The cat is out of the bag and the anticipation is now over! We can now say with certainty the Fed did not raise rates at its June FOMC meeting. Please note the snarkiness in our tone, but that lack of action was hardly a surprise, given the economic data we’ve been pouring over the last several weeks. That downward vector and slowing velocity was once again seen in yesterday’s May Industrial Production report, which showed the manufacturing economy slip back into contraction territory.

Eyeing this and other data, as well as the recent cuts to global growth forecast by the OECD and the World Bank, we’re not surprised to see the Fed cut its domestic 2016 GDP projection to 2.0 percent from 2.2 percent in March. The Fed also trimmed its 2017 GDP forecast to 2.0 percent from the prior 2.1 percent. Sifting through more of the details, six of the 17 policy makers now see just one rate increase this year, and the Fed has slowed the number of interest rate moves in both 2017 and 2018 to three increases in each of those years, down from the four they expected in March, per their latest median forecast.

What this tells us is even the ever optimistic economic cheer leader that is the Fed sees global headwinds fostering a slower economy despite its continued easy monetary policy. If the Fed is taking this position, then its rather likely growth will remain spotty over the coming months.

Remember, we are in the middle of one of the most “interesting” presidential elections ever!

Until Corporate America has a better understanding of which candidate will land in the White House come 2017 and what his or her policies will be, odds are high that corporations will keep a tight reign on the spending purse strings. What this means is the odds of a big uptick in the economy over the next few months are rather low.

Turning to the Fed’s other key focus — inflation — core CPI, which excludes food and energy, has been tracking near 1.5 percent, which is below the Fed’s 2.0 percent target. The Fed’s updated economic projections does not see annual inflation hitting 2.0 percent until 2018. With more domestic oil rigs coming on stream and oil exports surging from Iran, odds are we’ve see the bulk of the upward move in oil prices that we’re going to get until the global economy starts to perk up. That should help keep inflation in check at least in the short-term and help keep the Fed’s fingers off the interest rate increase button.

With just one more month’s worth of data before the Fed’s July meeting, we rather doubt we will see such a meaningful improvement in the data that it will prompt the Fed to boost rates at that meeting. The Fed is pretty much telling us that and signaling that any eventual move upward in rates will be “gradual” when it says:

“The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”

Putting down our economist hat and donning our investing one

The push out in rate hike timing to sometime late in 2016 (given the Fed’s next meeting after July is September) is going to weigh on interest rate expectations for financials. We’ve seen this already as more evidence suggests the Fed would not boost interest rates, but as we’ve come to realize, it’s one thing to see it coming and quite another for the market to digest the actual news. The push out, combined with the slowing economy and disconnect between the current stock market valuation and expected earrings growth, has a high probability of rekindling investor appetite for safer haven investments as we get ready for the upcoming June quarter earnings season. That means more inelastic business models, as well higher dividend yielding stocks, will be in vogue over growth stocks.

Finally, during the Fed’s press conference, Yellen admitted the pending Brexit vote was a consideration in the Fed’s decision:

“It is a decision that could have consequences for economic and financial conditions in global financial markets,” she said. A vote on June 23 by Britons to leave the EU “could have consequences in turn for the US economic outlook.” 

The question boils down to which way will the Brexit vote fall come June 23rd?

Per Reuters, “An opinion poll published late on Tuesday showed the once double-digit lead of the “In” campaign had narrowed to just 1 percentage point. Other polls have shown the “Out” camp ahead, reducing the value of sterling and wiping billions of dollars off global stock markets.

There are many issues that need to be addressed, but from our perspective the level of uncertainty is high heading into next week.

 

That brings us to our existing call option holdings

American Water Works (AWK) and Starbucks (SBUX) have both climbed nicely, with the AWK September $80 calls up more than 50 percent form our buy-in price just last week. The blended return on our two buy-ins for the SBUX October $60 calls, which closed last night at $1.18, is 35 percent. We’d also call out the sharp rebound in our Costco Wholesale (COST) shares, up 11 percent over the last month, which has us with a meager profit of roughly 2 percent.

Given those profits, as well as the desire to preserve capital ahead of what is likely to be a very sloppy several days of trading ahead of next week’s Brexit vote, we’d rather be sitting on the sidelines and buying positions back at better prices than watching those paper profits dwindle.

As such we are making the following changes to the Tematica Pro Select List today:

• Issuing a SELL order on American Water Works (AWK) September $80 calls (AWK160916C00080000) that closed last night at $1.75
• Issuing a SELL order on Starbucks (SBUX) October $60 calls  (SBUX161021C00060000)that closed last night at 1.18
• Issuing a SELL order on Consumer Discretionary Select Sector SPDR Fund  (XLY) December $78 calls (XLY161216C00078000) that closed last night at 3.75
• Issuing a SELL order on Costco Wholesale (COST) shares, which closed last night at 154.86

 

Upon that completion, what we have left intact on the Tematica Pro Select List will be:

• Inverse ETF positions: ProShares Short Russell 2000 (RWM), ProShares Short Dow30 ETF (DOG), and ProShares Short S&P500 (SH).
• Consumer Discretionary Select Sector SPDR Fund (XLY)
• Health Care Select Sector SPDR ETF (XLV) 

On an administrative note, because of the Brexit vote next Thursday (June 23rd) we will be publishing next week’s Tematica Pro up a day to Wednesday (June 22nd).