Sunday, August 31, 2014

The Buying-of-the-Dips Saga - AND - An Economic Update

August turned out to be a very nice month if you're long (own) the stock market. Yes, July's little swoon turned out to be yet another chapter in this buying-of-the-dips saga. That's virtually all we've seen since the fall of 2011---an amazingly long time without a 10+% correction.

So what gives? Of course nobody knows for sure, but here's what I'm thinking:

First and foremost, this has indeed been the most disrespected bull market of my career. While the indices hit all-time highs, among other things, folks carp about the Fed and how it's the reason for the season. Which means when the Fed turns the printing press cold, this market will melt down all over those fools who've been riding it higher. If you're a regular reader you know I'm not at all sympathetic to that thinking. Not that I don't think the market's in for some pain when the Fed finally lifts the interest rate pedal off the floor, but I adamantly do not fully credit the Fed with the bull market. So why do I label all this bull market-doubt "first and foremost"? Because an environment of disbelief does not lend itself to the telltale euphoria that typically precedes the demise of a bull market.

Secondly, low inflation amid an expanding economy---which is what we're now experiencing (in the U.S.)---is goldilocks for the stock market.

Thirdly, and sadly, the individual investor is always the last to the party. And, still suffering the psychological effects of 2008, he/she has been reluctant to entrust the stock market with his/her retirement savings. If history repeats, he/she'll ultimately capitulate and rush in, signaling (possibly) the last leg (which could be a short or long leg) of this bull market.

And, fourthly, while I don't credit the Fed with the productivity gains made by corporate America these past few years, I acknowledge the fact that it has contributed to an interest rate environment that virtually eliminates the stock market's competition. That is, for the attention of those who are uninterested in earning money market rates (essentially zero) on their entire portfolio, or earning 2.3% on a ten year bond that'll get creamed when interest rates rise, but are yet willing to expose a portion of their long-term portfolios to the volatility inherent in the stock market.

Of course there's more---geopolitical uncertainty keeping a lid on optimism for one---but we'll rest on those four for now.

Please keep in mind that, in the above, I only attempt to describe a few factors that might explain why we are where we are. You should not view it as any assurance that present trends will remain ad infinitum, or for the next few weeks, months or years. The world is a dynamic place, and, as I've explained here ad nauseam, the factors that move markets are uncountable. My comfort as a long-term investor comes from.... well, being a long-term investor, and from my belief that the goods and services you and I (and our children's children) will be enjoying years hence will make today's miracles seem stone-agely by comparison.

The following are the highlights from my economic journal for the last half of last week. As you'll see, things in the U.S are, on balance, looking up:


AUGUST 27, 2014

The Congressional Budget Office (CBO) released its latest update of economic projections. The first two paragraphs sum up its findings:
The federal budget deficit has fallen sharply during the past few years, and it is on a path to decline further this year and next year. However, later in the coming decade, if current laws governing federal taxes and spending generally remained unchanged, revenues would grow only slightly faster than the economy and spending would increase more rapidly, according to the Congressional Budget Office's (CBO's) projections. Consequently, relative to the size of the economy, deficits would grow and federal debt would climb.

CBO's budget projections are built upon its economic forecast, which anticipates that the economy will grow slowly this year, on balance, and then at a faster but still moderate pace over the next few years. The gap between the nation's output and its potential (maximum sustainable) output will narrow to its historical average by the end of 2017, CBO expects, largely eliminating the underutilization of labor that currently exists. As the economy strengthens over the next few years, inflation is expected to remain below the Federal Reserve's goal, and interest rates on Treasury securities, which have been exceptionally low since the recession, are projected to rise considerably.

NEW PURCHASE MORTGAGE APPS PICKED UP A LITTLE, rising 3.0%, but still flat (down 11% year over year).

AUGUST 28, 2014

The revised GDP number for Q2 came in at 4.2%, better than the preliminary estimate. Here's Econoday's summary:
The second estimate for second quarter GDP growth came in a little stronger than expected, rising 4.2 percent annualized versus a 4.0 percent forecast and coming off a 2.1 percent weather related drop in the first quarter. With this second estimate for the second quarter, the general picture of economic growth remains the same; the increase in nonresidential fixed investment was larger than previously estimated, while the increase in private inventory investment was smaller than previously estimated.

WEEKLY JOBLESS CLAIMS CAME IN JUST A BIT LOWER THAN LAST WEEK'S, showing strength in the jobs market. The present pace of economic growth is job-supportive for sure.

CORPORATE PROFITS are growing nicely. Here's Econoday's summary:
Corporate profits in the second quarter came in at $1.840 trillion, following $1.735 trillion for the first quarter. These numbers include annual revisions. Profits in the second quarter gained an annualized 26.5 percent after an 11.0 percent drop in the first quarter. Profits are after tax but without inventory valuation and capital consumption adjustments. Corporate profits on a year-on-year basis were up 4.5 percent, compared to 2.4 percent the prior quarter.

While the various housing indicators are coming in somewhat mixed, on balance, things are clearly looking up. As today's PENDING HOME SALES---3.3% increase, bringing the index to 105.9 (way above expectations)---number suggests.

AUGUST 29, 2014

PERSONAL INCOME GROWTH surprisingly decelerated in July, after two strong months. Personal income, up .5% in both May and June, came in at up .2% in July. The consensus estimate for July was up .3%. Wage and salary growth decelerated as well: up .2% in July after .4% increases in May and June.

Personal spending actually declined .1% in July after a .4% increase in June. The consensus estimate for July was up .3%. I'm surprised as well---given the strength we're seeing in the employment components of virtually every employer survey I've reviewed over the past several weeks.

The PCE (personal consumption expenditures) core inflation measure came in at 1.5%, same as June. PCE is the Fed's preferred metric, and remains below its 2% target.

While---based on what I'm seeing in the surveys, plus recent reads on consumer confidence---I suspect we'll see these stats improve in coming months, July's income and spending numbers, and PCE inflation, should calm the nerves of itchy trigger-fingered traders who remain focused on the Fed.

THE CHICAGO PURCHASING MANAGERS INDEX jumped big time, to 64.3, in August. This is after posting 52.6 (above 50 denotes an expanding economy) in July. Here's Econoday's summary:
The Chicago PMI moved from slight monthly expansion, 52.6 in July, to extreme monthly expansion for August, to 64.3. The August reading is the highest since a 65.5 spike in May.

Details of the report are released to paid subscribers only but a run down is published with production leading August's gain while the monthly gain in new orders is described as strong. The gain in backlog orders is also described as strong while supplier deliveries lengthened. Inventory accumulation was especially pronounced while prices paid edged up only slightly. Employment growth slowed.

Confirming Tuesday's Conference Board's Consumer Confidence Index (big positive move), the UNIVERSITY OF MICHIGAN'S CONSUMER SENTIMENT INDEX showed growing optimism---in current condition terms that is---coming in at 82.5. The current conditions component came in at 99.8 vs 97.4 in July.

However, future expectations are lagging a bit. That component came in at 71.3, which was better than the 66.2 mid-month look, but down a bit from the 71.8 reading in July. Econoday says:
The softness in expectations hints at a lack of confidence in the long term outlooks for jobs and income. Yet the gain for current conditions is a definite positive for the short-term outlook.

Again, I look for these numbers to improve going forward based on what I'm seeing in the leading indicators...



Thursday, August 28, 2014

Market Commentary (audio)

Click the play button for today's commentary...

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Wednesday, August 27, 2014

The possibilities, my forecast, and an economic update...

Just finished my biweekly look at market valuations and key market indicators. As has been the case of late, I find fewer sectors offering attractive value than I did in early 2013. Of the 27 proxies I track---which cover everything from U.S. home builders to emerging market stocks---I've highlighted 10 green, 7 red and 10 yellow. The colors (their meanings obvious) are assigned based on valuations and cyclicality. In January 2013, green---at least from a valuation standpoint---ruled the day.

