"Rates went up in the US for the first time since the middle of 2006, the previous hiking cycle had started in June of 2004, where the Fed went from a historical low (at the time) of 2 percent to 2.25 percent. All members unanimously voting in favour of hiking rates to the 1/4 to 1/2 percent range. And the moves northwards would be gradual, inflation, or the lack of it, is certainly still a problem for those setting monetary policy in the US."
To market to market to buy a fat pig. What a relief, it finally happened. Rates went up in the US for the first time since the middle of 2006, the previous hiking cycle had started in June of 2004, where the Fed went from a historical low (at the time) of 2 percent to 2.25 percent. Stopping eventually at 6.25 percent in late June of 2006, that was the Bernanke one and done. From there history will show some deep cuts in interest rates through from August 2007 to December 16 2008, when rates effectively went to zero. For all the history, check out the Historical Changes of the Target Federal Funds and Discount Rates, 1971 to present.
And then seven years to the day rates rose again by 25 basis points, December 16, 2015. I watched last evening, it was almost an anticlimax in a way, you can't stop the event, it is here. Stocks initially dropped and then I guess people started reading the statement, which you can read too, thanks to the beauty of the internet: 2015 Monetary Policy Releases, December 16, 2015, they started to rise again.
All members unanimously voting in favour of hiking rates to the 1/4 to 1/2 percent range. And the moves northwards would be gradual, inflation, or the lack of it, is certainly still a problem for those setting monetary policy in the US. Of course what these historical low rates for the banks don't tell you, is that banks themselves lend money out at higher than the Fed funds rate, of course they do. For money market funds, the last seven years have been spent wandering in the low yield desert. I noticed that Wells Fargo and JP Morgan increased their loan rate by 25 basis points to 3.5 percent, that is effectively their prime lending rate.
The only laggards were the energy stocks, an important announcement in the early hours of the day that US lawmakers looking to lift a 40 year ban on the export of oil saw another leg down for the price of oil. Amazing of course for the consumer, not so much for the oil producers. Both the Senate and the House, as well as the US president still need to put pen to paper, so to speak. Texas would be a short term winner, perhaps the pumping and sending of US crude offshore would mean another boom of sorts, the frackers have had an incredibly tough time of it as of late. NYMEX crude is last at 35.40 Dollars a barrel as I write this, off the worst levels of the week seen three days back. And to think that three years back the whole world was "ok" with a 90 Dollar a barrel oil price. The fracking boom is a win for global consumers, technology and efficiencies have driven oil prices to multi year lows.
Other than the lagging energy sector, all boats were floated. Utilities gained the most, perhaps with the long term rate being set at 3.5 percent the attraction of some of the utility stocks with higher yields and still the ability to grow earnings, the attraction is heightened. Something else in the utilities space was moving, and huge, SunPower, First Solar, SolarCity shares all jumped in celebration of an extension (pending) of tax credits in the industry. For another five years, the phase down was expected to also take a little longer. If the US, or any developed nation for that matter, are going to be serious about taking the lead in climate change action, then these are the industries that seem to be the natural beneficiaries.
The truth is, relative to the huge installed capacity of the old style utility companies, solar is tiny. SolarCity has a market cap of less than 4 billion Dollars, in the "Renewable Energy Equipment & Services" listed segment, there are a mere 18 listed entities to choose from. The biggest of the lot is First Solar, with a market capitalisation of 6 billion Dollars. And of the 18, only three currently make any money, the others (including the Musk associated company SolarCity) make a loss. Is it an interesting investment space? Hell yes! It is not going to be easy to find a company to back on what is clearly an important investment shift in our lifetime. We are holders and accumulators of SolarCity at the very fringes, these investments are not for the light hearted. Equally important investments include Tesla. Again, these are not for the faint hearted.
At the end of the session, and with the broader market just managing to sneak into the green for the session, the S&P 500 closed up over one and one-quarter of a percent to 2073 points, the Dow Jones Industrial average added nearly one and a half percent (it is still down year to date), whilst the nerds of NASDAQ added over one and a half percent. Thanks to some of the more stellar performances from the heavyweights, what Mr. Market refers to as FANG (Facebook, Amazon, Netflix and Google), the NASDAQ is up over seven percent year to date. Mind you, if you have been holding tech stocks since when Pete Sampras was the best tennis player around, you have seen a massive shift in the index constituents, not so much the index. The FANG acronym did not apply back then, only Amazon was listed, Facebook was not even invested yet, the Zuck was in high school. Why it is important to own stocks over the index.
Whilst we were all enjoying the day off yesterday, up on the highveld here it was a day of two halves in terms of the temperatures, cooler in the morning and warmer and lovely in the afternoon, Moody's took a decision the day prior to cut their outlook of South African debt from stable to negative. If the nuclear deal is unaffordable, then it makes sense to institute a tax relief or tax break system not too dissimilar to that of the US, get private business to install solar panels like crazy. And of course the much needed storage devices, batteries. Make all of this equipment exempt from import duties and tax free in terms of the consumer purchase price. It is still expensive to install a system, it is becoming a whole lot cheaper, however. If the national grid becomes too expensive, people will make plans to get off the grid.
Linkfest, lap it up
You cannot make up headlines like this: A security guard stole $5 million in diamonds that were thrown out in the trash. It turns out that the diamonds were kept in little boxes, little wooden ones. In an unlocked safe, for "easier access". All ended well, the diamonds were recovered, I am guessing both the security guard and the person who bought them are in big trouble.
This is interesting, Kenya's central bank is taking out newspapers ads to warn against buying Bitcoin. I am of the opinion that you must take your chances, if you want to buy something priced in Dollars and lose it all, good luck to you. In other news, you can buy real currency (like Dollars) that won't vanish. Makes more sense to me to buy the good old fashioned currency.
Josh Brown makes an interesting point or two in his article: Did we already have the post-Fed sell-off?. He reckons the sell off came first, the recovery is what we are seeing now. Sell first and ask questions later.
I always smile when people tell me that they did X on Y data and it worked, yet when you apply it to the real market, the desired outcomes are not the same. Read: Financial Backtesting: A Cautionary Tale. What works so well with back testing is that your timing is impeccable. Harry Hindsight is brilliant, unfortunately, many of these models crash and burn. Yes, whilst 2015 "feels" like another time in history for some market watchers, it is also completely different from any other year. Ever.
Home again, home again, jiggety-jog. We should start better today, having to catch up two days worth of gains in the US and a more settled market. Are the rumours about Barclays looking to offload their stake in ABSA (Barclays Africa) true? If so, to whom and how would that work? Has the proverbial horse bolted, in other words did offshore investors make a longer dated call on South Africa last Thursday and is that "done" already. We shall see, time will tell.
Sent to you by Sasha and Michael on behalf of team Vestact.
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