Your Weekly Update AND Correction History AND A Contrary View on the Prospects for Emerging Market Equities

At last, and halleluiah!!, a correction!

While every one of our clients has heard me preach from the get go that corrections are healthy bull market phenomena, clearly---as they occur---not everyone buys that line. Here are a few of the inquiries/comments I've fielded over the past few days:

"Should I build a bigger cash position?"

"What strategies do we need to take in order to stop the bleeding in our portfolio?"

"I'm afraid it'll take two years to recoup."  (I have no clue where the 2 years came from)

"Should we get out and buy CDs?"

"At our age we're afraid we won't live long enough to recoup."

Actually---believe it or not---I think that's all of them (the fearful ones). Although, I strongly suspect many more have been having similar thoughts.

Then there are those who couldn't rush in fast enough with extra cash to take advantage of what they viewed as a rare buying opportunity.

As I've expressed ad nauseam of late, while I make no guarantees, I don't see a bear market looming---because bear markets are typically things of recessions. And the preponderance of data---and, not to mention, present Fed policy---strongly suggest that a recession in the foreseeable future is highly improbable.

The chart below makes the recession/bear market case. The red areas are all of the recessions since WWII, the arrows are the bear markets (20+% declines). The arrows circled in green represent the three occasions where the S&P 500 dipped into bear market territory either after, or out of reach of, a recession. The red-circled arrows represent the bear markets we can attribute to recessions.     click to enlarge



Notice the length of the arrows: As you can see, those that occurred firmly outside of recessions were relatively short-lived. Per my recent audio commentaries, a bear market to me is one where stocks linger below that 20% dip for more than just a few months. I.e., in my view, while those three non-recession bear markets satisfy the official definition, the fact that they lasted only 6, 8 and 3 months respectively made them merely deep correction phases---and monster buying opportunities!

As for the dreaded, and inevitable, bear markets---while they are indeed painful experiences---when pictured against history's bull markets, as Business Insider has done below, we see how dangerous it can be to try and time the ups and downs.      click to enlarge



What the above chart doesn't show is all of the 10+% corrections that occurred within those blue-shaded bull markets (see the S&P, Deutsche Bank chart below). Talk about the risk of market timing!!!!

Is it really all about China?

So is it really China that's got the market all riled up? Well, the action would suggest as much. But, as I've been stressing of late, China does not pose the systemic risk the headlines and scaremongers would have us believe. And, therefore, I have to believe the smart money knows better.

Is that arrogant of me? Am I asking too much for you to adopt my view when the rest of the world says you should be worrying big time? Well, then, let's consult someone with some academic clout. In last Thursday's CNBC article Relax: China's Fundamentals are Sound, Warwick Business School Professor and senior editor of the Journal of World Business Kame Mellahi expresses the very points I've been pounding the table on. Here's a snippet:

The Chinese economy has hit some rough weather for sure, but the government still has $4 trillion of bank deposits to play with. The fact that it has decided not to use this financial firepower is perhaps an indicator that China has finally decided to let market forces play a bigger role in deciding the value of its stock market and its currency. 

The Chinese government has more levers than most that it can pull and, with such strong reserves, it still has the ability to rebalance its economy. Next year, I expect to see reforms and loosening of controls on the markets to deepen.

So if it's not China, what is it? Well, actually---all of my lecturing notwithstanding---I think it is China. But only because China's recent bungled effort to intervene into its stock market, and its ill-timed, but completely understandable, widening of the Remnimbi peg to the U.S. dollar occurred when the market was ripe for the picking. Meaning, the market, in my view, was staging for a correction; I think a Fed-induced correction.

You see, when the market's jittery, any "bad news" can send it reeling. I.e., had "China" occurred when stocks were on firmer footing, we may very well have experienced a far milder reaction. Here's the Bank of International Settlements making that point (HT Rockefeller and Schmelzer):

“Bad news in a market situation where investor risk appetite is already low is likely to result in a much greater repricing of risky assets than in periods where it is high. The dynamic stance of the risk appetite of market participants as a sentiment could thus serve as an important contributing factor in the transmission of shocks through the financial system. Furthermore, as it might itself be influenced by the situation in financial markets, it could work as a multiplier. Accordingly, taking into account the risk appetite/ risk aversion of investors and its evolution has become an important element of assessing the condition and stability of financial markets.”

Now if this "correction" got you rattled to begin with, you may now be feeling a bit relieved given the last few days' snap back. Well, please, don't! While maybe we have seen the bottom and it'll be blue skies from here, history suggests that there's a good chance the market will at least test last Monday's lows before it regains its footings. And, sincerely, I think that would be the healthiest scenario. Plus, the Fed still hasn't moved the needle on its benchmark interest rate and, alas, the government's about to bump its head on the debt ceiling once again. Yep, we're within a month or two.

The good news is we're not talking recession, we're simply talking volatility---which is the nature of the market, and the concern of only the short-term investor (whom we don't counsel).

One last note on corrections: You've heard me---and the TV pundits---say time and again that 10+% dips are, historically, annual happenings. Being that an unusually long period has elapsed prior to the one we're presently experiencing---and that the 90s saw several years without one---I figured I better update my story: According to American Funds, a 10+% correction, if we go all the way back to 1900, remains a once-a-year occurrence. According to S&P and Deutsche Bank (see below), since 1960 the number of trading days separating such downturns has averaged 357. While that's about a year's worth of trading days, when we throw in the weekends we're talking 499 calendar days between corrections. So, if we use 1978 as our starting point, the market has corrected once every 16.4 months---on average.     click to enlarge



Suffice it say, we were way overdue!

A quick note on emerging markets:

A good friend sent me an email last evening where he made an intelligent case that emerging markets have more pain coming. He referenced the headwinds posed by the impending Fed rate hike, the strong dollar and China's easy monetary policy. Yep, my friend has unusual insight into what moves global markets.

In a nutshell, here are his concerns:

A Fed rate hike, China's easing and the strong dollar concerns are all essentially one in the same. The idea is that an increase in the Fed funds rate and an increase in newly printed Chinese currency will bolster the dollar---as higher yields will make dollar-denominated debt securities more attractive, and as a central bank's easy monetary policy can serve to reduce the value of its nation's currency, thus increasing the value of other nations' currencies (read U.S. dollar). Now a strong dollar can pose severe headwinds for select emerging market economies for a couple of reasons: One, an emerging market has a problem if it holds much dollar-denominated debt, as a stronger dollar means it takes more---in home currency terms---to pay off the debt. And two, foreign investment can scurry in a hurry if the destination currency runs into trouble---which is what happened back in March 2013 when Ben Bernanke sparked the "taper tantrum". I.e., when he said that the Fed will begin to taper its asset purchases, the world viewed that as a bullish move on behalf of the dollar. And if you had borrowed dollars for virtually nothing and invested them in, say, Turkey, to net a much higher interest rate (plus, you made a killing if the dollar declined against the lira)---it's called a "carry trade"---you had to get that money back to the U.S., and in a hurry; as a rising dollar meant you'd need to come up with more lira than you originally exchanged for to pay off that U.S. loan. Emerging markets stocks literally tanked over the next several weeks.

Here's why I think that maybe my friend---while his concerns are perfectly textbook logical---will find his emerging market positions performing better sooner than he thinks. For one, everyone seems to be on that textbook-logical side of the boat. And it's been my experience that when everybody's on one side of the boat, you want to move to the opposite side---and collect a toll when the other side begins to sink and everybody runs to your side for safety. For two, while the textbook says the interest rate differential is a major currency driver, history at times says otherwise. The arrows on the chart below show periods when the U.S.'s benchmark interest rate and the dollar moved in opposite directions:     click to enlarge



For three, the dollar's already up 17% over the past 12 months. I assure you, there's been far fewer of those carry trades these days. Yes, emerging markets have indeed seen capital outflow as the prospects for higher U.S. interest rates increase, but that has to be more about equity and currency traders anticipating a textbook currency scenario playing out.

Ah, but what if the dollar actually begins to decline soon after the Fed raises rates (it's happened before)? Well, you'll likely see capital flow to foreign currencies in a hurry---exacerbating the dollar decline. And why might the dollar decline to begin with? Well, Europe's economy is picking up, and the ECB is desperate to create a stimulative wealth effect by boosting asset prices. And other central banks are in, or considering, similar modes as well. It's not much of a stretch to think that there's a good chance we'll see dollars flow to Europe, and emerging markets, in a big way---as investors look to invest where central banks are most hospitable. Plus, emerging market equities have seen some real pain of late and, therefore, are trading at ridiculously low valuations. Should the dollar waver, and should emerging market economies begin to, well, emerge from their doldrums, you may see one of those classic huge bounces that have followed so many of the emerging equity bear markets of the past.

Lastly, I should add that---contrary to popular opinion (and recent market action)---a stronger U.S. dollar isn't nearly all bad for emerging markets, as their exports become more attractive to their U.S. customers.

The Stock Market:

Non-US developed markets (EFA and FEZ below)—even after their recent pummeling—have outperformed the U.S. major averages (save for the NASDAQ Composite Index) year-to-date. Given many foreign markets’ cheaper valuations, early-stage recoveries and, yes, accommodative central banks, I remain constructive on non-U.S.. That said, there are a number of potential international hot buttons (as we've recently experienced) that could easily delay the narrowing of the gap between the valuations of U.S. and non-U.S. securities (particularly emerging markets [VWO below]). That’s why we think long-term and stay diversified!

