Today's TV Segment (video)

Thought of the Day: "Painful" Correction? Not for the Insightful Investor!

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2011 versus 2015

I’ve suggested ad nauseam of late that the present correction was long overdue, in that it’s been 4 years since the major averages have seen a 10+% decline.

This morning Bespoke Investment Group offered a comparison of the present correction to 2011’s. Fascinating that, at yesterday's close, the S&P 500 was down 8.60% on the year, while on the same day in 2011 the S&P was down 8.47% on the year.

The market peak to this point, however, was (per the chart below) a bit more dramatic in 2011. And, peak-to-trough, the S&P was down 19.39% that year. Should the August low for this year hold, the peak-to-trough correction will amount to minus 12.35%. As I suggested in this morning's audio, however, corrections tend to test, and often penetrate, the initial low---as did (per the chart) 2011's.



In terms of how 2011 ultimately played out: On this day 4 years ago the extremely nervous market was a mere 6 days away from bottoming---a 6 days that saw the average decline another painful 4.2%. The ensuing rally brought the year back to about even and, start to finish, saw the S&P 500 increase by nearly 94%. Thank goodness you didn’t panic during the decline, right?

My purpose folks is in no way to promise that the present correction is near its end, nor that it may not morph into the next bear market. I simply find the similarity to 2011 interesting, and, more importantly, I want to drive home my continuous point that corrections are common and that they ultimately set the stage for healthier moves down the road. The same can be said for bear markets, they just go deeper and take longer.

David Katz on Today's Market (audio)

Here's David Katz on today's market.

His perspective on the macro environment is the message I'm passing along. I am not recommending (nor condemning) his individual stock recommendations. 

Click the play button then move your curser to the 3 minute mark for the start of the interview.

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Are Commodities Beginning the Bottoming Process?

In the interview below, Dennis Gartman essentially makes the case I've been making of late with regard to the commodities market. As I suggested in an audio this morning, markets bottoming can be volatile phenomena, especially in commodities.

In presenting you this clip, I'm essentially offering up support for my thinking on commodities in the aggregate---I'm not endorsing (nor condemning) the recommendations he makes with regard to specific commodities to chase at the moment.

Thought of the Day (audio)

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Market Commentary (audio)

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Your Weekly Update AND The Confusing/Confused Fed AND On The 3 Risks That Have Everyone Up In Arms

If  you listened closely to Janet Yellen during her last two public appearances (the past two Thursdays) you just might be a little confused. The Janet Yellen of the post-September Fed Meeting press conference did not associate herself with her fellow members who thought that raising rates by year-end would be a fine idea. The Janet Yellen of last Thursday’s University of Massachusetts, Amherst speech, however, had shuffled over to the let’s-raise-the-rate-this-year side of the boat. So---merely a week later---what gives? Clearly, the stock market (the S&P 500 is off 3.5% since the Fed meeting) is calling the shots on this one.

But does it matter? Well, if your time horizon takes you beyond the few days, weeks or months following the next Fed meeting or two, certainly not! In which case you’re not concerned with how the market finishes up 2015, but rather with at what point you might begin tweaking your sector allocation to something a bit more defensive due to heightened recession-risk.

While I’m tempted to fill a dozen pages with recession indicator charts (the majority of which presently point to little foreseeable risk), I thought we’d consider the odds of a prolonged economic slowdown against the 3 risks that seem to have everyone up in arms these days:

1. The Fed raising interest rates.


2. The presumed signal from low commodities prices.


3. The threat from a slowing Chinese economy.

THE FED:

As for the Fed, you’ll notice in the chart below that, indeed, Fed rate hikes tend to precede recessions. However, historically-speaking, only after a series of hikes. Since the early 70s the average period between the first hike and the onset of recession was 32 months (the shortest being 15 [between the back-to-back early-80s recessions], the longest was 50). And that’s ignoring the instances when the Fed raised rates only to reduce them before raising them once again (with no recession in between).     click to enlarge

 

COMMODITIES:

A very confident money manager appearing on CNBC last week cited the present bear market in commodities as proof positive that we’re about to enter a global recession---and he reported that, consequently, he’s gone 100% cash.

I get that the freefall in commodities prices speaks to reduced demand from China, etc., but what if developed nation economies begin to accelerate and, thus, maybe offset some of that lost demand from Asia. What if the green and blue lines (copper demand in Europe and North America) below continue in the direction they’ve been heading of late (Asia demand in yellow):     click to enlarge

 

And what does it mean for the future price of, say, copper, when shipments of copper mining equipment are dropping precipitously while developed nation demand is picking up? I.e., less equipment shipments means less future production, which means less future supply, which means future prices rise when demand picks up:     click to enlarge

 

What happens to the commodities-dropping-spells-recession theory if commodities begin to rebound before the next recession? Like they did during the 80s:     click to enlarge

 

And the 90s:     click to enlarge

 

Hmm…

CHINA:

Yes, China, the world’s second largest economy, has issues. Its fantastic early-21^st Century growth has been fueled by an amassment of private sector debt which will be no small feat to unwind. The folks who cite China’s economy as the ultimate headwind to future global growth point to the visible slowdown in its all-important manufacturing sector. As I suggested in a recent audio, never forget, publicly-exposed "experts" tend to speak their book---whether it's literally a "book" they've written, or their books of business (their portfolios, essentially). Of course they believe what they preach, it's just that they generally have skin in the game and, therefore, a desperate need to be right, and to convince the rest of the world---book buyers and stock-price-moving investors alike---of the same. With regard to China, in my view, there just seems to be too much passion and commitment coming from those who believe some great implosion in the east is imminent.

