Monday, February 29, 2016

Market Commentary (video)

Click the icon in the lower right corner (after clicking the play button) for full screen, then wait a few seconds to focus.

Saturday, February 27, 2016

Your Weekly Update (and a video on recent market trends)

We'll stay with the economy theme for this week's update. As we've explored here, a thoughtful look at markets and the economy takes one way beyond the media commentators who are chosen for their ability to strike a nerve and to produce a provocative headline. Speaking of headlines, a quick Google search gave me these from the past few weeks:

Fannie Mae at Risk of Needing a Bailout

Fed Eyes Increased Risks for U.S. Economy

Europe's Recovery Plan Fails to Impress

Yellen's Bias Toward Higher Interest Rates

G-20 Says Economic Risks Have Risen Globally

Economists Lower Growth Estimates Amid Rising Recession Risk

U.S. Consumers Face Quickening Inflation

Here's a glass-half-full one:

U.S. Economy Starting 2016 on Solid Footing

And here are my two favorites:

U.S. Retail Investors Dump Global Stocks (that's a buy signal!)

Obama Seeks to Brighten Economic Mood (I wonder if he'd go there if he were a candidate)

The first of my two favorites is a favorite because the individual investor is forever on the wrong side of the trade. My parenthetical quip following the second speaks to a gloominess that forever seeps into election years as presidential hopefuls paint a picture of a desperate country in need of a savior. Not that things are all rosy in the good ole US of A, but are we truly living the desperation that some suggest??

So here, in a nutshell, is what last week's data releases had to say:

Of the 16 major indicators with published economist estimates, 9 came in either above (8) or in line (1) with expectations. 7 missed.

Of particular note for me were durable goods: Orders for January surprised measurably to the upside. While one month does not a trend make, the report, following a better than expected industrial production read the week before, got my attention. The core capital goods improvement, should it continue, could be a huge positive for the economy going forward. Again, a one month rebound for a manufacturing sector that has been so stuck in the mud does not warrant celebrating. I.e., don't hold your breath. Here's Econoday:
The factory sector bounced back strongly in January, indicated first by last week's industrial production report and now by durable goods orders which are up a very strong 4.9 percent. Aircraft did add to the gain but when excluding transportation equipment, durable orders still rose 1.8 percent. And core capital goods orders, which had been weakening, bounced back strongly with a 3.9 percent gain.

Personal Income and Outlays, and the PCE Core Price Index (the Fed's preferred measure): The following from Econoday speaks to what I've been preaching for months and, while it's very good (and comforting) news, it virtually has to make for some market anxiety over the course of interest rates going forward:
There's plenty of life in the consumer. Personal income jumped 0.5 percent in January as did consumer spending, both readings higher than expected. Also higher than expected are the report's inflation readings especially the core PCE which rose 0.3 percent for a year-on-year plus 1.7 percent.

Details are solidly positive with components on the income side led by wages & salaries, up a very strong 0.6 percent for the third large gain of the last four months. And consumers didn't draw from savings on their January shopping spree, with the savings rate unchanged at a very solid 5.2 percent.

Components on the spending side are led by durable goods which jumped 1.2 percent and reflect strong vehicle sales in the month. Spending on services rose 0.6 percent in the month.

But the big story of the report is the core PCE, especially the year-on-year rate which is up from 1.4 percent to 1.7 percent and is pointing confidently toward the Fed's 2 percent line. Total prices, which include food and energy, rose only 1 percent but the year-on-year rate for this reading has been on a tear, moving from about zero late last year to plus 1.3 percent in January.

Economic news outside of the consumer has been soft but today's report is a reminder that the nation's most important supporter is alert and in the driver's seat. A strong consumer, who is benefitting from a strong labor market, together with the upward pivot for inflation will not make policy makers comfortable at next month's FOMC where a rate hike, though long dismissed, may be a serious topic of discussion.

And, on the flip side, the PMI Flash Survey for Services: The service sector represents the bulk of the U.S. economy and has been the engine during this entire expansion. The preliminary read (negative) this report produced for February has to be a big red flag, and should to some degree offset market concerns over the Fed engendered by the recent readings on the consumer. Here's Econoday:
In what could be a chilling indication of trouble ahead, the February flash for the service PMI slipped below breakeven 50 to 49.8 for the weakest reading since the government shutdown of October 2013.