Here’s a look at the year-to-date price changes (according to CNBC) for the major U.S. indices---and for non-U.S. indices and U.S. sectors---using index ETFs as our non-U.S. and sector proxies:

Dow Jones Industrials:  -6.62%

S&P 500:  -3.40%

NASDAQ Comp:  +1.95%

EFA (Europe, Australia and Far East):  -0.69%

FEZ (Eurozone):  -2.69%

VWO (Emerging Markets):  -13.52%

Sector ETFs:

Here’s a look at the year-to-date results for a number of U.S. sector ETFs:

IYH (HEATHCARE):  +6.29%

XHB (HOMEBUILDERS):  +6.01%

XLY (DISCRETIONARY):  +4.73%

XLP (CONS STAPLES):  -1.75%

XLK (TECH):  -1.81%

XLF (FINANCIALS):  -4.45%

XLI (INDUSTRIALS):  -8.54%

XLU (UTILITIES):  -8.62%

XLB (MATERIALS):  -10.25%

IYT (TRANSP):  -13.33%

XLE (ENERGY):  -16.95%

The Bond Market:

As I type, the yield on the 10-year treasury bond sits at 2.18%. Which is 13 basis points higher than where it was when I penned last week's update.

TLT, an ETF that tracks an index of long-dated U.S. treasury bonds, saw its share decline a whopping 3.20% over the past 5 trading days (down 2.83 year-to-date).  As I keep repeating, I see bonds in general sporting a risk/return trade-off that makes going out on the yield curve not worth the risk.

On Volatility and Timing:

Each week I share with you the very short-term (year-to-date) results for major indexes and sectors. I do this with a bit of hesitation, as I in no way want to give the impression that you, nor I for that matter, should base our long-term investment decisions on short-term movements in markets or their sectors. It can, however, serve as a reference point for how the markets are, or are not, responding to the data (which is why I, as a professional, track the short-term). While my beginning of the year optimism over non-US (developed markets that is) and the housing sector, and my pessimism over utilities, appears to be justified by recent results, I need to strongly (very strongly!) emphasize that I was not predicting what we’ve experienced thus far in 2015. Plus, while we maintained our healthcare exposure I in no way expected the gains that sector has experienced this year. Same goes for energy and materials, only in the other direction.

My optimism or concerns over a given sector or region are based on factors such as valuations, trends, supply and demand, monetary policy and cyclicality—and my comfort in making allocation recommendations rests on the view that our clients are not short-minded investors (it can take awhile, if at all, for the market to reward what I believe to be good fundamental logic) who mistakenly believe that any human being possesses a capacity for market timing. Some people get lucky from time to time, but without exception, market timers are wrong far more often than they are right. The path to long-term investment success is fraught with bumps and potholes. The ones who successfully make the journey take it slow and never over-compensate when steering through and around the inevitable obstacles along  the way.

Last week's U.S. economic highlights:

AUGUST 24, 2015

THE CHICAGO FED NATIONAL ACTIVITY INDEX came in strong for July, with its first positive reading for the year. Here's Econoday:

Production, as expected, was July's strongest component, swinging to plus 0.28 from minus 0.14 on a big upswing in the auto sector where sales are very strong. The contribution from employment was steady at a constructive plus 0.11 while the component for sales, orders & inventories slipped from 0.06 in June to only 0.01. The only component in the negative column in the month is personal consumption & housing at minus 0.06 which is, however, up from minus 10.00 in June.

AUGUST 25, 2015

THE JOHNSON REDBOOK RETAIL RECORD budged .1% last week, to 1.7%, which remains a disappointing reading. The report suggests that this year's late Labor day may be delaying back-to-school purchases.

THE ICSC RETAIL REPORT came in at 2.0% last week, which, like the Redbook's report is not historically consistent with expansionary readings. No doubt the 14.1% increase in year over year online sales is showing up in the brick and mortar numbers.

THE FHFA HOME PRICE INDEX rose only .2% in June. Year-on-year growth came in at 5.6%.
Given the recent pace of sales vs inventory, this indicator should rise noticeably going forward.

MARTKIT'S FLASH SERVICES PMI FOR AUGUST shows continuing expansion in the sector, although at a slowing pace, at 55.2. Here's from the press release:

At 55.2 in August, the seasonally adjusted Markit Flash U.S. Services PMI™ Business Activity Index1 dropped from 55.7 in July to its second lowest since January. That said, the latest index reading – which is based on approximately 85% of usual monthly replies – was well above the neutral 50.0 threshold and still close to the average since the survey began almost six years ago (55.8).

NEW HOMES SALES rose solidly in July, which confirms my continued optimism and speaks to the view that U.S. economy is indeed in a nice, albeit not robust however, expansion mode. The number came in up 5.4% at a 507k annual pace, versus 482k in June.

THE CONFERENCE BOARD CONSUMER CONFIDENCE READING FOR AUGUST showed marked improvement over July's reading.... 101.5 vs. 90.9... However, the respondents were downbeat on future spending plans!! Here's Econoday:

Enormous improvement in the assessment of the current labor market drove the consumer confidence index well beyond expectations, to 101.5 in August for a more than 10 point surge from July. A rare 6.5 percentage point drop to 21.9 percent in those describing jobs as currently hard to get points to outsized gains for the August employment report. This reading will have forecasters scratching their heads. The gain for this reading lifts the present situation component to 115.1 for a more than 11 point increase from July that points to consumer power for August.

The expectations component also shows major strength, up more than 10 points to 92.5. Here the gain reflects improving expectations for the employment outlook were optimists are back out in front of pessimists. The outlook for income also remains positive.

Buying plans, however, are downbeat with fewer planning to buy a vehicle and, in what could be an ominous indication for housing, many fewer planning to buy a house. Inflation expectations are dormant, down 2 tenths to only 4.9 percent which is very low for this reading.

The Yellen Fed has put great emphasis on the importance on consumer confidence readings and this report points to job-driven strength ahead for household spending.

THE RICHMOND FED MANUFACTURING INDEX came in at 0 vs. July's 13. The regional manufacturing reports are sending mixed signals, but, on balance, they point to continued weakness in the sector.

THE STATE STREET INVESTOR CONFIDENCE INDEX dropped to 108.7 in August from 114.6 in July... Clearly the global dynamics are doing a number on sentiment of late.

AUGUST 26, 2015

NEW PURCHASE MORTGAGE APPS rose 2% last week, up a very strong 18% year over year. Refis were off 1%. The average 30 year rate fell to 4.08%.

THE JULY ADVANCED DURABLE GOODS REPORT, while showing a large decline year over year, isn't so bad when the effect of huge aircraft orders a year ago are stripped out. The report was far above economists' expectations and showed significant growth in capital goods orders over the past few months. This is an extremely encouraging economic sign, as capex has been a sorely-missed ingredient in this current expansion...

CRUDE OIL INVENTORIES actually came down 5.5 million barrels last week. This would be short-term bullish for the oil price. GASOLINE inventories rose 1.7 million barrels and DISTILLATES were up 1.4 mbs.

AUGUST 27, 2015

SECOND QUARTER GDP, the 2nd reading, came in at an impressive 3.7% annual growth rate.  This speaks to my recent commentaries where I've expressed my view that the economy is in better shape than many would have us believe. Note the 2.1% increase in the price index in Econoday's commentary below.

The second-quarter did show a big bounce after all, up at a revised annualized growth rate of 3.7 percent which is 5 tenths over the Econoday consensus and just ahead of the high estimate. The initial estimate for second-quarter GDP was 2.3 percent. This report points to better-than-expected momentum going into the current quarter.

Consumer demand was strong with personal consumption expenditures at a 3.1 percent rate led by an 8.2 percent rate for durables, a gain that was tied to vehicle spending. Residential investment was very strong, at plus 7.8 percent, as was nonresidential fixed investment which, boosted by an upward revision to structures, came in at plus 3.2 percent. Inventories contributed to second-quarter growth as did improvement in net exports. Final demand proved very solid, at plus 3.5 percent. The GDP price index, unlike many other price readings, is showing some pressure, at 2.1 percent and just above the Fed's general policy goal.

The economy's acceleration is now much more respectable from the first quarter when growth, at only 0.6 percent, was depressed by heavy weather and special factors. Splitting the difference, first-half growth came in a bit over 2 percent which, as it turns out, is right in line with the similar performance of 2014 when first-quarter growth, again depressed by severe weather, fell 2.1 percent followed by a 4.6 percent surge in the second quarter. Growth in the third quarter last year was 4.3 percent which would be a very good performance for this third quarter.

The impact of today's report on Fed policy for September's FOMC is likely to be minimal. Focus at the upcoming meeting will be on the state of the global financial markets and, very importantly, the strength of next week's employment report for August.

WEEKLY JOBLESS CLAIMS remain well under that 300k threshold, which signals real strength in the labor market.... coming in at 271k last week.

CORPORATE PROFITS FOR Q2 rose 7.3% year-over-year. However, when properly adjusted for inventories and depreciation, they're contracting. I.e., profit margins have been coming down of late. Here's Bespoke on the topic:

... corporate margins continue to decline to levels we haven’t seen in quite some time. In the long run, this is indicative of two things, in our view: pressure on asset prices backed by corporations (equities and credit) and higher wages. On the second point, at left we show the share of gross domestic profit that goes to workers through wages and benefits. As shown, the share is highly cyclical; it tends to peak during the depths of recessions, as workers wages are typically much “stickier” than output. But we would note that the current expansion has stopped that trend, to a degree. Wage share has been moving sideways, and that’s one of the reasons the economic cycle hasn’t been moving sharply higher. Low worker shares are a weight on inflation, and the fact that they aren’t rising indicates that we haven’t seen those pressures mount. Yet. If this chart does start to leg higher consistently, it’ll be a very big deal, signifying that price pressures have once again returned to the economy. Finally, at right we show a chart that also appeared in The Closer on 7/14/15. As we discussed in that note, the depreciation of capital assets has stayed near all-time-lows as a percentage of GDP; business are continuing to see their capital base eroded much faster economically than they are accounting for financially. All else equal, this is a tailwind for growth going forward and a negative for accounted profits. Overall, the backdrop we see is very positive for: more investment spending, higher wages, less profit, and higher inflation, all relative to the past few years.

