Friday, May 27, 2016

Weekly Update

Stocks just posted their best week since March! And the headline reads: “Stocks climb in light, pre-holiday trading, with the S&P 500 posting the biggest weekly gain since March, amid growing confidence that the economy is strengthening enough to handle higher borrowing costs as early as this summer.”

Hmm… I humbly, if not hesitatingly (no one knows for sure!) disagree (at this point) with the "growing confidence" part. I do, however, agree with the "economy is strengthening enough" part.

So what should we expect under a higher interest rate regime? Well, for starters, the dollar (given present conditions) would rise. Which it did a week ago Wednesday when the Fed’s---immediately interpreted as hawkish (portended a coming rate rise)---April meeting minutes were released:    

click each chart, then wait a second and click again, to enlarge...

Dollar's move on April minutes

And treasury yields would soar. Which they did “ “:

Treasury Yield on April minutes

And the stock market---assuming I’m right and traders aren’t positioned for a higher fed funds rate---would sink. Which it did “ “:

spx's move on April minutes

But look what happened during the week following those “logical” reactions.

The dollar was all over the place, but did edge higher:

Dollar a week after minutes release

Treasury yields were tumultuous, but ended slightly higher:

Treasury yield a week after minutes release

And the stock market soared!

spx a week after minutes release

What you see above is the result of short-term equity traders doubting a June fed funds rate hike. And currency and bond traders playing it safer and/or looking beyond the next three weeks, or both. There’s a commonly held Wall Street belief (held mostly among bond traders) that bond traders are smarter than stock traders. I’ve always thought nah, they’re just more careful…

Next week’s economic calendar is pretty full, with the biggie being the jobs number on Friday. As the above would indicate, in my view, a soft number would likely be welcomed by the stock market---as it would alleviate pressure on the Fed to move in June. A strong number would likely see stocks lower. In the long-term scheme of things---in terms of that long-term, globally balanced equity portion of your portfolio---it don’t matter :)!

Here’s yesterday’s commentary/technical lesson, in case you missed it.

Have a wonderful weekend!

Tuesday, May 24, 2016

Friday, May 20, 2016

Weekly Update -- AND -- Whilst you were sweating...

Let's say you're you, and you watch Fox News, and you keep hearing from those "in the know" that the market has peaked (it did last May actually), the Fed's brain-dead, Washington's broken and you better get out of stocks while the gettin's good!

You wake up in the morning, you check that stock app that came with your mobile phone and it tells you the Dow's down 150 points. The sensation borders on desperation, you knew it! Shoulda sold, like the guy on TV said! Then comes that voice in your head --- you're a long-term investor, don't panic. You feel better, but not great. Next day you wake up, the Dow's up a hundred, you feel really good! You get the email from your investment adviser, he confuses you with a chart and says that the near-term risk is likely to the downside, then he says "but don't sweat it, you're a long-term investor". You say to yourself "whatever". Next day you wake up, Dow's up another hundred, you wonder if your adviser knows what he's talking about, but you feel good. Next day you wake up, Dow's down 250, you feel awful and you completely forgot what your adviser said two days earlier about near-term risk---and about you being a long-term investor. Next day you wake up, you don't look at your phone. Mail comes, your monthly statement's in it. You open it, the first page tells you that your account moved a fraction one way or the other and you say to yourself, "geeze! I think that's roughly what I had two years ago!" You're thinking what's the use, I coulda done that at the bank and never stressed about the market!


Let's say you're a stock trader (as opposed to "investor"), and you're short (betting on the downside) the market. You wake up and the Dow's down 150 points. The sensation borders on elation, you knew it! Next day you wake up, the Dow's up a hundred, you feel like crap! But you know that that's the market. Next day you wake up, Dow's up another hundred, you really feel like crap! You know the market, which means you know it can burn you. So you take a quick look at the New York Stock Exchange's (NYSE) put/call ratio, it's at 1.1, which means options volume points to pessimism among options traders. You check NYSE short interest and you see that the short interest ratio is 8.6 (which means it would take nearly 9 days for all the shorts to cover their positions [buy] based on recent volume)---and that's kinda high. You're thinking if stocks keep rallying there are a lot of bearish bets that could panic---i.e., buy---and push this market way up, and utterly destroy your put positions (costing you a bundle). Now you're freaking out. Next day you wake up, Dow's down 250, your puts ran all the way back from the previous two-day drubbing and you're a little in the black. But you're nervous as hell!