New orders are still growing but at the slowest pace in nearly six years with contraction in backlog orders the most severe since early 2014. The 12-month outlook, though still positive, is the least positive in 5-1/2 years. Employment in the sample is still growing but for how long is a question. Price data are not favorable, with inputs down and growth in selling prices at a 5-month low.

The breakdown in the service sector, a breakdown however still isolated to this report, would leave the economy without a central point of strength. The declines here do suggest that domestic demand could be on the downswing and falling in line with sinking demand overseas.

Bottom line, despite some smart prognostications---and financial market signals---to the contrary, in my view the economic risk remains tilted to the upside... for now.

As for the markets, I'll offer up my thoughts while we run through some charts:

Friday, February 26, 2016

The Idea of America

"Let's make America great 'again'!" Hmm...

Clearly, America's greatness---what makes, or would make, America great---is the definition of subjective. To some it would mean erecting barriers, or walls, that have never existed in America's history. I, therefore, do not understand how those who would promote such things can claim that such things could make America great "again". To some it would mean limiting American individuals' and businesses' freedom to trade with individuals and businesses in other countries. I do not understand how limiting freedom can ever be confused with American greatness. But, alas, it so often is.

Consider the word "great", or "greatness": Does the notion of its achievement conjure up thoughts, or sensations, of pulling in, of protecting, of controlling, of contracting? Or does it provoke a sense of breadth, of clarity, of brightness, of liberation? What indeed makes a great nation?

I so cherish the memories of the long talks, during the summers of my youth, with my father's father, Manuel Lopez Mazorra: An immigrant by accident who built a life and a family on great American soil. My grandfather loved this country more than anyone I have ever known. His lectures on freedom---the kind that existed nowhere in the world but America---as we walked the streets of a small Northern California town, instilled in me the clearest understanding of the values that truly make this magnificent country of ours, well, magnificent! At least to me...

(Oh, and by the way, while the above may appear as if I have one candidate in mind [I am indeed borrowing from the rhetoric of one in particular], I don't. Protectionism has been a central theme---on both sides of the aisle---in every presidential election I can recall. This one's no different.)

It seems to me that foreigners are the best articulators of the idea of America. And that makes sense, given their vantage point.

Bono does it beautifully!

Market Commentary Video

Click the icon in the lower right corner (after clicking the play button) for full screen, then wait a few seconds to focus.

Also, in the following I mention "shorts" and being "short the market". If you need an explanation of that terminology, please watch the second video below...

Thursday, February 25, 2016

Market Commentary (video)

Click the icon in the lower right corner (after clicking the play button) for full screen, then wait a few seconds to focus:

Wednesday, February 24, 2016

Interesting Day Today for Stocks... Plus a little history on a period that looks kinda like today (for commodities)... (video)

Click the icon in the lower right corner (after clicking the play button) for full screen, then wait a few seconds to focus:

Today's TV Segment (video)

Where I say "tailwind for the stock market" (with regard to interest rates), at the 1:12 left mark, I meant to say "headwind for the stock market"...

Tuesday, February 23, 2016

Market Commentary (audio)

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Market Commentary (video)

Click the icon in the lower right corner (after clicking the play button) for full screen, then wait a few seconds to focus:

Monday, February 22, 2016

Market Commentary (video)

Click the icon in the lower right corner (after clicking the play button) for full screen, then wait a few seconds to focus:

Sunday, February 21, 2016

Beware the private sector actor who would aspire to public office!

Henry Ford, Thomas Edison, Alexander Graham Bell, William Gates, Steve Jobs, Sergey Brin, Warren Buffett, Elon Musk, etc.

Private sector actors make the world an ever-better place. The freest markets are where they thrive and where the masses enjoy the greatest standards of living. Their genius begets commerce, inspires competition and, therefore, accelerates the advancement of all manner of technology. And, by the way, commerce among nations has forever dwarfed military intimidation as a guarantor of peace.

The public sector is the upholder of the law and the arbiter of disputes. Politicians themselves are the manifestations of the evolving ideals of the populace. They are not leaders, they are followers by definition. They fall in line behind their interpretations of the desires of voters. While in office, they distribute the resources they extract from the private sector to do the bidding of those they deem most responsible for their political success. They do not create, innovate or even pave ways.

Have you come to the realization that the business people whom you truly admire would never run for office? Well, thank goodness! For had, choose a name from the above list, wasted his talents on the attainment of political office the benefits that he bestowed upon society would have, at best, been delayed.

