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Business/Finance See other Business/Finance Articles Title: Are We Back to ‘Bad News is Good News’? Are We Back to ‘Bad News is Good News’? Posted on October 9, 2015 by Brad Hoppmann If the past couple of weeks have left you feeling like you’ve seen this movie before, well, you have. One week ago we got a terrible September employment report that showed the economy created just 142,000 new jobs during the month. That metric was well-below expectations for more than 200,000 new job adds. The initial reaction last Friday morning was a big sell-off in stocks, but that selling was short-lived. Stocks ended the session with strong gains, and ever since then we’ve seen equities continue a robust march higher. So, why have we seen gains in the face of bad data last Friday, as well as the similarly bad ISM Non-Manufacturing PMI data early this week? The new speculation on Wall Street actually is old speculation, and that is the Fed-centric mantra that "bad news is good news" for investors. The theory here is that bad news will keep the Fed from hiking interest rates this year, and interest rates that are "lower for longer" are good for nominal equity prices. Like I said, we’ve seen this movie before, all throughout the many rounds of quantitative easing and the Fed’s zero-interest-rate policy (ZIRP) of the past seven years. If the data continues to be bad (or even just mediocre) I think we can forget about the Fed hiking rates anytime this year. Unfortunately, that just sets us up for more pain, suffering and angst over when the Fed will finally hike rates — and what the potential damage will be to stocks once the ZIRP punchbowl is taken away. From now until then, it looks like we’re in for a battle of "bad news is good news," vs. the fear and uncertainty associated with an indecisive and scared Fed reluctant to begin normalizing monetary policy. It’s Friday, and this week has been packed with interesting news stories and developments, many of which we’ve covered in the Afternoon Edition. As is usually the case, readers have given me their feedback on some of the issues we’ve explored this week, so today I wanted to share a few of my favorites on the various subjects at hand. Let’s start with Thursday’s article, "Hillary Takes Aim at Wall Street," where we considered the merits of the Democrat front-runner’s plan to curb Wall Street’s risky behavior. Common Sense writes: I do not mind these big financial firms taking risks. However, I do mind the government asking the taxpayers to pay for the results of this risk-taking. Ending the bailout of these crooks would control excessive speculation. Broomy writes: You seem to believe that something needs to be done, but you have no proposal. If we just let them fail, are you not concerned about the fallout of such inaction? Give us an alternative, otherwise I’m going with what Hillary, Bernie or Elizabeth come up with because they at least propose solutions. Brad comment: I’m not trying to get votes by appealing to the popular dislike of Wall Street. But I will say any plan that doesn’t address the "too-big-to-fail" moral hazard is not going to result in any meaningful reform. You can fuss around the edges if you choose, but until you tackle the real problem of a government backstopping big banks, there will be no real change. *** On Wednesday we wrote about the canary in the China coal mine that is Yum! Brands (YUM), and specifically about their downbeat China outlook. That outlook resulted in a 19% drop in YUM shares, and that’s a warning sign for other companies that do a lot of business in China. On this issue, Billy writes: Just like Caterpillar, Yum! Brands is an ABSOLUTE Canary in the coal mine as to the massive deflation problem that is spreading out of control around the world … What you need to remember is that the Chinese Stock market basically fell 45% in 2 months. This is the world’s second-largest economy and it fell just about as much as the U.S. market did in the same amount of time ….during the 1929 stock market crash! People have absolutely NO IDEA how bad the capital markets are right now. The scary thing is there is no way to stop this slow-moving train wreck. It spells major problems in the next 3-6 months … Brad comment: I am inclined to agree with Billy, although I hope we are both proven wrong. *** On Tuesday, we covered the fantasy sports scandal, a hot topic on both mainstream news outlets as well as sports-oriented news purveyors such as ESPN. The likening of this scandal to a Wall Street "insider trading" situation has already brought out the regulators. The New York Attorney General announced it was already looking into the practices in the nascent industry. About that situation, Ralph M. writes: Just what we don’t need as a nation … more regulations by some do-gooder in the name of public interest. Unfortunately these people think they know how to best run everyone’s life but cannot run their own successfully. More big government is just what we don’t need. We as a nation have much larger problems to solve … .national debt, immigration, joblessness, the economy and national defense to name a few. Brad: My thoughts exactly, Ralph. *** And on Monday we pressed the hot-button issue of CEO pay via a new a new study by researchers at Cornell University that showed offering CEOs a bonus for boosting shareholder returns is a tactic that just doesn’t work. Most of the responses I received came from readers who were upset about the big pay disparity between some CEOs and the average worker. While I understand the impetus to feel that somehow such big pay packages are generally "unfair," the larger point of the study is that simply aligning CEO pay with shareholder returns does not result in better shareholder returns. The other element here is who determines what is "fair." Toward this, I received an excellent comment by Sterling C., who writes: Yes, exorbitant salaries are a bit over the top in comparison with the average wage earner, but then that is a subjective call about what is fair and who is calling the "fairness" shot. While I understand the gravity of the discrepancy in wages, subjective calls are what happens in socialist countries where the government makes the decision about what is "fair" … usually taking from the rich and giving to the poor where the politicians spend other people’s money (yours and mine) in order to get elected over and over again … until the money runs out and there is a huge correction. Brad comment: Deciding "fairness" when it comes to CEO pay, or anything in life, is often a losing battle. While we can take steps to make sure the inherent unfairness of life doesn’t hurt others, life is not a level playing field. Moreover, bemoaning the "unfairness" of what another human being gets paid is just not, in my opinion, a productive use of one’s limited resources. *** As always, I want to know what’s on your mind. Tell me what you think about fantasy football gaming, or any of our past subjects, by leaving a comment on our website or by sending me an e-mail. *** U.S. stocks bounced around the unchanged line Friday, finally finishing the session slightly positive. For the week, stocks had a nice rebound, logging their best weekly gain in over a month. • The prices the U.S. paid for imported goods fell by a seasonally adjusted 0.1% in September, much smaller than the 1.6% plunge in the prior month. • The House of Representatives passed a bill to lift the U.S. ban on oil exports. The Obama administration has threatened a veto. • Gold rallied Friday to close at the highest levels since late August. The likelihood of a delayed rate hike by the Fed kept the dollar down and kept the bid in on gold. • Oil futures settled at their highest level since late July, and for the week oil logged a 9% gain. Good Luck and Happy Investing, Brad Hoppmann Publisher Uncommon Wisdom Daily Poster Comment: I hear the FED has initiated a new stealth QE by printing $1 Trillion in an attempt to stave off more fiscal problems. That is just fine, but who is counting anyway? To read more about the FED and QE go to: http://www.ritholtz.com/blog/2012/12/what-is-the-purpose-of-qe/ Post Comment Private Reply Ignore Thread
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