Utilities are one of the hottest sectors this year, but investors may want to be suspicious about the climb.» Read More
Here's the two questions that matter today:
1) How does the Fed communicate its intentions? The crowded trade is "dovish Fed." The risk, therefore, is that the Fed appears more hawkish than anticipated. Everyone believes Yellen will reiterate they plan to keep rates low for an extended period. But how to communicate that? Simply saying the Fed is "data dependent" may not enough, in fact that could be interpreted as being too hawkish.
She needs to tick off a few boxes to convince the trading community that they will not be moving fast. It would help to make some passing reference to the continuing volatility in oil and perhaps even to the credit market.
The Fed has said it would take a "balanced" approach to raising rates and that "economic conditions may, for some time, warrant keeping the target federal funds rate below levels the committee views as normal in the longer run."
One way to project a "dovish" position is to lower expectations for a rate hike. The current consensus is for rates to be roughly 100 basis points higher a year from now. That would imply four rate hikes of 25 basis points each, likely at each of the four meetings with press conferences: December 16, March 16, June 15, September 21.
If the Fed were to indicate that rates may be lower than that a year from now, that would certainly be dovish.
Another way would be to say they need to see more evidence that inflation is moving closer to their 2 percent goal.
2) What is the market reaction? Equity volatility has seen elevated, but not dramatically so, going into the Fed meeting. Part of this is due to the continuing volatility in oil, and, on Friday, in the credit markets.
I noted Tuesday that the quadruple witching expiration, the quarterly expiration of stock and index options, and stock and index futures that happens on Friday, is not normally a market moving event though it brings heavy volume. The concern this time is that because of the Fed this could be different. If the Fed appears to be "hawkish" (raising rates more aggressively) the S&P 500 could drop through several key levels where option prices are pegged for the Friday expiration, which would force additional selling.
If the market perceives the Fed remains "dovish," the consensus is for a rally going into the close of the year. We are in a seasonally strong period, tax loss selling is abating, many have been underweight stocks going into the Fed. Of course, stability in oil and high yield will be important factors.
Stocks are having a great day. High yield and oil are behaving, and we are entering a seasonally strong period of the year.
It may last, but it may not.
The problem is the unusual combination of an historic Fed meeting and the quadruple witching expiration, the quarterly expiration of stock and index options, and stock and index futures, which occurs on Friday.
Read MoreWitching Hour: CNBC Explains
Why is the market rallying?
There have been tremendous cross-currents buffeting stocks for the past two weeks. Some of them have changed from negative trends to positive ones.
Frank Sinatra would be 100 years old on Dec. 12. What is it about Frank Sinatra's enduring appeal? How did this man sell an estimated 150 million albums worldwide?
It's not hard to figure out: It involved greatness: great talent, great taste, great attitude, great style.
And great swagger.
I first felt it when I was a kid. In 1967, at 11 years old, I went to the Hatboro Record Shop in Bucks County, Pennsylvania, and bought a 45 of "That's Life," Sinatra's ode to the ups and downs of a guy who is always striving to be on top:
"I've been a puppet, a pauper, a pirate, a poet, a pawn and a king,
I've been up and down and over and out and I know one thing ...
Each time I find myself flat on my face
I just pick myself up and get back in the race...
Stocks are weak today as markets are dealing with three issues: oil weakness risk reduction ahead of Fed, and credit concerns.
The last issue sounds new, but is really just a different manifestation of an old issue: Liquidity. The Third Avenue fund suspension of redemptions is clearly related to concerns about the Fed, but there are broader concerns about liquidity in the bond market.
The last IPO of the year is set to price tonight, a prepackaged software company named Atlassian. It has the distinction of being the ONLY IPO in December, a rare event. This is the weakest December since 2008, when there were none. But that was 2008, a disastrous year.
It's the end to a dismal year for IPOs. It started promisingly with a strong spate of IPOs. But cracks started showing in the middle of the year when after-market return for IPOs started heading south. Then the whole market had a big drop in July and August.
The bottom line: Many IPOs were cancelled for market conditions when the market headed south in July and August, and investors started demanding lower prices for those IPOs that did go public.
Frank Sinatra's favorite toast was, "May you live to be 100, and may the last voice you hear be mine."
He didn't make it to 100, but the business of Frank Sinatra is still going strong.
Seventeen years after his death, that voice can still be heard in restaurants, bars, airports and other public spaces all over the world.