So, where does the market go from here? If you happen to know (for sure), please shoot me an email ASAP! Because I of course don't. But I can speak to what the possibilities are:

For starters, let's talk valuations. When we're looking at the price of stocks relative to underlying earnings (the commonly-used metric), stocks look expensive when their prices have increased faster than have their earnings to the point where, historically speaking, one of two things is likely (ultimately [meaning stocks can stay historically over-priced for a long time]) to happen: The price declines to a point at or below the historical average price to earnings ratio (that would be your correction or bear market [depending on the magnitude of the decline]), or earnings begin accelerating at a pace faster than the rise in share price (that would be your bull market continuing). As I suggested above, at this juncture some sectors look expensive, some look pretty good.

So, with that, where does the market go from here? Again, please email me if you know. Because I still don't.

So what do we look at now?

We look at the prospects for earnings growth going forward. Which means we look at the prospects for business going forward. Which means we look at the economy:

With regard to the U.S., if you've been reading my blog you know that in my view things have truly been looking up of late.  This week's indicators, on balance, continue to support that view. I'll include the highlights at the end.

With regard to Europe, things aren't so good. So much so that the ECB is looking to embark on its own quantitative easing program (printing money and buying bonds), while the U.S. central bank is about to put a wrap on its (tapering to zero by October). We'll see if it works better for Europe's economy than it did for the U.S.'s (i.e., I don't credit the Fed with the now-improving U.S. economy). Some (not me) believe the bull market in U.S. stocks has been all about the Fed. That sentiment could very well inspire optimism toward Eurozone stocks, at least at the get-go.

As for emerging markets, while some economies are doing better than others, we're looking at---in the aggregate---about 6% economic growth this year. That's like 3 times better than where the U.S. is likely to come in and at least 6 times better than the Eurozone. In terms of their stock markets, the two index ETFs we use show average P/Es at discounts to the S&P 500 of 26 and 49 percent. Now, please, don't run out and put all of your money in emerging market index funds. Those economies and stock markets are the definitions of volatility. If you have a strong stomach, by all means, own some, but go lightly!

So, with all that, where does the market go from here? Okay, I've figured it out. But I'll limit my forecast to the remainder of 2014. You ready? Here goes: The Dow Jones Industrial Average (familiar index to most people)---currently at 17,122---will end 2014 above, below or right at 17,122. And I stand firm on that prediction...

Disappointed? Sorry... The fact is I'm just not smart enough to know what will motivate thousands of people who sit on either side of millions of shares of stocks trading hands on any given weekday (which, honestly, is great news for our clients). So, with that, and your need to know, in mind, here are the links to today's slew of articles from a publication its provider says is geared toward the "sophisticated investor".

Economist: Stocks No Longer Risky, Will Go Up 'Steadily' 

The Dirty Dozen: 12 Key Reasons To Raise Cash And Get Defensive 

No Fire In The Hole - Two Macro Trades For The Rest Of 2014 

These 3 Things Will Keep Stocks Moving Higher...Which May Surprise You 

Rate Raise Will Not End Investors' Hunt For Yield 

The Demise Of American Yield 

Equity Markets To Drop In The Fall 

S&P 500 At 2,000. Now What? 

Daily State Of The Markets: The Current Key: Breakout Or Fake-Out? 

If, after reading each of the above articles, you've figured it out---in all sincerity---please DO NOT email me! Unless, that is, you're one of our clients. In which case you and I will immediately get together so I can bring you back to earth...

When it comes to the stock market, always think long-term my friend.


Here are this week's highlights from my economic journal:


New home sales disappointed in July. Which contradicts last week's high home builder sentiment reading and increase in existing home sales.

The Chicago Fed Activity Index came in better than expected and confirms the view that the U.S. economy is on an upward trajectory.

The Markit Services Flash PMI for July came in about as forecast, a little soft compared to the prior month, but showing reason for continued optimism. Here are the report's highlights:
Growth in the nation's service sector remains strong but has moderated this month, to 58.5 vs 61.0 in both the readings for final and mid-month July. Service businesses report strength among both household and business clients as new business remains strong. Employment is up but only slightly though the general outlook is very strong. Prices are accelerating sharply which the report attributes to fuel costs which is puzzling given the downdraft underway for gasoline prices.

The Dallas Fed Manufacturing Survey showed growth but at a slower pace than the previous month's reading. However, the employment component posted its "third robust reading".


The ICSC and Johnson Redbook retail reports show expansionary results on a year over year basis. Here are Econoday's highlights for both:
ICSC-Goldman Store Sales. Released 8/26/2014:

Store sales W/W Change: Prior -1.3%   Actual +0.6%

Store sales Y/Y  Change: Prior  +3.8% Actual +4.2%

Same-store sales rose 0.6 percent in the August 23 week for a very strong year-on-year rate of plus 4.2 percent. The report cites strength across most categories and general strength for back-to-school demand.

Redbook. Released 8/26/2014

Store sales Y/Y change: Prior +3.7%  Actual +4.0%

Boosted by solid demand for back-to-school apparel, Redbook's same-store sales tally came in at a year-on-year plus 4.0 percent in the August 23 week. Redbook notes that sales strength in the week was concentrated in the Midwest and South where school starts earlier than other regions. It also notes that sales of durables were sustained by demand for electronic goods. Based on this report and ICSC-Goldman released earlier this morning, store sales look solid for August.

TODAY'S DURABLE GOODS REPORT came in stunningly above expectations. However, it was all about a huge month for Boeing. Take that out of the mix and the report was, on balance, good enough to support the notion that the economy will continue to expand into the foreseeable future. Autos had a very good month...

THE FHA HOUSE PRICE INDEX AND THE CASE SHILLER INDEX WERE BOTH RELEASED TODAY. Home price gains continue to be uninspiring in terms of household wealth, but good news for potential buyers.

Today's CONFERENCE BOARD CONSUMER CONFIDENCE INDEX came in huge with at 92.4. This bodes very well for coming quarters... Here are highlights from Bloomberg's report:
Consumer confidence in the U.S. unexpectedly climbed in August to the highest level in almost seven years, reinforcing signs of a strengthening outlook for the second half of 2014. The Conference Board's sentiment gauge rose to 92.4, the highest since October 2007, from a revised 90.3 a month earlier, the New York-based private research group said to day. 

Unlike other regional reports this month showing a slowing in the manufacturing sector, the RICHMOND FED REPORT SHOWS VERY GOOD GROWTH. Here's Bloomberg's summary:
The overall business activity index for mid-Atlantic region factories rose to 12 in August, according to the latest report from the Federal Reserve Bank of Richmond. The monthly survey of manufacturers based in the Carolinas, the District of Columbia, Maryland, Virginia and West Virginia, found that the new orders index rose to 13 this month from 5.0 in July. The shipments index rose to 10 from 3. The Richmond Fed's district accounts for about 9.1 percent of the nation's gross domestic product.

While I generally view a pickup in investor optimism as a contrary indicator, this month's STATE STREET INVESTOR CONFIDENCE INDEX showing a sharp increase (to 122.8) in optimism in Asia and Europe, is welcome---particularly in Europe---given the recent economic doldrums. Here's Econoday's summary:
Boosted by expectations for accommodative monetary policy, sentiment among global institutional investors is up a very sharp 7.0 points in August to a very strong 122.8. This month's strength is led by Asia, up nearly 10 points to 101.7 in a gain that reflects improved growth in China where a lack of inflation is raising expectations for continued monetary stimulus. Expectations for stimulus are also boosting sentiment in Europe where the index is steady at 127.7. North America is little changed at 110.3.





Sunday, August 24, 2014

So why the crisis-like policy? (video)

I promised you a market-oriented commentary on this week's Fed symposium in Jackson Hole, Wyoming, but as I gather my thoughts it occurs to me that there's not much of a market story to tell here. Or, I should say, nothing surprised me.

Janet Yellen did her best to help the world understand that she's having a tough time understanding today's labor market.

Dovish central bankers cited their chosen data points while explaining to interviewers why this is no time to be "normalizing" (raising) interest rates. As if abnormalizing is a good thing.

Hawkish bankers cited their chosen data points while explaining to interviewers why there's no time like the present to be normalizing interest rates. Can you help but sympathize with someone who wants things back to "normal"?

