Thursday, March 31, 2016

This Week's TV Segment (video)

Market Commentary (video)

Click the icon in the lower right corner (after clicking the play button) for full screen, then wait a few seconds---or adjust the settings (left of the youtube logo in lower right corner)---to focus.

Monday, March 28, 2016

Middle Income Stagnation: Great Fodder for Budding Politicians...

I find myself presently in a state of waiting. My cell phone, through some magic, allows me access to dozens of books to keep me well occupied while I sit here. Should my wait take me deep into the evening I'll want for little as I'm finding the ebook on technical analysis to be quite interesting.

Makes me think:

Popular opinion/analysis says middle class folks have seen zero by way of inflation adjusted income gains for years. A find that proves to be great fodder for budding politicians.

Let's assume that those politically convenient findings are spot on: That a family with a $50k income, say, 25 years ago, survives on $82k today. Which, again, assuming 2% annual inflation, means said family has seen zero real income growth.

That is, same number of mid-priced TVs in the home, same number of mid-priced cars in the garage, same number of dinners out each month, same one family vacation a year, and so on. 25 years have passed and nothing, no lifestyle improvement whatsoever; or so the politician would have us believe.

Well, not so fast! Let's think about those mid-priced TVs for a minute. I wonder how many channel options today's family enjoys compared to the family of 1991, not to mention the high definition. And how about those mid-priced cars with the Bluetooth and the backup cameras; luxuries not available on the '91 mid-pricers. As for the dinners out, suffice it to say that along with a growing population, in a capitalist market, comes dining options that the '91 family could not have imagined. We can delve into entertainment options (like my ebooks) and other amenities/opportunities, such as cell phones and connecting with friends and loved ones through face-time and social media, but you get the point.

Bottom line, a middle income family today enjoys a vastly richer lifestyle on the very same real dollar of income than did the middle income family of a quarter-century ago.

That's free market capitalism at work!

If you find yourself warming up to the message of a Sanders/Clinton/Trump,etc., please understand that you're allowing the most thoughtless statistical analyses/interpretations to cloud your senses. And understand that the results of taxing producers to pay for the items that only a candidate desperate to win might propose (free college education and the like)---or, say, the walling off of trade (international trade being chiefly responsible for the above mentioned luxuries)---can only serve to limit the rate of enrichment that the family of 2041 will have otherwise enjoyed.

Sadly, the unskilled are losing the opportunity to show their stuff...

I am hard pressed to think of a law more pernicious than the minimum wage!

The agreement between an employer and an employee is a transaction, virtually like any other. The employee possesses talents that he/she brings to the marketplace. His/her customer---the purchaser of his/her offerings---is the employer. The employer will buy those talents at a price that when put to use nets it a margin above cost.

Employees enjoy the luxury of focusing their talents for an agreed upon number of hours each day. Their remuneration affords them lifestyles consistent with the value of their talents in the marketplace. Should they desire a richer lifestyle they must improve the quality, the value, of their offerings (their talents).

Here's an analogy:

Chances are your neighborhood department store has a clearance section. That's where the items that management determines offer the least value to the typical customer, and therefore garner the lowest prices, rest. Some folks enjoy sifting through the clearance aisles in hopes of finding an overlooked gem that might fulfill a want/need at an unusually low price.

My 19-year old son Ryan is a great kid and a real hard worker. Thing is, he has virtually no marketable work experience. So, his offerings are his ethic, his integrity, his arms, his legs and his stamina. The latter three are commonplace among teens. The ethic and integrity will only come forth after the fact, after he gets an opportunity to show his stuff to an employer. Ryan, before he got his current minimum wage-paying job, sat in the clearance aisle of the department store of available labor.

California is about to boost its minimum wage by 50%, from $10 to $15/hour. Essentially, the state is about to force its department store of labor to move all of the items, the Ryans, off of the clearance shelves and place them next to the merchandise that legitimately, to the eye, justifies a $15/hour wage. We may as well say they'll be discarding those clearance items, since placing a $15 price tag on a $10 item virtually eliminates its chances of being sold.

Wednesday, March 23, 2016

Doom and Gloom Sells Much Better Than Lights at Ends of Tunnels!

I'm letting you off very easy this week. That is, no lengthy update. That is, my bride and I are taking a holiday and I'm leaving the computer behind for three whole days. Umm... an iPad doesn't count as a computer, does it?

So, you've heard from me that the likelihood of recession in 2016 is very low. That market breadth is presently very strong and, thus, very bullish. That we're beginning to see a little business investment going on. That the labor market looks good, possibly even a little tight. That the short-term technicals are suspect (good chance of a healthy near-term pullback). That seasonality is strong (March and April have the best historical average 2-month performance). That there's ample bearishness (lots of people are either short or are entirely on the sidelines) out there to ultimately support higher prices going forward. That the Fed has no interest in upsetting the applecart. That the European Central Bank is going to do whatever it takes to, essentially, inflate stock prices. That commodity production is being cut right and left (although major gluts persist). That valuations are looking rich (getting a bit extended), but probably okay if rates stay low and, particularly, if businesses will get busy and invest---and, thus, make strides in productivity.