So why would I chronicle the hell (for some) that is short-term trading? Good question! I did it simply to have you appreciate why you aren't, and/or your adviser (assuming that's us) isn't (on your behalf), a short-term trader.

So back to you being you. Whilst you were (despite what your adviser advised) sweating over the day-to-day volatility---and grousing over the past two years of market flatness---the last thing on your mind was that miraculous machine you hold in the palm of your hand every morning that houses the stock app that drives you batty. You're not thinking about the recent upgrade and the two-year commitment to the service provider---or the fact that you've provided the same, or similar, for every member of your family above the age of, I'm guessing, 12. Or the fact that at some point today you, or a member or two of your family, and millions of other folks, will swing through Starbucks and pay north of ten bucks for something drinkable and the Thai chicken wrap. Or that Howard Schultz (Starbucks' CEO) was just in China preparing to open 2,500 new stores. Or that Tim Cook (Apple's CEO) just injected a billion bucks into China's answer to Uber, then jetted over to India to powwow with Modi and to announce plans to open a new office in Hyderabad that will focus on the development of maps for Apple products, as well as a  "design and development accelerator" in Bangalore.

Of course, as you can now imagine, I could fill a very large book with the potential for the dozens upon dozens of global enterprises that occupy the equity exposure within your portfolio.

Yep, while you're thinking you'd have been just as well off the past two years adding capital to your bank's war chest---capital that it would've used to help fund businesses venturing into the still untapped markets of the emerging world (while paying you virtually nothing for the use of your funds)---the companies whose stocks are prominently featured in the equity vehicles whose symbols occupy your monthly statement are providing their wares to you and yours (and looking to do the same the world over).

Now that ought to hold you over --- at least till the next 250-point down day...

As for the weekly update, being that this week was much about the Fed, I'm thinking yesterday's video covered it pretty well:

Have a wonderful weekend!


Tuesday, May 17, 2016

Market Commentary (audio)

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Friday, May 13, 2016

Weekly Update: Not Feeling All Recessiony...

The market shivered last week as those who've been predicting recession levered Macy's, Nordstrom and JC Penney's earnings misses as proof positive that the consumer is missing in action and that the U.S. economy is being kept alive by the machinations of Janet Yellen and her band of desperate FOMC board members.

But, you know, bars and restaurants are doing really well. So are companies that sell building materials and automobiles. Hmm... I wonder what they have in common?? Oh yeah, folks don't go to Amazon to buy the stuff they offer. In fact, the companies whose stuff Amazon does offer---specifically, clothing, electronics and appliances, furniture, general merchandise, health and personal care and sporting goods---are losing 24.3% of their sales to the online behemoth! Yep, if you belong to one of those eight categories, that's a serious hit to your bottom line.

While folks are indeed buying more from Amazon (Q1 revenue up 28.22%) and less from Macy's, JC Penney and Norstrom (-7.4%, -1.61% and +1.06% respectively), they're really enjoying those savings at the gas pump --- Priceline and Expedia (online travel agencies) saw their revenues rise 16.7% and 38.63% respectively, and Netflix enjoyed a whopping 24.45% increase.

I'm just not feeling all recessiony right about now...

So what's giving the market the blues? Well, while, again, I'm not feeling all recessiony, I can't say I'm feeling all warm and fuzzy either. In fact, as I've been illustrating in my weekly videos, I'm fairly gloomy over the very near-term. And that would be about seasonality; here's a heat map showing the average per month performance of the MSCI World Index over the past 5 and 10 years:     click each chart then wait a second and click again to enlarge...

5 and 10-year seasonality

Yep, sell in May and go away, as they say! Well, not so fast! If you do and the average doesn't occur, you could end up doing some real long-term harm to your bottom line. Here are the monthly highs over the past 5 years:

5-year high seasonality

And here's a look at the best monthly results over the past 10 years:

10-year high seasonality

Nah, better to stay the course --- if you have more than a two-month time horizon that is.

It would also be about the technical setup. Here's a cleaned up look at some of what I've been showing you on the videos:


Panel 2 shows us the Moving Average Convergence Divergence Oscillator (MACD). While, in different ways, this momentum indicator offers up signals to short and longer-term traders, I find it most predictive when its path diverges from the general price trend, as it began to in late March. The S&P 500 closing below its 50 day moving average (green line in panel 1) on Friday doesn't help either.