We should be most suspicious of the private sector actor who would aspire to public office. For such aspiration has to mean that he is motivated by something other (narcissism perhaps) than achieving the utmost good from his skills. He knows that his time spent in office will lay his talents dormant and that he will produce nothing of value (as you and I would define it). For him to believe otherwise would make him a most ignorant creature.

And, no, he would not be your grand idealist. For the idealist whom you would have as your leader follower would be incapable of stooping to the subterranean antics---the lying, the twisting, the turning, the backstabbing and the pandering---that it takes to win public office.

So what does that leave us? What we have had and will always have, individuals who find their way to office by identifying and harnessing the aspirations, fears and prejudices of voters. Whether they spawn from the private sector or the public sector makes no difference whatsoever.

Saturday, February 20, 2016

Grey Matter; The Investor's Greatest Single Threat (and a video update)

While I can offer up a number of reasons---both fundamental and technical---why we might expect the recent rally to hold, I can counter (if not more than counter) each with a reason why we shouldn't. In fact, even if the odds were overwhelmingly in favor of the market taking flight to all-time highs from here, I would encourage you not to expect it. Why? Simply because that within the expecting generally lies desire. The expecting, that is, of something deemed favorable: I.e., you expect your stocks will soon be rising in price, which would be a desirable near-term outcome.

You see, the greatest single threat to successful long-term investing lies between the ears of the investor. "Recency bias"---the belief that what's occurring now will continue---plagues the grey matter of both the naive investor as well as those who ought to know better (like the execs of copper miner Freeport-McMoRan who borrowed billions to expand into the oil market when the price was $100+ per barrel. Needless to say, their shareholders have suffered for it). In the context of a huge 3-day rally in stocks, we can call it "recency hope". And when market hopes are dashed, individual investors often react. I.e., they tend to offer up their shares to those who understand that it's best to attend the auction when buyers are feeling stingy. I.e., reluctant buyers equal lower prices.

Even if you're not prone to selling when prices are falling, suffering from "recency hope" not only sets you up for disappointment, it suggests that you somehow believe that a declining market is a bad thing. Well, unequivocally, it's not!

Yes, falling stock prices, for patient buyers and unflappable holders, are always and forever good things! So how can that be? Well, of course I've no need to explain on behalf of buyers, but for holders I can do this metaphorically: Think in terms of weed-pulling, underbrush-burning, pruning, fertilizing, raining, snowing, and plain old resting. Yep, you got it, market selloffs are rejuvenating phenomena. True investors (owners, as opposed to traders, of stocks) understand that, and, frankly, they appreciate---and never react to---corrections and bear markets, despite the attendant impact on the numbers printed on their monthly account statements.

Into the weeds:

It forever amazes me how so many "experts" can review the same data and forecast vastly different outcomes. I listened to two well-credentialed analysts yesterday, one has us on the verge of, if not already in, a recession, while the other says recession isn't even on the foreseeable horizon. The former cites credit spreads and commodity prices, the latter cites employment numbers, restaurant sales and housing. In last week's update I sympathized, more or less, with the latter---and this week's data only serves to bolster that case: Of the 15 indicators released, 9 beat analysts' expectations, 4 came in below, and 2 were in line. Of the 4 disappointments there was the NAHB Housing Index (measures builder optimism), which came in at 58 versus a 60 estimate (although above 50 denotes overall optimism), housing starts (although permits beat, which sets up better starts numbers going forward), continuing jobless claims (although initial claims beat) and the Empire State Manufacturing Index (yes, manufacturing remains weak, although other indicators have shown recent signs of life).

Friday's market action was interesting, in that the Dow and the S&P 500 ended flat, and the Nasdaq Comp saw a nice .4% gain, while oil plunged 3% and the Core CPI number for January came in at a hot 3.6% annual pace. I read the Fed's economic assessment from their January meeting minutes, and while I get why the market has discounted virtually no March rate increase---and I believe that remains firm---given the quality of much of the data released since that meeting I suspect that the futures market will be upping the odds of a hike or two later this year. The fact that stocks didn't give way to that thinking on Friday is, again, interesting. Could it be that good news is actually good news? We'll see... it's way too soon to tell.

I'll let you off easy this week and close here with a look at the technicals (click the icon in the lower right corner for full screen. It then takes a few seconds to focus):

Thursday, February 18, 2016

Market Commentary (audio)

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Wednesday, February 17, 2016

Market Commentary (audio)

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Saturday, February 13, 2016

Weekend Update: Are We Headed For Recession? Duh!