THE BLOOMBERG CONSUMER COMFORT INDEX logged its second weekly increase, coming in at 42 vs 41.1 the week prior.

PENDING HOME SALES were up .5% in July. This was a decent, but not great, showing.

NATURAL GAS INVENTORIES rose 69 billion cubic feet to 3,099 last week.

THE KANSAS CITY FED MANUFACTURING INDEX shows the KC region still stuck in teh mud. See Econoday's second paragraph below for the conditions unique to the region:

Factory activity in the Kansas City Fed's region remains in deep contraction, at minus 9 in August vs minus 7 in July and deeper than the Econoday consensus for minus 4. New orders are also at minus 9 with backlog orders at minus 21. These are deeply depressed readings that point to a long run of weak activity in the months ahead. Production is already far into the negative column at minus 16 with hiring at minus 10. Price readings in the August report are in contraction.

This report speaks to significant distress for the region which is getting hit by the oil-led fall in commodity prices. Taken together, regional reports have been mixed to soft so far this month, pointing to slowing for a factory sector that got a bit of a boost from the auto sector in June and July. The Dallas Fed report, which like this one has been badly depressed, will be posted on Monday.

THE FED BALANCE SHEET decreased by $2.1 billion last week to $4.475 trillion. RESERVE BANK CREDIT rose %70.8 billion.

M2 MONEY SUPPLY increased yet again last week by $33.4 billion...

AUGUST 28, 2015

PERSONAL INCOME AND OUTLAYS FOR JULY show real strength on both fronts. The .4% rise in personal income was the best reading since last November. Spending, led by a 1.1% gain in durable goods, jumped .3%. The personal savings rate even rose by .2%, to 4.9%. This is very good news for the outlook on the consumer-driven U.S. economy.

THE CORE PCE PRICE INDEX rose at a very tame .1% month-on-month rate in July. Year-on-year it remains entirely unthreatening, at 1.2%. Despite the fact that this the Fed prefers this measure over CPI, I believe its members see, as do I, the potential for inflation to pick up noticeably in the not too distant future. Which, on top of relatively good economic data, is, in my view, enough to allow them to nudge the Fed funds rate off of the zero lower bound this year.

THE UNIVERSITY OF MICHIGAN CONSUMER SENTIMENT INDEX FOR AUGUST disappointed, per Econoday's commentary below:

An early reading on the effect of global volatility is downbeat as the consumer sentiment index came in well below expectations, at 91.9 for the final August reading. The mid-month reading was 92.9 which roughly implies a pace near 91.0 over the last two weeks which is the softest since May.

But the effect isn't enormous as the current conditions component, where the immediate impact of market events is most felt, slipped only 2 points over the last two weeks to 105.1. This is a respectable level but is slightly lower than the 107.2 for July and points to a slight slowing in consumer activity for August.

The expectations component is only marginally lower, at 83.4 for final August for a 4 tenths dip from mid-month and a 7 tenths dip from July. Expectations for inflation are flat, at 2.8 percent for the 1-year outlook, which is unchanged from both mid-month and July, and at 2.7 percent for the 5-year which is unchanged from mid-month and down 1 tenth from July.

This report is probably a wash for the September FOMC. The doves can argue that market events in China are hurting consumer confidence but the hawks can argue that the effect isn't that great.

Market Commentary (audio)

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Market Commentary (audio)

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Market Commentary (audio)

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When "less-knowledgeable" Investors Assume...

Take in this excerpt from The Foreign Exchange Matrix, the excellent 2013 book by Barbara Rockefeller and Vicki Schmelzer:

In market contagion, the less-knowledgeable party knows that he is less knowledgeable and fears being cheated, so that he sells even when there is no evidence that the quality of the asset has changed.

I began this weekend's commentary by telling of the question a friend asked me yesterday. He simply wanted to know why the market sold off so hard on Friday. I think the above quote essentially answers his question.  

Here's more (the reference has to do with the late 90s Asian currency crisis):

When an investor knows he is less-knowledgeable, he assumes the more-knowledgeable parties have information he does not have, so he joins the stampede. Thus, when the presumed knowledgeable parties started a sell-off in overvalued Thai equities, it spread to other risky assets elsewhere in Asia and then Argentina and Russia, even though Malaysians, for example, complained it was unfair to be tarred with the Thai brush.

To bring the above home to today, insert China A share stocks in place of Thai equities. Here's more:

In many instances, the domestic investors were authentically more knowledgeable about their home assets and knew perfectly well that there was, objectively, no change in the conditions that should determine their prices – except that advanced country investors were fleeing emerging markets indiscriminately (in what investment managers term cross-market rebalancing).

Today, informed long-term U.S. investors are indeed "authentically more knowledgeable" about their home assets. But when a market correction is years overdue, traders will make the most of, and exacerbate, the kneejerk reaction to events that spark memories of contagions past. Even though today's circumstances are far removed from those of yesteryear's currency meltdowns. And lastly:

By assuming that emerging markets share the same market and economic risks to the same degree, the managers can transmit contagion in the form of falling prices even in the absence of directly relevant news, and sometimes between markets that do not, in fact, share the same risks.

Yep! And my the opportunities that develop when markets that do not, in fact, share the same risks sell off!

A Stock Market Conversation

After all of the analysis, the economic statistics, and the explaining that low commodity prices, particularly oil's, have a stimulus effect that ultimately offsets the ill, it's time to get down to what truly matters most in the business of long-term investing.

In 2008 (during the heart of last bear market) I published what I believe remains my most important essay. Here's that hypothetical conversation between an experienced adviser and his client:

Investor: My gosh, the Dow was down 250 points today! What happened?
Adviser: Stock prices fell.

Investor: Why?
Adviser: Because shareholders wanted to sell their stocks and no buyers would pay yesterday’s prices.

Investor: Why wouldn’t they pay yesterday’s prices?
Adviser: Because they didn’t see value in yesterday’s prices.

Investor: Why not?
Adviser: Perhaps they felt that yesterday’s prices were based on earnings assumptions that may not materialize this year, due to the slowing economy.

Investor: Will the economy continue to slow – will we have a recession?
Adviser: What do I look like, a fortune teller?

Investor: Uh..... so, my portfolio's been dropping almost daily since the start of the year. Why?
Adviser: Because stocks are falling.

Investor: But why are they falling?
Adviser: Because no one wants to pay last year’s prices.

Investor: I know, you told me that already. But yesterday the Dow was up over 100 points. Why?
Adviser: Because investors wanted to buy and shareholders weren’t willing to sell at day before yesterday’s prices.

Investor: Why wouldn’t they sell at day before yesterday’s prices?
Adviser: Because they saw more value in their stocks than the day before yesterday’s prices represented.

Investor: Why?
Adviser: Maybe they felt that the day before yesterday’s prices didn’t fully reflect the upside earnings potential of the underlying companies.

Investor: How could their attitudes change so much in one day?
Adviser: Now that’s a good question!

Investor: Okay, but what if the market keeps dropping?
Adviser: It will keep dropping, I guarantee it.

Investor: What do you mean?
Adviser: I mean it will always keep dropping and it will also keep going up. It’s inevitable.

Investor: How could it keep dropping and keep going up?
Adviser: What I mean is, the market will always have periods when it drops and periods when it goes up. That we know for sure.

Investor: Okay, I get that, but what about my portfolio?
Adviser: Your portfolio will keep dropping and it will keep going up. If you’re a long-term investor, you’re in luck. The market has always kept going up more than it has kept going down --- over the long-term.

Investor: But I don’t like the uncertainty?
Adviser: How much do you not like it? Are you losing sleep?

Investor: Yes.
Adviser: Then get out of stocks.

Investor: But I’ve been told they’re the best investment long-term?
Adviser: You’ve been told right, the best investment long-term – not always the best investment short-term. But is it worth losing sleep over?

Investor: But if I get out of stocks, what do I do with the money?
Adviser: Buy CDs and save every penny you can. You’ll likely have to save more to reach your long-term goals, but you’ll sleep much better.

Investor: I don’t think I’d sleep well only earning what CDs pay.
Adviser: Then learn how to sleep owning stocks.

Investor: How do I do that?
Adviser: Don’t think about your stocks. Hire a money manager and stick with your program.

Investor: When do you think the market will rise again?
Adviser: After it’s done falling.

Investor: Is there anything I can do in the meantime?
Adviser: Yes. Anything but think about the stock market.

Investor: Will the Fed lower interest rates?
Adviser: Of course.

Investor: When?
Adviser: When they see fit.

Investor: Will they lower interest rates at their next meeting?
Adviser: You’d have to ask them – but I’d guess yes.

Investor: Will that help the market?
Adviser: What do you mean? Help it go up, or help it go down? Both are important.

Investor: What do you mean?
Adviser: You can’t have one without the other. Down trends are essential for the long-term survival of the market. Kind of like taking a rest every now and then. The longer the market stays up without any sleep, the harder the sleep when it finally comes. The good news is the market has always woken up.

Investor: Can’t you be a little more helpful and just give me a forecast for 2008?
Adviser: Trust me, my forecast won't help you. And does it really matter?

Investor: What do you mean, of course it matters?
Adviser: What do you want the market to do – go up or go down?

Investor: Now there’s a brilliant question – I want it to go up, of course!
Adviser: Now or later?

Investor: Huh?
Adviser: Let’s forget about up for a moment and think about down. Since the market is for sure going to go down every now and then. Would you rather it go down now or later? Are you going to need the money you have in stocks now or later?