Normal?? What the heck is normal anyway? Compared to what? To when? And who decides? Is the normal 10 year treasury yield its long-term average of 4%? If it is and we get there in a hurry, I assure you, the financial markets are going to react in an abnormally bad way. Which I strongly suspect is why the doves aren't the least bit interested in getting interest rates back to "normal" anytime soon---or all at once.

My, what a catch-22! If you were an economist who just woke up from a 7-year coma and the first question you ask is "what's the fed funds rate", you'd conclude that we're in the midst of a terrible recession. But, clearly (as I pointed out Friday), we're not. So why the crisis-like policy? In my view, the Fed suffers PTSD every bit as much as the bloke who panicked in '08 and turned his 401(k) into a 201(k). And, like that halved bloke, the Fed is desperately afraid of making another mistake.

The scary thing is, the mistake of the Fed that---to no small degree---contributed to the great credit/real estate bubble of the mid-OOs was keeping interest rates "abnormally" low for "abnormally" long (I know, what's normal?). But the doves truly believe that they've saved the world by resorting to virtually the same policies that virtually destroyed the bloke's 401(k)..... (actually the bloke virtually destroyed his own 401(k) by panicking and selling when he should've been doubling his contribution).

I can't help but wonder where we'd be today if the Fed had accommodated to a far lesser degree---and if the market had been left to deal with certain failed banks and automobile companies. I suspect I'd be sending you a message this morning. I suspect I'd be thinking about how the family and I will enjoy the remainder of the weekend. I suspect I'd be thinking about next week's client meetings. I suspect you'd be thinking about the remainder of your weekend and the heading back to work tomorrow morning. If you're retired, I suspect you'd be thinking about your chores, your travel plans, your grandkid's soccer tryouts next weekend. In essence, I suspect that without the bailouts and a four trillion dollar Fed balance sheet, the world would yet be turning and we'd be very much in business. And the Fed wouldn't be fretting over how the markets will handle it finagling itself out of this mess it's gotten itself into.

Here's the great Milton Friedman on profit and loss:

Saturday, August 23, 2014

Janet and the Giant Elephant

The U.S. labor market was the theme for this year's Kansas City Fed's Jackson Hole symposium. As I read Janet Yellen's speech, and listened to an interview with Philadelphia Fed president Charles Plosser I found myself mystified by the supposed mystery over the presently high level of part-time employment. Although, I suspect it's more a case of omission than it is dimwition. Remember, the Fed Chair is appointed by the President. Thus, acting, as well as aspiring, chairs will choose their words carefully...

Here's Janet Yellen
A second factor bearing on estimates of labor market slack is the elevated number of workers who are employed part time but desire full-time work (those classified as "part time for economic reasons"). At nearly 5 percent of the labor force, the number of such workers is notably larger, relative to the unemployment rate, than has been typical historically, providing another reason why the current level of the unemployment rate may understate the amount of remaining slack in the labor market. Again, however, some portion of the rise in involuntary part-time work may reflect structural rather than cyclical factors. For example, the ongoing shift in employment away from goods production and toward services, a sector which historically has used a greater portion of part-time workers, may be boosting the share of part-time jobs. Likewise, the continuing decline of middle-skill jobs, some of which could be replaced by part-time jobs, may raise the share of part-time jobs in overall employment.12 Despite these challenges in assessing where the share of those employed part time for economic reasons may settle in the long run, the sharp run-up in involuntary part-time employment during the recession and its slow decline thereafter suggest that cyclical factors are significant.

All intelligent presumptions, I'm sure. But my how Janet is ignoring avoiding evading the giant elephant in the room: Which is the simple fact that when you raise the cost of something you get less of it. In this instance, we're talking full-time employment. When government mandates an increase in the price of full-time labor---which (right or wrong) it has with the Affordable Care Act's employer mandate, which goes into effect in 2015/2016---well, you get less full-time labor. 

After pointing out that the fed funds rate has been at zero for 5+ years---and unemployment has come down measurably of late---Plosser acknowledged that part-time employment remains relatively high. He stated that:
Something else is going on in this economy other than traditional labor market slack.

Yep, and I'll bet that over a cup of coffee he'd point to government's intrusion into the labor market as being a big component of that "something else." 

I have to say, on monetary policy, I was impressed with some of what Plosser had to say:
I would like to see a stronger and better labor market. But, having said that, it's not obvious at all to me anymore that monetary policy is the solution to fixing the problems in the labor market.

Ah, one small step toward the reality that Hayek pointed out years ago:

"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."

Friday, August 22, 2014

Market/Economic Report...

Today wraps up the Kansas City Fed’s annual Jackson Hole, Wyoming conference. This had been the venue (two of the past three years) for the announcing of two rounds of quantitative easing (printing money and buying bonds and mortgage securities—the proceeds of which remain in bank excess reserve accounts at the Fed earning .25%). This year, as anticipated, no such fireworks are taking place. I’ll give the pertinent detail and my thoughts over the weekend. In the meantime, below are the highlights from my market/economic notes of the past couple of days (cleaned up [with a little added venting regarding money-printing] for your reading). As you’ll see, the data generally support the notion that the U.S. economy is gaining some traction:

AUGUST 20, 2014

Fed minutes suggested that a minority of the board members are looking to push rates higher sooner, if they can gain a consensus. They'll remain "data dependent" of course... Last month's meeting (in that there appears to be a stronger push for---and/or more members leaning toward---a rate hike before late 2015) supports my view that the underlying pressures could, sooner than later, show up in PCE (Personal Consumption Expenditures [the Fed's preferred inflation measure]). Ultimately, there are board members who are concerned with the potential for an abrupt sell-off in the credit market that could play havoc with the economy and equity markets. The dollar gained, bonds and gold dropped... I think the gold bugs could be very disappointed this year. As the economy continues to gain traction (assuming it does) we'll see the dollar either strengthen further---as interest rise and inspire money flow to dollars---or, at a minimum, prove resilient. Neither scenario bodes well for gold.

I remain optimistic on industrial metals, particularly copper---despite the threat of a stronger dollar and the following re; China. At the end of the day, I'm assuming there is no recession (in the U.S. that is) on the horizon (although things can change in a hurry). My best guess (outside the U.S.) is that over the course of the next few quarters the Eurozone will show slightly better growth (although there's cause for doubt), and emerging markets will deliver relatively strong economic results...

China's flash PMI (last month's preliminary manufacturing Purchasing Managers Index) came in below expectations at 50.3, vs 51.5 estimate and 51.7 in July. Chinese stocks fell on the news, as did the Australian dollar (natural resource-rich Australia's economy is strongly tied to China's). Pundits are calling for looser policy in China to boost aggregate demand if they have any hope of hitting their 7.4 growth target this year. I.e., print money and get people to spend it to give the illusion that the economy is growing. My view is that excessive and prolonged monetary stimulus diverts resources from their otherwise more productive use. For example, when lending rates are bought down by intervention, capital will redirect to sectors that are heavily debt-dependent, such as housing. When such redirection is not where the market would otherwise have demanded, pricing distortions develop, then correct when the stimulus finally ends, or when the market has had enough. The 2008 bursting of the U.S. credit/real estate bubble is a classic example.

Re: Copper: A Bloomberg article just published reports an anticipated rebound in copper as demand expands amid signs of tightening supplies.... Standard Charter forecasts... The chart of the day shows the 12 month copper consumption rising to a record in China, while the use in the U.S. climbs to the highest since 2009. Global inventories have declined by almost 50% this year...

The CFTC Commitment of Traders report shows non-commercial speculators are slightly short (betting it'll drop) copper. While commercial users (smarter money) are slightly long (betting it'll rise)...

AUGUST 21, 2014

A number of indicators were published today... each one confirming the view that the U.S. economy is indeed accelerating, while much of the rest of the world is struggling to find footing. Minyanville summed it up nicely:

  • The S&P 500 (SPX) hit a new all-time high of 1994.76 today as positive economic data gave the bulls confidence ahead of Fed Chair Janet Yellen's speech in Jackson Hole on Friday.

  • Jobless claims came in at 298,000, beating the 315,000 forecast by economists.

  • The August Markit US Manufacturing PMI was 58.0, above the 55.7 consensus and an improvement from last month.

  • Existing home sales were 5.15 million in July, slightly exceeding the 5.02 million consensus, though June's figure saw a slight downward revision.