A friend of mine watched a financial program yesterday and told me that "all the pundits said we are headed for a recession", and wanted to know what I thought. My friend delivered me this weekend's topic.

First of all, the pundits are 100% correct. We are indeed headed for a recession! In fact, we are always headed for a recession, and we are always headed for an expansion. I.e., the economy is cyclical. The question is, are we headed for a recession anytime soon? I love this question, because it allows me to break out my charts!

But before I do, I have an observation to make: Whenever the market's in correction mode, recession calls seem to come screaming out of the woodwork. I just Googled "recession predictions in 2011"; 2011 was the last time we had a legitimate correction (and it was deeper than this one, so far). Here's from the first page:
"And Now Here Comes The Recession of 2011" 8/20/11

"A Recession Forecast That Has Been Reliable Before" 10/8/11

"Forecast says double-dip recession is imminent" 11/25/11

"U.S. Economy Tipping into Recession" 9/30/11

"Economist who Predicted Recession Warns of Worse Crash" 9/18/11

"This Economist is Forecasting Recession --- And He's Never Been Wrong" 10/4/11 (this one's my favorite!) 

Now is that right (that down markets bring out the doomsayers), or is there always an abundance of recession calls?

Just Googled recession predictions in 2012 (market trended higher). Here are the first page headlines that called (or sort of called) a recession:
"The 2012 Recession: Are We There Yet? 9/13/12 (this was from a 2011 frustrated forecaster)

"A New Recession Seems Inevitable" 2/24/2012  (could still be licking wounds from 2011 market correction)

"World Bank Warns of Global Recession"  1/17/12  ( " )

"Is U.S. Already in A Recession?" 10/1/12

So there were 4 that I can identify as recession calls. Although two felt like 2011 hangovers.   

How about 2013, a hugely positive year for stocks:
"60% chance of another global recession" 6/12/13

"U.S. Economy Will Fall Into a Recession" 8/7/13

Just two first-page hits that I can call true recession calls.


Oh, and by the way, they all happened to be wrong! So I guess the next recession prediction headline referencing the guy from the 10/4/11 article would have to read "This Economist is Forecasting Recession --- And He's Only Been Wrong Once". Or, more likely, "Been Wrong Five Times", since four years have passed without recession since his first miss.

Now, to clarify, my glasses are anything but rose-tinted! I am fully aware that recessions are an inevitable and all-important phase of the economic cycle. I have to be, for it's during such times that we rotate portfolios more to the "defensive" sectors that tend to do the best, or lose the least, during economic downturns.

I am also fully aware that during election years it's not just the economy that gets called into question---adding to the malaise---it's the future of the "American way of life" (which of course exacerbates the pessimism). Which gets defined for us by, this time in particular, an amazing assortment of political opportunists and propagandists---from both sides of the aisle---before they attempt to scare us into thinking that their dream of America is being stolen away by, say, capitalists or immigrants.

Hmm.... America, of all places, being taken down by capitalists and immigrants... Fascinating!

Here's much of the data I track that informs my view of where we sit in the business cycle (red shaded areas are past recessions). On most of the charts I circled where the indicator sat during the 2011 false alarm. I colored the font for each title to denote my interpretation of the economic signal it is currently sending:

Click each, wait a second, then click again to expand...

Consumer Confidence:

Consumer Confidence

Retail Sales (brick and mortar):

Retail Sales Brick and Mortar

Retail Sales (online):

Retail Sales On Line

Auto Sales:
Auto Sales

Housing Permits:

Housing Permits

Housing Starts:

Housing Starts

Mortgage Purchase Apps:

Mortgage Purchase Apps

Homebuilder Optimism:

Homebuilder Optimism

NFIB Small Business Optimism:

NFIB Small Business Optimism

NFIB Small Business Hiring Plans:

NFIB Hiring Plans Index

Weekly Jobless Claims:

Weekly Jobless Claims

Institute for Supply Management Manufacturing Sector Survey:

ISM Manufacturing

Institute for Supply Management Non-Manufacturing (services) Survey:

ISM Services

Chicago Fed Financial Conditions Index:

Chicago Fed Financial Conditions Index

Chicago Fed National Activity Index:

Cleveland Fed Financial Stress Index

Cleveland Fed Financial Stress Index:

Cleveland Fed Financial Stress Index

Kansas City Fed Financial Stress Index:

Kansas City Fed Financial Stress Index

St. Louis Fed Financial Stress Index:

St. Louis Fed Financial Stress Index

Index of Leading Economic Indicators:

Index of Leading Economic Indicators

High Yield Credit Spread:

High Yield Credit Spread

TED (treasury/eurodollar) Spread:

TED Spread

The 2s/10s Spread (yield curve):

Inverted Yield Curve

Industrial Materials Prices:

Industrial Materials Prices

Oil Price:

Oil Prices

Aside from illustrating that in many instances the 2011 recession calls (and we're still waiting) were more justified than today's, the charts tell us that there is indeed a heightened level of stress in the credit markets and weaknesses in the manufacturing sector---that are largely due to an epic bear market in oil and industrial commodities, as well as the negative effects of a strong U.S. dollar. These are the data that those who are predicting recession are legitimately clinging to. While I too am troubled by that data, the signals coming from the services sector and virtually everything consumer suggest (for now) that the odds of a near-term U.S. recession remain low.

Ironically, the source of much of the pessimism is in my view one of the strongest indications that the economy is safe for now: I.e., as the last chart illustrates, U.S. recessions simply (historically speaking) do not begin amid low oil prices. Of course the next one could be the first...

While, I promise, we will eventually get to the next recession, in the long-run I think Brian Tracy got it right:

"If you want to be known as a great economist in America predict growth. If you predict growth you'll be right seventy percent of the time, and if you're wrong temporarily you'll be right pretty soon."

As for the possibility that one's politics might cloud one's perspective, Paul Simon and Art Garfunkel (The Boxer) had their suspicions:

"A man hears what he wants to hear and disregards the rest."

Friday, February 12, 2016

"Hey Honey, I have to go fix the bathroom faucet in the $200,000."

Throughout last week I offered up data that suggest that past periods that smell like the present have on balance been wonderful buying opportunities. I need to make myself very clear, I make no predictions in terms of where we go from here---in the near-term, that is. My objective is to drive home the point that times like these, at a minimum, have been terrible times to sell!

So now you have another war story to tell your grandkids: "Kids, me and grandpa (grandma) lived through the worst start to a year in stock market history!"

Yep, through 2/11/2016, the S&P 500 Index declined 10.96%, and that's the "worst" ever. In other words, we've had a "bad" year over the past month and a half!

So now what? Sell while we have something left? Hmm...

Now that---the "something left" sentiment---is in my humble view the most permeating, and pernicious, misconception in the investing business. I have to say, my greatest professional challenge has forever been the disabusing our clients of this potentially devastating delusion. If---upon reading your investment account statement---you've ever uttered the words, "we've lost (x amount)", "we're down (x amount)", "we're running out of money", "at this rate we'll have nothing left" and/or especially "I'm going to kill my adviser", please pay close attention to the following:

I just ran a report that shows the names of the companies whose stocks occupy the top 500 equity positions for one of our clients (husband and wife) whom we maintain a 60% stocks, 40% fixed income allocation for. No doubt, this couple took note of the change in value on their January account statement. But here's the thing, everything that was in the account---and I mean everything---on December 31st was still there on January 31st---despite the change in value.

Yep, on December 31st their account held funds (mutual or exchange traded) that held: Apple, Microsoft, Procter and Gamble, Wells Fargo,, JP Morgan, Google, PepsiCo, Coca-Cola, Facebook, Citigroup, Berkshire Hathaway, GE, Philip Morris, CVS, Bank of America, Exxon Mobil, Chevron, FedEx, Costco, Visa, Wal-Mart, Home Depot, UPS, Mondelez Intl, Union Pacific, Oracle, Cisco Systems, Intel, AIG, Monsanto, Colgate-Palmolive, etc, etc, etc...

It's all still there! They didn't "lose" a single share of stock. So why did their account lose value? Because the parties to the last transactions on the last day of January for the stocks of the companies our clients hold agreed to prices per share that on average were lower than the prices per share that the parties to the last transactions on the last day of December agreed to.

That's right, it was a rough start simply because the folks who bought and sold stocks on the last day of January did so at prices that were lower than the prices agreed to on the last day of December.

