The Fed Has Me Worried. Here's My Trading Gameplan...

Recently, the Federal Reserve cut interest rates for the third time in a row.

After the meeting, Chairman Jerome Powell held a press conference. I found his comments particularly interesting this time around.

Here's why...

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In a nutshell, Powell said he is confident that Fed policy is helping the economy. He admits that the global economy is slowing but notes that the United States is different than the European Union or Japan. Because we are different, Powell is confident we won't experience the problems those regions have seen.

He's pleased to see the initial "phase one" trade deal between the U.S. and China. Combined with indications that the U.K. might be able to pull off its divorce with the EU, it means risks aren't as dire as they once appeared.

Since Powell spoke, however, the likelihood of a trade deal has waxed and waned. What's funny is traders are actually accepting the uncertainty associated with trade as a certainty in the market.

Closer to home, Powell noted that in the United States, "The consumer sector has been quite resilient. We know that manufacturing, investment, trade, the export sector has been weak. That continues, but nonetheless overall we've got an economy that is showing moderate growth."

In the end, he believes, "our current stance of policy is appropriate," as long as the economic outlook doesn't change.

Why The Fed Has Me Worried...

Powell's words were reassuring to traders, and stock prices went up as he spoke.

...That makes me think traders missed the part where Powell noted:

When short-term rates flared back in September, "one thing that was surprising about the episode was that liquidity didn't seem to flow as one might have expected." The Fed wants to understand how to improve that situation and he cautioned the situation will not get a short-term fix.

Powell is referring to the Fed's intervention in the repo market as well as its announcement that it would begin buying around $60 billion in treasury bills each month.

For a full refresher, I wrote about what was going on in the repo market in this piece in September. But in simple terms, repos allow banks and financial firms to meet short-term cash needs. Rates surged, from about 2.4% to 10% in September, which indicated the market wasn't functioning normally.

The spike in rates indicated there was an unexpected demand for cash. The demand lasted through the week and the Fed intervened. In fact, it is still intervening in this market and has said it will continue to do so at least through January. The bond-buying program (which the Fed assured us is "not QE") will likely last even longer. (I covered the "not QE" announcement in this piece.)

So to sum up, Powell is confident that the Fed is doing everything right even though the biggest shock to financial markets since the financial crisis caught the Fed completely by surprise. Rather than being concerned about missing the crisis, the Fed is confident they have things under control.

Judging by how they missed this last tremor, I find it hard to believe everything is truly "under control." I'm nervous but remain bullish until other analysts realize how precarious the global economy really is.

How I'm Trading This Market

That's why I'm sticking my strategy of making high-probability trades for income. And given the uncertainties in the market, I'm sticking to large-cap stocks like Visa (NYSE: V).

Visa is a well-known company with a great business model. Even better, my proprietary indicator is showing it's on a "buy" signal.

For those who may not be aware, Visa and Mastercard utilize the "open-loop" system. American Express, on the other hand operates on a "closed-loop" system.

"Open-loop" essentially means Visa and Mastercard simply earn a small transaction fee every time one of their branded cards is swiped. They don't own the cards and thus are not responsible for the debt that accumulates on them. "Closed-loop" means American Express controls the entire process. It owns the cards that it issues (and the debt that is accumulated on the credit card). It also collects a fee on the transactions.

Each system has their own benefits and drawbacks. I like the "open loop" model because it's a very predictable business model. Even better, there are still high barriers to entry since the infrastructure to process transactions is almost insurmountable.

V chart

American Express recently highlighted the value of Visa's infrastructure. The Wall Street Journal reported on that company's efforts to add merchants:

"American Express Co. wants more businesses to accept its cards. So it is paying them -- sometimes in amounts approaching a half-million dollars.

The company is offering sign-on bonuses to some businesses that don't take its cards in a bid to catch up to rivals Visa and Mastercard. The payments range from under $10,000 to about $450,000.

Known more for its focus on upscale customers than its mass-market appeal, AmEx has long lagged behind Visa and Mastercard in the race for American businesses. In 2018, Visa and Mastercard were accepted in some 1.3 million more U.S. locations than AmEx, which had 10.3 million locations, according to the Nilson Report. Investors have pressed the company to catch up."

This news offers an interesting way to value Visa. The company has 11.6 million merchant accounts and a market cap of about $400 billion. Each account is worth about $35,000 by market cap, a figure towards the low end of American Express' payments.

While fundamental metrics like the P/E ratio look high for V, the value of the company's operations is likely much more than $400 billion.

That is bullish for the long term. In the short run, the stock is breaking out of a consolidation pattern on the weekly chart. That's an ideal setup for a high-probability trade.

Action To Take

Normal investors could simply buy shares of Visa, but my followers and I have a different plan. We recently made a trade on V using the same technique that's allowed my followers to generate up to $1,155 (or more) in instant income week in and week out.

So while I can’t share the exact details of this trade with you today, here's what I’m going to do instead...

On Friday, November 29 (Black Friday), I will be hosting an online masterclass where I will teach you everything you need to know to make simple, effective high-payout trades that will help you generate more income than you ever thought possible. In fact, we're so sure you can use his program to become an income millionaire, we’ll pay you $1,000 to get you started. Go here to learn more and sign up for this one-of-a-kind event.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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