So when we square the above, we can feel fairly okay about the market going forward.

Ah, but then there's the potential for Britain to leave the European Union (we'll know June 23rd). There's the coming U.S. general election (my goodness!!)!! There's China, there's Greece, there's Italian banks, there's, well, there's a lot of stuff that can easily get in the market's way this year. Plus there's me telling you from the get-go that the only thing I'm certain of with regard to 2016 is that it'll be a doozy of a volatile year.

And then there's all the stuff you're hearing in the media*. Like:
The underlying change in the way American consumers and business leaders think about saving and spending will make the recovery one of the slowest in history and the next decade one of lowered expectations. Many economists agree that the U.S. will face at least several years of very modest growth as consumers and companies work off the vast debt they assumed in the last decade.

...whlie many analysts are seeking simply short-term adjustments in the Fed's position, others are asserting that nothing short of a new way of handling monetary policy is needed. For what is becoming increasingly clear is that there is little the Fed can now do to help bring interest rates down if it continues to embrace its current strategy. In some ways, the Fed appears to have boxed itself into a corner.

''They are stuck in the embarrassing position of having their finger in the dike and believing they are the country's last hope,'' observed Robert Solow, a professor of economics at the Massachusetts Institute of Technology.

And of course there's China:
On paper, China looks powerful and dynamic even today..... In reality, however, the Middle Kingdom, as it once called itself, is a paper dragon. Peer beneath the surface, and there's a weak China, one that is in long-term decline and even on the verge of collapse. The symptoms of decay are to be seen everywhere.

Yep, we're living in unusual times! Or are we?

Well, quote number one above came from a Time article in 1992. And, as you know, 1992 ushered in the most amazing decade for economic growth in modern history!

Surely, quote number two speaks to the unique predicament today's Fed finds itself in, as well as its general lack of credibility... Well, nope! That came from a New York Times article published April 1, 1982. Believe me, you and I would love for the market to do an 80s repeat from here!

As for quote number three, after a phenomenal decade of growth, surely that one speaks to the bubble that is today's China. Well, nope again! That came from the forward to Gordon Chang's book The Coming Collapse of China, which was published September 2001 --- the very beginning of that phenomenal decade.

Not to suggest that we don't have issues, we do. Thing is, we always do. And doom and gloom always sells better than sunshine or lights at ends of tunnels.

Happy Easter!


*Thanks go to The Fat Pitch blog for finding these gems...

Market Commentary (video)

Today's TV Spot (video)

Tuesday, March 22, 2016

Market Commentary (audio)

In addition to to the factors I cite in the audio, add central bank support (globally) as another buoy to the market mood of late. Also, when I refer to a high level of "short interest" then turn around and say it's "low" relative to recent history, I was thinking in terms of the chart; meaning, the lower the reading the higher the short interest...

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Monday, March 21, 2016

Trump the entrepreneur vs. Trump the politician on trade... Or, Trump, by Trump the politician's definition, gets beat badly by China!

Donald J. Trump is indeed a phenomenon. Early in his campaign his blusteryness inspired my oldest son to declare that he hopes he lasts a while because he's so dang entertaining! Well, last he has, and, yes, my son is growing concerned---as are our trading partners. Here's CNBC quoting a Japanese university professor on how the opinion of Mr. Trump has evolved among Japan's top policymakers:
"To start with they just thought 'he's funny'," said Masatoshi Honda, a professor of politics at Kinjo University. "But recently they're starting to worry — what happens if Trump wins?"

Politics often comes up these days as we review client portfolios and discuss the prospects for 2016. And while a few are bold enough to declare their support for Trump, there are those who profess to be uncommitted, yet laud the phenom's willingness to speak his mind and the potential for him to shake up the establishment---in a good, or perhaps refreshing, way. "He's not a politician" and "he's not politically correct" are common laudations. Hmm...

Here's my view (on his trade rhetoric):

Mr. Trump the businessman enjoys the freedom to import materials and labor from wherever in the world offers him the best terms. He strikes deals, makes trades. He doesn't "beat" anyone. He says he "beats China and Japan all the time." Nope, can't be! There's no "beating" in trade. Each party delivers to the other what it deems to be of lesser value (to itself) than what it garners from the other. Different people have different wants at different times, and different geographies house different resources and folks with different talents. Each party to a transaction generates a product or a service more efficiently than its partner, hence one party trades the stuff it produces more efficiently for the stuff the other party produces more efficiently.

