell, managing partner at Polaris Greystone Financial Group, said investors are taking a "wait-and-see approach" ahead of the meeting. "I don't think people are expecting too much of a change, but if we can get some sign of progress, that will help."

Trump and Xi are scheduled to have dinner on Saturday and are expected to discuss trade issues between the two countries. Investors are eagerly looking ahead to the dinner, hoping the two leaders can quell trade-induced volatility in the global economy and corporate earnings.

U.S. Trade Representative Robert Lighthizer said Friday he expected the meeting to be a "success," raising hope that a trade truce between the world's largest economies could be struck.

Caterpillar and Boeing rose 4.4 percent and 0.8 percent, respectively. These stocks are considered bellwethers for global trade because of their high exposure to foreign markets.

However, China hawk Peter Navarro, Trump's trade advisor, will attend the dinner between the two. Navarro is seen as a contentious figure in terms of Washington's trade relations with Beijing due to his aggressive stance on the world's second-largest economy. He clashed with White House economic advisor Larry Kudlow earlier this month after saying any deal with China would be "on President Donald J. Trump's terms, not Wall Street's terms."

Friday also marked the last trading day of November. Barring a major sell-off, two of the major indexes are on pace to post solid gains for the month. The Dow is up 0.9 percent in November, while the S&P 500 has risen 1 percent.

Heading into December, however, stocks could be in for more volatility, said Bruce Bittles, chief investment strategist at Baird.

"We do not have evidence that a meaningful cyclical low is in place, and the character of any rally attempts that do emerge will be watch closely," Bittles said in a note. He added, however, stocks have historically done well in December.

"December has a well-known history as being a strong month of the year for stocks," Bittles said. "In fact, it is the strongest month of the year for U.S. stocks on an absolute basis. Stocks have rallied over the course of the month about three quarters of the time."

The Dow is also on pace to register its biggest one-week gain since late 2016, while the S&P 500 is on track to post its largest weekly rise since February.

Shares of World Wrestling Entertainment traded 6.7 percent higher after J.P. Morgan Chase upgraded them to overweight from netural, noting the company's valuation is attractive compared to industry peers.

After the worst October since 2008, stocks rebounded in November but not enough to make up for the losses in the previous month.

As I stated last week, it might not be bear market time for the overall market but the FAANG stocks got clobbered in October and remain weak.

While all eyes are on the G20 meeting and Trump and Xi's dinner, the big news this week was the Fed Chairman Jerome Powell saying on Wednesday that the central bank's benchmark interest rate is "just below" neutral.

That unleashed a massive rally on Wall Street on Wednesday, but after reading his prepared remarks, I think a lot of people are getting way too excited about the so-called "Powell put".

On Thursday, the Fed paved the way for a fourth rate hike in December but sent a clear signal that it would be flexible on plans to raise rates in 2019:

Minutes of the US central bank's November 7-8 meeting showed "almost all participants" agreed that another rate hike would likely be necessary "fairly soon."

But Fed officials also raised the prospect they could slow plans to raise rates next year, and discussed how to signal to investors that they would stay flexible "in responding to changing economic circumstances."

Thursday's minutes reinforce a message sent by Federal Reserve Chairman Jerome Powell as yet another signal the Fed may pause rate hikes next year. His speech to the Economic Club of New York sent markets soaring more than 600 points on Wednesday.

In other words, the Fed realizes the cumulative effects of their soon to be nine rate hikes are starting to hit financial markets and the US housing market and don't want to commit to three more rate hikes next year.

The problem is the damage is already done, and if you ask me, the US economy is already slowing considerably and will continue slowing next year (start taking your profits from USD long positions in Q1 of next year)

About the only Fed official who's making any sense these days is Minneapolis Fed President Neel Kashkari who appeared on CNBC earlier today stating rates should not go up when job creation is strong and inflation is tame:

Minneapolis Federal Reserve President Neel Kashkari told CNBC on Friday that central bankers should not be raising rates while job creation continues to be strong and inflation remains tame.

"For the three years since I've been at the Fed, we have been surprised by the labor market. We keep thinking we're at maximum employment. And then wage growth is tepid. And the headline unemployment rate drops further. Inflation has been well under control," he said. "If the U.S. economy is creating 200,000 a jobs a month, month-after-month, we're not at maximum employment."