I spent the better part of last weekend engrossed in John Mauldin and Worth Wray's latest A Great Leap Forward?: Making Sense of China's Cooling Credit Boom, Technical Transformation, High Stakes Rebalancing, Geopolitical Rise & Currency Dream. The authors assembled a wide array of opinions from some of the world's most respected experts in global trends, economics and investing. The brainpower was divided essentially into two camps: those who bent toward a world-shaking hard landing for China and those who believe the odds favor a long, soft landing. While my bent favors the latter, I can't help but wonder if the most likely scenario doesn't lie somewhere in between.

Given the unreliability of economic reports coming from China's government, we have to rely on the data compiled by private sector players who've, surprisingly perhaps, been allowed in to gather a real world assessment of what the planet's largest population is truly up to. And, arguably, the best source is Leland Miller's China Beige Book (CBB)---literally, the world's largest private data base!

In 2012, Mr. Miller warned that his organization's 21,000 Chinese company survey told a story vastly different than the then consensus view: While the world saw China's rapid growth continuing unabated, the CBB was suggesting that China's economy was already slowing, and was likely to continue its descent in the coming years. As is now painfully apparent, the CBB had it right! However, today, ironically, while the world panics over the looming demise of the once great Red Dragon, Mr. Leland says not so fast. Here's from his Bloomberg Radio interview last week:

If you look back at what happened in June, in July and particularly in August, with the stock market collapse, with the surprise currency move, all of this with the Fed uncertainty hanging over it---people were really worried about China. And I think if you look at the August global market selloff, people mostly attributed that to this sudden fragility of the Chinese economy; why would the Chinese leadership do something so drastically with the currency unless they're seeing something we don't? So, something terrible has to be happening. And what our data show is, no, we had a mild slowdown this quarter---but the most remarkable thing about it was that there was nothing remarkable happening.

What I think is most important is that manufacturing, as we've been talking about for years now, is assumed to be the Chinese economy writ large. You look at people's reaction to the PMI, and it's visceral! So, people wake up, they check the Flash PMI---if it looks good they think China's in good shape, if it's looking bad they think it's in bad shape, but the Chinese economy is so much more than just manufacturing.

So all the data, public and private, is indicating that the manufacturing sector is going through some significant weakness, but I think our point there is that China is not just manufacturing. If you look at the economy through our multi-sector data, you see a much more mixed picture---you see what is a mild slowdown, but not this cataclysmic result that most people are assuming.

Services is a very important part of the economy, one of the leading, growing parts of the economy, and it had a very good quarter. So, you can have manufacturing have a down quarter, you can have services have an up quarter, you can have a very mix of the rest of the sectors and what you're left with is a very mixed picture of growth overall. But it's a lot more optimistic than what the current views on China are.

As I've described many times of late, China is evolving, rebalancing if you will. As was the case with every developed economy; in the beginning there was industry---smoke stacks and grimy faces. In the middle there was the transition---a rising middle class, growing consumption and a blossoming service sector. In the end a predominantly service-driven economy. 

Here's a visual:     click to enlarge



And the trend continues: As of last year according to the CIA World Fact Book: Industry: 42.6% Services: 48.2% Agriculture: 9.2%

A CNBC regular last week sought to downplay Nike's earnings report (yesterday) that showed it blowing past estimates---based, yes, on stellar sales out of China---by stating that for every Nike and Apple (another company showing great results in China), there's a Caterpillar (laying off at least 5,000 workers over the next couple of years due to challenges related to China's manufacturing slowdown) and United Technologies (suffering recent share price decline based on concerns over its Otis Elevator prospects in China and other emerging markets).

Well, yeah, given China's economic evolution/transformation, that makes sense!

While China---suffering through its growing pains---will no doubt be a source of volatility (extreme at times) well into the future, it's far too soon to call it down for the count.


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All things considered, for now anyway, the present downdraft in stocks looks more like a long-overdue correction to me, as opposed to the beginning of the next great bear market. Although, anything can happen---I make no guarantees.

The Stock Market:

After last week's pummeling of Europe (thanks in no small part to the VW scandal and Mario Draghi's somewhat hawkish tone) I can no longer say that non-US developed markets (EFA and FEZ below) have outperformed the U.S. major averages year-to-date. But I do maintain that, given many foreign markets’ cheaper valuations, early-stage recoveries and, yes, accommodative central banks, I remain very 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:  -8.46%

S&P 500:  -6.20%

NASDAQ Comp:  -1.05

EFA (Europe, Australia and Far East):  -5.56%

FEZ (Eurozone):  -9.28%

VWO (Emerging Markets):  -17.04%

Sector ETFs:

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

XHB (HOMEBUILDERS):  +4.60%

XLY (DISCRETIONARY):  +3.55%

IYH (HEATHCARE):  +1.64%

XLP (CONS STAPLES):  -2.08%

XLK (TECH):  -3.72%

XLF (FINANCIALS):  -7.76%

XLU (UTILITIES):  -9.51%

XLI (INDUSTRIALS):  -11.97%

IYT (TRANSP):  -14.07%

XLB (MATERIALS):  -17.25%

XLE (ENERGY):  -21.21%

The Bond Market:

As I type, the yield on the 10-year treasury bond sits at 2.17%.

TLT, an ETF that tracks an index of long-dated U.S. treasury bonds, saw  its share price decline a 0.46%  over the past 5 trading days (down 3.48% 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 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.

U.S. ECONOMIC HIGHLIGHTS:

SEPTEMBER 21, 2015

EXISTING HOME SALES, per Econoday below, softened a bit in August:

Though slowing in August, existing home sales are still healthy and trending higher. Existing home sales came in at a lower-than-expected 5.31 million annual rate in August which is the lowest since April. July was revised down just slightly but is still an 8-year high at 5.58 million. At 6.2 percent, growth in year-on-year sales is the lowest since February. The year-on-year median price, up only 4.7 percent to $228,700, is the lowest since August 2014. The report cites no special reasons behind August's softness, but notes that it follows prior strength, in fact six months of strength. 