For example: If you had a hundred shares of Apple on 12/31 your account statement said your Apple was worth $10,526. You receive your 1/31 statement: If you didn't sell an Apple share during the month of January, your January statements says your Apple's worth $9,734 (the price dropped from 105.26/share to $97.34/share).
Your spouse says: "Hey Honey, how's the account statement look?"

You say: "It's kind of a blueish-grey color, like always."

Your spouse chuckles and says: "You know what I mean."

You say: "Uhh, well, it looks the same as last month, since we didn't buy or sell anything."

Your spouse says: "How's Apple look?"

You sigh and say: "It looks like we still have a hundred shares."

Your spouse exclaims: "What's it worth?!?"

You holler: "How the #!@! do I know?!? We don't even have a sell order in!"

Your spouse screams: "What's the statement say?!?"

You scream: "I #%&@! told you! It says we still have a hundred shares!"

I'm thinking if you haven't yet opened your January statement, you should wait till after Valentine's Day!

Now, had you been on the sell side of the last Apple trade on the last day of January, you indeed would've lost $792---when compared to what you would've sold it for on the last day of December. If/when it gets back to the price it reached on April 28th of last year, and you decide to sell at that time, we're talking a roughly $2,928 (28%) gain versus the 12/31 value. In the meantime, you'll have a hundred shares of Apple.

Let me try one more angle: Say you own a rental house and you think it's worth around $200,000, but you have no intention of selling it anytime soon---it's a long-term investment. So do you say to your spouse "Hey honey, I have to go fix the bathroom faucet in the two hundred thousand"? Or "Hey honey, I have to go collect the rent on the two hundred thousand"? Of course not... You own the property for its long-term growth potential, and the income while you wait. If at some point the rental market takes its value to what you deem to be its peak potential, you may decide to sell it (or you may choose to simply keep it for the income). In the meantime, it's your rental.

Same goes for, in this example, Apple. You and/or gazillions of others love Apple products (and services) and you think it has great long-term growth potential---and you're happy to collect the 2.21% dividend. If at some point the market takes its value to what you (or I [your adviser]) deem to be its peak potential, you (or I) may decide to sell it (or you may choose to simply keep it for the income). In the meantime, it's your Apple. Simple as that!

"Two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics will be unpredictable. ... We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."

"Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down."

"We've long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children." 

Warren Buffett

Market Commentary (audio)

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Thursday, February 11, 2016

Market Commentary (video)

Click the lower right corner icon for full-screen...

A Thoughtful Analyst on Today's Environment (video)

Wells Capital's Jim Paulsen has been one of the more thoughtful and accurate market analysts over the years. Take a look at his interview today and, if you're a regular visitor to this blog, what he says is going to sound eerily familiar:

Wednesday, February 10, 2016

Market Commentary (audio)

Yeah, I know, it's 2016. Just saw where fed funds futures are now discounting no rate increase until 2018 right before I started talking  :)

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Be sure to stay with the video until the capitulation talk, or fast forward to the 3:20 mark if you like... (When I say "it doesn't happen every time" I'm referring to market bottoms that coincide with big capitulations. I.e., the market indeed bottoms every time, just not always with that super high volume selloff)...

Market Commentary (video)

While in this evening's presentation I paint an optimistic picture for stocks (from a valuation, and a comparable yield standpoint), I want to be very clear that I see the present backdrop as being very mixed from a macro environment standpoint, and very messy from a technical standpoint. Meaning, it wouldn't surprise me in the least to see the market achieve lower lows before ultimately bottoming and moving into the next uptrend. 

Today's TV Segment (video)

Monday, February 8, 2016

Market Commentary (audio)

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When to sell?

Divine Intervention Couldn't Keep (Many) Individual Investors From Selling! Or, Long-term Investment Success Means Living With Volatility...

On those occasions when we find ourselves entertaining whether a prospective new client is a good fit for us, and us for him/her, my first query always has to do with time horizon. Generally, folks come calling when they feel their portfolio needs professional managing and either a long-term client of ours or their accountant or attorney has directed them our way. Therefore, the time horizon question generally has to do specifically with the monies in need of management. 

If, say, we're talking about a retirement portfolio that's meant to provide a lifetime of income, perfect! If, however, we're talking about a windfall that needs managing until such time that it'll be spent on, say, that retirement home in Tahoe, aside from the client's tolerance for volatility, time horizon is everything.

When prospective client says it's Tahoe in two years, all I'm willing to offer is my input on the current interest rate environment and the term of the CDs they'll be buying from any number of banks (at $250k [the FDIC max] a pop). If it's three years, same advice. Four, same. Five-plus, we move on to strategy.