Investor: Later.
Adviser: Okay then, since we know the market will always go down, and since you’re not selling your stocks till later – better that the market go down now rather than later, don’t you think?

Investor: Okay I get it. But I still don't like it.
Adviser: I understand. Most people don't. But it's my hope that, with a healthier perspective, you'll stress less going forward.

Your Weekly Update AND The Way to View China AND Man, We Need Rain!!

"Why did the Dow drop 500 points on Friday?" asked my pal Dean as we took a breather between basketball games Saturday afternoon. While I've preached over the years that humility is an investment adviser's most critical trait, yesterday I completely abandoned it, and, with arrogance, answered his question: "Stocks plunged on Friday because sellers came to market and buyers wouldn't pay anywhere near Thursday's prices." Dean grinned and asked, "so why did they sell? China?". I replied "I know you read and listen to all my stuff, right?" Dean offered only another grin in response. I followed with "well, be sure to read this weekend's."

So apparently China is the new Greece. I.e., it seems like only yesterday, because it virtually was, that the world was all sideways over the Greek debt/political crisis. At the time, I reported to you that the size of Greece's economy placed it somewhere between Minneapolis and Miami---so don't sweat it (so much). Ah but China. China is a monster of an economy! Second only in size to the U.S.. Therefore, absolutely, we should be concerned about the state of its economy. Right?

Well, as the markets have dictated of late, of course! But to what extent? Good question! Let's noodle on that for a minute:

When China sneezes Apple seems to catch a cold. Why? Because Apple's sales to greater China account for roughly 30% of its revenue. That's big! Need I say more? Well, yeah, I need say more!

While China is a very big deal to Apple, using the same equation, is it a very big deal to the U.S. in the aggregate?

Well, not so much. The sum annual total of U.S. exports to China adds up to merely 0.7% of the U.S. economy. So let's say that China's economy slows to, say, 6%---which is 15% below its 2015 goal of 7%. And let's say that that slowdown equates to a 15% decline in U.S. exports to China. Well, then China's contribution to the U.S. economy drops to 0.6%. So, no big deal! Right?

Well, not so fast! China's economic well being is indeed consequential to the rest of the world. And the rest of the world is indeed consequential to the U.S.. But to what extent? To what extent do total U.S. exports contribute to U.S. GDP? Great question! The answer: A mere 13%. Hmm...

So am I saying that since 87% of the U.S. economy is not dependent on other nations buying U.S. stuff that we shouldn't concern ourselves if the rest of the world takes an economic nap for a few months, or years? Well, no. You see trade is a two-way street. And, as you may know, we Americans buy lots of stuff (lots of stuff!!) made on other shores; $2.3 trillion worth last year alone! So, indeed, the health of other nations, their ability to grow, to educate their people, to innovate and produce certain goods more efficiently than we can here at home is in no uncertain terms very important to us. So let's noodle on that for a minute.

We need a healthy China, no doubt about it. And as it attempts to reorient its economy toward services, the manufacturing sector remains its bread and butter for now. And while the stuff the Chinese buy from us doesn't register much in terms of the size of our economy, the stuff we buy from them is indeed consequential to their economy. China's exports account for nearly a fourth of its GDP. And sales to the U.S. account for roughly 20% of the total. So then, we must ask ourselves, as we get our heads around the present, and future, state of China's economy, shouldn't we direct our attention to the economic health of its largest trading partners (the U.S. and the Eurozone [China's biggest partner BTW])?  Of course we should! For, surely, the health of any organization rides on the wherewithal of the individuals and institutions it caters to.

So how are the economies of China Inc.'s largest customers doing? Well, as for the U.S., pretty darn good. While I can drown you in charts, suffice it to say that when housing starts are at an 8-year high, auto sales are near an all-time record, jobs are being created at a 2 million+ annual pace and the most recent Institute for Supply Management's Non-Manufacturing (i.e., service sector---which IS the U.S. economy) Index (a gauge of conditions derived from a survey of the source) sits at its highest level in 11 years, the U.S. economy is a-okay for the time being.

And what about Europe? While I can't say that Europe's economy is quite the success story the U.S.'s has been of late, I can tell you things are looking up. Here's a year-to-date look at the Eurozone Composite (includes manufacturing and services) Purchasing Managers' Index (above 50 denotes expansion):     click chart to enlarge

 

And here's Citi's Eurozone Economic Surprise Index (compares results with economist's expectations) since the end of May.      click chart to enlarge



So should the world be fretting to the extent it is over the prospects for the Chinese economy? Considering the above, and---to add one more---considering China's massive consumption of oil (and you know what oil prices are doing [talk about your economic stimulus!]), I don't believe the world has the story quite right---at least not for the moment.

But what about the stock market? Recent action suggests China is indeed a very big deal! Now that I can't deny.

As China struggles to reorient to a more consumer-driven economy and, consequently, its growth slows to a safer and more manageable single-digit pace, the rest of the world---having grown accustomed to years of China growing in the double-digits and, therefore, having expanded its production (of commodities) capacity to meet China's demand---is having a tough time adjusting. We're seeing that play out markedly in commodities prices and, consequently, in the economies that are driven by commodities production---and in the stock prices of commodity-producing companies, and in the stock prices of the companies that provide products and services to the commodity-producing companies, and in the stock prices of the companies that provide products and services to the companies that provide products and services to the commodity-producing companies, and so on.

Ugh! No wonder the market's getting creamed! The pain felt by commodity-producing countries and companies is rippling through to the rest of the market. Right? Well, maybe. But if bear markets are typically things of recessions, which they typically are, falling commodity prices wouldn't typically be something the long-term investor would stress over. Quite the contrary in fact---as the following chart illustrates. Notice the trend in commodity prices leading into and out of recessions. As you can see, high commodity prices typically set the recessionary stage, while low commodity prices tend to help stimulate the economy back to life.

(recessions are in red, the white line represents the JOC-ECRI Industrial Price Index and the yellow is crude oil)     click chart to enlarge



Here's Josh Brown having fun with the fear over low oil prices (read the complete article as he does the same on corporate cash, housing, etc.). HT Jeff Miller:

I bring you terrible news.

Oil prices have plunged to the point where it hasn’t been this cheap to fill up your gas tank in over a decade. Businesses that count energy as an input cost will be forced to figure out what to do with the excess capital they’re not spending on fuel.

And, lastly, on China, I don't want to come off overly sanguine. Truly, China has its issues. Not the least of which being the last few years of mounting private sector debt and a much-advertised property bubble. That said, the knockout punch is virtually never the one the fighter sees coming. I.e., the Chinese government acknowledges these issues, and with its massive store of foreign reserves and its willingness to absorb the shocks that might bring other economies to their knees, I don't suspect that China's economic day of reckoning is yet at hand.

Moving on:

I received an email amid last week's selloff from a client asking if I feel the stock market will see a near-term bounce. Here's my reply:

Yes I do, actually.... The most likely very near-term catalyst would be a Bank of China interest rate cut, reserve req cut, etc... Plus, the technicals suggest the market's way oversold... typically a short-term bounce would be in the cards...

 The dollar took a hit today against most major currencies. That, to me, is a sign that currency traders think all the current angst will take a 2015 Fed hike off the table. If the equities markets get a whiff of that, I expect a bounce. Personally, I'd rather feel more pain for now and get the Fed off of zero sooner than later (thinking longer-term)...

Bottom line: This is the market finally exhibiting a little normalcy. It's been four years since we've had a 10-20% correction (we're there in the Dow [10%], not quite in the S&P)... Barring a recession (not in the indicators presently for the U.S.), history strongly suggests we don't have a great bear market looming... 

Of course "near-term" is subjective. To my friend it may mean Monday, to me it may mean sometime in November.

As I suggested in my reply, and reported to you last Thursday and Friday, the history of experiences like last week's points to the high probability of a near-term bounce. But please make note of my view that more pain now would make for a more favorable longer-term experience.

Man, we need rain!!

I, and the majority of my readers, reside in California's Central San Joaquin Valley. We have "enjoyed" an unusually long stretch of warm weather and sunshine. So much so that we now have a liquidity problem. I.e., we haven't had nearly enough rain/snowfall the past few years and, therefore, our wells are drying up, our farming industry is in jeopardy and our skies to the east are thick with the smoke of out of control wildfires. While inclement weather will force my neighbors and I off of the golf courses, the outdoor basketball courts and our favorite fishing holes, we know we need it in the worst way.

U.S. equity investors have experienced an unusual period of warmth and sunshine. And while the parched ground under a correctionless stock market is far less noticeable than that of a waterless Fresno County farm, understand that it's there nonetheless. Yes, I equate stock market corrections to real world rainstorms. They are absolutely essential to the overall health of the market and the economy. Without them, stock prices would extend toward the sky, unsuspecting individual investors would throw caution to the wind and plant every penny to their names into the market---sucking every drop of liquidity (ready cash to buy the dips) out of the ground until it cracks and gives way to a great bear market that would swallow their life savings. Leaving them stricken with panic and eventually selling the remnants of their portfolios to the Warren Buffets of the world, who will hold patiently while the soil---then fertilized by the rotted froth that accumulated during the overdone expansion---soaks up the rain and ultimately bursts forward the next great expansion/bull market.

Folks, I know last week made you nervous. But understand that intermittent corrections are blessings to bull markets---and we're way overdue! As I've been reporting, the ground under today's stock market (the economy) tests pretty good for now. So, at this juncture, the worst case scenario is likely the long-overdue 10-20% correction (i.e., it could get worse before it gets better). Although, and of course, I make no guarantees---in one direction or the other...

