Monday – December 9, 2019

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Market opens flattish to begin the new week, after stocks closed Friday near all-time highs. A strong rally Friday, on the back of the better than expected job report, helped nearly erase the losses from Monday and Tuesday. Volatility is back as the year comes to an end. And there are two major issues to contend with before the holidays set in: the Fed meeting on Wednesday and the scheduled tariffs on Sunday. The Fed meeting is going to happen. Interest rates are expected to stand pat. But what the Fed says about the state of monetary policy and the US Economy will be Market moving. The tariffs are set to go higher this weekend, if a deal is not inked prior. The tariffs to be increased apply to PCs, smartphones and toys imported from China. They are items that often show up under the tree or are purchased around the holidays. Expectations were building as November came to an end. But there seems to be an abrupt change, and this phase 1 deal (which is not really a deal) is showing signs of not happening. In fact, it’s being reported the Americans and Chinese leaders can’t even agree on a place where they would sign something. We’ll see how the Market reacts as the news flow continues on this subject. White House economic adviser Larry Kudlow told CNBC that the US and China are “close” to a trade deal but that the administration was prepared to walk away if it did not get the terms it wanted. He added that constructive talks are taking place almost daily and they are probably even closer to a deal than in mid-November. There appears to be a deal to be had with Democrats to get Trump’s renegotiated and rebranded North American Free Trade Agreement through Congress. The deal with Democrats could come together this week, putting a ratification vote for what is now known as the USMCA on the same possible pre-Christmas timeline as an impeachment vote. China reported another drop in exports in Dollars, and the trade war continues to put a drag on growth. The Fed balance sheet is back above $4 Trillion again, as the central bank continues to step in to service the overnight repo market, which has had consistent liquidity issues. Fed Chair Powell asserts this assistance is not quantitative easing, but it sure seems like it is. It begs the question, if the Fed has to intervene in the overnight lending rate to prevent default during good times, what’s going to happen if this turns south? I think everyone knows, but nobody seems to be concerned. Everything is fine when things are going well and people are making money. It often masks trouble beneath. We are paying attention to this closely. Coca Cola is celebrating 100 years as a public company. Paul Volcker, the Fed Chair under Ronald Reagan who whipped inflation, passed away this morning at age 92. He was a Great American. Stocks are flat. Bonds are higher, while yields are lower. Oil is lower, while Gold is higher. The Dollar is flat. The VIX is back above 14. Hang on for the ride.

Have a great morning,

Mike Frazier

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