Ah, but what about trade deficits? Truly, there are no such things, they're myths! How so? Well, think about it: Mr. Trump says we have a $50 billion annual trade deficit with Mexico. Really? Would he truly have us believe that Mexico presents us with $50 billion more in stuff than we give it in return? My, if it were only so! The fact is, along with various goods and services, we hand over fifty-billion U.S. dollars---a "product" that Mexico would only accept if it had its eyes on $50 billion worth of stuff the U.S. had to offer (or knew that it could trade those dollars to other parties in the world who had their eyes on stuff the U.S. had to offer). And, oh my goodness, do we ever have stuff to offer! In addition to the $180 billion or so a month in goods and services the U.S. sells to other countries’ buyers, it possesses the most fertile ground for financial products on the planet. We indeed have the deepest markets! The world comes to the U.S. for corporate stocks and bonds, derivative investments, bank deposits, treasury securities and, not to mention, real estate and private businesses. That's how the $50 billion comes home!

Come to think of it, if a so-called trade deficit, as Mr. Trump presents it, were a bad thing---if it indeed measures to what extent one (or an entity) has been beaten---then, clearly, Mr. Trump gets forever killed by the likes of China! Think about it; his companies buy materials, components, source their labor (his clothing line ain't made in the U.S.) from other nations---he mentioned in an interview that he recently bought thousands of windows from China and complained that nobody makes them here. And what is China buying from Mr. Trump? I don't know; a stay at a hotel? A round of golf? A few shirts and ties? I strongly suspect that Mr. Trump's companies buy far more stuff from China than they sell to China. Again---by his own definition---he's getting completely destroyed by China! 

Of course he's not losing to China any more than China is losing to him. Mr. Trump wants to build towers and golf courses, make clothing, etc., in the most profitable manner possible; China wants U.S. dollars because U.S. dollars buy stuff the world over.

So, in a nutshell, Trump the entrepreneur expands his fortune (profits from the advantage his trading partners enjoy in the production of certain goods and inexpensive labor) by offering his international trading partners the currency they need to expand their fortunes.

As for Trump the politician, well, he profits from the fears, misconceptions and prejudices of an apparently large number of U.S. voters by proposing policies that, if implemented, would limit other American entrepreneurs' ability to take full advantage of what the outside world has to offer. Other than the bluster, there's nothing unique, or refreshing, about Trump the politician on trade.

Saturday, March 19, 2016

Weekly Update: Things are looking up and the Fed doesn't want to screw things up by admitting that things are looking up!

Two weeks ago I showed you this chart, which shows how much better the U.S. economy has performed this year versus economists' expectations:     click the chart, then wait a second, then click it again to enlarge...

Economic Surprise Index 3-18-16

This was support for the notion that economic risk in the U.S. remains tilted to the upside.

Last week I offered up a plethora of data---from an increase in business capital investment, to robust Ford truck sales, to an increase in the labor force participation rate, to record hotel occupancy rates (to name just four)---in support of my claim that the economic trend is markedly improving (while acknowledging potential headwinds [such as central bank policy]).

This week saw 23 economic indicators published, of which 12 beat economists' estimates, 6 met expectations and merely 5 disappointed (but not by much). Plus, and this is a big "plus"(or minus, as the case may be), inflation reads are starting to, well, read inflation. Here's from Bespoke on this week's CPI report:
Core CPI is up to 2.3% over the last year but is up to 3% annualized in the last three months. That's despite ongoing energy declines. Apparel prices have shot higher to start the year, up almost 8% annualized, while services have been by far the largest impulse. Shelter is accelerating in cost again while anything involving labor inputs is trending steadily higher and generally accelerating.

So, as I intimated in my weekly TV interviewin my view (and I was far from alone) the Fed---coming out of this week's policy meeting---would leave rates as is (as expected) but, being "data dependent", would surely signal to the market that inflation (their target) is close at hand, that the labor market is tight and that the economy can withstand higher interest rates, and soon!

And what did the Fed deliver?  An across-the-board downgrade of its economic, inflation and interest rate expectations going forward! Say what?!?

So what's the Fed up to? Well, other than punishing those who were logically short interest sensitive securities last week, the Fed is either reaching beyond its dual mandate (full employment and stable prices) or is concerned with the economy's ability to sustain an upward slope amid our global partners' central banks' easing campaigns and ahead of a tumultuous political environment at home (you've got to be kidding me!) and abroad (particularly Europe). I.e., things are looking up and they don't want to screw things up by admitting that things are looking up! I.e., they're in no mood to presumably (or potentially [I have my doubts that it would]) boost the dollar and catch the blame for halting what has been an impressive 5-week rally in global markets---by threatening anything other than the most gingerly path to higher interest rates.

It should come as no surprise that equity markets rallied hard on the Fed's about face.

