Fictionary: Interest Rates and “Fed Funds Futures” Farce

On the 7/26 episode of Stock Talk, CIO Chris Perras recaps the Q2 2019 earnings reports and covers the lack of the predictive power of the oft-quoted Fictionary term, “Fed Funds Futures.” Plus, a new “I don’t want to invest now because…”!

Chris Perras: Good afternoon. My name is Chris Perras and I am the Chief Investment Officer at Oak Carver’s Financial Group in Houston, Texas. Welcome to the July 26th edition of our weekly stock talk podcast keeping you connected to your money. This week we’re going to cover two topics. First, we’re going to recap the second quarter-to-date earnings report. Secondly, we’re going to educate you on the lack of importance, the fictionary term often quoted on interest rates. It’s a prognostication tool for the Fed Funds futures markets.

The S&P 500 sits near an all-time high of $3015. I’m going to repeat this. This should not be a concern for investors. I repeat once again, stop listening to the TV and all the talking heads on TV. If you didn’t invest in the market when the market was at a new all-time high, you would have stopped investing in mid-2013 and you would have now missed 100% return on stocks the past six years. Please stop reading Doomsday articles.

Second-quarter earnings are about half over and a quick recap is in order. Financial stocks like JP Morgan, Morgan Stanley, and Charles Schwab, all beat expectations, and they are all undervalued in front of what Oak Harvest believes will be a pickup and an acceleration in both inflations in the second half of 2019 and a pickup in global growth in 2020. Technology stocks like Google and Texas Instruments beat low bar estimates and they confounded negative financial analyst opinions, with the stocks jumping 7.5 to 10% on their earnings reports.

Consumer staple stocks like Coke, Pepsi, and Hershey have all beaten earnings expectations, but the team at Oak Harvest believes that the safety trade represented by staples, utilities, and real estate investment trusts that all act like bonds is overvalued, overcrowded, and capital returns will be much higher in cyclical areas of the market the next 12 to 18 months. Our second topic of the week, it’s addressing the often mentioned term on the financial news network. This term is called the Fed Funds futures.

The Fed Funds futures index is thought to predict the direction of interest rates. The Fed Funds futures market is a financial contract that is supposed to represent the market’s opinion of the direction of the Federal Reserve. The Fed Funds futures can be traded every day for every month for up to three years. Every research this piece of data extensively over my career. Here are the results of my research on the predictability of it as a forecasting tool for interest rate direction. Are you ready? Hold on. It is near worthless.

Yes, something that is brought up almost daily on TV by both reporters and market forecasters has almost zero, I repeat zero ability to forecast. The length of time that is good at forecasting is months– No, weeks? Wrong again. Days, you’re kind of getting warmer. How long specifically is it good for as a forecasting tool? About three to five business days. Basically, the week that the Federal Reserve meets, the number is pretty good at forecasting what the Federal Reserve will do at that meeting. It is basically as good and precise as the weather forecast. It’s good for three to five days max.

Why this number is quoted almost daily on TV is beyond me. What does this mean to our listeners, and what does it mean to investors? It means when people bring this piece of data up on TV, please either turn off your TV, get up and get a drink of water or go walk your dog. On a final note, returning to our weekly segment of the podcast, I don’t want to invest now segment. This week the excuse I heard was this. “I don’t want to invest now because I heard a Smart Money hedge fund manager on TV predict an upcoming recession and an upcoming Doomsday and now is not a good time.”

I spoke to this prospect on the phone and asked them, “Who are you referring to on TV?” From their answer, I surmised who it was and I asked this prospect, “Why is this hedge funds manager opinion relevant to your financial planner investing?” “He got the subprime mortgage collapse right,” this prospect said. “He’s worth hundreds of millions of dollars and he sounds really smart.” To which I asked, “How’s he done since this 2008, 2009 market curve?” This prospect had no idea. A little research by way of Google search would show that since the market turned off in 2009, this hedge fund manager has almost consistently pitched his ideas that were negative on both the economy and stocks.

At first, there was the upcoming collapse of China, then there was the upcoming collapse of Japan. I admit he did nail the collapse of tiny and almost irrelevant Greece correct in 2012 but I asked you and I asked you again. Why does this person’s opinion matter to you? Why does it matter to any retiree? Why is it his opinions matter to someone who’s in the accumulation stage of their life? Someone who is 20 to 40 years old and saving for the next 40 to 50 years. My answer? These opinions mean nothing. They should mean nothing to you. They are more irrelevant noise that shows up every day on the financial news networks that are there to make you emotional with your money.

Please stay the course, talk to your financial advisor. Trust in the process that you invested your own time and money in. That’s what financial planning investing is all about. If you find this content helpful forward it to friends and have them give us a call at 281-822-1350. Please browse our updated website and new content at oakharvestfg.com. Our main job at Oak Harvest is to have you retire only once in your life with a customized retirement planning. Many blessings. This is Chris Perras.

Speaker 2: The preceding content expresses the views of the speaker and is for informational purposes only. It is based on information believed to be reliable and created but any cited data statistics and sources are not guaranteed. Content ideas and strategies discussed may not be right for your personal situation and should not be considered as personalized investment, tax or legal advice, or an offer or solicitation to buy or sell securities. Investing involves the risk of loss and past performance does not guarantee future results.