  • The August Philly Fed Index hit 28.0, well above the 19.7 consensus.

  • And finally, the Leading Economic Indicators Index rose 0.9% in July, above the 0.6% expected.

  • Overseas, the data was mixed. China's August HSBC Manufacturing PMI disappointed, as did the Eurozone's manufacturing and service PMI's.


Here's summary commentary on the Markit PMI from its chief economist:

  • August’s survey delivers further evidence that robust manufacturing growth momentum has been sustained through the third quarter, with overall business conditions improving at the fastest pace for over four years.

  • Stronger employment growth was a key factor boosting the headline PMI reading in August. Staff hiring picked up to its sharpest for around a year-and-half, providing an early indication that the US manufacturing sector has generated in excess of 20,000 jobs over the month in August.

  • Export sales finally showed signs of improvement, despite relatively subdued business conditions in some key markets, with the latest rise the steepest for three years.

  • Overall, with job hiring gathering momentum and input buying expanding at the sharpest pace for at least seven years, it seems US manufacturers are increasingly confident that the recovery is firmly back on track and are gearing up for a sustained rebound in production schedules over the months ahead.


Here's the report on manufacturing input prices showing prices remaining steady relative to July:

Input cost inflation was unchanged since July and remained subdued in comparison with the survey’s historical average. August data also indicated a further rise in manufacturers’ factory gate charges. The latest increase in output prices was little-changed from July’s seven-month high, and a number of survey respondents reported passing on a proportion of their higher input costs to clients in August.

Here's the Conference Board's summary commentary on leading, lagging and coincident economic indicators:

  • The Conference Board Leading Economic Index® (LEI) for the U.S. increased 0.9 percent in July to 103.3 (2004 = 100), following a 0.6 percent increase in June, and a 0.6 percent increase in May.

  •  “The LEI improved sharply in July, suggesting that the economy is gaining traction and growth should continue at a strong pace for the remainder of the year,” said Ataman Ozyildirim, Economist at The Conference Board. “Although housing has been one of the weakest components this year, the sharp gain in building permits helped boost the LEI in July. Financial markets and labor market conditions have also supported recent gains, but business spending indicators remain soft and their contribution marginal.”

  • “The pace of economic activity remained reasonably strong in July,” said Ken Goldstein, Economist at The Conference Board. “Although retail sales were a little disappointing, hiring and industrial activity improved. July’s increase in the LEI, coupled with its accelerating growth trend, points to stronger economic growth over the coming months.”

  • The Conference Board Coincident Economic Index® (CEI) for the U.S. increased 0.2 percent in July to 109.6 (2004 = 100), following a 0.3 percent increase in June, and a 0.2 percent increase in May.

  • The Conference Board Lagging Economic Index® (LAG) for the U.S. increased 0.2 percent in July to 124.6 (2004 = 100), following a 0.5 percent increase in June, and a 0.4 percent increase in May.

Here's commentary from the Philadelphia Fed:

Activity Index Highest Since 2011

  • The diffusion index of current general activity increased from a reading of 23.9 in July to 28.0 this month. The index has increased for three consecutive months and is at its highest reading since March 2011 (see Chart). The new orders and shipments indexes remained positive but fell to near their levels in June. The new orders index decreased 20 points, while the shipments index decreased 18 points.

  • The current indicators for labor market conditions suggested continued modest expansion in employment. The employment index remained positive for the 14th consecutive month but declined 3 points from its reading in July. The percentage of firms reporting increases in employment (25 percent) exceeded the percentage reporting decreases (16 percent). The workweek index was positive for the sixth consecutive month and increased 1 point.

Price Pressures Moderate

Nearly 30 percent of the firms reported higher input prices this month, but this was lower than the 36 percent that reported input price increases last month. The prices paid index decreased nearly 10 points from July to its lowest reading in three months. The prices received index, which reflects firms’ own final goods prices, also decreased, from 16.8 to 4.2. The 12 percent of firms reporting higher prices was notably lower than the 21 percent reporting higher prices last month. Over 79 percent of the firms reported steady prices for their own products this month.

Tuesday, August 19, 2014

Pontificating pundits... Everybody wants to be in shape, but... And notes to self (economic/market update)...

The gists from four panelists on CNBC this afternoon:

1. "It's all about the Fed. There's no wage growth to support any optimism that the U.S. consumer will become a major economic force anytime soon."

2. "Price to earnings ratios will expand to 20 (up 20% from here) and stay there for a long time going forward. This makes for a continuation of the bull market."

3. "Earnings have been all about cost cutting. There's not nearly enough top line growth to support this market going forward. It's all about the Fed."

4. "The prospects for job, and wage, growth is beginning to show up in employer surveys. As this shows up in the real data, the Fed's going to have to rethink present interest rate policy. And that'll be a headwind for the market"

As you can see, the folks the media trots out are kinda all over the place in their assessments of today's economy and stock market. As for my take on the above: I disagree with number one. Number two is possible, but, frankly, it's too arrogant an assumption on two fronts. One: it's an outright market prediction. And two: it requires that interest rates remain very low going forward. I think for this bull market to continue longer-term, we're going to have to see earnings continue to improve, while maintaining P/E's in the mid to high teens.  Number three is basically correct (save for the "it's all about the Fed" part), however, revenue growth was better last quarter, and I like a market that consists of lean companies. I.e., when revenue materializes, a great deal flows to the bottom line. I agree with number four.

Everybody wants to be in shape, but nobody likes the pain it takes to get there:

In recent conversations with clients, I'm sensing an increase in anxiety over a potential near-term correction. I tell these folks that a near-term correction would be a beautiful thing in my estimation. We must never forget that a market is made up of buyers and sellers, who, by nature of the fact that each is either a buyer or a seller, think differently about the present state of the market --- or at least a particular stock or commodity. Aside from the fact that the market needs sellers---which means to keep sellers, sellers are going to have to be right every now and again---without corrections there'd be no correcting. Of course everybody wants to make money in the market. And, clearly, long-term, the market has delivered. But what it requires of those whom it would reward is the willingness to endure the pain of the occasional correcting process (and nobody likes pain). Sometimes it comes in the form of a 10-20% "correction", other times it comes dressed as a bear that'll maul the market by more than 20%. Oh, and by the way, I don't view intelligently rotating between sectors based on valuations and perceived cycles as market-timing...

Here are the highlights from my notes to self over the past few days.

AUGUST 15, 2014

Very good industrial production report today, up .4% vs .3% estimate. That's six consecutive months of gains. 1.0% manufacturing output, largest gain since February. Capacity utilization ticked up .1 to 79.2 for all industries. Still not, overall, into the 80s, which is that inflation-risk zone. However, mining at 89.4 is 2% above its long-term average. Auto production was huge in July. This report strongly supports my opinion that the U.S. economy is finally beginning to look like an economy in recovery...

UNIVERSITY OF MICHIGAN CONSUMER SENTIMENT DISAPPOINTED NOTICEABLY: Which contradicts other indicators, and my own recent assessment that consumer optimism, along with various surveys, conclude that the consumer is coming back strong. My observation over the years is that the stock market tends to noticeably impact this reading. Recent volatility may have influenced the results. Regardless, this particular report does not paint a rosy picture for consumption (and, therefore, GDP) going forward. Which very much supports the Fed's present easy-money posture.

AUGUST 18, 2014

The National Assoc of Home builders/Wells Fargo sentiment index came in at 55 up from 53 and vs a 53 estimate. NAHB Chairman says, "As the employment picture brightens, builders are seeing a noticeable increase in the number of serious buyers entering the market." Builders, while optimistic, continue to harbor concerns over tight lending conditions and shortages of finished lots and labor. The six-month sales outlook component advanced to a one-year high of 65, from 63 in June.

As I suggested to a client this morning, who is considering up-sizing, the now positive trend in employment should foster a pickup in the housing market.

The stock market rallied over 1% today..... apparently on reports that Russia and Ukraine are considering a truce. My eyes are on Eurozone equities---despite the present economic weakness there---as valuations look compelling and we could see a nice bounce on a pickup in sentiment and the beginning of QE from the ECB.