Beyond the market's kneejerk reaction to the Fed, I see a pretty nice setup going forward (no guarantees of course). The economy, as I've been suggesting for months, is far better than a raft of doomsayers (and apparently the Fed) preferred we believe to start the year. Market breadth---participation across sectors, new highs, etc.---has been very impressive. The dollar is posing no present threat; in fact, technically-speaking, it's breaking down (that's bullish for the stock market and commodities). Mutual fund managers, according to the Bank of America Merrill Lynch monthly survey, are sitting on more cash than they normally do, their allocations to U.S. equities remain below their long-term mean and they remain generally pessimistic (that's a good thing!)---and, as I'll illustrate on the chart, stocks have shattered previous levels of technical resistance.

Of course it's never perfect when it comes to the market: The recent rally has stretched valuations (in the aggregate) to a point where I'm back to telling folks that stocks are richly valued, although the Fed just quelled that concern a ton (as stocks tend to stay richly valued while interest rates stay strictly low). The jury's out as to whether the recent lack of correlation between stocks and oil, on some days, is a sign of a more normal relationship or simply a trial separation. That's an issue because, given the stubborn glut in oil and other industrial materials, we can't be sure that the recent rally in commodities is the start of the next bull market or a simple head fake. I can tell you this, however, we'll get there: Commodity production is declining and expansion plans are terminating, thus it's only a matter of time (how long??) before the supply/demand equation flips and higher pricing makes fundamental sense. In the meantime, markets anticipate...

And, lastly, in the very short-term stocks look way overbought to me. Which, of course!, is of no consequence to you long-term investors---it's just me helping you keep the short-term in perspective.

Take a look:

Should we really discourage illegal immigration?

I absolutely know I am (or Milton Friedman is) about to ruffle a feather or two. Before you watch the video, and send me your barbs, ponder these words of wisdom:
“Once your mind is inhabited with a certain view of the world, you’ll tend to only consider instances proving you to be right. Paradoxically, the more information you have, the more justified you’ll feel in your views.” Nassim Taleb

“Our ideas are sticky. And we tend to stick to our theories. Good idea then to delay ones theories, for once they’re made they’re very difficult to let go of.” Nassim Taleb

"There is now scientific evidence indicating that the part of the brain associated with reasoning is inactive when people are given information that conflicts with their own thoughts about a particular subject. In place of reason people seek out information and opinions that confirm their own views." Anthony Crescenzi

Thursday, March 17, 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---or adjust the settings (left of the youtube logo in lower right corner)---to focus.

Wednesday, March 16, 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---or adjust the settings (left of the youtube logo in lower right corner)---to focus.

Today's TV Segment (video)

Monday, March 14, 2016

Consummate Cherry Pickers!

Ever feel manipulated by a politically-motivated media, or by a politician him/herself? The notion that the game is rigged in favor of the "rich" plays effectively these days from both sides of the aisle. Well, what if I told you that the recent outsized gains by the wealthy have much to do with timing and little to do with what conniving candidates might have you believe?

Scott Winship's research will enlighten you. Here's a snippet (HT Don Boudreaux):


According to many observers, incomes have stagnated for most Americans since the Great Recession, while the rich get richer. This claim, however, is based on analyses that cherry-pick start and end dates to assess income growth: the top 1 percent of households see sharper income declines during economic downturns than everyone else, and the Great Recession was especially destructive.


An accurate accounting of who is gaining and losing in the U.S. economy requires a broad view across an entire business cycle: while the richest households tend to gain the most during economic expansions, this is partly because they also lose the most during recessions.

In the current, ongoing, business cycle, real incomes declined between 2007 and 2014; the top 1 percent experienced nearly half of that total decline.

From 1979 to 2007, 38 percent of income growth went to the bottom 90 percent of households, amounting to a 35 percent increase ($17,000) in its average income.

Even if one ignores the Great Recession and cherry-picks the expansion period of 2009–14, it is not true that all gains during the recent expansion have gone to the top 1 percent—in fact, only about half did.

Sunday, March 13, 2016

Be optimistic, yet beware the grand planners!

Political seasons forever foster the characterization of the times as in desperate need of repair. The populace is wooed into believing that progress has been stymied by the shenanigans of the wooer's opposing party. Not that progress is not indeed often stymied by political processes, but to accept the notions that we are to be rescued from some impending collapse by increasing taxes on employers and by the delivering of "free" college educations to all (for two examples), or that life in these United States is not presently "great" for the majority of its citizens, is to be the pawn of the politician.