You see, to engage our firm an investor has to possess two traits: One: the desire to earn more than what mere deposit accounts can offer. Two: some stomach for volatility. My insistence that the time horizon must exceed 5 years (at a bare minimum) has to do with what, after nearly 32 years of advising investors, I've come to know about markets and cycles: That is, downward volatility is inevitable and is, alas, virtually untradeable (as in trading in and out to avoid the inevitable). Therefore, we have to have the time horizon and the temperament to let market storms run their course (and, frankly, do their good). Honestly, five years is not my ideal, I'm most comfortable with the lifetime scenario (and, by the way, that would be for the 90 year-old as well. As his/her aim is typically to pass the portfolio on to younger heirs). For the finite situation, closer to 10+ is a very comfortable proposition for me.

An article titled "Even God Would Get Fired as an Active Investor" by Wesley R. Grey, PhD with Alpha Architects (HT Bespoke) divulges the results of a fascinating study which illustrates vividly why I won't touch a portfolio that doesn't have at a bare minimum a five-year+ time horizon. 

Grey and his colleagues went back to 1926 and reconstructed the humanly impossible. They, essentially, calculated the results of a portfolio that only God could've assembled; one comprised of the best 50 performing (of the largest 500) stocks from July 1, 1926 to July 1, 1931. Then continued the exercise for every 5-year interval (the next being July 1, 1931 to July 1, 1936). They took the study all the way through 2009.

While, of course, the ultimate results were astounding---a 28.89% annual return versus 9.63% for the S&P 500---there was another, perhaps unexpected, astounding statistic that emerged from the study. Being perfect (on the long side) meant suffering frequent stretches of gut-wrenching downside volatility. The "worst" ten such stretches ranged from -19% to -76% (over periods ranging from 1 month to 2+ years). That's right, owning the very best performers in 5-year intervals meant suffering through periods that would've shaken the resolve of the most, well, resolute investor.

But, you know, being perfect actually wouldn't be going long (owning) just the 50 best performers; perfection would be buying the 50 best and shorting (betting they fall) the 50 worst. So Grey and company put that one together as well. And, of course, the results were out of this world! Up 39.74% per year! But, guess what, staying with the very best portfolio man could never produce would've meant suffering huge drawdowns along the way; the "worst" ten ranging from -25% to -70%! 

Now you know why I require longer time horizons before even considering whether to take on the responsibility of managing someone else's money and, more importantly, the task of keeping him/her from making the fatal mistakes that plague the average investor. The results of which are vividly illustrated in the CGM Focus Fund story I featured in an earlier post. Here's a snippet:
Imagine the following theoretical investment opportunity: Investors can invest in a fund that will beat the market by 5% a year over the next 10 years. Of course, there is the catch: The path to outperformance will involve a five-year stretch of poor relative performance. “No problem,” you might think—buy and hold and ignore the short-term noise.

Easier said than done.

Consider Ken Heebner, who ran the CGM Focus Fund, a diversified mutual fund that gained 18% annually, and was Morningstar Inc.’s highest performer of the decade ending in 2009. The CGM Focus fund, in many respects, resembled the theoretical opportunity outlined above. But the story didn’t end there: The average investor in the fund lost 11% annually over the period.

What happened? The massive divergence in the fund’s performance and what the typical fund investor actually earned can be explained by the “behavioral return gap.”

The behavioral return gap works as follows: During periods of strong fund performance, investors pile in, but when fund performance is at its worst, short-sighted investors redeem in droves. Thus, despite a fund’s sound long-term process, the “dollar-weighted” returns, or returns actually achieved by investors in the fund, lag substantially.

In other words, fund managers can deliver a great long-term strategy, but investors can still lose.

I.e., Long-term investment success requires "suffering" through some amazing periods of downward volatility...

Sunday, February 7, 2016

Market Commentary (audio)

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Friday, February 5, 2016

Still, Oil and Central Bankers...

There’s just so much to report---and comment on---after yet another volatile week! So much so that to do it justice would be asking you to devote way too much of your weekend (let alone a Super Bowl weekend) to take it all in. So I’ll simply focus on the two no-brainers, oil and the Fed.     to enlarge the charts, click, wait a second, then click again...