The Stock Market:

Non-US developed markets (EFA and FEZ below)—even after their recent pummeling—have outperformed the U.S. major averages (save for the NASDAQ Composite Index) year-to-date. Given many foreign markets’ cheaper valuations, early-stage recoveries and, yes, accommodative central banks, I remain constructive on non-U.S.. That said, there are a number of potential international hot buttons (as we've recently experienced) that could easily delay the narrowing of the gap between the valuations of U.S. and non-U.S. securities (particularly emerging markets [VWO below]). That’s why we think long-term and stay diversified!

Here’s a look at the year-to-date price changes (according to CNBC) for the major U.S. indices---and for non-U.S. indices and U.S. sectors---using index ETFs as our non-U.S. and sector proxies:

Dow Jones Industrials:  -7.65%

S&P 500:  -4.27%

NASDAQ Comp:  -0.63%

EFA (Europe, Australia and Far East):  -1.51%

FEZ (Eurozone):  -3.62%

VWO (Emerging Markets):  -15.39%

Sector ETFs:

Here’s a look at the year-to-date results for a number of U.S. sector ETFs:

XHB (HOMEBUILDERS):  +9.20%

IYH (HEATHCARE):  +5.99%

XLY (DISCRETIONARY):  +3.06%

XLP (CONS STAPLES):  -1.61%

XLK (TECH):  -4.33%

XLF (FINANCIALS):  -4.41%

XLU (UTILITIES):  -4.60%

XLI (INDUSTRIALS):  -9.05%

XLB (MATERIALS):  -11.10%

IYT (TRANSP):  -13.74%

XLE (ENERGY):  -19.78%

The Bond Market:

As I type, the yield on the 10-year treasury bond sits at 2.05%. Which is 15 basis points lower than where it was when I penned last week's update. I.e., bond prices rallied hard last week as stocks tanked.

TLT, an ETF that tracks an index of long-dated U.S. treasury bonds, saw its share price rise by 1.97%  over the past 5 trading days (up 0.38% year-to-date).  As I keep repeating, I see bonds in general sporting a risk/return trade-off that makes going out on the yield curve not worth the risk.

On Volatility and Timing:

Each week I share with you the very short-term (year-to-date) results for major indexes and sectors. I do this with a bit of hesitation, as I in no way want to give the impression that you, nor I for that matter, should base our long-term investment decisions on short-term movements in markets or their sectors. It can, however, serve as a reference point for how the markets are, or are not, responding to the data (which is why I, as a professional, track the short-term). While my beginning of the year optimism over non-US (developed markets that is) and the housing sector, and my pessimism over utilities, appears to be justified by recent results, I need to strongly (very strongly!) emphasize that I was not predicting what we’ve experienced thus far in 2015. Plus, while we maintained our healthcare exposure I in no way expected the gains that sector has experienced this year. Same goes for energy and materials, only in the other direction.

My optimism or concerns over a given sector or region are based on factors such as valuations, trends, supply and demand, monetary policy and cyclicality—and my comfort in making allocation recommendations rests on the view that our clients are not short-minded investors (it can take awhile, if at all, for the market to reward what I believe to be good fundamental logic) who mistakenly believe that any human being possesses a capacity for market timing. Some people get lucky from time to time, but without exception, market timers are wrong far more often than they are right. The path to long-term investment success is fraught with bumps and potholes. The ones who successfully make the journey take it slow and never over-compensate when steering through and around the inevitable obstacles along  the way.

Last week's U.S. economic highlights:

AUGUST 17, 2015

THE EMPIRE STATE MFG SURVEY surprisingly plunged in August, -14.92 vs 4.75 consensus estimate.  Despite all the negative  current numbers, the six-month outlook was optimistic. Here's from the release:

The August 2015 Empire State Manufacturing Survey indicates that business activity declined for New York manufacturers. The headline general business conditions index tumbled nineteen points to -14.9, its lowest level since 2009. The new orders and shipments indexes also fell sharply, to -15.7 and -13.8 respectively, pointing to a marked decline in both orders and shipments. The inventories index dropped to -17.3, signaling that inventory levels were lower. Price indexes showed that input prices were slightly higher, while selling prices were flat. Labor market indicators suggested that employment levels and hours worked were little changed. Indexes for the six-month outlook registered somewhat greater optimism than in July, with the future general business conditions index rising seven points to 33.6.

THE NAHB HOUSING MARKET INDEX FOR AUGUST confirms my year-long optimism over housing in the U.S. Coming in at 61... Above 50 denotes optimism.

E-COMMERCE RETAIL SALES FOR Q2 came in at a very strong 4.2% gain. As I've suggested before, some of the periodic weakness in brick and mortar can be explained by the consumer's move to do more buying on line.

THE TREASURY INTERNATIONAL CAPITAL DATA FOR JUNE show foreigners buying U.S. long-term securities. Here's Econoday:

Strength in the dollar may be hurting exports but it's a definite plus for foreign investment. Foreign accounts bought a net $87.2 billion of U.S. long-term securities in June while U.S. accounts sold a net $15.9 billion of long-term foreign securities. Putting these together, inflow into the U.S. totaled a very strong $103.1 billion. This compares with a very strong inflow of $93.0 billion in May.

Foreign accounts were major buyers of U.S. Treasuries in June, at a net $69.9 billion. They were also big buyers of U.S. government agency bonds, at a net $25.6 billion, and also U.S. corporate bonds at $13.8 billion. But foreign accounts have been selling U.S. equities all year and the pace picked up in June to a net $22.0 billion.

On the U.S. side, accounts were big sellers of foreign bonds, at a net $29.3 billion, but were buyers of foreign equities, at $13.4 billion.

Country data for U.S. Treasury holders show China once again at top, unchanged at $1.27 trillion, and Japan a more distant second at $1.20 trillion vs $1.22 trillion in May. Caribbean banking centers, the favorite of hedge funds, is third at $319 billion.

AUGUST 18, 2015

HOUSING STARTS rose nicely in July, to 1.206 million vs 1.174 m in June. However, permits plunged, which signals weakness coming in the next monthly starts report. Although much of the permits plunge is explained away by the expiration of a tax incentive in the Northeast that pushed permits much higher in June. The July decline, therefore, made perfect sense. Still, we should expect somewhat of a decline in the August starts number.

THE JOHNSON REDBOOK RETAIL REPORT showed slower growth last week, vs the previous week, coming in a 1.6% year-on-year.

THE ICSC RETAIL REPORT backed off a bit as well, dropping to 2.6% vs 3.10% the previous week.

AUGUST 19, 2015

MORTGAGE PURCHASE APPS declined 1.0% last week while refis surged by 7.0%. Despite the weekly decline, purchase apps are up a huge 19% year-on-year.

JULY CPI barely budged. Here's Econoday:

Inflation wasn't brewing in July and with oil prices moving lower, inflation may not be showing much pressure in August either. The consumer price index rose only 0.1 percent in July as did the core, both under expectations. Year-on-year rates show slightly more pressure. Overall inflation is up 0.2 percent, which is very low but up from 0.1 percent in the prior month and the second positive reading of the year. The core is steady at plus 1.8 percent which is just under the Fed's 2 percent target.

Gasoline moved sharply higher in July, up 0.9 percent following outsized gains of 3.4 percent and 10.4 percent in the prior two months. But with gas prices moving steadily lower this month, the upward effects of gasoline will be turning downward in August. Another major component showing upward pressure in July is apparel which rose 0.3 percent following, however, a long string of declines. Owners equivalent rent continues to show pressure, up 0.3 percent on top of June's outsized gain of 0.4 percent.

Elsewhere, however, pressures are hard to find with electricity down 0.4 percent, used vehicles down 0.6 percent, new vehicles down 0.2 percent, and airfares down 5.6 percent. Medical, drugs, and education all rose only 0.1 percent.

There may be some upward creep in the headline year-on-year rates but, given the ongoing decline in oil, this report won't be pushing the Fed for a September rate hike.

OIL INVENTORIES grew last week by 2.6 million barrels. GASOLINE stocks fell by 2.7 million barrels while DISTILLATES grew by .6 mbs.

FOMC MINUTES for last month's meeting offered little clue as to when the Fed will hike the funds rate. However, there is a consensus building that it needs to occur sooner than later. Likely this year...

AUGUST 20, 2015

WEEKLY JOBLESS CLAIMS logged yet another sub-300k number (277k). This points strongly to continued strength in the labor market!

THE BLOOMBERG CONSUMER COMFORT INDEX broke the recent trend, registering a increase to 41.1 from the prior week's 40.7. However, given the influence the stock market seems to have on consumer sentiment readings, such surveys could get ugly in the coming weeks.

THE PHILADELPHIA FED BUSINESS OUTLOOK SURVEY effectively countered Monday's disaster of an Empire State report. Here's Econoday:

That sigh you hear is one of relief, that Monday's historic plunge in the Empire State report is probably a fluke. The Philly Fed's index, which is very closely watched, posted a gain for August and not a huge plunge. The general business conditions index came in at a stronger-than-expected 8.3 vs July's 5.7. Shipments lead the report at a very strong plus 16.7. Order data show less strength, with new orders at 5.8 in August vs 7.1 in July and with unfilled orders showing a slight month-to-month decline at minus 1.0. A positive in the report is a respectable monthly gain for employment to 5.3 vs July's contraction of minus 0.4. The 6-month outlook is also a plus, up 1.6 points to a solid 43.1. The early view on the August factory is thankfully mixed. Watch tomorrow for the manufacturing PMI flash.