Matt Ridley, in the epilogue to his 2015 book The Evolution of Everything elegantly sums up reality. Here are a few snippets:
There are two ways to tell the story of the twentieth century. You can describe a series of wars, revolutions, crises, epidemics, financial calamities. Or you can point to the gentle but inexorable rise in the quality of life of almost everybody on the planet: the swelling of income, the conquest of disease, the disappearance of parasites, the retreat of want, the increasing persistence of peace, the lengthening of life, the advances in technology. I wrote a whole book about the latter story, and wondered why it seemed original and surprising to do so. It was surely gloriously obvious that the world was a much, much better place than it had ever been. Yet read the newspapers and you would think we had lurched from disaster to disaster, and faced a future of inevitable further disaster. Glance at school history curriculums and you find them utterly dominated by the disasters of the past – and the crises of the future. I could not quite reconcile in my mind this strange juxtaposition of optimism and pessimism. In a world that delivers an endless supply of bad news, people’s lives get better and better.

Now I think I understand, and it has been the purpose of this book partly to explore that understanding. To put my explanation in its boldest and most surprising form: bad news is manmade, top– down, purposed stuff, imposed on history. Good news is accidental, unplanned, emergent stuff that gradually evolves. The things that go well are largely unintended; the things that go badly are largely intended. Let me give you two lists. First: the First World War, the Russian Revolution, the Versailles Treaty, the Great Depression, the Nazi regime, the Second World War, the Chinese Revolution, the 2008 financial crisis: every single one was the result of top– down decision-making by relatively small numbers of people trying to implement deliberate plans – politicians, central bankers, revolutionaries and so on. Second: the growth of global income; the disappearance of infectious diseases; the feeding of seven billion; the clean-up of rivers and air; the reforestation of much of the rich world; the internet; the use of mobile-phone credits as banking; the use of genetic fingerprinting to convict criminals and acquit the innocent. Every single one of these was a serendipitous, unexpected phenomenon supplied by millions of people who did not intend to cause these big changes. All the interesting things are incremental, says the psephologist Sir David Butler, and very few of the major changes in the statistics of human living standards of the past fifty years were the result of government action.

It is a fair bet that the twenty-first century will be dominated mostly by shocks of bad news, but will experience mostly invisible progress of good things. Incremental, inexorable, inevitable changes will bring us material and spiritual improvements that will make the lives of our grandchildren wealthier, healthier, happier, cleverer, cleaner, kinder, freer, more peaceful and more equal – almost entirely as a serendipitous by-product of cultural evolution. But the people with grand plans will cause pain and suffering along the way.

Your Weekly Update

I keep an electronic file that I titled "current trends": There, along with a daily economic log and a weekly updated macro indicator file, is where I accumulate various topics and data points that offer clues as to where we are in the business cycle and, thus, influence our sector and regional allocation decisions.

For this week's update I thought I'd highlight much of what currently sits in that file and translate (in italics) each item in terms of its signal to the market and economic growth. Here goes:

American workers are claiming a rising share of GDP. Both wages and benefits are hitting new cycle highs as a share of the economy. Sounds great, and it is, but understand that more expensive workers can be a real headwind for profit margins over time.

Three of America's biggest banks recently warned that oil prices will create headwinds on Wall Street. Banks expect to build additional loan loss reserves if the oil outlook weakens from here. Forty-two North American oil companies have filed for bankruptcy since the beginning of 2015. Here's from an interview with Jamie Dimon:
Dimon said the energy portfolio makes up just a small portion of JPMorgan's balance sheet and many of the loans are backed by physical assets. That means banks can sell off assets to recover money if a company defaults on its loans.

"We're not worried about the big oil companies. These are mostly the smaller ones that you're talking," Dimon said.

Paul Miller, a banking analyst at FBR, said oil loans don't represent nearly the same threat to banks that mortgages did last decade. He also pointed out that banks have been forced to stockpile capital to help them absorb losses.

"The big banks might have 1% to 6% of exposure. That's not going to kill them. This is not like 2006 or 2007," Miller said.

Despite the turmoil, JPMorgan isn't planning to run away from the oil patch.

"To the extent we can responsibly support clients, we're going to. And if we lose a little bit more money because of it, so be it," Dimon said.

In terms of the energy sector, the company failures are part and parcel to the price bottoming process. In terms of the banks, a 2008 scenario is not in the cards---and they are among the fundamentally cheapest stocks in the market. An improving economy, with its attendant higher interest rates (not to mention a bottoming in oil) could bode extremely well for investors in the sector going forward. We're maintaining 15-20% exposure to financials in most of our client portfolios.

Underlying market breadth is extremely bullish! 80% of the stocks in the S&P 500 are trading above their 50-day moving averages. The stocks in seven of the ten major sectors have readings above 80%, while the only three with less, health care, financials and technology, have readings of 56%, 76% and 78% respectively. While there's much more to consider, this is, again, an extremely bullish signal for the market.

Long-term trend channels have been broken in emerging markets: Up nearly 20% off their recent lows, emerging markets have broken above the trend line that has been firm resistance dating back to last May's market peak. This is a bullish technical sign for our emerging markets exposure!

