Saturday, November 21, 2015

Your Weekly Update...

In a post last week I offered up three charts that illustrated the ills of recency bias: which, in the context I use here, is the basing of one's investment decisions on recent past performance.

Here's another illustration:

It's September 30, 2015 and John and Jane (both in their early 60s) recently contributed (but not really) to the political narrative that says the U.S. economy is going to hell in a hand basket because the labor force participation rate is shrinking. I.e., they, oops!---(doesn't quite fit the glass-half-empty narrative)---retired. I know, I just angered at least half of you!

Anyways --- the newly-retired couple have to do something with the zillions they saved in their 401(k) plans over all those years of toil and sweat.

So John---or please pretend I said Jane if my gender bias disturbs you... or if your name is John pretend I said Jim... if your name is Jim pretend I said....umm.... Bartholomew! (I don't counsel any Bartholomews)---is the analytical sort. Well, kinda: let's just say John, I mean Bart, considers himself the analytical sort. (I'm thinking my condescension toward Bart just won me back the feminists I offended in the previous sentence)... So Bart does his due diligence and assembles the sector performance spreadsheet below (click to enlarge):


Bart, having eyes that do not deceive---and limited (having been confined to his old 401(k) options) investment experience---knows one thing for certain: he ain't touching energy, materials or industrials with the 60% of the family portfolio he's devoting to the stock market. He'll play it safe (as most retirees should) and divide it amongst the top 6 performing sectors.

Well, we're now 7 weeks into the fourth quarter, and Bart, the analytical sort---with gobs of time on his hands---updates his sector spreadsheet to see what's what since they rolled over their zillions. Here's what he saw:


It's not like they lost any money (it's been a very good Q4), but Bart, being competitive (folks who consider themselves the analytical sort generally are.... i.e., they like to be right), is feeling a bit frustrated. The 3 sectors he shunned have delivered impressive top 5 results since day one of his foray into the world outside the old 401(k).

I know, that's too short-term an example to get excited about, but it is perhaps a hint that the constructiveness on commodity-related equities that I've expressed in recent audios might bear some fruit---if, that is, we're anywhere near embarking on that later inflationary-phase of the economic cycle. That said, while we're beginning to dribble in (where we deem client portfolios to be underweight), I can make a bearish very-near-term case for commodity stocks if, as so many expect, the dollar appreciates further as a result of the Fed raising interest rates (while other central banks are taking opposite measures). I.e., commodities tend to correlate negatively to the U.S. dollar. As I've previously expressed, however, while the logic is textbook, history doesn't entirely support today's consensus on the dollar. Good thing we don't concern ourselves with the very near-term when making sector allocation decisions.

Since we're on commodities, let's take a peek at some data you'll seldom, if ever, hear discussed on CNBC. When they're talking commodities, they're talking oil, copper and the like. And they're generally assessing the prospects for taking speculative positions in the commodities and/or their futures contracts. A common refrain of late has been that the horrendous bear market in commodities says something, well, horrendous about the global economy. I've sung a bit of a different tune: China's evolution, if not orchestration, from an industrial-driven economy to one that's geared toward consumption has been the primary catalyst for a major bear market in commodities. Now, while, indeed, supply and demand impact the price of copper and a barrel of oil, speculator sentiment plays into the mix as well. But when we're talking nontradable, nonmetalic, commodities, the ones---such as cement, clay, glass, lime and gypsum---whose prices are captured in the U.S. PPI Commodities Nonmetalic Minerals Index, there are no speculators pushing prices around while trying to make a buck. Nope, the only players are the suppliers and the users.

The following chart (click to enlarge) shows the one-year move of said index (red) along with the index for brick and structural clay tile (purple).   

Nonmetalic Minerals and Brick and Clay Tile Indices

While the above should in no way be considered conclusive that things are going gangbusters and that the bear market in tradable commodities is due primarily to speculative fervor (it absolutely isn't!), it does offer some support for the notion that the prospects for the global economy (not to mention the U.S. housing market) aren't nearly as bad as some would have us believe.

The Fed:

Can't close a market commentary these days without touching on the Fed: The punditry seems to have fallen into alignment on the market sentiment toward a December rate hike. Last week's impressive rally amid Fed chatter that December may be the month was greeted by virtually every commentator I paid attention to as proof positive that the market is a-okay with higher rates. I get it, but I'm not convinced. Last week saw France go hard after suspected terrorists, it saw Dow-component Nike announce a $12 billion share buyback, a hike in its dividend and a two-for-one stock split (now tell me again how bad the global economy is [55% of Nike's sales occur outside of North America]), and it saw the likes of Lowes and Home Depot post impressive results (now tell me again how awful life is these days for the American consumer). Those events---not to mention the season [November and December tend to be very good months for stocks]---by themselves were enough to spark a rally, especially after the previous week's dismal showing.

2-year treasury yields, as well as Fed funds futures, are pricing in a December hike---and the pundits may very well have it right (it'd sure be nice) on how the stock market views it. But I'll need a little more time---and to see the market react to a few more economic data points---before joining the consensus.

I do believe---particularly since we just got our 10+% correction---there's a good chance the Fed can pull off the first rate hike without turning the market completely upside down. They'll do it with a firm promise that they'll go most tenderly in their efforts to "normalize" interest rates during the months to come. But I struggle with the notion---as so much of last week's commentary suggested---that the market will actually accelerate right through it, being, they say,  that it'll confirm the Fed's confidence that the economy's in good enough shape to withstand higher rates (I actually believe it is). Which implies that the market has complete confidence in the Fed's forecasting ability. I don't believe it does...

I'll keep you posted...

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