WEDNESDAY 3/19/14; Fed Chair Yellen's First FOMC Meeting

The Flight 370 mystery continues. The pilot’s home flight simulator shows practice flights to landing strips on remote islands in the Indian Ocean while other data on the simulator was erased. Conspiracy theories are increasing daily and many believe the airplane has landed somewhere perhaps in Pakistan. No trace of the airplane is found as the entire ocean is searched from Australia to China.

Ukrainian soldiers are given the command to shoot in Crimea after a soldier is shot and killed. Putin says Crimea is an “inseparable part of Russia” and he will “never seek to spark a confrontation with the West.” Putin, however, routinely goes back on his statements. Russia has taken the Crimea jewel, which is a warm water base for the naval fleet, and is downplaying further aggression into Ukraine. The Russian Ruble recovers slightly to 36.105. The milk toast response with meek sanctions is mocked and laughed at by Russians and will only encourage Putin to kick more sand in the West’s face. Russia will not laugh if their currency collapses.

The dollar/yen moves above 101.60 and the NIKK is up +0.4%. The Japan trade deficit is wider than forecast. Japan plans to relax the work rules concerning women. They see the disastrous demographics challenge ahead with the smaller young population likely not able to support the aging nation in the years ahead. Japan’s Fast Retailing is no longer in talks to buy J Crew. TM agrees to a $1.2 billion settlement with the DOJ and attempts to restore its image. Toyota probably surmises that compared to General Motors, they look good. Porsche announces an automobile recall. The global auto recalls continue almost on a daily basis lately indicating that most manufacturers are performing shoddy mediocre work these days. Perhaps companies are under staffed so employees are over worked making mistakes. Unfortunately, business is not good enough to justify hiring additional workers.



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Volatility is slowly creeping higher. VIX 14.44. At 3:00 PM, Yellen is responding to a question concerning the time frame of when rates will rise. Currently, the Fed is tapering QE at $10 billion per month and this will end in August or September, then a few months will go by and rates will take their first hike sometime in 2015 perhaps late 2015 as much as one year after QE ends. After all, the Fed pumped the ZIRP Forever policy moving forward when they announced the taper. Yellen says the period between when QE ends and the first rate hike would begin will be a “considerable period.”

When prodded on what considerable period means, Yellen stepped into a hornet’s nest by stumbling at first, appearing a bit unsure, and then saying a “considerable period is probably about six months.” She placed a time target on the answer a rookie mistake for her first press conference. Traders want to hear firm numbers and immediately do the math where QE ending in August leads to a rate hike in February 2015, one year or less away, sooner than virtually any trader had thought. Everyone was not expecting a rate hike until the middle or end of 2015. The VIX spikes to 14.85. Computer screens are lighting up red. Markets react violently.

The SPX is down 15 points. The Dow is down 150 and the Nasdaq loses 40 points. Gold loses 30 bucks. The 10-year yield is 2.78%. The VIX leaps higher above 15 to 15.43. The more Yellen is talking the more stocks are dropping. At 3:11 PM, stocks are in free fall. SPX down 19 points. Dow loses 185 points. Nasdaq is down 45 points. At 3:12 PM, markets are in collapse. SPX is down 22 handles. Dow is down 210 points. Nasdaq collapses 50 points. The VIX is at 16. The 10-year yield is 2.79%.

The Q&A continues until 3:30 PM when Yellen exits the stage. Equities moderate but remain weak. Front-end interest rates leap higher as the short maturities are sold off (lower price higher yield). The 5-year yield leaps to 1.72% and the yield curve actually flattens across the 5-10 spread. The main takeaway is that Yellen is now suggesting that a rate hike is coming sooner than anyone expected. Market consensus is for the first hike to occur in June 2015 so obviously traders were taken by surprise that a hike may occur in spring of next year instead of summer or later. Equities have rallied each time Yellen speaks. She knocked it out of the park pleasing market bulls during her Congressional testimonies. Today, however, Yellen shows up in a bear suit and lays an egg.

The wild session ends with the SPX down 11 points, -0.6%, to 1861. The Dow loses 114 points, -0.7%, to 16222. The Nasdaq is down 26 points, -0.6%, to 4308. The RUT loses 9 points, -0.8%, to 1196. The computer programs are moving stocks uniformly. The VIX is 15.12 and above the 200-day MA a bearish market signal. Healthcare is the big winner as traders salivate over the 5 million sign-ups for Obamacare. UNH +2.5%. WLP +1.4%. HUM +3.1%. AET +1.4%. IPO’s continue to pop higher and PCTY, Paylocity, is the flavor of the day catapulting +41% on its debut. FDX -0.1%. UPS -0.5%.

After the bell, GES collapses -7.2% on weaker guidance. Wall Street is abuzz over Fed Chair Yellen’s debut performance. In a nutshell, she continues the $10 billion per month QE taper and surprisingly shortens the time when a rate hike will occur now targeting spring 2015 about one year from now. The dollar index jumps +0.8% to 80.15. The dollar/yen leaps to 102.40 due mainly to the strong dollar. The euro drops to 1.3822 due to the strong dollar.

President Obama rules out military action in Ukraine. The president is pushing diplomacy and says even the Ukrainians will understand that engaging Russia in a war is not appropriate and will not help the Ukraine. Putin threatens to retaliate against sanctions by raising the stakes in the Iran nuclear talks. With all this world turmoil ongoing and perhaps escalating, President Obama fills out his March Madness basketball brackets putting on a show for reporters.