As of March 4th, the three worst performing sectors from last year's peak---energy, industrials and materials---have moved into positive territory year-to-date. While I anticipate huge volatility in these areas going forward, their recent strength suggests that the market anticipates a better global economy going forward, as well as the reaching of some equilibrium in commodities.

The fourth quarter of last year saw increased spending on manufacturing and industrial equipment. This is a signal that there may at last be an increase in productivity going forward. This is what the market sorely needs, particularly when we consider the fact that labor costs are on the rise!

Ford F-series truck sales grew 9.9% year over year! The 60,697 was the most sold in any February dating back to 2006. Ford truck sales are considered an indicator of activity in the small business sector. This number says good things!

German industrial production at 6-year high! Way too soon to break out the bubbly, but in the face of Europe's present headwinds this is a very hopeful development!

Hotel occupancy tracking best year ever: 2015 was the best year on record for hotels, and 2016 is tracking it perfectly thus far. Hard to think "recession" under such circumstances!

U.S. industrial production staged a broad-based pickup in January: Not to an extreme, but the readings beat expectations. The strength especially in consumer goods speaks to the underlying strength of the (consumer-driven) U.S. economy.

February's jobs report showed a 555,000 person pickup in the labor force participation rate: The biggest one-month reading in over a year and the fifth consecutive increase---the longest streak during the present expansion. If this is indeed the start of a new trend, it speaks volumes for the U.S. economy! The one perceived negative being the potential that an increasing labor force could suppress wages, as there'll be more competition for available jobs. To turn that around, however, a larger pool of workers is a boon to businesses and potentially offsets my concern over the desperate need for increased productivity.

Metals prices, across the board, have been quietly rising of late. Rising metals prices are an inevitable reality as producers shutter production and the global economy doesn't spiral into the abyss. If the recent trend holds, the doomsayers' case that low commodity prices are a harbinger of a global economy, well, spiraling into the abyss are going to have a tough time maintaining credibility. My contention from the start has been that low commodities prices do not contribute to recessions. In fact, they serve as stimulators as business and personal resources are freed up and allocated to productive uses. At the moment, it appears as though my (not original, but not [lately] popular) contention may be the one beginning to play out.

Short interest remains elevated. The March 11 update showed short interest (bets on stocks that their prices will fall) at the end of February (always a two-week lag) remains overall very high. This is somewhat surprising in that the recent rally has been credited largely to short covering. While denoting a high degree of pessimism,  the high level of short interest fuels contrarian optimism and suggests that, barring big negative surprises, the current rally may have more room to run.

According to the latest Bank of  America Fund Manager Survey, investor cash positions are at their highest level in 15 years and their overweight to equities is at its lowest percentage in 4. Of course this---in terms of liquidity, and investors getting caught with too little exposure during an upswing---would be a huge buy signal!

Transportation stocks bottomed well before the S&P 500: The weakness in transportation stocks last year was huge fodder for the doomsayers who characterized that weakness as an unequivocal sign that the global economy is on the verge of, if not already in, deep recession. Well, if the transportation sector is indeed a sign of economic strength, its bottoming several weeks prior to, and outperformance of, the broader market should be yet another indicator that things aren't nearly as bad as some might have us believe...

There's more, but I think you get that the general trend of late is markedly improving. Nonetheless, there remains major potential headwinds---central bank policy, Great Britain referendum, volatility in commodity markets and the U.S. political circus!!, for example---that will no doubt inspire huge volatility as we meander our way through the year. 

The good news, for those who fear bear markets, is found in Sir John Templeton's timeless, and forever prescient, quote:
Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.

Here's a quick look at the chart:

Friday, March 11, 2016

They're "Steeling" From Us!

I wrote the short essay below the other day on impulse and never sent the email. Protectionist rhetoric is reaching fever pitch and now I simply can't resist.

This notion that other countries are somehow "beating us all the time" in trade is utterly ludicrous! All one has to do is consider the American lifestyle versus those of the supposed winners and one realizes how, frankly, idiotic such remarks turn out to be. And don't let the word "versus" fool you. Trade itself is not a contest. The fact that the lives of folks in producer countries are improving as well does not in any way diminish the virtually immeasurable benefits that flow to the U.S. consumer. In fact it fosters them!

Beyond what your eyes clearly tell you, consider the simple fact that you aren't beaten when you purchase a product at the best possible price. In fact, you have "won!" And, we'll assume, the producer---having priced its product to its own benefit---"wins" as well. But it doesn't stop there; when the producer hails from other shores, your country "wins" too. For the dollars you send abroad must come home (never forget, U.S. dollars are claims on U.S. stuff), to the coffers of U.S. exporters (who employ U.S. citizens), to the sellers of U.S. assets, and to the issuers of U.S. debt (keeping interest rates at bay).