AUGUST 19, 2014

July CPI came in at up .1%, which was at the forecast. Core (ex food/energy), was up .1% as well, which was under the forecast. The Fed's supposed inflation target is 2% annual, which makes today's CPI not a worry for those focused on the first hike in the Fed Funds rate. Besides, CPI is not the Fed's chosen measure. It's PCE (which tracks how folks actually spend their money [they eat more hamburger & chicken when the price of prime rib goes up) that the Fed focuses on, which generally runs somewhat under CPI.

HOUSING STARTS jumped in July at the highest pace in eight months. Which buoys home builders, per yesterday's optimistic sentiment survey results. New home constructions was up 15.7%, or 1.09 million annualized. June's was revised up to 945,000. This makes sense given what I'm seeing in the employment components of most surveys. I.e., folks---notwithstanding last week's consumer sentiment reading---are probably beginning to feel better about the long-term sustainability, and growth, of their wages. Also, there's a large contingent of Chinese buyers moving into select markets, like northern and southern California. This speaks to my long-held view that the trade deficit is an utterly meaningless statistic. The money with which Americans buy Chinese goods always returns to America to either buy goods or assets. When someone from China buys an asset in the U.S., it of course frees up new capital right here in the U.S. It's a very good, and unavoidable, phenomenon.

The stock market rallied again today, as good news (housing) and inflation, turned out to be good news for equities. Had the CPI come in much higher, I suspect we'd have seen the market trade lower, as Fed watchers would've become nervous.


Saturday, August 16, 2014

"You Didn't Build That!" A great, and so effective, political line that'll never die...

EJ Dionne quoting Elizabeth Warren in his May 18 Washington Post Column (HT William Anderson):
“There is nobody in this country who got rich on his own,” she said. “Nobody. You built a factory out there? Good for you. But I want to be clear: You moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police forces and fire forces that the rest of us paid for.” It was all part of “the underlying social contract,” she said, a phrase politicians don’t typically use.

Sound familiar?

I'll here attempt to turn Ms. Warren's logic on its head:

First came the risk takers. There was no government-provided concrete laid to support their foundations. As successful enterprises grew, the people saw the wisdom in promoting certain collective endeavors. While we may dispute the merits of public education, infrastructure and the like, make no mistake, the efforts of courageous, hard working, industrious private-sector individuals allowed for the establishment of this system Ms. Warren so passionately defends. Truly, the roads, the schools, the police and fire forces could not, cannot, exist without the efforts of entrepreneurs. Warren, as do all self-concerned politicians, would turn the truth on its head. She'd have us see government as benefactor to businessmen and women. When, clearly, it couldn't be more the opposite... 

Or how about something even simpler: 

Dear Mr./Ms. Businessperson,

I'm happy to pay taxes to pave roads and protect your interests, for I need you to safely and swiftly deliver to me the virtually countless number of goods and services I consume on a daily basis. Don't let those vote-hoarding politicians get under your skin. The infrastructure is there because we need you!!

I was about to close there, but I feel compelled to comment on the seedy side of government supporting business. Here's a snippet from my July 2012 essay Bending Context - or - The Truth Flatters Neither Side:
Now while there’s no disputing the former, the latter is worthy of a little deeper scrutiny. Not that the President meant ‘you didn’t build your business’, he indisputably didn’t. But when we consider the extent to which government has infiltrated the private sector, perhaps those who would bend context to their political benefit may be (entirely by accident) onto something. Perhaps there are businesses in our midst that in fact wouldn’t exist were it not for government favor. Perhaps, in essence, there are executives who indeed deserve the charge ‘they didn’t build that’. Think GM, Chrysler, AIG, and God knows how many other financial institutions and green energy firms that’d be gone were it not for American-style cronyism. Perhaps the liberals are every bit as culpable as the conservatives when it comes to cozying up to big business. Perhaps they’re just better at concealing it.

And lastly---back to my main point---just stumbled upon this one from January 2013:
Clearly, the President was simply stating that you, the business owner, didn’t build the roads and bridges. That your individual success was the result of group effort. That you received instruction. That you, in essence, received help (from people pursuing their own interests). And of course he was right.

You, the business owner, did not personally build what Mr. Obama says you did not personally build. And yes, you use infrastructure that 51% of the populace (including you) pays taxes to maintain. I do, however, have a serious gripe with the President’s lead-in to “you didn’t build that”: That would be the notion that you have been “allowed” to thrive by the grace of “this unbelievable American system”. Allow me to state, emphatically, that the President (as politicians tend to do) has put the proverbial cart way before the horse. Meaning, frankly, vice versa; “this unbelievable American system” has been allowed to thrive by the grace of hard-working, entrepreneurial-minded individuals. To say that government deserves credit, unless you’ve paid for political favor, for the success of your business, is like saying that your dog is responsible for your physical health because of the exercise you get while cleaning up his crap in your backyard day after day after day. Thus, if you’ll over-feed him and extend your fence, you’ll become remarkably fit. Ridiculous! The fact is you allow your dog to dirty your yard because you made a commitment back when he was a puppy (when he was smaller and his piles of crap were easier to manage), and you can still afford to feed him. Not that he doesn’t offer some utility—perhaps he barks off the occasional intruder—you just have to make sure he doesn’t ultimately destroy your landscape and eat you out of house and home…

Friday, August 15, 2014

Expensive game for Putin...

If you're in that camp that thinks Putin's recent rhetoric with regard to deescalating the Ukraine situation is just that---rhetoric---think again. Here's a snippet from GEI's What We Read Today 15 August 2014:
Rosneft asks Moscow for $42bn (Jack Farchy and Kathrin Hille, Financial Times) The crunch of sanctions is starting to show as the huge government owned energy company Rosneft asked the government for $42 billion to offset losses resulting from the western action. One of Putin's most trusted economic advisors has said sanctions would cost Russia "at least" $200 billion over the next three years.  

Putin's Ukraine gamble hastens exodus of Russian money and talent (Guy Faulconbridge, Shadi Bushra and Jack Stubbs, Reuters) Russia is paying a big price for Russian President Vladimir Putin's adventures in Ukraine. Reuters reports that capital outflows are as much as 3-4 times normal and may reach amounts as high as 10% of the country's GDP in 2014. And capital inflows which normally somewhat balance outflows have gone to zero. And some of the top talent in Russia is fleeing as well. From Lev Gudkov, director of the independent Moscow-based Levada Centre pollster:  "We are losing the most educated, most active, most entrepreneurial people."

To remain in that camp you have to believe that Putin is willing to exacerbate the economic damage already delivered onto Russia and, therefore, to put his reign at risk personally destroy his own political career. Of course you may be right..... but I wouldn't bet on it.

Market commentary (audio)

Click the play button for today's commentary:

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Thursday, August 14, 2014

Market update...

Each day I pen a few notes to myself about the world's goings on. This essentially helps me track what I see as important trends and to gauge my commentaries to clients as well as our allocation recommendations. The fact that I will, from time to time, share these notes  (easier than a whole new essay) should in no way give the impression that we're approaching the business of investing from a short-term perspective. And while I've been sounding pretty optimistic on the economy of late, please don't read this as a prediction on the market going forward. As I've maintained, this year's economic pickup thus far only validates last year's results...

Here's today's (cleaned up for your reading):

August 14, 2014

German and French GDP numbers came in poorly. We're going to see fairly aggressive QE coming from the ECB in the near future, I suspect. While the Eurozone economy looks suspect, I'm bullish on European stocks going forward. I'm assuming that current conditions reflect Russia/Ukraine to no small degree and that traders will respond favorably to QE... initially...

Weekly jobless claims in the U.S. shot back up to 311k, vs 295k estimate. That was disappointing and counter to the recent trend. However, the number is near previous expansion lows. So, as I heard one Bloomberg commentator report, they can only stay relatively flat or edge up from here. So, not necessarily horrible news.

