Stocks gained yesterday in a rocky session as investors wondered what a split government might do for stocks. The crypto world was sucker punched when Binance announced the acquisition of rival FTX to "shore up” FTX’s balance sheet – that’s code for “not good.”
Rated. Have you heard your favorite newscaster on the tube use the word terminal? Of course, you have, if not on the TV, you must have read it in the press. Somewhere in the cold, grey, austere lower level of the Federal Reserve headquarters there must be a small unimpressive office that houses some sort of a marketing genius. That virtuoso is tasked with producing special taglines. When I say special, I mean single-worded, highly meaningful, yet unmeaningful all at once catchphrases. That special phrase is first introduced by the Fed Head himself and it is then repeated over and over by the FOMC members as they enlighten audiences on the good work of the Central Bank. Notable ones in the past were the likes of “pivot”, “r-star”, “Phillips-curve”… oh this one was a hit, how about “transitory?” These are all words used to describe policy or the economy and they sound very academic, like terms of art only reserved for the highly powered banking set, but in this case the bankers are letting us into the clique. So, they sound official, they feel technical, they leave you with a sensation of “ahh, I get it [shaking head positively],” but by the time you get back to your desk from your coffee run, your head is full of question marks. Now, these words are also vacuumed up by the media… because the media loves to appear to be “in the know” and it uses technical terminology… in order to enlighten you on what YOU need to know. What you really want to know is “WHEN THE H#@& IS THE FED GOING TO STOP RAISING RATES?”
Of course, the Fed policymakers won’t tell you because they themselves don’t even know. They, just like you and me, read economic releases, economists’ opinions, and rummage through earnings reports looking for positive signs. They, just like you and me, are worried about inflation getting out of hand… er, further out of hand. The Fed bankers know that we expect them to fight inflation by raising interest rates. They also know that, in the past at least, raising interest rates was an effective tool to fight inflation, if not cause the economy to fall into a recession, which has a really good chance of causing inflation to fall. Now, of course the Fed does not want you to believe that it does not know when it will stop raising rates because that would imply that it is not in control of the situation. So, in order to avoid that, the bankers will evoke special, technical terminology that is beyond our understanding, but easily remembered and repeatable. We have been obsessed with the Fed’s “pivot”, and now we are turning our focus on the “terminal rate”, a new favorite of the media. It sounds like it will take a lot of serious math to understand it, so you may just drop it and think “sounds like those guys and gals are on top of things,” and leave the math to the experts. No, it is simpler than you think. The terminal rate is the rate at which the Fed is expected to stop raising rates. I am going to use a graphic to illustrate… you know I love pictures.
Yes, indeed, that is a picture of Kingda Ka a Six Flags Entertainment roller coaster, and yes, the riders actually ride to the top of that track, scary in and of itself, only to free fall at 128 miles per hour down the other side (Six Flags Entertainment, SIX, announces earnings tomorrow). Just a few weeks ago, the market expected the terminal rate to be around 4.5% and arrive sometime in early summer of next year. When the Fed released its economic forecast in September, it too was projecting rates to top off at 4.5% sometime next year. Well, a couple of hot economic prints and some carefully selected, hawkish wording, and that terminal rate has now risen to just around 5%. If you are a regular reader, you shouldn’t be surprised by this revelation, but to bring it home, I am going to leave you with one more graphic. This one depicts the expected Fed Funds rate based on the Futures markets. You will see it peak just above 5% next June. You will note its striking similarity to the Kingda Ka coaster pictured above. So now you too can throw around the slogan “terminal rate” like a pro-level economist. Strap in and enjoy the ride.
WHAT’S SHAKIN’
Meta Platforms Inc (META) shares are higher by +4.33% in the premarket after it announced that it will cut 11,000 jobs, or roughly 13% of its workforce. Perhaps the picture above is set to change once again. Potential average analyst target upside: +52.2%.
The Walt Disney Co (DIS) shares are lower in the premarket after it announced that it missed EPS and Revenue targets by -41.08% and -5.22% respectively. In the past month, 38% of analysts have changed their price targets 1 up, 13, down, 20 unchanged, and 2 dropped. Potential average analyst target upside: +36.9%.
News Corp (NWSA) shares are lower by -9.30% in the premarket after it announced that it missed EPS and Revenue estimates by -13.51% and -0.63% respectively. The company expects to have continued FX headwinds in the coming quarter. Dividend yield: 1.17%. Potential average analyst target upside: +25.3%.
YESTERDAY’S MARKETS
Stocks had a bumpy session yesterday ultimately closing in the green as investors prepared for election results. The S&P500 gained +0.56%, the Dow Jones Industrial Average added +1.02%, the Nasdaq Composite Index climbed by +0.49%, and the Russell 2000 Index slipped by -0.05%. Bonds gained and 10-year Treasury Note yields lost -9 basis points to 4.12%. Cryptos dropped by -15.59% on the merger news from Binance and Bitcoin fell by -9.6%.
NEXT UP