Morning Market Thoughts

by DAN We’ve got a pretty flat open today as traders wait for the decision from the Fed at their policy meeting. For a while now, they’ve been saying that we’d see another rate hike this year, bringing the number of interest rate increases in 2017 to three. I’m sure they’ll also give an indication of the number of rate hikes next year. The Fed’s forecasts for the economy are rarely correct. Honestly, I can’t remember one forecast that was even remotely in the vicinity of accurate. However, the forecast is important because it indicates what the Fed may do in the near future — and THAT is something that has a big impact on the flow of money…and the flow of money is a big deal because the direction of money is what pushes stocks up or down.

So, as with many things in the market, news is always relevant, what what is more important is the reaction of traders to that news.

But beyond the question of rate hikes and economic forecasting, traders will want to know whether the Fed is going to begin the process of shrinking its $4.2 trillion balance sheet. The way the Fed shrinks the balance sheet is simply refraining from putting money received from maturing bonds back into the bond market. When the money is reinvested, bond prices remain elevated, and yields remain low. But when the money is not reinvested, the bid in the bond market shrinks a bit and prices should come down — which pushes yields higher.

For you non-accountants, buying bonds results in an increase of the “accounts receivable” of the Fed’s balance sheet. When the money is paid as a bond matures, the accounts receivable drops by the amount received. Duh. If the Fed then reinvests the money back into the bond market, the accounts receivable goes back to where it was prior to the receipt of money from maturing bonds and the balance sheet remains unchanged. If the Fed does not reinvest, the balance sheet shrinks because the “accounts receivable” number falls.

On the most basic level, this decision is what traders are waiting for. To shrink, or not to shrink?

A shrinking balance sheet allows rates to rise in the direction of a free market (an ancient concept rendered irrelevant by Ben Bernanke with his helicopter full of money). And rising interest rates result in greater profits for lenders — banks!

This possibility is likely at least partly behind the recent lift in banking stocks. So if the Fed announces that the process of shrinking the balance sheet will indeed begin, look at the banks. You’ll probably want to own some of them — and we’ll be picking through them to find the best technical pictures.

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TODAY’S TRAINING SESSION
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Don’t forget about today’s training session at noon eastern time, and 9 pacific time. If you’ve got any stocks to discuss, let me know. I always appreciate it when requests or comments are sent to Gary prior to the session. (Gary@stockmarketmentor.com) I then review them prior to the session and can address the questions at the front of the session.

Hope to see you there.

–DAN

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