And, not to mention, when you have the world market at your disposal and you therefore find what you need at the best possible price, you have more resources than you otherwise would that afford you and your family a materially richer life experience, as well as benefit the sector that is truly the backbone of this country---small businesses: The restaurants, the clothing stores (sure, the clothes (like Trump ties) are made in China, but the store owner and his/her employees are your neighbors), the movie theater, the airline, the cruise line, the car lot, the flower shop, the jewelry store, the homebuilder, the pool guy, the math tutor... you can take it from here.

They're "Steeling" From Us!

So, tell me, if you heard that Home Depot overbought, say, fencing, and felt like they needed to unload the extra inventory in a hurry and therefore slashed the price by 50%, would you shun the opportunity to replace your rotted fence on the cheap because it wouldn't be fair to the fencing department of Lowe's? And what if Lowe's had an in with a top politician and successfully convinced him/her to lobby for, and get passed, a 50% duty on Home Depot fencing (effectively upping the price so as to destroy HD's price advantage), would you see that as a good thing?

So China has an oversupply of steel, and, therefore, its offering it to us at a crazy low price. The U.S. buyers of Chinese steel thus get a steal and the aggregate U.S. economy benefits measurably from the savings (i.e., it gets spent/invested in other sectors of the economy). It's truly a win for us! Ah, but it's a lose for U.S. Steel and a few other American steel manufacturers whose stocks soared yesterday on the news that the politicians whom they've bought and paid for succeeded in imposing a 266% tariff on steel imported from China.

Yes, folks, whenever a politician suggests that the imposition of import restrictions is a good thing, he/she's right, but only for his benefactors---the rest of us get screwed. Sad thing is, it seems like most of the rest of us truly don't understand it!

Market Commentary (video)

Marriott customers and employees, along with U.S. exporters, investors and borrowers, are about to take a bath!

So I'm at the gym this morning, with Bloomberg radio playing into my earbuds. The morning newsflash troubled me greatly.

Right then, my good friend---I'll call him Mike, because that's his name---approaches: Mike says "how's it going?" I say "I'm very troubled", he says "what's up?" I say "if you have a minute and promise to hear me out, I'm going to try and change your mind about buying only American made stuff" (he made that declaration to me a few weeks ago, and I promised then to take every opportunity to disabuse him of his ill-conceived commitment). He says "go for it."

I say to Mike "I just heard that Marriott has decided that going forward every towel in every Marriott hotel the world over will be made in America, and that the cotton used will be grown by only American farmers." I went on to explain how Marriott executives have made the conscious decision to screw the American consumer, the American exporter and the American investor. That Marriott's faux patriotism is in no way a display of a willingness to take a hit to its profit margin in the interest of the country. That the willful increase in its business expense will be passed along to the traveler through a marginally higher bill, to the employee through a subtly smaller, if any, pay raise and/or benefits package and less desirable working conditions, to the American exporter who exists to capture back those U.S. dollars that were spent on non-U.S.-made towels, and to the investor who will see smaller gains as assets (stocks, for example) suffer under less liquid conditions (as fewer dollars look to find their way home to U.S. assets). I could even add the American borrower as interest rates rise against less liquidity flowing back to the U.S credit markets...

I say "you get what I mean?" Mike noncommittally says "I understand what you're saying." I say "well, I'm going to keep it up until you totally agree with me!"

Here's Milton Friedman and a couple from me. And, by the way, while video number 2 singles out Donald Trump, he has in no way cornered the market on protectionist rhetoric (from either side) this election season. He's just the most outspoken:

If you've taken the time to take in the debates, watch the interviews and/or read the pundits, you owe yourself---your desire to truly understand this issue---the 20 minutes (in total) it'll take to take in these five presentations...

[video mp4=""][/video]


Thursday, March 10, 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, March 5, 2016

Your Weekly Update and The Heart of the Matter

One of the oft referred to phenomena of late has been the stark divergence with regard to monetary policy among the world's major central banks. The Fed, having raised its benchmark interest rate in December, has adopted a tighter stance (although they say they remain accommodative) . The European Central Bank, on the other hand---already engaged in an aggressive quantitative easing plan (and negative interest rates)---is about to add more fuel to a fire that's hardly burning (i.e., the Euro economy isn't yet exactly booming). There's no end in sight to the Bank of Japan's negative rate policy, and the People's Bank of China is engaged in everything from reducing bank reserve requirements to stepping directly into the stock market.

Now, we can debate the merits of their methods, but it's tough to argue with their positions---as Citigroup's economic surprise indices (they illustrate actual economic results compared with economists' estimates) suggest.     click, then click again, to enlarge...

Economic Surprise Index

Yep, I'm sticking to my closing line from last weekend's update: "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."

