Fed Thoughts, The Statement, The Presser, Trading ServiceNow and Lam Research

Tick, tick, tick, tick... 2 p.m. ET. The official FOMC policy statement. Quite vague. Well written for sure. The equity market knee-jerk? Higher.

Tick, tick, tick, tick..... 2:30 p.m. ET. The press conference begins. A more hawkish, bluntly honest transmission of information ensues. Equities reverse sharply lower, as do Treasury securities across the yield curve.

One might say, it's all in the presentation. One might say that the press conference did not go so well. This depends on what one is trying to do.

Was the Fed Chair trying to talk down inflation? Or maybe giving markets fair warning? Maybe the Chair was just being pragmatic with his answers.

Regardless, the point has been made. The page will turn shortly, and a new environment, like it or not, beckons.

You can adapt. You can proceed accordingly. Or you can wither and disappear. Up to you.

The Statement

There were several distinct changes made to the Jan. 26 FOMC's policy statement from the statement published on Dec. 15.

The statement starts out... "Indicators of economic activity and employment have continued to strengthen. The sectors most adversely affected by the pandemic have improved in recent months but are being affected by the recent sharp rise in Covid-19 cases." What the FOMC is doing here is laying out the case for taking action toward tightening monetary policy based on the perception of what should be robust economic activity if not for the pandemic. This provides for flexibility in both timing and in terms of impact should shortages of both goods and labor persist. Remember, the Fed can always act (or not act) to defend or promote maximum sustainable employment.

In the third paragraph, the FOMC adds, "With inflation well above 2 percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate." This sentence is perfect. This sends the message without being pinned down. This tells investors that the FOMC plans to act in March, but remains vague enough as to where there is no commitment to act that might possibly have to be rolled back.

Strangely, or at least I thought it strange, the FOMC does commit to continue with its wind-down (tapering) of its quantitative easing (balance sheet expansion) program in February with the purchase of $20B in U.S. Treasury securities and $10B in agency mortgage-backed securities. Why I think this is strange is that the last round of purchases for this program is really unnecessary. The Fed has made it plain where they want to go with short-term rates and what they would like to do with the balance sheet (which we will still get to), therefore, this appears to be something of an exercise in futility that the FOMC probably could have gotten away without doing.

Additional Reading Material

While committing to adding $30B in assets to the already almost $9T Fed balance sheet in February, the FOMC on Wednesday published an additional sheet alongside the FOMC statement titled: "Principles for Reducing the Size of the Federal Reserve's Balance Sheet." Just in case you were confused about intent. On this page, the Committee makes clear that the target range for the federal funds rate remains the central bank's primary tool for adjusting monetary policy.

The Fed intends to determine the timing and pace of reducing (quantitative tightening) the size of its balance sheet so as to remain supportive of the central bank's twin mandate (price stability & maximum employment for the new kids). Importantly. The page stipulates that this "QT" program will not commence until after the process of increasing the fed funds rate has been initiated. In short, the Fed is going to start lifting short-term interest rates prior to rolling maturing assets off of (rather than re-investing in) the back end of their balance sheet.

The FOMC adds that they intend to reduce their holdings over time in a predictable manner primarily through adjusting the pace of reinvestment (what we just spoke of). This is in a way, a mirror image of the tapering process that winds down the expansion of the balance sheet next month. Of course they want this to run (almost in the background) in an orderly manner. They are not going to plan chaos.

I think, quite interestingly, that the Committee intends to hold primarily Treasury securities in the SOMA (System Open Market Account) once all goes according to plan (it won't) and the Fed gets the balance sheet to where it wants it (again, unlikely). What that means is that the central bank will finally be out of the mortgage-backed securities business (which it had no business being in for well more than a year now) even as it plans to purchase $10B worth of this type of asset next month. Kooky, ain't it?

The Press Conference

This is where it got a little rough. Not that Fed Chair Powell screwed anything up. Not at all. He was honest, and that rattled equity and debt markets at the time. Powell got the market's attention when he admitted that he still sees inflation risks to the upside. Risks to the persistence of high inflation I get. Upside risk from 7%? That turned keyword reading algorithms into torpedoes aimed at points of sale everywhere.