With the in dip sales, supply relative to sales is less tight, at 5.2 months from 4.9 months in the prior two months. But there's still a lack of homes on the market, evidenced by a comparison with the year-ago supply at 5.6 months.

SEPTEMBER 22, 2015:

THE JOHNSON REDBOOK RETAIL REPORT came in very soft last week, +0.9%. The report blames the wind-down after back to school season.

THE ICSC RETAIL REPORT came in soft as well, +1.03% last week.

THE FHFA HOUSE PRICE INDEX showed strength in July’s number. Here’s Econoday:

Home prices cooled late in the second quarter but began to pick up in July based on FHFA's house price index which rose a higher-than-expected 0.6 percent with the year-on-year rate at plus 5.8 percent. This is the largest monthly gain since February this year and the largest year-on-year gain since April last year.

The strongest gains were in the West led by the Mountain region at 1.6 percent in the month. Only two of nine regions declined in the month with New England at a steep minus 1.2 percent. Year-on-year, Mountain is out in front at a very strong plus 9.4 percent with New England bringing up the tail end but still in positive ground at plus 2.1 percent.

THE RICHMOND FED MANUFACTURING INDEX confirms the weakness reported in other recent manufacturingsector data. Coming in at -5.

SEPTEMBER 23, 2015

NEW PURCHASE MORTGAGE APPS surged last week by 9.0%. REFIS even more so, up 18%. The 30-year mortgage rate averaged 4.09%... This is good near-term news for the housing market…

CRUDE OIL INVENTORIES declined by 1.9 million barrels last week. GASOLINE rose by 1.4 mbs, DISTILLATES declined 2.1 mbs…

MARKIT’S FLASH MANUFACTURING PMI came in an expansionary 53 for September. While above 50 denotes expansion, 53 is as slow as its been since October 2013…

SEPTEMBER 24, 2015

DURABLE GOODS ORDERS FOR AUGUST came in inline with the consensus estimate, -2.0%. Aircraft orders are once again skewing the number. Ex-transportation, orders were unchanged. Captial goods slipped .2% after posting two months of very sold growth.

WEEKLY JOBLESS CLAIMS remain unrellentingly below the all-important 300k market, coming in last week at 267k. Clearly, the U.S. labor market is strong!

THE CHICAGO FED NATIONAL ACTIVITY INDEX points to a weak August for the economy, coming in at -0.41. Manufacturing is largely to blame for August's weakness.

THE BLOOMBERG CONSUMER COMFORT INDEX surprisingly rose last week, to 41.9, from 40.2. I'm surprised given recent stock market volatility.

NEW HOME SALES surged in August, to 552k, vs the consensus estimate of 515k. Here's Econoday:

Because of a small sample, new home sales can be very volatile month-to-month as they are in the August report where, at 552,000, the annual rate came in far above the high-end estimate. This is the highest rate since February 2008. Adding to the momentum is a 15,000 upward revision to July. 

In especially welcome news for builders, the sales strength pulled supply relative to sales even lower, to 4.7 months from 4.9 months. Still, low supply is a constraint on sales in contrast to pricing which remains favorable, at a median $292,700 for a 0.5 percent gain on the month but at a paltry year-on-year gain of only 0.3 percent. By comparison, the year-on-year sales gain is 22 percent.

NAT GAS INVENTORIES continue to climb, up 106 bcf last week.

THE KANSAS CITY FED MANUFACTURING INDEX came in weak, -8, as the sector continues to struggle under the weight of a strong dollar and weak commodities prices.

THE FED BALANCE SHEET grew by $9.7 billion last week. RESERVE BANK CREDIT grew by $10.9 billion.

M2 MONEY SUPPLY posted yet another gain last week, by $36.7 billion.

SEPTEMBER 25, 2015

Q2 GDP'S FINAL REVISION came in at a very strong 3.9% annual pace. Thanks to consumer spending!

THE SEPTEMBER SERVICES FLASH PMI came in at a nicely-expansionary 55.6. Consumer services providers report solid domestic conditions. Hiring has been "robust" and the respondents are optimistic going forward. New orders, however, slowed for a second month.

THE UNIVERSITY OF MICHIGAN'S CONSUMER SENTIMENT INDEX for September rose to 87.2. While it's an improvement over the prior reading, it's the weakest number since October of last year.

Thought(s) of the Day: Caterpillar and Yellen

Caterpillar CEO this morning:

"We are facing a convergence of challenging marketplace conditions in key regions and industry sectors -- namely in mining and energy. While we've already made substantial adjustments as these market conditions have emerged, we are taking even more decisive actions now. We don't make these decisions lightly, but I'm confident these additional steps will better position Caterpillar to deliver solid results when demand improves."

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Market Commentary (audio)

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Market Commentary (audio)

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Your Weekly Update (audio)

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Thought of the Day/Market Commentary: Smelling Fear...

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Thought of the Day: Are You Glued on the Fed??

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Today's TV Segment (video)

Thought of the Day: Advice for Presidential Candidates (audio)

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Thought of the Day: The timeless wisdom of Hollywood Henderson (audio)

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Thought of the Day (audio)

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Your Weekly Update AND Essential Unpleasantries AND Too Much of a Good Thing

I must say, my greatest---and most important---vocational challenge is the convincing our clients that what they know to be true with regard to virtually every other aspect of their lives is true for their portfolios as well. They've heard me preach both privately and publicly that market downturns---like winters, like diets, like sore muscles following a workout---are the unpleasantries that are essential to a healthy functioning system.

