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The Market Sum | Insight after the bell

By Caleb Silver, Editor in Chief

Wednesday's Headlines

1. Markets Tepid on Fed
2. 10-Year U.S Bond Yields

3. Moneygram gets Ripped
4. Slack on the IPO Launch Pad

5. Gold Shines

Markets Closed

Dow
26,504.00 +0.15%

S&P
2,926.46 +0.30%

Nasdaq
7,987.32 +0.42%

VIX
14.33 -5.41%

Bitcoin
$9,146.38 +0.43%

US 10-Yr Yield
2.029 -1.50%

credit: Frank Hoensch / Getty Images

Tepid Rise for Markets Following Fed Comments

"You can't always get what you want
But if you try sometime you find
You get what you need..."

Mick Jagger, the legendary front man for The Rolling Stones, may have put it best on the group's 1969 hit song from the Let it Bleed album. Those words kind of sum up the market's reaction to Fed Chair Jerome Powell's comments following the FOMC's decision to leave interest rates as is, and potentially not adjust them at all in 2019.

No matter how consistent he has been with that message, and irrespective of the veiled and direct threats Powell has received from the White House, many investors were expecting a nod to future interest rate cuts this year.

They didn't quite get it, but they got what they needed.

U.S. markets hiccuped for a few minutes, then rallied a bit into the close.

While Powell and the other Fed governors noted that the economy has slowed a bit, and inflation is below its 2% target, they saw no need to adjust rates now or forecast rate cuts through the second half of the year. The Fed did say, "The case for somewhat more accommodative policy has strengthened," which may have been enough to calm investors betting on rate cuts in 2019.

Here are the key sentences from the Fed's statement today:

"The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes, but uncertainties about this outlook have increased. In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective."

Not as cool as Mick Jagger's lyrics, but pretty on point. The Fed is on alert and ready to step in and adjust monetary policy to sustain the economic expansion. In other words, nothing has changed from a few weeks ago.

Traders haven't gotten his message yet, apparently, because they are still betting on a 0.25%-0.50% cut in the next Fed meeting in July, per the CME's Fed Watch Tool.

They just can't get no satisfaction, I guess. ;)

Side Notes from the Fed Meeting

A couple quick side notes came from Fed Chair Powell's press conference this afternoon:

Powell intends to serve his full four-year term as Fed Chair despite threats from the White House.
11 out of 12 members of the FOMC voted to keep interest rates as is. The lone holdout was St. Louis Fed President James Bullard. This was the first dissent vote since Powell took over as Fed Chair.
7 of the members of the FOMC indicated through the Fed's Dot Plot that they expect rates to be lower by the end of 2019. There is still a chance!
The Fed took out the word 'patience' from this statement.
Facebook has met with the Fed to talk about its Libra cryptocurrency. (See yesterday's Market Sum for context.)

A Note on Bond Yields

In yesterday's note I commented that falling 10-year U.S. Treasuries hurt bond investors even though the price of the bonds they own is rising. One of our smart readers called me out on that comment and said that bond investors lock in their yields when they buy a treasury bond, so they are not impacted when yields fall, and enjoy the price appreciation. He was right, and I wasn't clear. The point I was trying to make, but clearly missed, is that lower yields make bonds less attractive to investors who are considering buying them to capitalize on that yield. 2% feels pretty measly when some banks are offering CD's at close to 3% and money market funds are also offering better than 2% yields.

Meanwhile, today's Fed announcement drove the 10-year U.S. Treasury down yet again to its lowest level since November 8, 2016. That was the election day in the U.S.

Here's a one year chart of the 10-year U.S. Treasury, courtesy of koyfin.com

Moneygram Gets Rippled

Blockchain, cryptocurrency and the world of money transfers is on fire right now.

Ripple, a blockchain software company that is also associated with the widely adopted cryptocurrency of the same name, entered into a partnership with Moneygram(MGI), the global money transfer company. Specifically, Ripple announced late Monday that it would buy $30 million worth of Moneygram shares, and offer up to $50 million worth of capital in exchange for equity over two years, to "become MoneyGram's key partner for cross-border payment and foreign exchange settlement using digital assets."

Shares of Moneygram shot up 168% on the news yesterday, and have come back to Earth, a bit, but this broader trend of global money transfers and the crypto world is one to watch.

For those readers outside the U.S., or have relatives outside the U.S., money transfers are a big deal. They are cumbersome and costly, and dying to be disrupted. This is one of the reasons Bitcoin took off like it did in 2017, and it's a key reason that global banks are embracing the blockchain.

Western Union (WU), the other big player in the global money transfer space, has been left out of this party, so far. We'll see if that lasts. Here are the two stocks over the past 5 days.

Bonus Infographic

Howmuch.net made this cool infographic showing how much money was transferred out of the U.S. to other countries via global payments. It's worth a look.