With neither pillar of the Fed's dual mandate from Congress — to promote maximum employment and keep inflation from getting too high — throwing off warnings signs, the Fed should pause on rate increases at this point, Kashkari said. He added that hiking too forcefully before necessary could risk causing a recession in the U.S. economy. He believes rates are "close to neutral."

Furthering his case for holding rates steady, Kashkari said "there's still slack" in the labor market. Unless wages really go up or inflation spikes, a wait-and-see posture at the Fed makes sense, he suggested.

Kashkari is not a voting member on the central bank's policymaking committee this year or next year. But as a voter in 2017, he was against all three rate hikes last year, saying at the time there was no need to move because inflation wasn't a problem.

Over the long term, he thinks the economy won't grow much more than 2 percent. While that's been seen as a base case for some time, he said Friday that 2 percent growth at the near zero percent rates of the past is far more difficult to maintain with rates so much higher nowadays.

Kashkari appeared on "Squawk Box" as debate raged in the investment community on whether Fed Chairman Jerome Powell's speech this week really departed materially from the comments he made last month that led to widespread concern about the path higher next year for interest rates and an October market rout.

In Wednesday's address to the Economic Club of New York, Powell said rates are "just below" neutral, which appeared to be a sharp turn from his Oct. 3 remarks that rates were long way from neutral, a level neither stimulative nor restrictive to the economy.

The stock market ripped higher Wednesday on the thought that Powell softened his stance and thus signaled that the Fed may not be as aggressive as feared on rates. Stocks pulled back slightly Thursday. While U.S. stock futures were lower Friday, on the last day of the month, the market stands a chance at holding on to the small gains made in volatile trading in November.

Despite the initial optimism in the market, some prominent Wall Street economists said they did not see a major difference in what Powell said this week compared to last month.

The central bank has already increased rates three times this year, with one more expected in December. The target range for the central bank's benchmark federal funds rate, which banks charge each other for overnight lending, stands at 2 percent to 2.25 percent. After its most recent hike, in September, the Fed projected three rate increases for next year.

In recent months, Powell has been under constant pressure from President Donald Trump to halt rate hikes. Trump told The Washington Post Tuesday that he blames Fed policies for the stock market declines and General Motors' plan to cut production at several U.S. plants.

Kashkari on CNBC Friday defended the Fed's independence.

"Inflation expectations are so anchored because of the political independence of the Fed, because the Fed has done a good job over the last 20 or 30 years. That to me is something that is enabling this economy to continue strengthen, enabling the job market to continue to strengthen without inflation taking off. And so, let's let it continue."

Kashkari, who unsuccessfully ran as a Republican for governor of California in 2014, served as the administrator of TARP, the Troubled Asset Relief Program, at the Treasury Department during the financial crisis. After leaving Washington, he joined Pimco as a managing director and head of global equities. Before his time at Treasury, he was a vice president at Goldman Sachs.

A friend of mine who trades currencies sent me something this morning after I sent him this article:

Here is some food for thought... US funds rate is at 2.25% core inflation is 1.8% so real rate is 0.45% hardly tight monetary conditions. The problem is consumers can't borrow at 2.25% ... the prime rate is 5.25% so the banks charge a 3% spread for their best customers... avg credit card rate in the US is 17.14%... avg rate on 1 year US CD's by the banks is 2.5% and 30yr fixed mortgage rate is 4.90% vs 3.30 for the 30 year bond.

So, essentially US banks take a huge spread on short term loans which is very greedy and this is what the problem is. That is what Trump should be complaining about.

In Canada, the Bank of Canada rate is at 1.75% and the prime rate is 3.95%. During the decade of the 1990s the spread between the two averaged 1%, during the 2000s it averaged 1.5% and now its north of 2% sneaky creeping up and nobody says anything. On top of that they always increasing service fees.

So, the takeaway is that central banks can do what they want but domestic banks move in unison and try to continuously widen their spread to the detriment of the consumer and economy.

The correct scenario is poor credit should not have access to cheap money, good credit should get better rates and savers should get paid more for their money. Banks need to narrow their lending spreads.