All that preaching notwithstanding, when they open that August statement, and/or when we're meeting and I describe the potential for a market selloff upon the first Fed rate hike in nine years, our clients (well. some of them) tend to cringe. With regard to the Fed, "Let's pray they don't!" or "Surely they won't while the market's so volatile, will they?" are common retorts. Again, all my ramblings on confusing volatility with loss, on why now is the best time for the inevitable and why hanging onto emerging markets and commodities stocks---perhaps even adding a little---amid their pummeling may, as we look back, turn out to be our smartest decisions of 2015 seem to carry little weight against the possibility of a near-term selloff in stocks. Oh well, I remain undeterred!

If, for the moment, you're in need of a little reassurance, please take a few minutes and take in this commentary from a tumultuous moment in 2012, and this one from last month.

As you'll read in the excerpt from my 2007 book Making Lemonade below (yes, a most shameless plug!), the fall of 1997 saw some unexpected volatility that, like today, was blamed on struggles befalling certain Asian nations. But before we go there, I'd like to share an observation that comes from the past three decades of doing what I do: It's that Mark Twain was mostly right, "history may not repeat itself, but it does rhyme". And that policymakers, as they come and go, are every bit as human as the rest of us: At the end of the day, they pursue their own objectives. In fact, if in this context, being human means they suffer the frailties of the ego, I must say that they are yet more human than the rest of us---which will be my segue into the next section:

TOO MUCH OF A GOOD THING??

The dollar has been very strong of late, and while that in many ways is a good thing, it's not viewed that way by many politically-influential leaders of the U.S. manufacturing industry. Here's from L. Ashraf's excellent 2008 book Currency Trading and Intermarket Analysis: How to Profit from the Shifting Currents in Global Markets:

It was no coincidence that the dollar’s peak of spring 2002 coincided with President Bush’s trade war action of slapping foreign steel producers with tariffs in order to secure the Republican Party victory in key states ahead of the Congressional elections later that year. Escalating protests by U.S. manufacturers calling the administration to weaken the strong dollar were heeded by Washington. The message was also loud enough for currency traders to begin selling the dollar against all major currencies, including the euro, which had become an obligatory legal tender in the Eurozone that year.

Make no mistake folks, while the coming Fed rate hike may indeed---as so many predict---spark more upward momentum in the dollar, too much of a good thing is too much of a good thing. A truism that, with regard to a strong U.S. dollar, the powers that be are keenly aware of. I can't help but wonder (and not just for political purposes) how much life the dollar has left and, therefore, how utterly attractive commodities and emerging markets may be at current levels. Check out the inverse relationship (the blue is the dollar index, the yellow is the MSCI Emerging Mkt Equity Index and the red line is the CRB Commodities Index):     click to enlarge



Also take a look at a time when the global powers-that-be formally agreed that too much of a good thing was too much of a good thing. I added text to describe the wheres and whens of the globally coordinated efforts to manipulate the dollar back in the 1980s.     click to enlarge



And, to bring it forward, here's an excerpt from the final communiqué released by the G20 finance ministers and central bankers after their meeting in Ankara just two weeks ago (emphasis mine):

We reiterate our commitment to move toward more market-determined exchange rate systems and exchange rate flexibility to reflect underlying fundamentals, and avoid persistent exchange rate misalignments. We will refrain from competitive devaluations, and resist all forms of protectionism.  

I.e., they'll be careful while manipulating their currencies to not further exacerbate the knock on effects of a strong U.S. dollar (or a weak Chinese Remnimbi).

A DOSE OF REALITY

In Making Lemonade: A Bright View on Investing, on Financial Market, and on the Economy, I took the reader---by way of my newsletter articles---back through the bull and bear markets of my career to that point. Here's a featured essay from November 1997 that speaks to our connection to emerging economies, the inevitability of falling markets, and of recency bias. The latter being the tendency to frame the current market environment within the context of the most emotionally impacting experience of the recent past. In that the internal manifestations of (the emotional reactions to) market declines are measurably more intense than market advances for most people, the current "correction" is surely provoking 2008, and/or 2000 to 2003-style nausea for your everyday individual investor. Particularly those who reacted, and sold, during a previous market downturn. Oh, and by the way, that 554 Dow-point decline on 10/27/97 that I reference in the following would equate to a 1,200 point decline today:

A Dose of Reality,  November 1997  

It’s the end of the day, October 27, 1997, and the Dow Jones Industrial Average just plunged 554 points, the second biggest one-day point drop and the twelfth biggest percentage drop in the history of the stock market. How did this happen? The market was moving along just fine. We had low interest rates, low inflation, good corporate earnings, lots of cash going to stock funds every month—all the makings of a great outlook for the U.S. stock market. Then “Bloody Monday”! We all thought that, with such a favorable economic backdrop, stocks would just keep moving up indefinitely; after all, it’s different this time, right? Well, those who really believed that have just received a dose of some much-needed reality.

You’ve read here before that I subscribe to the notion that it’s next to impossible for anyone to successfully time the market on a consistent basis. Therefore, I expose my own portfolio, and suggest my clients do the same, to the stock markets of the world when a long-term position in equities fits our overall objectives and tolerance for risk, rather than when the “timing” seems right. As a result, at times we feel like geniuses and at other times like nincompoops.

I’m tempted to provide a chart illustrating past down years in the market and the subsequent up years, but you’ve seen those before. Besides, at this time the Dow is already above where it was before the big sell-off. So can we call this a non-event? Certainly not for that portion of a diversified portfolio allocated to non-U.S. stocks, which are still well below the values seen just a couple of months ago (see Q and A for info on Asian markets). As for our U.S. market, it’s easy to blame the October 27 drop on events in Asia (it’s widely believed that the massive Asian market sell-off is the primary cause for the recent turmoil in our market). Regardless of where the blame resides, you might say that a Wall Street correction was overdue. Valuations were high relative to historic norms, and next year’s corporate earnings outlook isn’t as rosy as the past couple of years, particularly if Asia’s woes play havoc with U.S. multinationals. So maybe a correction such as the one that occurred on October 27 was meant to be. If so, my concern now is that we may be shrugging it off a little too quickly.