The recent decline in commodities (virtually across the board) is an interesting development. With regard to grains, it's simply about bumper crops. With regard to industrial metals; it virtually has to reflect recent sketchy results out of Asia and the slowdown in Europe. The PMI's are showing pretty steady increases in the price of manufacturing inputs, so it'll be interesting to watch the trend going forward. If (IF!) the U.S. economic trend continues and can lead the rest of the world, you'd want to own industrial metals here. Oil is a bit of a conundrum... in that it began declining amid the turmoil in Iraq. Some commentators view it as a harbinger of a slowing economy (U.S. even) to come, which contradicts other indicators. The beauty of lower energy is its stimulative effect. If it's not discounting a slowdown (or if those commentators are wrong), it'll add "fuel" to the economy, or mitigate the slowdown. Could also be traders anticipating a stronger dollar --- as Europe begins printing money and U.S. interest rates begin to rise (although I haven't heard anyone pose this). Of course the end of the summer driving season is upon us, which (reduced demand) tends to depress the price somewhat.

Walmart made its number (surprisingly to some), while JC Penny beat... These two reports contradict this week's retail numbers and Macy's report. Many pundits are using this week's data to proclaim that the US consumer is still missing in action. I entirely disagree (sentiment and producer surveys re; hiring and wages tell me that the consumer is likely on the rise and that it will reflect in future numbers). That said, I'm still not crazy about discretionary stocks --- although their valuations (particularly PEG [p/e to earnings growth) have come back down to where I'm now neutral, as opposed to bearish (where I've been)...

Putin pledged to do what it takes to end the violence in Ukraine... There are hordes of skeptics, and I suspect justifiably so. However, as I've maintained from day one, Putin the businessman/politician wanting to survive can't go the distance (not even close)---beyond Crimea---on Ukraine. A recent NYT columnist virtually declared the end of globalization and totally poo-pooed we who believe that it leads to a more peaceful world. She cited Putin's antics as proof... I suspect she's on the verge of looking very foolish, which I'll for sure point out on the blog...

The stock market is having a decent week despite the weaker global economic data... I suspect it's about Putin, along with, ironically, the weak data (taking the heat off the Fed for the moment)...


Monday, August 11, 2014

A reason to be bullish...

If you want to feel good about present market conditions, forget about the good economic data I've been reporting of late. Like I've said, that only validates last year's gains, and needs to get even better to justify higher highs from here. And that's while being tested by attendant (it'll happen) higher interest rates.

Now here's something to get legitimately bullish about (but don't hold me to it): This graph (click to enlarge) showing bearishness (yes, negativity toward the market) has spiked to nearly a 52 week high (HT Barry Ritholtz):

photo (8)

As Sir John Templeton presciently put:

"Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria."

An idea for the "task force of mayors"...

Here's an excerpt from yesterday's New York Times article Task Force of Mayors Address Income Gap
Income inequality has long existed, but the disproportion is stark when looking at how wealth has been distributed over nearly four decades, said Jim Diffley, an economist at IHS Global Insight, a worldwide information company that prepared the report using census and other data. “The purpose here was really to document the extent of income inequality,” he said.

From 1975 to 2012, the highest-earning 20 percent of households markedly outpaced the lowest-earning 20 percent in America. In 1975, the wealthiest households captured 43.6 percent of the nation’s income, while the poorest had a share of 4.3 percent. In 2012, low-income households saw their share drop to 3.2 percent while the high earners saw their share jump to 51 percent. “From the mayors’ standpoint, is this something we can grow out of or should we come up with policy to ameliorate the problem?” Mr. Diffley asked.

Hmm.... "captured"... Let's change the feel of the above and use "generated" instead:
In 1975, the wealthiest households generated 43.6 percent of the nation's income, while the poorest generated 4.3 percent. In 2012, low-income households generated 3.2 percent while the high earners generated 51 percent.

Make no mistake, there's not some preset quantity of income out there to be "captured", or distributed by some central body. That thought is ludicrous. One generates one's income by providing goods and/or services others produce goods and/or services (to generate income) in order to obtain.

Yes, there are actors in the economy who produce little of value or, worse yet, destroy value and yet get by. Like, for example, politicians and failed bankers. Understand, however, that those actors only get by as a consequence of government intervening into market processes. Bankers would---on occasion over the years---have personally failed were it not for taxpayer-funded bailouts. And politicians... well, with the way they allocate resources, they couldn't even begin to breathe the air of a true market environment.

So, does "the gap" really matter? Think about it. Why would it? Why would we even measure such things, other than out of pure envy or for political gain? What must occur in order for the vast majority of high earners to become high earners? They would have to produce value that exceeds their earnings. Right? I mean, would you pay someone as much or more than what you deem to be the value of his/her services to you? Of course not! You'd only pay for services that you value more than the money you paid.

So what should we measure? Perhaps simply the number of poor folks? And what can a "task force of mayors"---if they're truly interested in helping poor folks---do? For starters, they can lobby against the obviously destructive intrusions into employer/employee contracts. Such as minimum wage laws. Which price a large percentage of uneducated folks entirely out of the workforce---as those folks are too often unequipped to produce value in excess of mandated wage levels.

Sure, in theory, you can tax producers at a higher rate and use the take (what's left after it's sifted through government that is) to pay to educate/train poor folks. But wouldn't it make more sense to allow actual employers to invest directly in the training? The money government would have taken in tax hikes---without minimum wage laws---would be used to bring poor folks directly into the workforce; as employers could pay wages low enough to allow for the expense of training and have it still be a productive experience. How much faster would poor folks learn real skills? And, thus, become truly self sufficient? How much better would the economy be if resources were actually allocated to their most productive use?

Here's Milton Friedman:

Saturday, August 9, 2014

A thoughtful PhD on inequality...

If you're interested in seeing beyond the politics of inequality, watch this interview with Dierdre McCloskey (HT Don Boudreaux). She's the thoughtful sort of PhD I referred to in yesterday's blog post.

Here's a snippet:
I think we need a rethink of market economies. We don't want to throw them away, they're a fantastically valuable tool for helping the poor. They're so much larger, in effect, than any redistribution we can do. Since 1800, incomes per head in places like Britain and the United States have increased by a factor of twenty or thirty. That helps poor people a lot more than a five or ten or fifteen percent redistribution. It's twenty-nine hundred percent, as against fifteen percent.

Might have been worse if the news was better...

Last week was beautiful from an economic reporting standpoint---in the U.S. that is. Weekly unemployment claims came in below 300k, with the four-week average now at 293,500, the lowest it's been since February '06. Retail sales came in strong and PMI (Purchasing Managers Index) readings for the services sector came in noticeably better than expected, following very strong results for the manufacturing PMI the prior week. All confirming what I've been reporting of late, that the U.S. economy is on the move.

And that's... well, beautiful, right? Right! That is if you're a long-term investor, or someone looking for a job. If you're a short-term trader who's long this market (holding stocks), particularly one who's obsessed with the Fed, you're not so jazzed about these numbers. For---should the economy further pick up the pace---it would bring the expected timing of the first rate hike into question. Fed funds futures have been pointing to the second half of 2015 and, for the time being, traders seem fine with that.

In terms of recent volatility, we can legitimately attribute it to geopolitical risks. Last week was quite the roller coaster ride, with Friday's rally bringing the major averages into positive territory (for the week). The question is, without the geopolitical, would the market have performed better or worse? Instinct might say better, but I'm not so sure.

Last week's economic numbers---ex the global concerns---might have spooked traders who fear Fed tightening into hitting the exits. Ironically, all this uncertainty may actually have muted what otherwise might have been a more meaningful correction---in that it might very well keep the Fed on hold for longer. At a minimum, it offers cover for those on the Fed who have no interest whatsoever in raising interest rates in the foreseeable future.

I know, it's WAY too soon to call an end to the current sell-off. Things could heat up in any of number of places in the world that would send the market into a tizzy come Monday morning. I'm simply suggesting that the present international turmoil not only takes the focus off the Fed, it could eventually cool the economy to the point where the Fed gets to remain easy longer than even they currently anticipate. Of course then the market would have to contend with a cooling economy...





Friday, August 8, 2014

A no-brainer (i.e., brainless) proposition...

Just watched a Bloomberg taped interview featuring a Standard & Poor's economist making the case that income inequality slows economic growth. Then read Paul Krugman bouncing up and down atop that bandwagon in today's New York Times.