There's more. Powell said "This is going to be a year in which we move steadily away from the very highly accommodative monetary policy that we put in place to deal with the economic effects of the pandemic." Powell added... "I don't think it's possible to say exactly how this is going to go. I think there's quite a bit of room to raise interest rates without threatening the labor market."

Kapow !! Powell did not have to say another word. Equity markets that had been higher when the press conference began, for the most part closed lower. Small caps were severely beaten, while somehow the Nasdaq siblings (Composite & 100) managed to close (on the green side of being) virtually unchanged. The S&P 500 has still not taken and held its 200 day SMA.

Beyond equity markets, Treasury securities sold off across the entire curve but much more severely in the belly. While the short end (as always) moved in baby steps and the Ten Year Note paid as much as 1.87% (up 9 bps), and the Two Year Note paid 1.2% (up 17 bps) at its overnight nadir.

My Thoughts

I really do not think anything happened on Wednesday that we did not see coming. I did take profits ahead of the statement (The heads up was posted on Twitter) about 20 minutes ahead of the event. Of course, I am still net long equities. I only sold what I had been buying at the lows of the Monday and Tuesday sessions. Simply put, I took short-term gains in Advanced Micro Devices (AMD) , Microsoft (MSFT) , Nvidia (NVDA) Planet Labs (PL) and Redwire (RDW) , and left core positions in place in each and every one of those names.

I am guardedly optimistic moving forward. Will the Fed be able to normalize monetary policy? I have my doubts, like all of you do. We'll get our first look at Q4 GDP this morning. We know that the last month of the fourth quarter was pretty rough and that the first few weeks of the first quarter probably have not been much better. The IMF did reduce their projection for 2022 U.S. GDP growth from 5.2% to 4.0% in one fell swoop. If that does not catch your attention, you're not paying attention.

We do know that Jerome Powell is not a dove at heart. He proved this in 2018, when he took on then President Trump and tried to normalize policy at that time. I think he has probably learned better the art of nuance from that experience. Will it be easy for traders/investors? No, of course not. The market is done handing out participation trophies, at least for now. You likely won't do well just showing up and playing the game. Those who got by through only using technical analysis, will now be forced to expand upon their tool kit. Those who think technical analysis is simply voodoo do not understand how algorithms work.

You will now need to be expert at both. You will also need to understand how both policy and macroeconomic performance feed off each other and impact the flow of capital.

Think you can do all of this? So do I. If not, you know where the door is. We lose traders every time this sport gets tough. Adapt. Be what you need to be when you need to be whatever is called for.

Equity markets can do well in a rising rates environment as long as the economy keeps growing. The danger lurks in that the impacts of monetary policy are often not felt on Main Street, USA for nine months to a year after the fact. That makes it difficult for policy makers to know in real-time where the demilitarized zone is, and if they have crossed it.

Rejoice, my friends, for we have been gifted a challenge, and who amongst us does not love to be tested under pressure. Be swift. Be silent. Be true. Become your environment. Fear? Fear is but for the wicked. So, let the wicked tremble before us.

Trading

ServiceNow (NOW)

The company posted Q4 adjusted EPS of $1.46 on revenue of $1.61B. Both numbers beat Wall Street estimates, while the sales print was good for year-over-year growth of 30.9%.

Subscription revenues account for nearly all sales, which is positive. ServiceNow closed on 135 transactions of over $1M in net new annual contract value for the quarter, up 52% from Q4 2020. The company expects 2022 subscription revenue to land in a range spanning $7.02B to $7.04B, which at the low end, is above the $7.015B that Wall Street had in mind.

I am not in NOW at this time, though the name and the CEO (Bill McDermott) are both long-time Sarge faves. The shares are trading in the $535's overnight, up 10.5%. Yes, I did miss this move. That said, my out was at an average price of $578.01, so while I certainly have not maximized my re-entry, I am still ahead of the game.