And of course there's the prospects for a Fed rate hike(s) this year, which has the market a bit anxious. And you can see why based on how stocks responded to the Fed's stab at it last December:

December rate hike

Then there's "Brexit" (the June 23rd Great Britain referendum on whether or not remain in the European Union). Here's the latest poll result:

Brexit poll

While---despite what you see above---I seriously don't see Brexit happening, the market could experience some serious volatility leading up to it. Particularly if there's no clear sign of nogo going in.

Beyond all that short-term stuff (there's of course more we could delve into, positive and negative), I feel very good about owning the world's great companies (in balanced, diversified fashion) on behalf of our patient, eating, drinking, traveling, home-improving, car-driving, Netflix-watching, online-buying, long-term-thinking clients.

Have a wonderful weekend!


Saturday, May 7, 2016

Weekly Update And Inconsequential (to the long-term investor) rough patches...

For this week's update I'm going to pull (and edit/amend for clarity) some highlights from my daily market journal.

From May 3rd:

Dow's down 190, Nasdaq's off 1.22%, S&P's down 22 (1.05%).

The manufacturing ISM was published yesterday. It came in below expectations, but was the 2nd consecutive month above 50. Construction spending was overall constructive. Auto sales decent, particularly Ford F150s (positive sign for small business activity)…

The RSA (Australian central bank) surprised and cut their benchmark rate by .25 last night, Aussie up 2% today...

The Yen is still amazingly rising against USD...

Overall, my view is that there's nothing particularly pernicious in the environment that would smack of huge economic risk that would take us spiraling into the next bear market soon. The market in the short-run, however, is clearly losing momentum; seasonality stinks and "Brexit" (Britain's 6/3 referendum on leaving the EU) is on the horizon, not to mention my bbdxy (dollar) chart is turning bullish.

From May 4th:

Stocks are continuing to trade lower… this is consistent with what I’m seeing in the MACD, FSI and OBV (technical indicators)…

Don’t know that the political landscape is seeping in just yet, I don’t suspect so with regard to the U.S..

The dollar’s rallying which could be a headwind at this juncture…

I suspect the recent selloff in stocks is largely about seasonality after a big bounce off the 2/11 bottom…

Staples and utilities are the only sectors higher at the moment… utilities big time!

Looking out a bit: today’s productivity numbers were weak, employment costs are rising and capex (businesses investing in capital and capital improvements) isn’t happening (although weak productivity and rising labor costs should inspire it). This does not paint a pretty economic picture going forward and, added to the Manuf ISM---with its reported rise in commodity input prices, smacks of inflation---makes the Fed’s job tougher…

On the brighter side, Services ISM beat estimates (firmly above 50), other manufacturing surveys have been threatening improvement… construction spending decent… Ford F150 truck sales up.

12:43pm: Dow’s come back a bit, down 70ish, S&P 500 down 9. Given what I’m seeing in the technicals, seasonality, etc., I’m reluctant to put new money to work just yet.

Just did a check of recent U.S. ETF in and out flows: Investors/advisors appear to be leaning jittery, while looking for yield (let’s hope not in all the wrong places). Market Implications: conventional wisdom says nervousness is bullish…

From May 6th:

The jobs number disappointed, coming in at 160k vs 200k consensus. The market immediately sold off half a percent or so (-100ish Dow), however, at the time of this typing the Dow and S&P are down only .1%, Nasdaq is down .23%...

Now, you'd think that such disappointment would send bonds up (yields down), utilities up and cyclicals down. That, more or less, was the kneejerk reaction. However, as I type, utilities are down .8% and transports are only down .1%. Actually, that makes better sense given the last paragraph below (Bloomberg):
Add employment to those reports showing weakness, at least moderate weakness as nonfarm payrolls rose a lower-than-expected 160,000 in April. Revisions are minor, down a combined 19,000 in the two prior months with March now at 208,000. Government is a weak spot in April, down 11,000, with retail also showing weakness, down 3,000 after a series of outsized gains.

The unemployment rate is unchanged at 5.0 percent but the size of the labor force did fall in this reading. And the participation rate, which had been jumping, slipped 2 tenths to 62.8 percent.