EXISTING HOME SALES confirm the optimism over housing I've expressed since the start of the year. Here's from the release:

Total existing-home sales¹, which are completed transactions that include single-family homes, town homes, condominiums and co-ops, increased 2.0 percent to a seasonally adjusted annual rate of 5.59 million in July from a downwardly revised 5.48 million in June. Sales in July remained at the highest pace since February 2007 (5.79 million), have now increased year-over-year for ten consecutive months and are 10.3 percent above a year ago (5.07 million).

Lawrence Yun, NAR chief economist, says the increase in sales in July solidifies what has been an impressive growth in activity during this year's peak buying season. "The creation of jobs added at a steady clip and the prospect of higher mortgage rates and home prices down the road is encouraging more households to buy now," he said. "As a result, current homeowners are using their increasing housing equity towards the down payment on their next purchase."

THE CONFERENCE BOARD'S INDEX OF LEADING ECONOMIC INDICATORS declined 0.2% in July. Apparently the sharp drop in housing permits in the Northeast (following the previous month's surge inspired by the expiration of a tax break) noticeably influenced the overall number. Here's from the release:

“The U.S. LEI fell slightly in July, after four months of strong gains. Despite a sharp drop in housing permits, the U.S. LEI is still pointing to moderate economic growth through the remainder of the year,” said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board. “Current conditions, measured by the coincident economic index, have been rising moderately but steadily, driven by rising employment and income, and even industrial production has improved in recent months.”

NATURAL GAS INVENTORIES increased yet again last week, by 53 billion cubic feet.

THE FED BALANCE SHEET decreased by $2.0 billion last week after increasing by $2.9 billion the week prior. RESERVE BANK CREDIT increased by $10.5 billion.

M2 MONEY SUPPLY growth has been unstoppable for weeks. Up another $26.5 billion last week. This bodes well for the U.S. economy going forward.

AUGUST 21, 2015

FLASH MANUFACTURING PMI for August came in at an expansionary 52.9. Although that's the slowest pace recorded since October 2013. Here's Econoday:

Monthly growth in Markit's manufacturing PMI sample is at its slowest since October 2013, at a much lower-than-expected 52.9 in the flash for August. A slowing in production growth pulled the index down as did moderation in what is still described, however, as solid growth in new orders. But export sales remain subdued and capital spending in the energy sector remains weak. Growth in hiring is the weakest since July last year.

This report follows mixed signals from yesterday's Philly Fed, which was solid, and Monday's Empire State which was a disaster. Today's report is also mixed with broadly weak indications offset by the continued strength in domestic orders. Next indications on August factory conditions will be Tuesday with the Richmond Fed.

 

5% Down Weeks

Earlier today, a client asked me if I expect the market to "bounce" (I'll feature my reply in this weekend's commentary). Because I'm thinking you're maybe wondering the same thing---while no one (least of all yours truly) knows for sure what the next few weeks/months will bring---here's a little history:

Since 1980 there have been 28 other weeks that have seen a selloff of this week's magnitude (5.69% for the S&P 500), or greater:

One week later the S&P was up 60.7% of the time with an average gain of .50%.  

Best: 12.03%     Worst: -18.20%

Four weeks later the S&P was up 60.7% of the time with an average gain of 1.65%

Best: 23.28%     Worst: -19.50%

Twelve weeks later the S&P was up 71.4% of the time with an average gain of 4.95%.

Best: 34.50%     Worst: -20.60%

To paraphrase yesterday's message: I offer up the preceding with a bit of hesitation. For, while it may make you feel better about this week’s market action, it offers no guarantee that one, four or twelve weeks from today the market will be higher than it is right now—despite the fact that that’s been the case 61%, 61% and 71% of the time respectively since 1980. In fact, I might argue that a further decline over the next few weeks would ultimately be a longer-term positive—as corrections during bull markets are essential to their sustainability.

 Source: Bespoke Investment Group

Market Commentary (audio)

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2% Down Days

I offer up the following with a bit of hesitation. For, while it may make you feel better about today's market action, it offers no guarantee that one month from today the market will be higher than it is right now---despite the fact that that's been the case 80% of the time during the present bull market. In fact, I might argue that a further decline over the next month would ultimately be a longer-term positive---as corrections during bull markets are essential to their sustainability.

Number of days since March 2009 when the S&P 500 has declined 2+%: 57

Number of days that were followed by gains over the subsequent month: 46

Smallest one-month gain: 0.1%     Largest one-month gain: 14.7%    

Number of days that were followed by declines over the subsequent month: 11

Smallest one-month loss: -0.7%     Largest one-month loss: -9.8%   

Average return: 3.48%

Source: Bespoke Investment Group

P.s. One other point worth noting: While today's 2.11% decline seemed dramatic, such days have occurred, on average, 9 times a year since the beginning of this bull market. Although a lot of those days occurred during 2009 (15), 2010 (10) and 2011 (21). Less so in 2012 (3), 2013 (2), 2014 (4) and 2015 (now 2)---which is why perhaps today seemed so dramatic. Myopia is forever the affliction that exaggerates the emotional response to normal market phenomena.

Market Commentary (audio)

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Market Commentary (audio)

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Your Weekly Update AND The China crisis that wasn't...

One can't help but develop a thick skin when one has been an investment adviser since the mid-1980s. Experiencing the investing turmoil---the crashes, the recessions, the bear markets and the currency crises---of the past 31 years gives one a perspective that transcends the fear and stress inspired by situations such as the Greece political/debt crisis, the slowing of the Chinese economy, the devaluing of the Chinese currency and, relatively soon I suspect, the beginning of the first Fed tightening cycle in 9 years.

While my experiences give me the confidence that the balanced portfolios of patient investors will survive the inevitable corrections and bear markets to come, I recognize that I must remain sensitive to the attendant fears and stress of the folks who have hired me to manage their portfolios. Remaining sensitive, in my view, is not about placating clients with the worn platitudes that are notorious among your everyday advisers, it's about offering up a perspective and clarity on mucky headlines that, by design, stir up all manner of fear and angst.

This past week was all about China. Last Tuesday saw the Dow down 240 points on news that the currency (the renminbi [RMB], or yuan) of the planet's second largest economy's peg to the U.S. dollar would be expanded by two percentage points. The world, or, I should say, the media---and a whole slew of pundits---saw this as a move that signaled extreme panic on the part of Chinese policymakers. I.e., confirmation that, by devaluing the RMB, they see major trouble in their economy going forward. The stocks of companies whose fortunes are to some degree tied to the buying habits of a billion+ Chinese consumers took the largest hits---as a weaker RMB means Chinese buyers pay up for, say, American and European goods.

So what gives? Did the kneejerk headlines get it right? Is there something dire brewing in the Chinese economy that could bring on extreme global unrest?

Well, there may or may not be a black swan (an unforeseeable event) lurking somewhere within the Chinese economy, but I can tell you with certainty that last week's currency move was not an attempt to circumvent some impending cataclysmic event. While, granted, a cheaper currency may indeed help China's slowing manufacturing sector---which I suspect was one justification for expanding its range---the following statements from the International Monetary Fund (IMF) speak volumes about another key motivation (the IMF is considering a bid to move the RMB closer to becoming a world reserve currency). I also included IMF commentary on China's economy that reiterates what I've been reporting about its move to a more services/consumer-oriented economy and the resulting slower GDP growth---plus, the IMF's view of where China's present vulnerabilities lie:

The changes by China will help it gradually transition from a tightly managed system linked to the U.S. dollar to one that is more open and more flexible and more responsive to market conditions. The currency ought to move to free float within two to three years.

The Chinese government should put in place an effectively floating rate for the yuan before fully liberalizing its capital markets.

Moving to a free float is necessary for allowing the market to play a more decisive role in the economy, rebalancing toward consumption, and maintaining an independent monetary policy as the capital account opens.

China is moving into a phase of slower, yet safer and more sustainable growth.

Gross domestic product will expand 6 percent in 2017 before rebounding modestly. Growth should be allowed to slow to 6 percent to 6.5 percent per year to address vulnerabilities in the economy.

China’s reliance on credit-financed investment as the primary engine of growth since the financial crisis has created large vulnerabilities in the fiscal, real estate, financial and corporate sectors.

Thus, a key challenge is to ensure sufficient progress in reducing vulnerabilities while preventing growth from slowing too much.

Lastly, as the chart (click to enlarge) below illustrates, the RMB peg to the dollar has, over the past decade, resulted in a substantial appreciation that indeed makes China exports less competitive on the global stage (hence, one motivation to back it off a bit)---while on the flip side creating greater purchasing power for the Chinese consumer, which is consistent with its economic reorientation:

The Remnimbi in USD Terms:



Bottom line: While, as the IMF reports, China's economy indeed holds excesses that should not be overlooked, last week's move was in no way a desperate attempt at saving a failing economy from collapse, as so many "experts" might have you believe.

The Stock Market:

Non-US developed markets—even after their recent pummeling—have outperformed the U.S. major averages (save for the NASDAQ Composite Index) year-to-date. Given many foreign markets’ cheaper valuations, early-stage recoveries and, yes, accommodative central banks, I remain constructive on non-U.S.. That said, there are a number of potential international hot buttons (as we've recently experienced) that could easily delay the narrowing of the gap between the valuations of U.S. and non-U.S. securities. That’s why we think long-term and stay diversified!