The day after the big 554-point drop, we received lots of calls from clients, as we did the day after the October 1987 crash, the biggest point drop in history. However, this year’s calls had a very different tone than the 1987 calls. In ’87, clients were very nervous and were asking if they shouldn’t “jump ship” and take their losses. Very few, if any, wanted to rush in and buy at those much lower levels. This year the calls were almost entirely from clients asking what to buy and wanting to place a trade that very day. My initial thought was that folks are certainly more educated than they used to be; they understand the long-term nature of stock market investing, and instead of panicking about their current holdings going down, they want to put even more money to work at these now lower prices. Then I had a different thought: if our clients had really been listening to my advice, any money they had in reserves that wasn’t intended for emergencies or other short-term needs would have already been in their long-term portfolios. They were actually calling to get into this downward-trending market to make some quick bucks and were willing to risk their cash reserves to do it. After all, we’ve learned that stocks just don’t stay down very long, right? Who could blame these investors for such assumptions? Even if they were in the market when it tanked in ’87, their portfolio probably did fine if they just held on. However, what we can never forget is that once in a while the market takes a dip that turns into a “bear market” that can leave scars on a portfolio—scars that, believe it or not, last longer than a week or two, or even a year. Recall this summer’s newsletter article “Why Buy Bonds,” which recounted the market decline of 1973 and 1974.

So what’s my point? Am I predicting a bear market in the foreseeable future? Certainly not. I don’t make near-term market predictions. In fact, I believe the stock markets of the world will continue to offer patient investors great potential for long-term returns. I also believe, however, that the old law “the higher the potential return, the higher the near-term risk” will never be repealed.

History suggests that sticking to a long-term, balanced approach—mixing the stocks of U.S. companies, non-U.S. companies, large companies, small companies, etc.—and riding through the inevitable ups and downs is how we stand the greatest chance of beating inflation and reaching our long-term financial goals.

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:  -7.80%

S&P 500:  -4.75%

NASDAQ Comp:  +1.27

EFA (Europe, Australia and Far East):  -2.30%

FEZ (Eurozone):  -3.61%

VWO (Emerging Markets):  -14.87%

Sector ETFs:

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

XHB (HOMEBUILDERS):  +8.68%

IYH (HEATHCARE):  +4.74%

XLY (DISCRETIONARY):  +4.67%

XLK (TECH):  -2.15%

XLP (CONS STAPLES):  -2.87%

XLF (FINANCIALS):  -6.51%

XLI (INDUSTRIALS):  -8.96%

IYT (TRANSP):  -11.65%

XLB (MATERIALS):  -11.88%

XLU (UTILITIES):  -12.01%

XLE (ENERGY):  -19.95%

The Bond Market:

As I type, the yield on the 10-year treasury bond sits at 2.19%. Which is 6 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 price decline a 1.05%  over the past 5 trading days (down 3.60 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.

Thought of the Day (audio)

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Thought of the Day (audio)

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Market Commentary (audio)

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Your Weekly Update AND Contradicting Numbers AND Something (business construction spending) to get Excited About

A friend emailed me Friday, in response to my morning audio, and asked how I can be so optimistic? She says the numbers contradict each other and simply don't make sense. She's "pessimistic about the crazy world we are living in."

If only the numbers made sense!  How nice the world---the market---would be! Right?

Well, let's explore that notion:

What if "the numbers" made sense. What if "it" were as easy as "the numbers" lining up in a manner that told the world conclusively where it stood and what to expect going forward?

Well, if the numbers foretold of a growing economy, and jobs and corporate profits aplenty---and everyone agreed---who'd sell us a single share of their stock? Can you imagine how high stock prices would go if everyone interpreted the numbers in that manner? Could we even get a price?

A market is where seller meets buyer. Where the seller possesses an item that he values less than he does what he could buy had he the cash in the buyer's wallet. Where the buyer views the item in the seller's possession as the best trade for his cash. With all the information at hand, a transaction requires two parties who essentially disagree on the value of the items exchanged.

Investor A believes Disney stock is going to pop big time on the inevitable success of its new Star Wars franchise. Investor B owns the stock and believes that Star Wars' potential is already in the price---and believes the risk is to the downside if Disney's latest bet doesn't deliver. Hence, a transaction is born.

Investor A has analyzed JP Morgan up, down and sideways, and sees the recent selloff as a huge long-term buying opportunity. Investor B owns the stock and thinks the economy is weaker than the numbers suggest and, therefore, believes interest rates---and banks' net interest margins---will remain low, and that financial stocks en masse will, therefore, underperform when the Fed doesn't raise rates in 2015. And he'd prefer not to suffer what he's convinced will be some near-term pain. In this hypothetical, A is thinking in terms of years, B is thinking months. Hence, based largely on different time horizons, a transaction is born.

Investor A believes Disney, JP Morgan, Apple, Exxon Mobile and a host of other solid U.S. companies will grow their respective businesses and, thusly, their earnings well into the twenty-first century---regardless of the near-term direction of interest rates and/or the challenges presently facing emerging world markets. And he believes that trying to time the unpredictable stock market is a fool's errand. Investor B's portfolio is diversified in the above names and a host of other solid companies but has bought into the hyperbole of some gold-toting pseudo prophet (who will profit if he can incite global panic) and wants out, like yesterday! Hence, transactions are born.

You see folks, we're only human. And as author, and general surgeon, Atul Gawande---quoting social scientist Robyn Dawes---points out in Complications: A Surgeon's Notes on an Imperfect Science (his book on the power and limits of medicine):

... human beings are inconsistent: we are easily influenced by suggestion, the order in which we see things, recent experience, distractions, and the way information is framed. Second, human beings are not good at considering multiple factors. We tend to give some variables too much weight and wrongly ignore others.