Earnings are a positive, up 0.3 percent in the month with the year-on-year rate back on the climb at 2.5 percent for a 2 tenths gain. The workweek is also a positive up 1 tenth to 34.5 hours.

Turning back to industry sectors, mining extended its long trail of contraction with a 7,000 decline. But there is definitely strength especially for the closely watched professional & business services reading, up a very strong 65,000 and pointing to the need for additional permanent hiring in the months ahead. The temporary help services subcomponent of this reading is up 9,000 for a second month. Financial activities also show strength, up a very solid 20,000 with manufacturing back in the plus column but not by much with a 4,000 gain and reflecting a snap-back for the auto industry.

In a nutshell, the services sector read remains strong with temp hiring up (denotes a pickup in business) as well, and manufacturing showing a net gain. Weakness in govt does not denote economic weakness. All this, along with the spike in wages and hours worked---and a still very low 5% unemployment number---actually makes this a pretty strong report in my view. Also, gotta factor in that the labor market is tight, meaning there really isn't the number of available (or qualified) workers that there was earlier in the expansion. 160k is in fact more than enough to handle new entrances into the workforce.

As I finish this note the Dow is now up 8 points, Nasdaq down 4, S&P flat. Transports are up .4%, utilities are getting crushed -1.3%, treasury yields are up (10 yr +.02), and the dollar (bbrg index) is higher. I.e., contrary to the headlines, the market logically says this is a good report. Now, if that's the case, is it so good that Fed-fears take hold and send stocks lower?  Right now fed funds futures trading discounts a 4% chance of a rate hike in June --- that dropped to zero on the release of today's numbers before bouncing back up a bit. I agree (for now at least) with the traders, simply because I don't see enough just yet to force the Fed to hike ahead of the Brexit vote.

As for my view of the market, I still see the near-term (next 6 weeks or so ) risk firmly to the downside --- per the technicals, seasonality and potential global angst...

12:56pm: Stocks have rallied back, Dow up .4%, S&P up .3%, Nasdaq up .3%... Utilities still lower -.7%, transports up .9%... Looks like a risk-on rally… However, volume is unimpressive (spy 76 million vs 107 mill average)…

Oil is up .5%, but down 3% on the week (strong dollar)...

My guess is that the market accurately interpreted the jobs number as good, in economic terms, but not enough to push the Fed toward higher hawkishness. The perspective on the Fed could change going forward, as it relates to inflation (productivity is down, labor costs are up, manuf and services commodity input prices are up). If we get a raft of really good economic data between now and the June meeting, we could see some pain in stocks for that reason---although I think a fed hike in front of Brexit is extremely unlikely unless polls say there’s virtually no chance…

The VIX (volatility index) hovering below 16, while the curve (vix front months' futures) flattens, is not supporting my view that the market’s in for pain for May and June. The technicals, however, point firmly to near-term weakness. And the dollar is showing me technical strength (up slightly today). My best guess is that today’s rally was the jobs# reaction referenced above, and that it’ll be short-lived and we’ll still see lower levels between now and the end of June. All that said, have to keep an open mind---knowing how the market loves to make mincemeat out of short-term prognostications. Plus, many pundits remain near-term bullish.

I think the above more than suffices as a weekly update.

Of course I can't leave you with only a short-term view of the market (a pessimistic one no less), which is of virtually no import with regard to your long-term portfolio. Allow me to wax a minute on what truly makes me bullish for you faithful investors in the companies that make the stuffs and provide the services that you, me and the remaining 7 billion earthlings will buy for eons to come:

So, close your eyes, breathe in deep, then breathe out while chanting "om". Just kidding with the "om" (unless of course it helps you find your center). Now imagine your life, say, 5 years from now if you think you're really old, 10 years-plus if you don't think you're really old. Will you, over the coming years, have eaten literally tons of food, finished off hundreds of sticks of deodorant (well, let's hope so), worn out a good number of pairs of shoes, changed up your wardrobe, replaced a few tires, a few cars maybe, traveled to a few places, paid for a few parking passes, visited a few restaurants, seen a few movies/plays/etc., upgraded your cell phone/computer/tablet/tv/boy friend/girl friend (the latter two can be very expensive), reroofed your house, remodeled your kitchen, bought a new home, a second home, a first home, paid thousands to the utility company, invested a few bucks with Marty :), and on and on and on?

