Wednesday, June 28, 2017

No Biggie, Fed Officials Use The Term "Correction" All The Time. CORRECTION?!

websters dictionary
If Fed officials want to point out risk they need to look up bigger words.



We're sorry to say, but if San Francisco Fed President John Williams wants to call out market risk he has to pick more scholarly terms that most normal people won't catch. Using terms like "running on fumes," "risk" and "correction" are words that us normal people understand. We might even listen and could even sell. That may have caused some of the selling yesterday. We also want to show the market is far from "running on fumes."



First, Fed Speak 101, C'Mon John.

First, before we get into analyzing and responding to the SF President's comments we have to teach him a thing-or-two about Fed Speak. Famed Fed Chairman Alan Greenspan knew how to do it. In his famous 1996 speech he coined the now famous "irrational exuberance."

Maybe some people know the meaning of one word, maybe both. But in today's A.D.D.-internet age a term with more than two or three syllables gets quickly flipped through and no risk of market reaction.

Mr. Greenspan's term had a fancy 8 syllables in a mere two words which tied for a Fed Speak record.

And don't worry the market strongly catapulted way after his 8-syllable Fed-speak record.

Here's the market.
irrational exuberance chart 1996
Dow Jones After 1996's "Irrational Exuberance" went a lot higher
Chart By Macrotrends
What Did He Say?

Here's what the Fed President just said,

"The stock market seems to be running pretty much on fumes. It's something that clearly is a risk to the U.S. economy, some correction there, it's something we have to be prepared for to respond to if it does happen."

Uh, Mr. Williams, those are words we can all understand. "Running on Fumes" is a term we all use and relate to. The words "correction" and "risk" are terms that don't abide by the Fed-Speak-101 class of how to speak like Alan-Greenspan.

And markets listened and dropped yesterday.

TG For Fed Chair Yellen

Fed Chair Yellen came to every bulls rescue yesterday with an easy to understand, "another financial crisis is not likely in our lifetime."

Ahh!  Much better.  Fed officials are allowed to say simple things that are easy to understand if they are bullish, but bearish things have to be in scholarly multi-syllable puzzles. Fed Chair Yellen knows.

But Stock Market Far From "Running On Fumes"

Present Value

Anybody who is trading any serious money understands the math related to present-values. That's the method of predicting future cash flows and wrapping it up into an estimated value today. That estimated value is what most stocks run on today.

In the denominator of that equation for each year going out a decade or two from now is an interest rate factor. The higher the interest rate is in the denominator, the lower the present value today.

The lower that interest rate is in the denominator, means what?

Let's all say it together.

That's right, higher present values today; higher stock prices.

long term yield chart 2017
Source: St Louis Fed


These interest rates in the chart above are not just historic, they are prehistoric, caveman levels. That means what for valuations? That's right high valuations. That is not fumes.

And who do we have to thank for these rates? Fed President Williams and all his Fed cohorts have a part in it by buying $4T of assets from the open market.

That higher value due to lower interest rates is one big reason that valuations are not fumes. They are math-based and reliable.

Earnings

Boring, here we go, Elazar going on another diatribe about how important earnings are. Here we go.

earnings versus stock market
Source: St Louis Fed













Ok, we'll keep this part brief.  Above you have earnings pointing up. Earnings pointing up means what in the history of stock markets? Higher markets. That's not fumes.

Conclusion: Sorry Mr. Williams

Choose bigger words next time not to scare us and please, brush up on your present-value analysis. This market is far from fumes.

[Please write your local representative to impress upon Fed officials; bullish comments, easy words. bearish comments, scholarly terms]

By: Chaim Siegel, Elazar Advisors, LLC

About Stock Pickers Premium: SPP is the best way to build conviction what stocks to own in this bull market. Daily reports, access to analysts, chat, targets, get the calls before the street.

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