Coming Up Roses!

So everyone seems to be wondering whether the Fed will raise rates when it meets September 20-21.  The "official" data points have been mixed as of late, but the Fed thinks things are going pretty well.  Indeed, Janet at J-Hole noted that the economy is "nearing the Federal Reserve's statutory goals of maximum employment and price stability."  Yeah!

Of course good news is bad news as the thought of the Fed perhaps raising rates this month is not what the market wants, especially on the heals of Draghi and the ECB doing nothing this week.  And thus, the market dropped a tad on Friday, like a little over 2% tad.  Mind you, not because the economy sucks, but because, as Bloomberg puts it, "central banks signaled reluctance to extend stimulus." 

http://www.bloomberg.com/news/articles/2016-09-09/no-stimulus-no-peace-as-stocks-end-two-month-snooze-with-plunge

You see, everyone knows the economy sucks even it if it not catching the headlines daily but they are willing to ignore that as long as the Fed is serving up drinks and catching the tab.  But the Fed is likely second guessing things a bit and wants to raise rates, knowing it needs a buffer to play with in the next recession, but it cannot justify a rate increase if the economy sucks.  So according to the Fed, it does not suck and everything is coming up roses.  The true irony here is the market is bombing because the Fed might raise rates when the market should be bombing because the economy sucks, yet the excuse for the Fed possibly raising rates is that the economy is just honky dory.  Got that?

Now you won't hear that the economy sucks from Hillary who needs to ride Obama's coattails, but on this I have to agree with Trump who has been pointing the finger at the Fed for propping up the economy.  Now he says it is to make Obama look good and sway the election. I do not think they are per se doing it to sway the election or to make Obama look good; they are doing it to make themselves look good and they refuse to admit the utter failure of their policies.  They refuse to admit the economy is on Fed life support and nothing they have done has improved it fundamentally.  Indeed, the fundamentals are disastrous.  Don't believe me, look at the stats, many of which you can find in this nice article from Bloomberg:

http://www.bloomberg.com/news/articles/2016-09-06/buyback-addiction-getting-costly-for-s-p-500-ceos-burning-cash

The focus of the article is on the cash position of many companies worsening significantly the past couple of years, suggesting the share buybacks and dividends that have propped up share prices on failing companies are coming to an end.  As the article notes, the top 10% of the S&P 500 has plenty of cash, but that lower 90% not so much.  And it is shrinking fast - down from $447 billion at the end of 2015 to a mere $385 billion at the end of the second quarter.  If my math is right, that is nearly a 14% drop in half a year.  Oops.

But the article has a host of other nasties in it, like:

• S&P companies have posted negative growth for the past six quarters;
• Earnings in the last quarter were the worst since 2011;
• Dividends and stock buybacks equaled 128% of earnings this past year;
• New stock buyback announcements are down $115 billion this year;
• Median debt in the S&P 500 is $5.43 billion, it's highest eeeevaaar; and
• The debt to earnings ratio is at its highest since 2003.

Debt to me is a major issue.  Easy credit exists at the moment due to central banks and investors having no place to earn a decent return without turning to the corporate debt market.  But if rates go up, creditworthiness goes down and liquidity dries up, there are going to be a lot of companies unable to roll-over their debt.  Time is approaching to give the devil his due.

But other than all that, Janet is right, everything is coming up roses!