Arguably, the economy's better at this moment than a lot of folks expected. And, I assure you, a lot of folks (me included) thought that this reality could be a short-term negative (good news means higher odds of a Fed rate hike) for the stock market---as has been very much the case of late. So why the nice rally? Well, could be because traders indeed see the economy picking up, so much so that maybe a slightly more aggressive Fed won't kill the recovery after all. That's a good story, it makes sense. That said, the market could be anticipating new fiscal stimulus measures arising from China's now-in-session "National People's Congress", as well as a further easing of monetary policy among non-US major central banks, per paragraph one. That's certainly a plausible story. Or could be the fact that oil---along with high yield (junk) bonds---has rallied hard of late, which, given the recent correlation between those two and stocks, makes perfect sense. Of course these stories are in no way mutually exclusive. I.e., they meld together rather nicely.

There's one more to ponder: The notion that traders are convinced that a March rate hike, recent data notwithstanding, is entirely off the table. And with the other factors mentioned above in play, they see (or fear) strong near-term upside and are exiting their short positions and piling in on the momentum---expecting to sell it hard a little later in the year when the world wakes up to a high probability of a next-meeting rate hike. I do believe this one has high odds of becoming the mid-2016 narrative. So, if you're a short-term investor, keep your wits about you, and go ahead and hit the 'X' in the upper right corner of your screen (or skip to the video). I have little to offer you from here.

As for the technicals (along with the charting exercise below), I've mentioned a few times lately that market "breadth" has been picking up noticeably, and that that's a positive sign. And my how it's picking up! For example, as I type, 80% of the stocks in the S&P 500 are trading above their 50-day moving averages. A week ago that number was 55%. Also, last week 6 of 10 sectors saw more than 50% of their stocks above their 50-dmas, today it's all 10. That's bullish!

On to more important matters:

As you've noticed, during corrections and bear markets I kinda go wild with the commentaries! You see, while you may think my primary task is helping our clients make the most of their investment portfolios (which of course I effort mightily to do), I view it a little differently. Having experienced (firsthand) all of the volatility the global markets have served up since 1984, while you might say that I keep my finger on the pulse of the market, I am ultimately concerned with keeping my finger on the pulse of each and every one of our clients', well..., pulses. Yes, as I've stressed a thousand times herein over the years, investment mistakes are more often than not driven by emotion. Per my February 8 commentary:
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.

But, honestly, when I get to the heart of the matter, my ultimate concern is with our clients' hearts. You see, the last thing in the world I want is to in any way contribute to what some say is the number one killer among human beings, stress! In other words, our ultimate goal is to make our clients' lives better---to the extent we can---than they otherwise would be with their portfolios exposed to what the overwhelming consensus says is the best long-term investing venue, the stock market. I.e., if our clients' portfolios are indeed best-served by having some stock market exposure, we have to not only make it livable, we have to make it as stress-free as possible.
“If you ask what is the single most important key to longevity, I would have to say it is avoiding worry, stress and tension. And if you didn't ask me, I'd still have to say it.”

− The late comedian George Burns, who lived to 100

So how do we do it? Aside from pointing out that the market will forever go up and down, that down markets are beautiful cleansing phenomena, and that stocks in the aggregate have always recovered from the worst the world could dish out, I'm finding that (during client review meetings) digging inside the many mutual and exchange traded funds we own and exposing the actual companies they hold---and discussing the products and services they sell, their global reach and balance sheets---helps foster a healthy perspective among our clients and, most importantly, measurably relieves their stress, or so they tell me.

With that in mind, here's a snippet from my January 25 commentary:
Yep, you can become an owner of the companies you buy your stuff from. And when you do it through investment funds, you do it in a hugely diversified way. For example, if you happen to be one of our retiree clients, you’ll get a slice of the dividends and whatever growth Procter and Gamble can realize by selling:

Product Images P&G

And whatever GE can realize by selling:

Product Images GE

And Kroger can realize by selling:

Product images Kroger

And Merck can realize by selling:

Product images Merck

And CVS can realize by selling whatever’s inside there:

Product Images CVS

And Johnson and Johnson can realize by selling:

Product images JnJ

And Apple can realize by selling:

Product images Apple

You’ll even get a slice of whatever this guy can produce:

Product images Buffet pic

Of course the above is the very short list of what resides in your portfolio.

So, while the prices of the stocks of what will continue to be the world’s finest companies fluctuate as generally short-term thinking market participants trade amongst themselves, you approach the world of investing like the gent in that last photo.

"There seems to be some perverse human characteristic that likes to make easy things difficult."

"I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years."

"Time is the friend of the wonderful company, the enemy of the mediocre."

"We believe that according the name ‘investors’ to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a ‘romantic.’"

"Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years."

All Warren Buffett

Here's a very quick look at the chart:

Friday, March 4, 2016

Market Commentary (audio)

[video mp4=""][/video]

Thursday, March 3, 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.

Tuesday, March 1, 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.