So, with regard to my friend's concern over contradictions in the marketplace, she's absolutely right, contradictions abound! They always will. And---in that the market needs buyers and sellers---thank goodness!!

Sellers have the upper hand:

Despite the chorus of analysts who've been, like myself, suggesting no bear market looms based on generally solid economic fundamentals, the sellers of late are clearly maintaining the upper hand. As noted above, the sellers possess a different opinion and/or time horizon and/or temperament than do the folks (the buyers) who are happy to accommodate their desire to sell. While no one knows how the future will unfold, history offers up a bit of evidence that suggests selling amid declining markets would not be the optimal course of action for the long-term investor.

Let's use the very volatile, and presently price-depressed MSCI Emerging Markets Index as an example:

Had you invested $50,000 into a fund that tracks that index on January 1, 2000, you would have watched the value of your position plunge by 31.47%, bringing it to $34,265 over the course of the next 12 months. UGH! Had you, understandably, had enough at that point and surrendered your shares to some risk-tolerant, and patient, opportunist, here's how her $34k investment would have fared over the ensuing 10 years (according to Morningstar):

2001: +1.45%          $34,762

2002: -4.54%          $33,184

2003: +62.26%       $53,844

2004: +30.66%       $70,352

2005: +32.95%       $93,533

2006: +31.06%       $122,585

2007: +42.20%       $174,316

2008: -50.27%       $86,687

2009: +79.11%       $155,265

2010: +18.41%       $183,850

Dang!

Here's Morningstar's chart if you'd like to extend the illustration through last year and/or do the exercise on other asset classes:     click to enlarge



 

The Economy:

As I've reported numerously in recent months, business capital investment has run at a slower than your typical expansion pace throughout the life of the present recovery. This speaks loudly about why productivity has waned of late (although last week's nonfarm productivity number for Q2 came in noticeably better than economists had predicted) and why I warned back in November of last year that the Fed having waited far into the profit cycle to raise rates could bring on a nasty correction in stocks. I should note that in the following slice of that commentary the "expanding profit margins" I referred to were primarily, if not entirely, the result of cost-cutting as opposed to capital investment.

Here’s one of my charts (I apologize for its busy-ness). The dark blue line represents the P/E for the S&P 500, the light blue line represents earnings per share and the purple line represents profit margins: click the chart to enlarge


The declining P/E is warranted given higher interest rates. Accelerating profits during some of those cycles (when the market held or advanced) effectively offset the potential fallout from lower P/Es. During a Fed tightening cycle—when P/E’s are declining—and profits aren’t rising, stock prices will come down hard. My concern this go-round is that profit margins have been expanding, virtually non-stop (note the purple line and white arrows on the graph), for 5+ years and the Fed has yet to begin tightening. Which they generally in the past have done earlier in the profit cycle. On this observation, by itself, we should expect a significant correction to occur when the Fed begins raising rates.

However, there is a counter argument to be made that, by itself, may not avert a 10+% correction, but should provide some comfort to those who fear that the next great bear market lies just around the next turn. The U.S. economy has just begun to accelerate at a pace worthy of your typical expansion. Companies are holding large cash positions, commercial and industrial loan issuance looks healthy, commercial paper issuance is up off its low in March and commercial paper rates remain extremely low. The corporate financing gap (non-residential fixed investment vs corporate profits, i.e., the amount companies must finance for capex [capital expenditures... i.e., investing in plants and equipment]) sits ($87 billion) way below the long-term average of 2% of GDP ($350 billion). Which means there’s plenty of room for capex spending going forward. Which leads to economic growth, jobs and future profits. This would be one (there’s more) legitimate bull case amid the coming Fed tightening cycle.

All that said, my suspicion (a suspicion, mind you, is not a prediction) is that the Fed will induce a healthy 10-20% pull back in U.S. stocks, should they begin tightening, as expected, during the second half of 2015. But being that great bear markets are things of recessions, and that your conventional pre-recession warning signs in the U.S. are virtually nowhere to be seen, I would be surprised if the U.S. stock market begins a prolonged 20+% sell-off next year. But it absolutely could happen…

Well, I bring potentially very good news: Private nonresidential construction spending (capital investment) may be on the rise. Last week's report on July's construction spending showed a major increase in what, in my view, matters much if you're hoping for a healthy bull market after the present dust settles. Here's a visual:     click to enlarge



Oh, and with regard to the presidential hopefuls who hope to push the buttons of those citizens who believe our primarily service sector economy should find its way back to the smokestacks, here's a visual on construction spending within the manufacturing sector that might allay those voters' concerns:     click to enlarge



Lastly---and I digress---while, alas, on the subject of politics, when your man or woman begins to sing the unoriginal refrain on China "cheating"---by devaluing its currency---in order to sell you and me affordable goods (how dare they!), here's a 10-year chart of the value of the yuan versus the dollar:     click to enlarge



Like my friend said, the numbers contradict!

