Cuts at Caterpillar (CAT) Slam Stocks Ahead of Yellen

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Stocks came under increasing pressure Thursday on job cuts by Caterpillar (NYSE:CAT), weaker oil prices and losses in Europe. All eyes were on Federal Reserve chairman Janet Yellen’s speech after the close for any hints that a 2015 rate hike is off the table. Which is unlikely, since Fed officials just last week forecasted action before the end of the year.

In the end, the Dow Jones Industrial Average lost 0.5%, the S&P 500 Index shed 0.3%, the Nasdaq Composite dropped 0.4% and the Russell 2000 lost 0.2%.

Healthcare stocks led the decliners with a 1.1% loss while defensive utility stocks carried the day, gaining 0.8% as a drop in yields boosted interest in dividend payers.

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CAT finished down 6.3% after cutting fiscal 2015 revenue forecast for the second time and announced it will cut 10,000 jobs by the end of 2018, as China slows and the mining and energy sector continues to struggle. The firm warned that fiscal 2016 revenue would likely fall 5% year-over-year — the fourth consecutive annual decline.

Crude oil broke below the trading range that has been in place since late last month, testing the $44.75 level. Gold and Treasury bonds finished higher on a safe-haven bid, with the yellow metal adding 1.8%, while the iShares 20+ Year Treasury Bond (NYSEARCA:TLT) gained 0.7%. Edge Pro subscribers benefited from the latter with a 20% move in their October $122 TLT calls.

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The global economic backdrop remained a challenge with Japanese stocks moving lower coming off of a holiday closure. Unexpected rate cuts from Norway and Taiwan did little to boost sentiment.

Here at home, the Kansas City Fed regional manufacturing activity index became the sixth regional Fed survey to start flashing red printing at -8 (vs. expectations for -6) for its seventh negative monthly result in a row — something that hasn’t been seen outside a recession. Not good.

Especially in the context of a Federal Reserve, who seems determined to hike interest rates for the first time since 2006 before the end of this year. Yellen, in a speech that focused on inflation dynamics, admitted after the close that most Fed voting members, including herself, believe conditions will warrant “an initial increase in the federal funds rate later this year, followed by a gradual pace of tightening thereafter.”

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Stocks have entered a new short-term downtrend in recent days, breaking below a two-month uptrend support, largely on concerns that higher interest rates are coming sooner than the market wants. Better-than-even odds of a Fed hike based on futures pricing cannot be found until early 2016. Current odds put a December rate hike at a 41% probability. Wall Street simply isn’t ready for higher rates.

In response, I continue to recommend a defensive positioning to clients, including a new position in the VelocityShares 2x TVIX (NASDAQ:TVIX), which gained 5.8% for Edge subscribers today.

Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters. A two-week and four-week free trial offer has been extended to InvestorPlace readers.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/09/cat-stock-tvix-tlt-yellen-rate-hike/.

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