Yes, of course you will have! And so will have many of the folks like you who live in the world's developed countries. Now imagine the life-changing to come for the folks living in the world's emerging countries---who, believe it or not, comprise 85% of the earth's population ---who are the chief customer targets of the world's greatest multi-national companies. Imagine the economic growth of the emerging world in the decades to come. Imagine investing in that growth! That's what we do, through the ups and the downs that are part and parcel to long-term investing. Imagine how utterly inconsequential will be the potential rough patch (regardless of the extent to which it sees stock prices lower) I see developing over the next few weeks (or months)---and the many more to come---against the global potential I outlined above.

Tuesday, May 3, 2016

Socialism is a taxing, and economically destructive, proposition...

Well, for starters, when it all began I thought the notion that Donald Trump would win the Republican nomination to be, well, unthinkable. I just heard that Bernie Sanders won Indiana's primary. Suddenly I'm thinking the unthinkable for the Democrats as well.

Before I continue, you must know that I have no dog in this race. Let me rephrase that, I don't have so much as a flea in this race! Actually, not even an itch! I.e., I have zero regard or respect for a single candidate on either side of the aisle. So there! If I offend you, know that I do not do so in favor of any individual who opposes your chosen one.

As for the notion that a self-proclaimed socialist, democratic socialist, and progressive would be the choice of a majority of American voters suggests that a majority of American voters have virtually no concept of history (explains the youth vote, perhaps?) or of the utterly destructive incentives/tendencies of big government politicians who aim to centrally control  the economy our lives.

Back in January 2014 I wrote about a politician who made his way to office by promising to rescue his country's populace from their economic ills while having the upper income class foot the bill. Hmm... Kinda sounds like erecting a wall between businesses and success and having businesses pay for the construction... sound familiar?

Well, a funny thing happened on the way to the promised land the land of broken promises.

Here's that short essay (feel free to pass it along to the folks whom you passed "There Ain't No Such Thing As Free College Education" along to):

“How can we redistribute if there’s no wealth?” French President Hollande, of all people…

May today's (1/14/2014) Wall Street Journal Article Hollande Courts Business With Economic Revival Plan be a lesson to us on the economic realities of socialism---and the duplicity of politicians. I can almost make my entire point by excerpting the article. Here goes:
Speaking at a news conference designed to relaunch his presidency that—like France's economy—has been stuck in the doldrums, Mr. Hollande said he would tackle France's chronically high payroll taxes, addressing a long-standing demand of French business leaders.

Mr. Hollande is striving to repair relations with France's business community, which has voiced anger about climbing taxes and alarm that the euro zone's second–largest economy is losing ground to Germany.

Since his election in May 2012, Mr. Hollande has relied largely on tax increases to fix France's finances with only marginal efforts to pare expenditures. The economy has barely grown since he took power while unemployment has risen.

Business leaders say this has hampered their efforts to compete internationally. France stands out among European peers for its relatively high labor costs, which eat into profit margins necessary to invest and recruit. For nonfinancial corporations in France, gross profit share—a standardized measure of profit margins—stood at just over 28% at the end of 2012, compared with 38% in the wider euro zone and 40% in Germany, according to Eurostat.

"How can we run a country if entrepreneurs don't hire?" he said. "And how can we redistribute if there's no wealth?"

By the end of his mandate in 2017, Mr. Hollande said, French companies will no longer be required to foot the €35-billion ($47.9-billion) annual bill for France's generous family welfare programs. He said he planned to fund the tax cut by slashing government expenditures, a departure from his previous practice of forcing consumers to bear the burden through high sales tax.

The overture to French companies risks fueling tensions within Mr. Hollande's Socialist-dominated majority in parliament and angering the country's unions. "He's turned his back on workers," the left-leaning CGT union said in a statement.

Yes, promising the moon wins elections---we've witnessed that a lot of late. But, like I said the other day, the moon is---fortunately, ironically, for the promiser's political career (and the promisees' livelihoods)---unreachable. Although, as France's president is discovering, the air can get mighty thin even as you head in that direction---particularly in a country that was half way there to begin with. Ah, but Hollande, like all politicians, is of the family Chamaeleonidae: while campaigning in 2012 he donned his socialist colors and slid his way to office. Today, he senses danger. Survival going forward means blending with the folks whose vilification was so effective on the stump. I.e., he has come to understand that the economy will break him if he doesn't break his government's stranglehold over French businesses...


Market Commentary (video)