And why shouldn't business be good, with a legacy like this: 1,400 recordings, 31 gold, nine platinum, three double-platinum and one triple-platinum album. And he appeared in 60 films!
And the business keeps expanding.
Another day, another epic selloff in the energy sector.
The catalyst is twofold. The end of the commodities bull run has driven oil well below $40, and Friday announcement by pipeline operator Kinder Morgan that it was reviewing its dividend stoked new fears for energy investors.
That dividend review is creating a second wave of panic above and beyond sliding oil prices. Chevron and ExxonMobil have increased the dividend every year for some 28 years. If Kinder Morgan can talk about cutting the dividend, could it happen to Chevron and ExxonMobil and the others?
For the moment, no. Right now, energy stocks are a one-trick pony. They are owned for their dividend, period.
Do you think John Watson, the chairman of Chevron, is going to be the guy who goes down in history as the CEO who cuts the dividend? Or Rex Tillerson at ExxonMobil?
No. However, the problem is the "lower for longer crowd" is now becoming the majority. That is, there is a substantial group who think oil could still be in the $40 range a year from now, going into 2017.
If that is the case, then all bets are off. It's not clear if the dividend is safe, even for a giant like ExxonMobil.
It is really expensive to keep the dividend, particularly for the big guys. Exxon pays $1 billion a month in dividends, and so does Shell. Chevron pays about $650 million a month, which is a lot of money, about 25 percent of the cash flow.
It's worse if you are just an exploration and production (E&P) company that operates in the U.S. The big multinationals are at least still profitable. But not a single oil company is making money pumping in the United States. Not one.
A lot of crosscurrents today.
1) The dollar weakness, euro strength on Mario Draghi's failure to increase the size of the ECB's monthly bond buying program was a modest help to some commodities like oil and copper, but no help to commodity stocks. Most oil stocks were down 3 to 5 percent. Steel stocks were down one to two percent, as were other metal stocks like Alcoa down 4 percent. The equity markets seem to believe that the rise in commodity prices was a head fake and would not last.
2) The aggressive move up in bond yields put pressure on interest-rate sensitive stocks. Home builders like Hovananian were down 3 to 6 percent. A number of utilities, like Duke, Exelon, and Public Service Enterprise, hit 52-week lows, though they came off their intraday lows as the day wore on.
4) The impact of any terrorism concerns over the shooting in San Bernardino, California, if any, is hard to quantify, but traders noted that oil had a sharp spike up midday when it was announced that the person responsible for the shootings had traveled to Pakistan and Saudi Arabia.
The bigger questions are, first, is this finally a turn for the dollar, and is this the start of a sustained move up in interest rates? I noted earlier in the day that Draghi may have inadvertently send an early Valentine's Day present to Janet Yellen, in the sense that the dollar weakness, euro strength may make it easier for the Fed to raise rates. Treasury yields were up across the board.
Here's something strange: Banks, which should be a winner today on the higher rates, are down across the board, roughly 1 to 2 percent. Huh?
This may finally be the expected market reaction to the Fed raising rates, as well as to the fact that the "long dollar, short euro" trade was one of the few trades that was working for traders.
There have been some notable failures:
1) Efforts to buy oil stocks at their lows failed throughout the year,
2) and biotech, a huge winner through the middle of the year, has now only modest gains.
The dollar falling apart was the final straw: it "finishes off everyone for the year," one trader said to me.
We are certainly seeing a "degrossing" or reduction in stock holdings across the board today. That's the likely answer.
Hawks on the European Central Bank committee won a battle on Thursday, and the euro is screaming higher.
The ECB, which began its bond purchasing program in March 2015, will extend its bond buying program to March 2017 (and possibly beyond) from September 2016. The central bank will also include the debt of regional and local governments, or muni debt, in purchases.
Though the ECB will reinvest the principal payments of the securities purchased, it is not increasing the amount of monthly purchases beyond the money that is being reinvested.
And that was the problem. The markets, expecting ECB President Mario Draghi to continue his "whatever it takes" stand, believed the ECB would expand the amount of monthly purchases. Accordingly, much of the trading community was long the dollar, short the euro.
This is how beggar-thy-neighbor monetary policies work, and perhaps why they ultimately fail.
UBS has reacted to the financial market turbulence by freezing salaries for its investment bankers until at least mid year. The FT reports.
Janet Yellen is expected to attempt to balance raising interest rates against the risks of a weaker global economy.