Here Comes Slack

Slack Technologies, the company behind the popular Slack messaging app, is planning on going public Thursday morning at the New York Stock Exchange under the ticker symbol WORK. Slack is not taking the road most traveled to its IPO, choosing to go with a direct listing, instead.

A direct listing is essentially when a company doesn't issue new shares as part of its public offering, but lists existing shares directly through an exchange. No underwriters, no fancy road show...just direct to market. Spotify took this route, among other companies, and while risky, it does reduce the costs for the company going public while allowing existing shareholders and employees with pre-IPO shares to sell them on the open market.

Slack's Performance

While popular in a lot of offices, Slack is still losing money. Slack reported a net loss of $138.9 million in its last fiscal year. That follows losses of $140.1 million and $146.9 million in the preceding two years. It also posted a loss of $31.9 million in the first quarter of 2019, up from a loss of $24.9 million a year earlier. It does boast 10,000,000 active users, which is impressive.

Read Slack's prospectus if you have the time.

There is nothing surprising about new technology companies losing money before they go public. In fact, going public is often a remedy to give the company some cushion as it loses money from operations. It is a concern, however, when sales start to slow for a company coming to the public market, and that's what's happening to Slack. It grew sales 82% last year, which is respectable. But it was able to double sales the prior year, and in the most recent quarter, sales growth slowed to 67%

By going public at $26 per share and seeking a valuation of $17 billion, Slack is taking a big chance that public investors are willing to be patient with it. Going public without big underwriters promoting the stock is even riskier. It's not selling veggie burgers, after all.

More News:

Microsoft Shares Are Seeing Unusual Trading Activity

Celebrate Summer With Us! - 50% OFF ALL COURSES

Warning Signs Ahead For Unicorn Slack's Public Offering

chart courtesy www.koyfin.com

Allergan popped more than 6% today as the company reported positive trial results for a drug aimed at treating irritable bowel syndrome. Adobe climbed more than 5% today after reporting better-than-expected quarterly results.

Financial stocks dropped today on news from the Fed and the possibility of lower interest rates in the future. Lower interest rates from the Fed mean lower interest rates for banks, which means less money from one of their main lines of business.

Word of the Day

Inflation

Today, the Fed lowered its inflation expectations for 2019. The central bank now expects that inflation will grow at a rate of 1.5%, not the 1.8% predicted in March. In the meantime, expectations of a 2.1% GDP growth rate for the year remain unchanged, and the unemployment rate is expected to stay at 3.6%.

Why does it matter that the Fed is projecting a lower inflation rate than previously expected? Excellent question.

The Fed's goals are to promote price stability and maximum employment.

The Fed wants inflation to occur at an expected and steady rate, which consumers and businesses can account for and comfortably adjust to, allowing businesses to hire employees, keeping the unemployment rate low.

In this case, since inflation expectations have been lowered, we may be looking at a case in which the Fed will lower interest rates in order to increase inflation rates. Key word here being may.

"Inflation is a quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over a period of time. It is the constant rise in the general level of prices where a unit of currency buys less than it did in prior periods. Often expressed as a percentage, inflation indicates a decrease in the purchasing power of a nation's currency."

Today in History

June 19th, 1865 - Juneteenth, or Juneteenth Independence Day, or Freedom Day, is the day that the abolition of slavery was announced in the state of Texas. It came more than two and a half years after the Emancipation Proclamation, the executive order issued by President Abraham Lincoln, changing the federal legal status of more than 3.5 million enslaved African Americans from slave to free. Seeing as Texas was the most remote of the slave states, the abolition of slavery in the state is a cause for celebration, and is a day of commemoration of the emancipation of slaves throughout the former Confederate States of America.

This is not primarily a financial event, but it is certainly one worth commemorating and celebrating. Happy Juneteenth.

Chart of the Day: Gold Glitters Again

Though there weren't any major surprises in the Fed's monetary policy announcement on Wednesday, one thing is clear. Investors are still expecting interest rate cuts on the horizon, and the Fed is far from dashing those hopes. Hints of lower rates pervaded the FOMC statement and press conference, though the uncertain timing of the first rate cut is the subject of much speculation.

Stocks closed higher after the Fed's release on Wednesday, and gold prices also surged. Typically, when interest rates are expected to fall or remain low, non-interest-bearing gold has less competition from interest-bearing instruments. As a result, demand for gold, and gold prices, tend to rise. This is what we're currently seeing with the precious metal as the Fed has become increasingly dovish of late.

The chart above clearly shows gold's sharp upside trajectory since the trough in August of last year, and more recently, since late May. As of Wednesday, the price of gold reached above the $1360 level, re-testing the range highs that were hit from January to April of 2018.

Could gold prices continue to climb? As the Fed potentially prepares to cut rates and bond yields drop to new long-term lows, gold could very soon be poised to reach the top of the large range that price has been fluctuating within since late 2013. From there, the key question will be whether gold's momentum has the strength to break this range to new highs or if it turns back down from resistance.