Do I (or we) re-enter on the overnight pop? Forget the technically "oversold" indicators. They will vanish with the opening bell. You see that near absolute gap in trading volume on the left in between the high $530's and about $560? Anything can happen should the stock reach that area. The trading volume at the lowest prices has been not only light but all red, which makes me wonder where real support actually is.

I think I will watch this one for now, and if I participate, it will be as a trader rather than an investor. McDermott is a winner. It's not about whether or not to enter ServiceNow, it's about where.

Lam Research (LRCX)

This is one name where I did participate overnight. Lam Research, which is a semiconductor equipment company specializing in etching and cleaning systems used in wafer fabrication, reported fiscal second-quarter results on Wednesday night.

The company posted adjusted EPS of $8.53 on revenue of $4.23B. The earnings print was beat. The sales sprint was good for year-over-year growth of just 1.9% and did miss estimates. The current quarter guidance was also light.

That said, we know that U.S. semiconductor inventories are down to five days from a pre-pandemic norm of 40. We know that Secretary of Commerce Raimondo has asked Congress to free up that $52B bill aimed at stabilizing U.S. chip supplies. The bill has passed in the Senate and is caught up for some reason in the House. Not that this bill, if passed into law, would help immediately, but I think it obvious that it would be a plus for the entire industry.

The fact is that Lam Research's problems stem from shortages across the supply chain and have nothing to do with demand. The stock trades at just 17 times forward looking earnings, operating cash flow is growing like a weed, and the balance sheet is in spectacular condition.

The stock sold off hard in after-hours. I did come in with a small long position that I more than doubled overnight. I see a Thursday morning pre-opening last sale of $563-ish (-6%). My average price overnight was just above $543.

Will I add this morning? If I see the shares take another shot at the $535 lows of this past October, I'm pretty sure I will. My overtly biased opinion is that this stock is a bargain on this kind of weakness.

Last Word

CEO Tim Cook of Apple (AAPL) may have more of an impact on U.S. equity markets on Thursday night than Fed Chair Jerome Powell had on Wednesday night.

Economics (All Times Eastern)

08:30 - Initial Jobless Claims (Weekly):Expecting 273K, Last 286K.

08:30 - Continuing Claims (Weekly):Last 1.635M.

08:30 - Durable Goods Orders (Dec):Expecting -0.5% m/m, Last 2.5% m/m.

08:30 - ex-Transportation (Dec): Expecting 0.4% m/m,Last 0.8% m/m.

08:30 - ex-Defense (Dec):Expecting 1.5% m/m, Last 2.0% m/m.

08:30 - Core Capital Goods (Dec): Expecting -0.1% m/m,Last 0.4% m/m.

08:30 - GDP Growth Rate (Q4-adv):Expecting 5.4% q/q, Last 2.3% q/q SAAR.

10:00 - Pending Home Sales (Dec):Expecting 0.2% m/m, Last -2.2% m/m.

10:30 - Natural Gas Inventories (Weekly):Last -206B cf.

11:00 - Kansas City Fed Manufacturing Index (Jan): Last 10.

The Fed (All Times Eastern)

No public appearances scheduled.

Today's Earnings Highlights (Consensus EPS Expectations)

Before the Open: (MO) (1.08), (CMCSA) (0.74), (DHR) (2.52), (HCA) (4.52), (MA) (2.21), (MCD) (2.34), (NOC) (5.96)

After the Close: (AAPL) (1.88), (TEAM) (0.39), (CE) (5.05), (KLAC) (5.45), (MDLZ) (0.73), (HOOD) (-0.30), (V) (1.70), (WDC) (2.12)

(MA, AAPL, AMD, MSFT and NVDA is a holding in theAction Alerts PLUS member club. Want to be alerted before AAP buys or sells these stocks?Learn more now.)

At the time of publication, Guilfoyle was long NOC, AAPL, AMD, PL, RDW, MSFT, NVDA equity; Short PL calls.