The S&P economist stressed education as one answer to this perceived economic problem. Krugman, on the other hand, goes right for the jugular with the no-brainer "solution", tax the rich (a place the S&P economist didn't go, by the way). Not, mind you, the "no-brainer" in the sense that it's the obvious "solution", but in the sense that raising taxes on those who made and maintain their fortunes by producing the goods and services the masses most desire, and filtering that take through the fingers of politicians who---with all their personal incentives---produce virtually nothing of value, is an utterly brainless proposition.

You don't need a PhD in economics to understand that if we raise taxes on producers we get less production. And if we get less production, we get less opportunity for everyone, especially those at the lower rungs of the economic ladder.

Apparently, in fact---in that Krugman has a PhD in economics---it takes something more. Like truly caring about those in need (which would inspire a thoughtful PhD to offer up legitimate strategies that might help them become productive)---as opposed to caring only about promoting your personal stock by bolstering the biases of your audience.

"You simply cannot time these things!"

Here are two snippets from last night's market update:
Earlier this evening I received a news alert that President Obama has indeed authorized air strikes against Islamic state militants if they advance toward the city of Erbil, where the U.S. has diplomatic personnel. Upon receiving that alert I took a look at U.S. stock futures prices, as well as how the Asian markets were trading, and, as I suspected, everything was getting hammered. Dow futures were off over 160 points, and Asia was just plain ugly. Then, a little while ago, China’s most recent trade data was released, which showed its exports surging way beyond any economist’s expectation. As I type, the Shanghai index has rallied into the green and Dow futures have recouped about a hundred points. But don’t hold your breath: Barring the announcement of Russian troops doing a 180 by sunrise in the U.S., I’m doubtful that the China data bounce will hold. That said, I can’t tell you how many times over the past 30 years the market has totally surprised me and traded against what the headlines portended. You simply cannot time these things!

I’ll take a look at present short interest (tracks bets made that the market will drop) and the put/call ratio (another key sentiment indicator). I expect to find bearishness up, and traders looking to make money on a further decline. Which ultimately sets the stage for those out-sized upward bounces (as short sellers cover their positions [buy stocks] to avoid getting creamed when the market turns back around) once things begin to calm down. Don’t know when that occurs, or from what level, but that’s a prediction I’m very comfortable making (as long as I’m not guessing when it occurs).

Well, rumor has it that Russian troops are literally doing a 180. Which means---for only this moment mind you---that things have calmed down a bit. Which, as I suggested might happen, had bears covering some of their bets. Hence the 185 point bounce in the Dow. Again, that was an easy prediction to make, but utterly impossible to time (wasn't expecting it today). And who knows, with the current fixation on geopolitical conflicts, where next week takes the market (good thing you're a long-term investor, right?).

You've heard the old guard warn that Putin has ambitions that give zero regard to Russia's economy. While I don't doubt that if Putin were true to his ideology that this could morph into a holy mess, as I've suggested from day one (then here and here and here), Putin the politician, the global deal-maker, has to know better. His challenge now is to somehow withdraw while saving face with his people. I think...

Thursday, August 7, 2014

Market Update...

I must at this point concede to the notion that the present focus for short-term traders is all about geopolitics---and no longer (for the moment) about fears over when the Fed will adopt a tighter-money policy (begin raising interest rates). In fact, present geopolitics should serve to alleviate those concerns for the time being.

Today's trading clearly told that story: Stocks traded in the green early in the day immediately following news that Vladimir Putin met with the presidents of Belarus and Kazakhstan to explore ways of ending the fighting in Ukraine. But traders later retreated when NATO's Anders Fogh Rasmussen indicated that Ukraine has his organization's support should Russia take military action, along with news that the US and Turkey were considering airstrikes in Iraq. The Dow closed down 75 points (.46%), the S&P 500 was off .46% as well, and the NASDAQ finished the day down .56%.

Earlier this evening I received a news alert that President Obama has indeed authorized air strikes against Islamic state militants if they advance toward the city of Erbil, where the U.S. has diplomatic personnel. Upon receiving that alert I took a look at U.S. stock futures prices, as well as how the Asian markets were trading, and, as I suspected, everything was getting hammered. Dow futures were off over 160 points, and Asia was just plain ugly. Then, a little while ago, China's most recent trade data was released, which showed its exports surging way beyond any economist's expectation. As I type, the Shanghai index has rallied into the green and Dow futures have recouped about a hundred points. But don't hold your breath: Barring the announcement of Russian troops doing a 180 by sunrise in the U.S., I'm doubtful that the China data bounce will hold. That said, I can't tell you how many times over the past 30 years the market has totally surprised me and traded against what the headlines portended. You simply cannot time these things!

I guess I should clue you in on the technicals as well: To add insult to the bulls' recent injury---even after the China bounce---S&P 500 futures are trading below their 100 day moving average, which has been a strong technical support level of late. Breaching that could trigger further technical-based selling.

When I'm better positioned (currently away from the office), I'll take a look at present short interest (tracks bets made that the market will drop) and the put/call ratio (another key sentiment indicator). I expect to find bearishness up, and traders looking to make money on a further decline. Which ultimately sets the stage for those outsized upward bounces (as short sellers cover their positions [buy stocks] to avoid getting creamed when the market turns back around) once things begin to calm down. Don't know when that occurs, or from what level, but that's a prediction I'm very comfortable making (as long as I'm not guessing when it occurs).

And, lastly, to bring it all home, as of today's close the Dow and the S&P 500 are both off a little more than 4% from their recent peaks. Meaning, we're not quite halfway to a 10% correction---which used to occur on an annual basis. So, while things may indeed get worse before they get better (safe to expect they will), thus far---from a historical stock market perspective---these geopolitical events have, surprisingly, been virtual nonevents.

I'll keep you posted...

Tuesday, August 5, 2014

Is it the bad news, the good news, or the technicals (or all 3) that has the market rattled?

Today brought us good news from the retail sector (same store sales up on the week), which prompted Johnson Redbook to up its August estimate to 4.5% annualized growth, which denotes a nicely expanding economy. Better yet, the ISM's non-manufacturing (services) index came in strongly above the consensus estimate (58.7 versus 56.5), with the new orders component showing its third highest reading on record. The overall pace of expansion bests any seen since 2005.

So why the sell-off in stocks? Well, the headlines suggest it was Russia. Could be. But I'm thinking it's more about the confusion over what happens when the Fed begins to normalize (raise) interest rates. News like the above serves to heighten the fear in those who are fixated on the Fed. Another wrinkle on today's trading is the S&P 500's breaking below what technicians consider a key support level (1,926). The number of programmed stop losses at that level, I assure you, was nothing to sneeze at. The triggering of which (the sell orders) had to exacerbate today's downward action as well.

I can go on ad nauseam about what makes a market, about how we're so overdue for a good double-digit pullback, and how that would be a beautiful thing (for the long-term investor) right about now. But of course I've made that point ad nauseam over the past year+. So you're spared. At least for the moment.

I'm thinking the best I can do for today is direct you to my blog post from Sunday (it speaks a little to the technicals and a lot to the fundamentals). If you haven't taken the time to take that one in, and you're at all unnerved by recent volatility, by all means take the 10 minutes.

Be back with more soon...



Sunday, August 3, 2014

One simplician's view of the market...

As you might imagine---after last week's market action---this weekend brings me greater than the usual volume of investing and trading (two different things btw) opinion articles to consume. I find the technicians particularly fascinating. These are the folks who produce colorfully-lined charts showing trends, support and resistance levels against moving averages, volume, relative strength, breadth and a number of other important (in their views) indicators to assess and draw conclusions from.

I'm not much of a technician, I'm more into the fundamentals: The state of the economy, of corporate balance sheets, of earnings and the like. I pay very close attention to valuation metrics---like, but not only, price to earnings (p/e) ratios---and I plot historical relationships between them and market movements to get a feel for whether stocks are relatively expensive, cheap or fairly valued. Which I suppose (that trend/chart-watching), essentially, makes me a bit of a technician. Honestly, I consider myself a simplition. I gather information and I apply what I believe to be simple common sense.