Here’s a look at the year-to-date price changes (according to CNBC) for the major U.S. indices---and for non-U.S. indices and U.S. sectors---using index ETFs as our non-U.S. and sector proxies:

Dow Jones Industrials:  -1.94%

S&P 500:  +1.59%

NASDAQ Comp:  +6.59%

EFA (Europe, Australia and Far East):  +5.19%

FEZ (Eurozone):  +3.42%

VWO (Emerging Markets):  -8.00%

Sector ETFs:

Here’s a look at the year-to-date results for a number of U.S. sector ETFs:

XHB (HOMEBUILDERS):  +11.78%

IYH (HEATHCARE):  +11.37%

XLY (DISCRETIONARY):  +8.61%

XLP (CONS STAPLES):  +3.44%

XLK (TECH):  +2.59%

XLF (FINANCIALS):  +2.10%

XLU (UTILITIES):  -3.49%

XLI (INDUSTRIALS):  -3.89%

XLB (MATERIALS):  -5.89%

IYT (TRANSP):  -8.90%

XLE (ENERGY):  -12.41%

The Bond Market:

As I type, the yield on the 10-year treasury bond sits at 2.20%. Which is 1 basis point higher than where it was when I penned last week's update.  

TLT, an ETF that tracks an index of long-dated U.S. treasury bonds, saw its share decline by 0.31%  over the past 5 trading days (down 1.56% year-to-date).  As I keep repeating, I see bonds in general sporting a risk/return trade-off that makes going out on the yield curve not worth the risk.

On Volatility and Timing:

Each week I share with you the very short-term (year-to-date) results for major indexes and sectors. I do this with a bit of hesitation, as I in no way want to give the impression that you, nor I for that matter, should base our long-term investment decisions on short-term movements in markets or their sectors. It can, however, serve as a reference point for how the markets are, or are not, responding to the data (which is why I, as a professional, track the short-term). While my beginning of the year optimism over non-US (developed markets that is) and the housing sector, and my pessimism over utilities, appears to be justified by recent results, I need to strongly (very strongly!) emphasize that I was not predicting what we’ve experienced thus far in 2015. Plus, while we maintained our healthcare exposure I in no way expected the gains that sector has experienced this year. Same goes for energy and materials, only in the other direction.

My optimism or concerns over a given sector or region are based on factors such as valuations, trends, supply and demand, monetary policy and cyclicality—and my comfort in making allocation recommendations rests on the view that our clients are not short-minded investors (it can take awhile, if at all, for the market to reward what I believe to be good fundamental logic) who mistakenly believe that any human being possesses a capacity for market timing. Some people get lucky from time to time, but without exception, market timers are wrong far more often than they are right. The path to long-term investment success is fraught with bumps and potholes. The ones who successfully make the journey take it slow and never over-compensate when steering through and around the inevitable obstacles along  the way.

Market Commentary (audio)

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Market Commentary (audio)

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Your Weekly Update --- AND --- You're nervous for the wrong reasons...

As I suggested in this morning's audio, the number of our clients
expressing concerns over the near-term state of the U.S. stock market
has been on the rise of late. Their worries are centered around a
general feeling that an economic collapse is close at hand --- spawned by
everything from China's struggling manufacturing sector, to the level
of U.S. (and other select nations') government debt (that's a
perennial [and legitimate] concern), to the size of the Fed's balance sheet, to the
signals sent by a massive commodity bear market, to the perceived lofty
level of the U.S. stock market. The now seven-day string of Dow
losses serves to bolster the doomsday argument.

While I can absolutely promise you that a bear market is indeed in our
future (can't, alas, tell you when), I can say with confidence that
the recent selloff has little, if anything, to do with the fears that
certain characters and media outlets are inspiring amongst some of our
clients. In fact, I'll argue that the market is struggling over what
has been relatively good economic news*---i.e., virtually nothing in
the data here at home supports the attention-hungry doomsayers'
prognostications, but it does support the notion that the Fed will
hike its benchmark interest rate come September.

*As you'll see if you read the economic highlights at the end, last week's economic
data releases were, on balance, quite strong, while the stock market sold off.

While I'm not all that bullish on the near-term prospects for the U.S.
stock market, again, I'm not at all worried over the present state of
the U.S. economy---nor is the Fed (other than its prospects for
heating up to a degree that might stoke above 2% inflation). And, therefore,
while anything can happen when we're talking the stock market (i.e., a
bear market---we must presume---can come growling at any  time), I'm
not losing sleep over the prospects for another 2008-style bear market
anytime soon---as such events are typically things of recessions. I do
fully expect, however, that we will experience the recently-elusive
10-20% correction a time or two or three before the economy and,
hence, the stock market is ready to purge the inevitable excesses
accumulated during the present bull market.

So when will I start worrying?

Well....      (click charts to enlarge)

When job growth turns negative:



When weekly jobless claims are north of 300,000 on a trend basis:



When the ISM Service Sector Surveys are reading below 50:



 

When commodity prices are pushing extreme highs:

 

When short-term interest rates exceed long-term interest rates (an
inverted yield curve):



When market sentiment is at a bullish (optimistic) extreme:



 
When household formations decline on a trend basis:



When I have multiple parking options near my neighborhood mall
entrance on a Saturday afternoon:



 

When none of our clients are worried ("Bull markets die on euphoria"
J. Templeton):



SCARY!

The Stock Market:

Non-US developed markets—even after their recent pummeling—have outperformed the U.S. major averages (save for the NASDAQ Composite Index) year-to-date. Given many foreign markets’ cheaper valuations, early-stage recoveries and, yes, accommodative central banks, I remain constructive on non-U.S.. That said, there are a number of potential international hot buttons (as we’ve recently experienced) that could easily delay the narrowing of the gap between the valuations of U.S. and non-U.S. securities. That’s why we think long-term and stay diversified!

Here’s a look at the year-to-date price changes (according to CNBC) for the major U.S. indices—and for non-U.S. indices and U.S. sectors—using index ETFs as our non-U.S. and sector proxies:

Dow Jones Industrials:  -2.26%

S&P 500:  +1.20%

NASDAQ Comp:  +6.76%

EFA (Europe, Australia and Far East):  +6.39%

FEZ (Eurozone):  +6.00%

VWO (Emerging Markets):  -6.10%

Sector ETFs:

Here’s a look at the year-to-date results for a number of U.S. sector ETFs:

IYH (HEATHCARE):  +11.44%

XLY (DISCRETIONARY):  +8.58%

XHB (HOMEBUILDERS):  +7.77%

XLP (CONS STAPLES):  +4.02%

XLK (TECH):  +1.79%

XLF (FINANCIALS):  +1.70%

XLI (INDUSTRIALS):  -4.65%

XLB (MATERIALS):  -5.60%

XLU (UTILITIES):  -7.14%

IYT (TRANSP):  -8.45%

XLE (ENERGY):  -13.78%

The Bond Market:

As I type, the yield on the 10-year treasury bond sits at 2.17%. Which is 2 basis points lower than where it was when I penned last week’s update.

TLT, an ETF that tracks an index of long-dated U.S. treasury bonds, saw its share price rise 1.48%  over the past 5 trading days (down 2.53% year-to-date). As I keep repeating, I see bonds in general sporting a risk/return trade-off that makes going out on the yield curve not worth the risk.

On Volatility and Timing:

Each week I share with you the very short-term (year-to-date) results for major indexes and sectors. I do this with a bit of hesitation, as I in no way want to give the impression that you, nor I for that matter, should base our long-term investment decisions on short-term movements in markets or their sectors. It can, however, serve as a reference point for how the markets are, or are not, responding to the data (which is why I, as a professional, track the short-term). While my beginning of the year optimism over non-US (developed markets that is) and the housing sector, and my pessimism over utilities, appears to be justified by recent results, I need to strongly (very strongly!) emphasize that I was not predicting what we’ve experienced thus far in 2015. Plus, while we maintained our healthcare exposure, I in no way expected the gains that sector has experienced this year. Same goes for energy, materials and emerging markets, only in the other direction.

My optimism or concern over a given sector or region is based on factors such as valuations, trends, supply and demand, monetary policy and cyclicality. My comfort in making allocation recommendations rests on the view that our clients are not short-minded investors (it can take awhile, if at all, for the market to reward what I believe to be good fundamental logic) who mistakenly believe that any human being possesses a capacity for market timing. Some people get lucky from time to time, but without exception, market timers are wrong far more often than they are right. The path to long-term investment success is fraught with bumps and potholes. The ones who successfully make the journey take it slow and never over-compensate when steering through and around the inevitable obstacles along  the way.

Here are last week’s U.S. economic highlights:

AUGUST 3, 2015

MOTOR VEHICLE SALES got July data off to a strong start. Exceeding the consensus estimate, coming in at a very strong 17.6 million. This speaks volumes about the health of the consumer...

PERSONAL INCOME AND OUTLAYS in June were uninspiring. Note, from Econoday's commentary below, the reference to weak June auto sales---per today's July auto sales report July bounced back very strong:

The consumer showed less life in June with inflation remaining very quiet. Consumer spending rose an as-expected 0.2 percent in June, down from a revised spike of 0.7 percent in May with the slowing tied in part to lower vehicle sales. Personal income, boosted by gains for rents and transfers that offset slight slowing in wages, rose slightly more than expected at 0.4 percent.

THE PCE PRICE INDEX came in very anemically, at 1.3% (core [ex-food and energy]) year-over-year. The Fed reportedly prefers this gauge over CPI...

THE ISM MANUFACTURING INDEX FOR JULY came in at 52.7. While the headline number was nothing to get excited about, there was some undlerying strength worth noting: The new orders component came in at 56.5 (best reading of the year), and production came in at a strong 56. A drop in inventories weighed on the number, but of course that's not all bad, in that it portends a potential pickup in production going forward. A legitimate negative is the decline of backlog orders to 42.5...