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:  -9.65%

S&P 500:  -6.69%

NASDAQ Comp:  -1.10%

EFA (Europe, Australia and Far East):  -3.09%

FEZ (Eurozone):  -4.18%

VWO (Emerging Markets):  -15.44%

Sector ETFs:

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

XHB (HOMEBUILDERS):  +5.30%

XLY (DISCRETIONARY):  +3.47%

IYH (HEATHCARE):  +1.67%

XLP (CONS STAPLES):  -4.06%

XLK (TECH):  -4.96%

XLF (FINANCIALS):  -8.41%

XLI (INDUSTRIALS):  -10.99%

XLB (MATERIALS):  -13.44%

XLU (UTILITIES):  -13.62%

IYT (TRANSP):  -14.62%

XLE (ENERGY):  -19.42%

The Bond Market:

As I type, the yield on the 10-year treasury bond sits at 2.13%. Which is 5 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 decline a whopping 3.20%  over the past 5 trading days (down 2.57 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 31, 2015

THE CHICAGO PMI FOR AUGUST, while coming in at an expansionary 54.4, the details show a real weakening in the Chicago area manufacturing sector. Here's Econoday:

The headline for August looks solid, at 54.4 for the Chicago PMI, but the details look weak. New orders and production both slowed and order backlogs fell into deeper contraction. Employment contracted for a fourth straight month while prices paid fell back into contraction. Lifting the composite index are delays in shipments which point to tight conditions in the supply chain. Inventories rose sharply in the month and the report hints that the build, despite the weakness in orders, was likely intentional. But strength is less than convincing and this report suggests that activity for the Chicago-area economy may be flat going into year end.

THE DALLAS FED MANUFACTURING SURVEY continues to show the pain in the oil sector taking its toll in Texas. The general activity index fell to -15.8 in August, after July's -4.6.

SEPTEMBER 1, 2015

AUTO SALES have very strong of late, and August was no exception. Total vehicle sales came in at 17.8 million annualized, up from a strong 17.6 million in July.

THE JOHNSON REDBOOK RETAIL SALES REPORT came in at a weak 1.3% year-over-year last week. This report has run contrary to what we're seeing in other key consumer metrics, such as auto and home sales. Although, the latest reading for online retail sales have been strong.

THE ICSC RETAIL REPORT came in at 1.9% last week. Ditto my comment on Redbook.

MARKIT'S MANUFACTURING PMI FOR AUGUST came in at an expansionary 53, right in line with consensus expectations.

THE ISM MANUFACTURING INDEX came in at a lower-than-expected 51.1. While above 50 denotes expansion in the sector, there's no question that the strong dollar---hitting exports hard---is doing a number on U.S. manufacturers. 

CONSTRUCTION SPENDING FOR JULY came in strong, up 0.7%, up 13.7% year-over-year. Here's Econoday and Bespoke (pay particular attention to Bespoke's comment, the last sentence holds huge promise for the economy going forward):

Econoday:

Led by strength in single-family homes, construction spending rose 0.7 percent in July while an upward revision to single-family homes added to a sharp upward revision to June, up 6 tenths and also at plus 0.7 percent. Year-on-year, total construction spending was up 13.7 percent in July.

Private residential construction rose 1.3 percent in July with construction spending on single-family homes up 2.1 percent vs a 0.5 percent gain in June that was initially reported at a 0.3 percent contraction. Spending on the more volatile multi-family category, which is much smaller in scale, fell 2.2 percent after spiking 5.5 percent in June. Year-on-year, both categories show robust gains, at 15.8 percent for single-family homes and 21.2 percent for multi-family.

Turning to private nonresidential construction, spending rose 1.5 percent in the month. In gains that belie concerns over weakness in business investment, manufacturing was very strong at plus 4.7 with power and transportation both at plus 2.1 percent in the month. But spending on public construction was negative, at minus 3.0 percent for educational buildings and minus 0.2 percent for highways & streets.

Housing and construction, which are domestic sectors insulated for global volatility, are posting some of the best numbers of any sectors in the economy right now and look to give 2015 substantial support.

Bespoke:

As far as investment goes, it’s hard to beat the levels currently seen in the Amusement and recreation category. Transportation and High/street spending also continue to make new highs, in line with a more robust investment profile from state and local governments that we noted in The Closer last week. Sewage and waste disposal, while not a “clean” data series, is another sign that municipal spending is finally recovering after years of suppression. Finally, our favorite series? The exploding construction in Manufacturing facilities, which is indicative of significant capex and capacity expansion in the US manufacturing sector, weak ISM and Markit PMIs or no.

SEPTEMBER 2, 2015

MBA MORTGAGE PURCHASE APPLICATIONS rose 4.0% last week, up a whopping 25% year-on-year!! REFINANCES surged 17% w/w. The average 30-year rate ended last week at 4.08%.

THE ADP EMPLOYMENT REPORT showed 190k jobs created in August. While that's plenty to compensate for population growth, it's below expectations... Friday's BLS number will be telling. Other employment related data suggest the jobs market continues to tighten.

PRODUCTIVITY AND COSTS FOR Q2 show productivity growing far better than economists predicted. Up 3.3% Q/Q. Y/Y results, however, remain week, as does the forward outlook. Here's Econoday:

The upward revision to second-quarter GDP gave a strong lift to nonfarm productivity, up 3.3 percent at an annualized rate which is at the very top of the Econoday consensus and well up from plus 1.3 percent in the initial reading. This is the best performance since the fourth quarter of 2013.

The gain in productivity in turn drove unit labor costs 1.4 percent lower which is well down from the prior estimate of plus 0.5 percent and at the very low end of consensus and the sharpest drop since the second quarter of 2014. Output rose a sharp 4.7 percent in the quarter while hours worked rose only 1.4 percent with compensation up only 1.8 percent.

But year-on-year data tell a different story with productivity up 0.7 percent in the second quarter and labor costs up 1.7 percent. These readings reflect prior weakness in productivity tied to weak output in the first and fourth quarters.

And the productivity outlook for the ongoing third quarter is also soft with early GDP estimates at roughly plus 2 to 2.5 percent. For reference, second-quarter GDP came in at 3.7 percent, revised from a prior reading of 2.3 percent.

THE GALLUP U.S. JOB CREATION INDEX remained at 32 for August. Which is the best reading in the report's 7 year history.

FACTORY ORDERS for July came in below expectations, at .4%, vs .9% est. In that orders are expressed price-related, energy products are responsible for the less than expected reading. Compensating for the drop in oil, the results were actually pretty strong. Particularly in the one area that could really move the needle for the economy and corporate results going forward: capex! (as noted in the above on Factory Orders): From Econoday's commentary:

The gain in durable goods was driven by gains in motor vehicles and includes strong gains for capital goods which indicate, at least it did as of July, rising business investment and rising confidence in the overall outlook.

