Mike’s Morning Brief – September 11, 2019

What’s going on in the world…

Market opens higher on this 18th anniversary of a day we must never forget. The unthinkable happened. September 11, 2001 was a tragedy of massive proportion for the United States. It was the largest terror attack on American soil. It was a wake-up call to Americans. It changed everything. We were no longer immune from the rest of the world. The world was no longer the same. President Trump fired National Security Advisor John Bolton, in a somewhat bizarre fashion. This administration has had so many moving parts and roles in the cabinet, which has to complicate internal policy and external relations. It’s been the case from day 1. Optimism for a deal on trade seemingly keeps building, yet there have been very little in the way of progress. Trade Advisor Peter Navarro gave no reason to think anything was imminent, impressing patience and the approach is working. China did exempt 16 US products from higher tariffs ahead of trade talks planned for next month. The exemption will include whey and fish meal, which are fed to animals, as well as some lubricants, starting Sept. 17. China is feeling the pain more so than the US, but are unlikely to cave on what the US wants most. Piracy and IT theft are not likely to be addressed in any deal this year. Another trade war has been brewing, but not getting the same headlines or attention in the US is the fight between South Korea and Japan. Tensions are decades long, but South Korea filed a complaint with the WTO against Japan. China is strategically trying to moderate these issues, in the absence of US assistance, as it continues to flex its muscle in Asia. The Brexit mess continues, with contestation of the Prime Minister’s Parliament suspension. Hopes for a September stock rebound are also getting a boost on expectations for fresh monetary stimulus from the European Central Bank tomorrow and the Federal Reserve next week. There’s a lot of hope. When it comes to central banks, the aid is coming. Central banks around the globe continue to take rates lower and provide substantial stimulus. The approach has not resulted in the desired outcome. Inflation is benign and growth is slowing. The problem is, there are unintended consequences with low and negative rates over an extended period of time. The system needs to run its course in a natural way. The system has been artificially propped up, which has benefitted asset prices like stocks, bonds and housing. And central banks don’t have the firepower to address a crisis, should one develop. It’s a serious issue which is being masked with the Stock Market rally. The Bond Market has been telling a much different story. Interest rates have been ticking higher the last few days, a big reversal from the prior trend. And the Market is no longer pricing in a 100% certainty for a rate cut by the Fed next week. There is now an 88% probability of a ¼ point cut now, down from 92% yesterday, and 100% a month ago. President Trump continues to hammer the Fed on the need for more rate cuts, this morning referring to them as “Boneheads.” Leadership continues to shift. Tech has been weak, while the beaten up industrials and Energy have caught a bid. The DOW has been the strongest of late, up 5 consecutive days, while the Tech heavy NAS has been down the last 4. The S&P 500 has been flat. The iShares Momentum ETF slid 1.5% Tuesday, bringing its decline so far this week to 3.1% as so-called momentum stocks continue a recent fall. The Value ETF, consisting of value stocks rose, is up 3.2%. Stocks are higher. Bonds are lower, with higher interest rates. The Dollar is higher. Gold is higher. Oil is higher, with WTI back towards $58. The VIX is lower, below 15. The last time it saw this level, the August selloff ensued as did the May decline prior. Fear is abating. Complacency is setting back in. We remain cautious and disciplined. We’ve seen this set-up before. Never forget.

Have a great morning,

Mike Frazier

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