MARKIT'S MANUFACTURING PMI stayed steady and hit the estimate, at 53.8 for July. While the key points and summary from the release sound upbeat, the following commentary by Markit's Chief Economist dials it back a bit. The part about the benefit of low commodity prices speaks to what I've been preaching of late:

Key points: § Sharpest rise in production volumes for three months § Incoming new work increases at fastest pace since March § Job creation moderates across the manufacturing sector in July Markit U.S. Manufacturing PMI (seasonally adjusted) Source: Markit. Summary July’s survey data highlights that the U.S. manufacturing recovery stepped up a gear at the start of the third quarter, largely driven by the fastest rise in overall new business volumes since March. However, there were signs that manufacturers remained cautious regarding the business outlook, as purchasing activity expanded at the slowest pace for 18 months and job creation eased to a threemonth low in July. Meanwhile, input cost inflation remained subdued and factory gate charges increased only marginally during the latest survey period.

Commenting on the final PMI data, Chris Williamson, Chief Economist at Markit said: “The PMI picked up in July but the sector continues to endure one of the slowest growth phases seen over the past year and a half. Companies reported that the strong dollar once again hurt export competiveness, exacerbating already-weak demand in many countries, especially emerging markets and Asian economies. “However, the data suggest the manufacturing sector is struggling rather than collapsing against the various headwinds. Relief has also come in the form of lower commodity prices, and low oil prices in particular. “Low prices have helped to reduce manufacturers’ costs and protect margins, while households are also benefitting from low fuel bills in particular. The survey data showed manufacturing growth being led once again by producers of consumer goods in July. “Policymakers are unlikely to be dissuaded from raising interest rates on the back of the weak manufacturing performance, focusing instead on the steady improvement in the labour market and robust service sector growth which have been signalled at the start of third quarter. However, with other manufacturing PMI surveys showing emerging markets suffering their steepest downturn for two years, worries about the global economy may well deter the Fed from tightening policy this year.”

CONSTRUCTION SPENDING IN JUNE was subdued a bit by a surprise decline in single-family homes. Multi-family units---on the other hand---were up strong. Year-over-year saw single-gamily homes up a very strong 12.8% while multifamily homes were up a whopping 23.7%.

AUGUST 4, 2015

GALLOPS US ECONOMIC CONFIDENCE INDEX FOR JULY falls in line with other such surveys, coming in at -12, after Junes -8. Clearly, turmoil in Greece, uncertainty around China and market volatility here at home did a number on consumers' outlooks going forward. I look for sentiment to improve going forward. That said, a continued volatile equity market could subdue what might be an otherwise optimistic view of the US economy going forward.

THE JOHNSON REDBOOK RETAIL REPORT, improved last week, however, the year-over-year rate remains a weak 1.7%, up from the previous week's 1%.

THE ICSC RETAIL REPORT surprised me last week, as it came in at merely 1.5% year-over-year. Up until last week, this report has been coming in much hotter than Redbook's. Neither speaks particularly well of the fiscal health of the U.S. consumer...

FACTORY ORDERS FOR JUNE weren't bad at all. I particularly like the pickup in core capital goods orders and shipments. Here's Econoday:

Factory orders rose nearly as expected in June, up 1.8 percent for only the second gain in the last 11 months. The durable goods component, initially released last week, is unrevised at plus 3.4 percent in a gain distorted by aircraft orders but one that does reflect a pop higher for capital goods. The non-durables component, data released with today's report, rose 0.4 percent on order gains for oil and chemicals.

Orders for civilian aircraft jumped 65 percent in the month following, in routine up-and-down fashion for this component, a 32 percent downswing in May. Industries reporting respectable gains include 0.5 percent for furniture and 0.6 percent for motor vehicles as well as a 1.5 percent gain for machinery. Orders for energy equipment bounced back 5.5 percent after sinking 25 percent in May. Year-on-year, energy equipment is down 51 percent.

Looking at totals again, shipments rose a very solid 0.5 percent with shipments of core capital goods up 0.3 percent. The latter, which is a key reading that excludes aircraft, isn't spectacular but is still a solid gain for business investment. Unfilled orders, which have been in contraction most of the year, were unchanged in June. Inventories rose 0.6 percent in a build that falls in line with shipments, keeping the inventory-to-shipments ratio at a manageable 1.35.

Today's report offers rare good news for a factory sector that, due to weak exports and the collapse in oil & gas equipment, has been struggling to stay above water for the last year.

AUGUST 5, 2015

MORTGAGE PURCHASE APPS increased 3.0% last week while refis jumped 6.0%. Purchase apps are up a huge 23% year-over-year. Speaks loudly about my continued optimism over housing.

THE ADP EMPLOYMENT REPORT came in at 185k. A very okay number, but below the 210k consensus estimate.

THE MONTHLY TRADE BALANCE rose slightly above expectations as imports increased in June. Goods exports declined while services exports are very strong... we actually have a $19.7 billion trade surplus in services.

THE GALLUP U.S. JOB CREATION INDEX stayed at its record high 32 in July. That's the third month in a row.

MARKIT'S SERVICES SECTOR PMI INDEX came in at a solid 55.7 in July. New and backlog orders showed strength. Hiring was described as "robust" in the report. The 12-month outlook, however, was down for a second straight month.

THE ISM NON-MFG (SERVICES) INDEX came in way above expectations at 60.3. This is the highest reading in 10 years! Here's Econoday:

ISM's non-manufacturing sample reports a giant surge of strength, to 60.3 for the July index and the highest reading in 10 years. The result far surpasses expectations where the high-end Econoday forecast was 57.5.

New orders, at 63.8, and backlog orders, at 54.0, both show substantial acceleration from June as do new export orders. Strong orders are boosting employment which, echoing this morning's earlier release of the Services PMI report, is robust, at 59.6 for one of the strongest readings on the books.

Breadth is very strong with 15 of 18 industries reporting composite growth in the month including gains for retail trade, transportation & warehousing, and construction. Mining is one of two reporting contraction.

The rise in export orders underscores the strength of the nation's trade surplus in services which, despite strength in the dollar, is getting a boost from foreign demand for technical and management services. The service sector appears to be rolling along fine and will likely continue to offset weakness in manufacturing. And for Friday's jobs report outlook, the employment index in this report will help offset this morning's very weak ADP estimate.

CRUDE OIL INVENTORIES drew down by 4.4 million barrels last week. Refinery capacity ramped up to a nosebleed 96.1%. GASOLINE INVENTORIES rose 0.8 mbs and DISTILLATES increased 0.7 mbs.

AUGUST 6, 2015

THE CHALLENGER JOB CUT REPORT surged hihger in July to 105,696. However, a huge cutback by the Army (57k jobs cut over the next two years) was the primary culprit. 18,891 cuts in computer and electronics didn't help the number either.

WEEKLY JOBLESS CLAIMS continue to come in way below the important 300k mark---at 270k last week.

THE GALLUP U.S. PAYROLL TO POPULATION rate remained at 45.5 in July. This is the highest rate for any July since tracking began in 2010. Here's Econoday:

The U.S. Payroll to Population employment rate (P2P), as measured by Gallup, was 45.5 percent in July, unchanged from the previous month, and the highest rate Gallup has measured for any July since tracking began in 2010. The P2P measurements for the past two months tie for the second-highest recorded by Gallup after October 2012, when P2P hit 45.7 percent. This increase in P2P rates in the summer months is in line with an expected seasonal rise in full-time employment, though the baseline trend is higher in 2015 than it has been in the past two years.

The percentage of U.S. adults participating in the workforce in July was 66.9 percent. While this is 0.3 percentage points higher than July of last year and at least 0.6 points lower than the rate measured in any other July since Gallup began tracking it in January 2010. Since that time, the workforce participation rate has remained in a narrow range, from a low of 65.8 percent to a high of 68.5 percent.

Gallup's unadjusted U.S. unemployment rate was 6.1 percent in July, up nominally from June's 6.0 percent, but still near the 5.8 percent low point from December 2014 in Gallup's five-year trend. However, after years of gradual decline, Gallup's unemployment measurement has not substantially changed from the 6.3 percent measured in July 2014. Gallup's U.S. unemployment rate represents the percentage of adults in the workforce who did not have any paid work in the past seven days, for an employer or themselves, and who were actively looking for and available to work.

Gallup's measure of underemployment in July is 14.2 percent, the lowest level recorded since Gallup began tracking it daily in 2010. Gallup's U.S. underemployment rate combines the percentage of adults in the workforce who are unemployed (6.1 percent) and those who are working part time but desire full-time work (8.1 percent).

THE BLOOMBERG CONSUMER COMFORT INDEX declined slightly last week to 40.3. The trend in this indicator has been decidedly lower of late. I suspect recent global concerns have contributed measureably to the weaker sentiment.

NATURAL GAS INVENTORIES rose again last week by 32 billion cubic feet.

THE FED BALANCE SHEET increased by $0.9 billion last week, after dropping $15 billion the week prior. RESERVE BANK CREDIT decreased by $9 billion.

M2 MONEY SUPPLY rose yet again last week by $12.1 billion.

AUGUST 7, 2015

THE BLS JOBS REPORT FOR JULY came in right at expecations, 215k. The job market is strong, there's no question. Here's the breakdown:

Other details look surprisingly solid with payrolls rising 60,000 in trade & transportation, for a third straight strong gain, and professional & business services rising 40,000 to extend their long healthy run. Retailers continue to add jobs, up 36,000 for their third straight strong gain with the motor vehicle subset up 13,000 and reflecting the strength of car sales. Manufacturing, which is usually weak, rose a notable 15,000 in the month with construction, where lack of skilled labor is being reported, showing a modest gain of 6,000.

THE HEADLINE UNEMPLOYMENT RATE held at 5.3% while the U6 (includes part-timers who'd prefer full-time, discouraged and marginally attached workers) dropped a tenth to 10.4%.

THE LABORFORCE PARTICIPATION RATE remained at a low 62.6%.

CONSUMER CREDIT rose in June by $20.7 billion. The breakdown helps set an optimistic stage for both retail and auto going forward.