While there were some moments early in the week (as highlighted on the chart), it appears as though stocks are content following oil in whatever direction it wants to go. This, I can virtually promise, will not be a long-term relationship (it's an infatuation that will ultimately wear off), but for now it remains the “trade”…

Oil and spx 2-1 to 2-5

As for the fundamentals: Bottom line, there’s (per the chart below) currently more global production of oil---for whatever reasons---than there is demand. Thus, the crazy low price and, thus, the cancelling of billions of dollars worth of projects, and, thus, the crazy notion (given OPEC’s campaign to put the marginal competition completely out of business) that OPEC and Russia are on the verge of cutting production to support the price.

Oil Supply Demand Chart

That cancelling of projects and the shuttering of unprofitable production would explain the EIA’s projections for late this year and into 2017.

As for the correlation to stocks; here’s from last week’s update (click here for the full story with charts):
After the nightmare that was the 2008 recession, and the memories of the late ’90s “Asian Contagion”, anything that smells of stress in the credit, and currency, markets is going to send the equity market into a tizzy.

The Fed…

The Fed sent three speakers into the world this week. Two voiced their concerns about the present global state of affairs and suggested that a cautious approach was warranted going forward. The third cited a strengthening U.S. labor market (confirmed by Friday’s jobs report) as sufficient reason to stay the course and continue to move rates higher this year.

Stocks early-week separation from oil coincided with Fed vice president Stanley Fisher’s voicing his concerns (i.e., he softened his typically hawkish tone). I.e., the market rallied on his commentary.

Friday’s jobs number, while missing the consensus estimate, unveiled a consumer with a larger pay check and an increasing number of hours worked. Couple that with flat corporate output and you get a scary-bad productivity reading. And, put simply, higher labor costs without higher output mean higher prices! Which means Esther George (the confident one of the three Fed members I mentioned) may be onto something. Which I'm guessing inspired traders---who were bullish because they thought stocks would see no competition this year from higher interest---to sell big time on Friday (although the day did not have a panicky feel to it).

(Side note: The notion that lower productivity ultimately equates to higher pricing is sound. However, we should seriously doubt that true productivity in today’s economy can be fully measured with the tools at hand. For example; sometime before Christmas (I won’t confess to how much time before Christmas) I went shopping for my wonderful wife’s present. In the olden days I’d have had to check out of the office at around, say, 1 o’clock in the afternoon and head to a mall where finding a parking spot would’ve been a most time consuming (and tactical) adventure. Of course you know the rest in terms of crowds, checkout lines, inventory of my item, color, size, etc. I.e., the joyful experience of finding just the right thing for the love of my life would have no doubt taken me long into the evening. Instead, I walked the 10 steps from my office to the office of Nicholas, the heir apparent (the ultimate buyer, actually) of the firm, and said “hey, I need to get Judy an Apple Watch for Christmas”. He said “cool” and immediately began typing those magic words, “”, onto his keyboard. Within literally five minutes (it was of course a most joyful five minutes of shopping for the LOML) I was back at my desk being productive---knowing that the very next day the UPS guy would be hand-delivering the goods that’ll make me look like a prince the day after that (oops!).

Again, there’s no way the utterly poor productivity numbers of late are catching all of the gains realized by today’s technology.)

Here’s how the Dow traded last week. I noted the moves when Fed funds futures discounted noticeable changes in the likelihood of a December 2016 rate hike (the first was on Fisher’s comments, the second was on the jobs number). The chart implies that the market remains very sensitive to the Fed (as well as oil):

Fed probabilities and market 2-1 to 2-5

Realistically, I see virtually zero chance of a rate hike at the March meeting (too soon to say about June). Here’s why:

Citigroup’s U.S. Economic Surprise Index, which compares actual economic readings against economists’ expectations, says that the Fed (given that it’s staffed by economists) likely overestimated the economy’s near-term prospects when it signaled four 2016 rate hikes after last December’s meeting. Thus the very low odds of a March rate increase:

Citi Econ Surprise Index US

Plus, the Fed has, in no uncertain terms, voiced concern over the conditions existing outside our borders. Here’s Citi’s index for the Eurozone:

Citi Econ Surprise Index EU

For China (hmm, not as bad):

Citi Econ Surprise Index CHINA

For Japan:

Citi Econ Surprise Index JAPAN

And for emerging markets in general:

Citi Econ Surprise Index EM

To wrap it up for the week, here's me, briefly, on the technicals:

Enjoy your weekend!


Market Commentary (audio)

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