Not to say that the market, with all its nuance, is the least bit simple to understand. Or that we live in a simple world. Not in the least. I simply see the market for what it is; the place where people buy and sell companies. As with any other transaction, when we're talking stocks, one party sees more value in cash (or what he can purchase with it) versus the stock he presently owns, while the other sees more value in that stock than he does whatever else he might purchase with the cash he presently holds. So the latter hands his cash to the former, and the former hands his shares to the latter. Last Thursday, those who saw value in shares of stock, saw it 300+ Dow points cheaper than where they saw it on Wednesday. It's really that simple.

(Yes, the machine has infiltrated the process. Computer programs set to trade on various signals can occupy either or both sides of a trade. Which, in essence---in that the programs are acting on behalf of their programmers---doesn't alter the dynamic.)

Well, yeah, but we all want to know why. Why, at any given moment, do some folks value cash more than the shares of a given company's stock, and vice versa? Yes, that's where things get complicated. Of course only they can tell you. But, surely---as there are technicians and fundamentalists---different people can see entirely different things when they look at a share of stock.

Some see stocks as commodities in and of themselves. They see ticker symbols that move up, down and sideways in price. They speculate as to where the price of a given symbol is headed, then trade accordingly. Not to suggest that they are entirely oblivious to what the underlying company (or companies [in the case of a diversified investment product]) actually produces, but that's not their focus. They have zero interest in riding a business model to fruition. They're in the market to make money right now. I would call them traders, as opposed to investors. That ain't me, but, hey, more power to em! The market needs liquidity, and traders provide it.

To others, like yours truly, stocks represent ownership in companies. We would be your investors. We're looking to participate in the success of the companies that produce goods and services for a world of consumers. Our portfolios, over time, rise and fall with the business prospects of the companies whose shares we, or the vehicles we invest in, own.

Which brings us to the topic of the day: What, in the opinion of one simplician, are the prospects for the companies whose stocks trade on the world's exchanges in the summer of 2014?

Before I offer up my view, I want to be very clear that my generally positive take on the present prospects for a growing economy and growing company earnings may not translate to a near-term advance in the major averages. For one, in the short-run, the technicals matter (in that lots of folks trade on them). And for another, not all fundamentalists, I'm sure, share my views. Of course that (buyers and sellers) is what makes a market.

As for the U.S.---which is where we'll remain for today---the economy, while not setting records, is clearly picking up. The Purchasing Managers Indices---for both the manufacturing and the service sectors---among other indicators, are showing strong signs that on balance business, both current activity and the forward outlook, is improving. And it's beginning to show up in corporate top-line results, in GDP, in the employment numbers, etc. The thing is, the price of your average share of stock is, in my view, largely discounting recent results already. Meaning, for stocks to move measurably higher, a better economy will have to translate into better corporate results. Which, of course, it should.

So why the recent volatility? Once again, technicals matter (and some charts are looking suspect), and not everyone sees eye to eye on the fundamentals. There is a contingent out there that believes that this bull market has been all about the Fed and what it sees as ultra-easy monetary policy. To it, a growing economy spells the end of easy money, and the end of easy money spells the end of the bull market. While, on its face, that sounds too, well, simple, I could take that one---drill down a bit---and run with it. To make that a plausible position for me, I would not have to concur (which I don't) that the Fed made this bull market, I'd simply have to assume that present stock valuations fully discount all this economy can produce, and that a change in monetary policy (from easy to tight) is a classic sign that the economy is entering its final phase of expansion. Or, as some assert, that nothing can kill a bull market faster than a tight-money Fed. In either case, sympathetic market timers would sell at these presumably peak levels and wait for the coming recession/bear market to open the valuation door to re-entry.

To justify that position, I'd start with this graph showing total U.S. GDP (green) along with the total value of the U.S. stock market (yellow) (sadly, the Bloomberg data on total market cap doesn't go very far back). Notice how the total value of all U.S. stocks has quickly caught up to the total output of the U.S. economy:    Click on any of the following graphs to enlarge...

photo (1)

Then this graph showing how, historically, raising the Fed Funds Rate (white) has tended to precede economic (yellow) contractions:

photo (2)

Then this one showing how the stock market (yellow) tends to follow the economy (green):

photo (3)

I'd then conclude (although I could offer yet more visual support)  that history virtually assures that this bull market, if it isn't kaput already, is on its very last leg.

Well, not so fast. Remember what I said about corporate results, meaning earnings. Take a look at this graph which shows how earnings (blue) for S&P 500 stocks exploded off the 2009 bottom and ran at a faster pace than the index (yellow) for the next couple of years. The index, of late, has simply been catching up to where earnings suggest it should be:

photo (4)

Now take a look at this historical S&P 500 price to earnings graph. Notice how the present 17ish level is by no historical means anything to loose sleep over:

photo (5)

And this one showing the relationship between GDP growth (yellow) and corporate earnings (blue). See the strong correlation?

photo (6)

So what should we expect from earnings if the economy continues to expand from here? That's right, we should expect them to rise as well. Now look again at the graph fourth from the top. See what history says happens to stock prices when corporate earnings are on the rise?

And, lastly (but I could show more), here's one that charts the S&P 500 (yellow) against the 10-year treasury yield index (white). Not much, historically-speaking, to worry about when interest rates begin rising (although, as I've cautioned of late, I have a sneaking suspicion that this time around---given the Fed's extended easy policy---the stock market may not initially follow the pattern of those lines presented on this last chart). 

photo (7)

Hmm... I guess we should conclude that this bull market---intermittent volatility notwithstanding---has yet to even catch its stride.

Well, not so fast. In the fall of 2007, before the great fall of the stock market, I could have shown you plenty of graphs suggesting that stocks weren't nearly in bubble territory. Ah, yes, but the bubble wasn't in the stock market, it was in real estate. And upon its bursting, earnings plummeted and took the stock market with them. However, today, the U.S. real estate market---while having definitely improved---is still struggling to gain some traction. Plus---while the sentiment indicators lean toward bullishness---the tell-tale euphoria (recall what folks were doing with their home equity back then) that often proceeds big blow offs seems nowhere in sight.

So what about bonds? While not everyone agrees, I do see bonds as a big fat bubble. The good news is that while not everyone agrees, lots of folks do, and it's seldom the punch you see coming that knocks you on your butt.

This all (I know it was a lot) brings me to my simple, yet all important, point: The fact that I can offer up real data suggesting that the market is a-ok at these levels is nice, for I know you sometimes worry about this stuff. But there's no guarantee---as I stated above---that this time around this data spells higher highs for stocks. Or, as is always the case, that some black swan (unforeseen happening) can't swoop down and---without a whisper of a warning---take the market with it.

When it's all said and done---all my charting and analyzing notwithstanding---here's why I sleep like a baby:

A husband and wife (clients) stopped by last week to discuss whether they should pay cash or finance a brand new pickup at zero interest. With permission, here's a snippet from the email that inspired our meeting:
My daughter is in the process of purchasing a house in the Sacramento area and of course, she wants me to install tile on the kitchen floor and wood flooring in other parts of the house. I was originally planning on purchasing a pickup in a year or two, however, it looks as if my plans just got accelerated.

Yes, the husband's retired and has discovered all sorts of hidden talents, and time, for his family to exploit. And he gladly accommodates.

His daughter I suspect submitted her request through some miracle of wireless technology that she and Dad both possess. Technology that will seem utterly outdated in short order. Son in law will drool over his wife's pop's new truck and tell her he's got to get one of those. Daughter, if she's anything like her folks, will remind hubby that they just bought a new house (in need of remodeling) that'll be housing a future youngin or two, and that they need to start thinking about college for him/her/them and saving for their own retirement. Nevertheless, hubby will someday negotiate himself into that new truck and, in the meantime, they'll not want for the latest technological innovations that'll organize their lives (nor will all the folks responsible for bringing Pop's truck, their home, the remodeling materials, the takeout lunches for Pop, the gas that'll get him to and around Sacramento, etc., etc., etc., to market). While their savings will provide growing capital for the companies that produce the goods and services they and billions of others, the world over, will utilize in the years to come.

I, the simplician, simply want to own those companies as they (the good ones) forever innovate and grow with their customers. The inevitable, and unavoidable, ups and downs simply reflect the market's growing and pruning of those enterprises---and our expectations---along the way...