Fear and Follies on Wall Street
We’ve got an interesting week ahead of us.
Between a potential Federal Reserve rate cut, Democrats running for president and the IRS going after bitcoin profits, we’ll either be laughing or crying by Friday.
Tomorrow, the Federal Reserve begins its two-day meeting to decide how to screw up — ahem, I mean, fix — the U.S. economy.
Federal Reserve Chairman Jerome Powell will take the stage on Wednesday to let us all know the Fed decided to cut U.S. interest rates. At least, that’s how Wall Street is expecting things to go.
You might be asking: “Why do we need a rate cut when everyone says the U.S. economy is strong?”
That, my friends, in the trillion-dollar question. Unemployment is the lowest it’s been in decades. The housing market rebounded last month. Everything seems to be chugging along fine.
But investors are worried about trade wars, the growing threat of conflict with Iran and sluggish leading indicators on manufacturing. It’s a tightrope act, for sure.
I don’t envy the Fed right now.
At the same time as the Fed’s meeting, the Democrats will hold back-to-back debates on Tuesday and Wednesday night in Detroit. Once again, the topic of “Medicare for All” with be a major point of discussion, alongside the 2017 tax cuts, trade wars and sluggish manufacturing.
The major media outlets are sure to pull snappy quotes and one-liners from these debates. And with so many Democrats in the field right now, quite a bit of this is sure to be entertaining.
I’m bringing the popcorn.
Are the Democrats fear and the Fed follies? Or is it the other way around?
I’ll let you decide. Or we’ll all let the market decide.
There are two important things to keep in mind about this week’s Fed and Democratic events:
- The dollar shouldn’t be hurt too much by any Fed rate cut. After all, the rest of the world is already racing to the bottom on easy monetary policy. As a result, the U.S. dollar and the stock market shouldn’t feel too much of an impact.
- There are at least 24 Democrats running for the presidential nomination in 2020. Because of this, there will be a lot of sensationalist rhetoric in the early going as candidates try to one-up each other. It’ll be entertaining, but don’t let these early debates affect your investments … especially where health care in involved. There’s still plenty of time before the big dance.
Speaking of “big dances,” Banyan Hill’s annual bash, the Total Wealth Symposium, is literally just around the corner.
The event takes place September 12–14, and there are still a few seats left! (Lucky you!)
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Once again, Great Stuff readers, I have your invitation waiting right here.
The Good: A Generic Merger
Pfizer Inc. (NYSE: PFE) is shedding more dead weight, and Mylan NV (Nasdaq: MYL) is the … beneficiary?
The deal has Pfizer spinning off its off-patent drug business with Mylan, the king of generic drugs. Mylan shareholders will own 43% of the new company, while Pfizer shareholders will own 57%. Pfizer will also get $12 billion from the deal.
So, $12 billion for ditching patent-free drugs? Sounds like a steal for Pfizer, which can then turn around and use that cash to snap up other, more profitable opportunities on the market. Vertex Pharmaceuticals (Nasdaq: VRTX) comes to mind.
Mylan is clearly getting the shaft in this deal, yet MYL shares are up more than 8% on the news. The company was already struggling before this influx of new generic drugs. I fail to see how more generic drugs will achieve the “cost synergies” needed to turn things around.
The Bad: A Sell-Off With No Name
This image has about as much to do with Roku Inc. (Nasdaq: ROKU) as the company’s news today. Which is nothing.
Roku shares are down about 6%. And there’s no news. Nada. Zip. Zilch.
It’s not just Roku. Momentum stocks across the board are struggling today.
But this is nothing to really fret about. It happens ahead of Federal Reserve meetings, especially controversial meetings like the one happening this week.
In fact, today’s news-less drop could be a buying opportunity for Roku bulls. Revenue is expected to grow 41% this year and 34% next year.
Those are solid growth figures in the red-hot cord-cutting market. And Roku has barely tapped overseas markets yet.
The Ugly: The Taxman Cometh
Did you cash in on that record run in bitcoin this year? The cryptocurrency topped out just north of $13,000 earlier this month, marking a 228% run for 2019. That’s quite a tidy profit.
One of the benefits of bitcoin, and cryptocurrency in general, was supposedly to avoid government interference. That was a pipe dream.
Starting in June, the Internal Revenue Service (IRS) began reaching out and slapping crypto traders in the face. Three noncompliance letters are going out, reminding traders that they might not have reported their cryptocurrency transactions on their tax returns.
According to the IRS, it’s sending out “more than 10,000” noncompliance notices.
If you trade bitcoin or other cryptocurrencies, you might be at risk of receiving a nasty note from the IRS. If you receive a notice, review your taxes and contact a tax specialist and/or a lawyer.
You can find more information on these letters here.
Are we headed for a VIXplosion?
Sven Henrich, founder and lead market strategist at NorthmanTrader, certainly thinks so. The CBOE Volatility Index (VIX) does exactly what you think it would do. It monitors market volatility. The higher the VIX, the higher the market’s volatility.
It’s also known as the “fear index,” as the VIX spikes higher when the market falls sharply.
According to Henrich: “When that energy compresses too much, then we see these spikes. We have seen these spikes with quite a bit of regularity, but they always need some sort of trigger, and perhaps the Fed may be the trigger.”
I guess we’ll find out this week if Henrich is right. The Fed is expected to cut interest rates this Wednesday.
“So be good, for goodness sake! Whoa! Somebody’s coming!” — Peter Venkman, Ghostbusters.
Great Stuff: Buy on Black
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Until next time, good trading!
Great Stuff Managing Editor, Banyan Hill Publishing