The Stock Market Is on Fire, Especially in These Sectors: Market Recon –

“Don’t confuse brains with a bull market” — Humphrey B. Neill; “Really, I’ll take it either way” — Your Pal

Stating the Obvious

Our plates are full as we head off into the melee of another day of creativity in the financial markets. Yes, our plates are nearly always full, but today is different. Today is “Fed Day”. This one, though, is sort of like a diet FOMC meeting. Yes, in theory the committee could take action, but without a scheduled press conference, and without new economic projections, this meeting will almost certainly result in the use of the official statement in order to prep both the public and the marketplace for the next policy steps to be taken.

Watch: Who Is Gary Cohn — Janet Yellen’s Potential Replacement at the Federal Reserve?

Inflation is probably the most important factor facing policy makers as we steam toward 2pm ET. The FOMC is catching a break here, as crude oil prices have been spiking higher in recent days. In the absence of a breakdown that evolves as quickly as has this run, consumer level inflation should look far more aggressive (at least at the headline) in the July data than it has over the last few months. Cosmetically, however, we will see June PCE numbers this Tuesday, which will be ugly, and then July CPI on August 11, nearly two weeks later. Remember, consumer level inflation has been an ongoing problem for the FOMC not only over those last few months, but for many years. There are two lines from the policy statement that I will be watching for development.

1) The Committee will carefully monitor actual and expected developments relative to its symmetric inflation goal.

2) The Committee currently expects to begin implementing a balance sheet normalization program this year, provided that the economy evolves broadly as anticipated.

That second line covers a topic just as important to policy watchers as the first. The balance sheet. Yeah, that’s the 800-pound gorilla in the room. When will the central bank actually start the process of allowing its massive $4.5 trillion portfolio of Treasury and mortgage backed securities to roll off? Will that change in policy impact the trajectory of tightening currently underway? I believe it is necessary for that trajectory of interest rate hikes to be put on hold, while this step is taken. Let the markets absorb this change in the monetary environment on its own merit. To try to do both would, in my opinion, be too aggressive, and present a significant headwind to economic growth. The truth is though that my opinion doesn’t count here, so we better focus on the committee’s statement. Odds of another increase in the feds funds rate as priced in by futures markets have increased from 47% to 52% over the last 24 hours.

Hamburgers and Bulldozers

Several areas of the equity markets are on fire for several reasons. Number one would be earnings. The season is quite simply off to a good start. Yesterday, shares of such old economy names as McDonalds (MCD) and Caterpillar (CAT) ripped to the upside. What could hamburgers and bulldozers be doing different? Let’s see; they both beat EPS and revenue projections, but so have a lot of other firms. CAT raised guidance. What do they do? A huge international business. Hey, that’s where growth in MCD’s numbers nearly doubled expectations. Hmmm. The dollar sure is plagued by weakness right now. That’s if you call it a plague, which I am not too sure that U.S. multinationals, nor the current resident in the White House in Washington, would do. This is a trend that I would expect to continue as we move forward through the season. Then as the year progresses, this change in currency valuations will very likely act as a tailwind for corporate earnings just as year-over-year comps for many firms start to get tougher. Danger ahead? Always. Afraid? Never. Optimism? Yeah, dudes.

Watch: Jim Cramer: Caterpillar Could Rise to $120

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