CRUDE OIL INVENTORIES grew 4.7 million barrels last week. GASOLINE stock declined by .3 mbs, and DISTILLATES grew by .1 mbs. Oil prices declined on the news.

THE FED BEIGE BOOK sees growth moderate to modest across the regions. Here's from the summary:

Reports from the twelve Federal Reserve Districts indicate economic activity continued expanding across most regions and sectors during the reporting period from July to mid-August. Six Districts cited moderate growth while New York, Philadelphia, Atlanta, Kansas City, and Dallas reported modest increases in activity. The Cleveland District noted only slight growth since the last report. In most cases, these recent results represented a continuation of the overall pace reported in the July Beige Book. Respondents in most sectors across Districts expected growth to continue at its recent pace, but the Kansas City report cited more mixed expectations. District reports on manufacturing activity were mostly positive, although among these, the Cleveland, St. Louis, Minneapolis, and Dallas Districts painted a somewhat mixed picture across manufacturing sectors. Only the New York and Kansas City Districts cited declines in manufacturing. Retail contacts in a majority of Districts reported that their sales and revenues continued to expand. By contrast, the Cleveland and Minneapolis Districts cited flat consumer activity since the last report, Atlanta was mixed, and Dallas reported decreased sales year-over-year. Most Districts reported increased auto sales. Among Districts with information on tourism, activity was strong in most reports.

September 3, 2015

WEEKLY JOBLESS CLAIMS continue to point to a strong labor market, as they remain below 300k. 282k last week.

THE CHALLENGER JOB-CUT REPORT also speaks to strength in the labor market. Here's Econoday:

Lay-off announcements, at 41,186, were moderate in August and far lower than the 105,696 in July which was skewed higher by a massive Army cutback. August layoffs were led by the retail sector reflecting the bankruptcy of the A&P supermarket chain. Layoff levels in this report have generally been on the low side but are not nearly as striking as actual jobless claims which are extremely low. This report will have no effect on expectations for tomorrow's employment report which is expected to be moderate to soft and in line with trend.

THE TRADE DEFICIT narrowed in July. A stat that, by itself, is utterly meaningless in the sense that us importing more goods than we're exporting is somehow a bad thing in the global scheme of things. What I am interested  in, however, is the makeup of the stuff that moves to and fro. And July's report solidly confirms the notion that capex is beginning to accelerate (globally). Which is hugely positive news for the economy and the stock market going forward. Here's Econoday:

The nation's trade gap narrowed to a nearly as expected $41.9 billion in July following an upward revised gap of $45.2 billion in June (initially $43.8 billion). The improvement reflects a monthly rise of 0.4 percent in exports, which were led by autos, and a 1.1 percent contraction in imports that reflected a decline in pharmaceutical preparations and cell phones which helped offset a monthly rise in imports of oil where prices were higher in July.

Aside from autos, exports of industrial supplies, specifically nonmonetary gold, were strong in July while exports of capital goods also expanded. This helped offset a monthly decline in exports of civilian aircraft and consumer goods. Turning again to imports, other details include a rise in capital goods in what is the latest sign of life for business investment.

By nation, the gap with China widened slightly, to an unadjusted $31.6 billion in the month, while the gap with the EU widened more substantially to $15.2 billion, again unadjusted which makes month-to-month conclusions difficult. Gaps with Mexico and Canada both narrowed.

This report is another positive start to the quarter and will lift early third-quarter GDP estimates. But these will be cautious estimates as recent market turbulence pushes back conclusions and will make August's trade data especially revealing.

MARKIT'S U.S. SERVICES PMI shows the sector (85+% of the U.S. economy) remaining firmly in expansion territory. At 56.1 versus the consensus estimate of 55.2.

THE BLOOMBERG CONSUMER COMFORT INDEX unsurprisingly---given the recent global and stock market turmoil---declined to 41.4 from 42.0 the week prior.

THE ISM NON-MANUFACTURING (SERVICES) INDEX for August confirmed Markit's results. Coming in at 59.0 vs a 58.5 consensus estimate. Econoday's summary should make one feel very good about the present state of the U.S. economy:

What global turbulence? The ISM non-manufacturing index held on to the great bulk of its historic July surge, coming in at 59.0 in August vs the Econoday consensus for 58.5. Outside of July's 60.3, this is the second strongest rate of monthly growth since December 2005!

New orders are especially strong, at a robust 63.4 for only a 4 tenth down-tick. Not much effect there. And backlog orders? They're up 2.5 points to 56.5 which is the highest rate of accumulation since May 2005.

Employment edged back from July's near record level but remains very strong at 56.0. Export orders continue to expand, at 52.0 vs July's outsized 56.5 in what pessimists can hang on to as an indication of global-related trouble.

But the non-manufacturing sector, unlike manufacturing, is insulated to a large degree from global effects, as illustrated in today's report. 

NATURAL GAS INVENTORIES once again grew last week by 94 billion cubic feet.

THE FED BALANCE SHEET expanded by 0.8 billion last week to $4.476 trillion. RESERVE BANK CREDIT declined by $9.3 billion.

M2 MONEY SUPPLY continued its ascent, rising by $33.1 billion last week. That's positive news for economic growth going forward.

SEPTEMBER 4,2015

THE BLS JOBS REPORT FOR AUGUST came in below expectations, at 173k. However, June and July's numbers were revised upward by 44k. The unemployment rate came in below expectations and hourly earnings came in above. As I've been reporting for months, the U.S. labor market is looking quite strong these days. 

Market Commentary (audio)

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Market Commentary (audio)

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