Another problem is greedy corporate management that uses the company cash reserves to buy back stock (which benefits them) and raises their own compensation at a multiple of the inflation rate but refuses to raise the avg employee salary. We all have heard how the avg CEO salary as a multiple of the avg employee at their company. In 1950s the avg CEO made 20x what the avg worker made. In May of this year it hit 361x.. Hey, if you started the company took all the risk, built it up, God bless you, make as much as you want...but if you didn't then its a different story.

He's absolutely right, banks are collecting huge spread and compensation is out of whack but I'm sure some academics at Harvard or Yale's business school will defend the current bloated compensation structure at corporate America so their very wealthy alumni can keep donating to their large endowment funds.

The system is rigged folks, it's been rigged forever to favor the affluent class. Even financial markets are rigged with some participants getting information seconds ahead of others which is all they need to have an "edge" and make a killing in markets.

Anyway, don't get me started on that tangent, it will devolve and get ugly very quickly.

What I find interesting is even though banks rallied on Friday (with exception of Goldman Sachs),  financial shares (XLF) remain weak (click on image):

Now, given my macro view that the US economy is slowing and will follow the rest of the world lower next year in a synchronized global slowdown, I remain bearish on cyclical shares like energy (XLE), financials (XLF) and industrials (XLI).

But markets swing so violently that it's hard staying bearish on some sectors (like energy) and even in financials, there are opportunities like shares of Goldman Sachs (GS) which have been clobbered following the 1 MBD scandal (click on image):

Had lunch with two friends of mine today and one said "I think Goldman is going under." I replied: "No chance. Zero, zilch. This feels a lot like JP Morgan's London Whale scandal and I ended up buying those shares at $35 and sold them at $70."

In fact, on StockTwits today, I recommended buying out-of-the-money calls on Goldman's shares at these levels and hedging that with some puts (2 to 1 call/put ratio).

I realize that chart is bearish and signals more downside ahead, but either Goldman leads the rest of the banks or something is way off and the premium other banks are receiving here is ridiculous.

What about Malaysia? What about it? Goldman will pay a fine and move on. Trump will call the Malaysian Prime Minister and tell him: "That's it. Lay off Goldman."

People have this irrational hatred toward Goldman. They need to relax, it's a great bank with a boat load of smart people printing money. I'm sure their traders are thriving in these volatile markets.

Anyway, back to the G20 and the Trump - Xi dinner. I'd be surprised if there is a major positive announcement, however, Trump has shown his cards, he tracks the stock market very closely.

If Powell is now on the fence, it's up to Trump to do something on trade to ease fears in the stock market. He might say there will be no new tariffs on China as the US continues to negotiate trade with that country and that might be enough to lift Chinese and US shares higher.

Interestingly, on Friday, I noticed iShares China Large Cap ETF (FXI) and the Kraneshares China Internet ETF (KWEB) were both up big on expectations some good news will come out of the G20.

Both these ETFs have bounced but remain very weak (click on images):

If you believe China is turning the corner, you should be loading up on these ETFs, especially KWEB. I remain skeptical as China just reported its weakest factory growth in over two years on eve of US trade talks, but I remain open-minded and I'm tracking these ETFs very closely.

Below, Lori Calvasina, RBC Capital Markets head of US Equity Strategy, and Bruce Bittles, Baird chief investment strategist, discuss markets ahead of the G-20 summit in Buenos Aires.

Second, Neel Kashkari, Minneapolis Fed President, joins 'Squawk Box' to discuss the state of the labor market, neutral rates and the chance of a recession.

Third, Gluskin Sheff’s David Rosenberg believes a liquidity squeeze could hit stocks hard next year, stating people are ignoring the 'elephant in the room'. Very interesting comments, listen carefully to Rosie's comments.

Lastly, investors are piling into boring defensive stocks like P&G (PG) as 2018 comes to an end. While the rest of the market struggles to get back up to record highs, consumer staples stocks like Church & Dwight and Hormel have quietly rallied to new highs. Mark Newton of Newton Advisors and Erin Gibbs of S&P Global Market Intelligence discuss whether their rally can continue.

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