Today's TV Segment (video)

Market Commentary (video): One you should watch!

What gets you into trouble...

The reason, during every political season, that politicians play the protectionism card is because it works. Honestly, you don't have to be a businessperson who sources from, and sells to, other nations to understand that our relationships with fellow humans in other countries are essential to our own peace and prosperity. You simply have to look around! But, sadly, apparently far too many Americans sorely lack peripheral vision.  This popular notion that there's a "beating" that takes place when folks from two separate nations trade is ludicrous! As Milton Friedman pointed out:

The most important single central fact about a free market is that no exchange takes place unless both parties benefit. 

As your man or woman (yes, both major party candidates, at least rhetorically, embrace protectionism) gets his/her followers' fist-pounding approval when he/she rants and raves on how he/she will punish our trading partners, know that the folks truly being punished by whatever their idol is proposing will be, well, those fist-pounding approvers --- who will unwittingly give up their freedom, their discretionary income, and in some cases their jobs should their hero/heroin make good on his/her threats! Mark Twain got it right:

It is not what you don't know that will get you into trouble; it is what you know for sure that just ain't so.

My morning snack, courtesy of international trade...

Here's a snapshot of my morning snack (too many of each actually):



The almond was grown right here in California, the cashew was grown in India. Thus, international trade made my morning a bit more interesting and certainly --- in that I love cashews --- more satisfying.

Here would've been my morning snack without trade:



Ah, you say, that's nuts! We could create jobs and produce cashews right here in the U.S.A.! Well, cashews survive only in tropical environments. I honestly don't know that it can't be done here, but I do know that it isn't, and for good reason: it simply doesn't pencil. But almonds do, big time! 

So, rather than going to great lengths and allocating valuable resources to the growing of things that our climate doesn't readily accommodate, our farmers grow what they grow best --- and take full advantage of the world's appetite for almonds. And, in the process, provide me with delicious, and deliciously affordable, cashews.  In a sense, our California almond farmers grow cashews in India. Or, we can say, they inspire cashew growing in India. I.e., Indians produce cashews because they love almonds, and we do almonds way better than them. And they know we love cashews, and they do cashews way better than us. 

Folks, free trade ---  two sides to a transaction agreeing to terms --- is always a win/win. There's never a "beating"...

"What" to vote for!

Recently I shared that I have no affinity for either major party candidate currently running for the U.S. presidency. The displays from both since have done nothing to dissuade that sentiment (probably exacerbated it). Plus, there's virtually nothing that either has credibly presented that I believe would be supportive of the financial markets or the economy at large.  On the other hand, alas, there is sacred market/economic ground (international trade) that both candidates seem far too willing eager to trample all over --- at least rhetorically. In fact, protectionism is not simply unfriendly to markets and our economy, it is inconsistent with true American tradition and threatens our national security as well.

"Where goods don't cross borders, soldiers will." Thought to be a Frederic Bastiat (19th Century economist) quote...

I can't even begin to tell anyone (wouldn't if I could) whom to vote for. But I can implore everyone to push hard for free trade! You may believe that we ---  collectively --- would somehow benefit by imposing measures that might "protect" a particular group or industry, but, frankly, you'd be wrong! If that is indeed your position (and me telling you you're wrong isn't remotely enough to convince you otherwise [of course it's not!]), here's Leonard Read's beautiful I, Pencil and something else from me (from a few years ago) that I hope will disabuse you of that most dangerous misconception:

Weekly Message: Subjectiveness rules!

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If you happened to be listening to Bloomberg Radio Wednesday afternoon you heard Axiom Capital Management’s Gordon Johnson offer his view of markets and the economy. And, therefore, if you’re the least bit impressionable, you might attribute the recent rally in commodity-based stocks to “expectations of stimulus” from the world’s central banks in response to the unexpected Brexit vote --- definitely “not from fundamentals”. I.e., the rally is “very weak in terms of substance". While, yes, commodity stocks have done well since the “Brexit bottom”, they weren’t looking too shabby at the start of the year either:      Click each chart, then click again, to enlarge... As for the U.S. economy, Mr. Johnson explained that auto sales are rolling over (well, after Johnson's interview GM reported record Q2 earnings and raised its full-year forecast) and commodity demand is waning --- while durable goods orders, import and export prices are pointing to recession. He mentioned that United Rentals --- a company his firm tracks, and has a sell order on --- was set to report Q2 earnings at 4pm that afternoon: “We think the numbers are going to be bad, and we think that overall the U.S. is still mired in economic weakness”. Well, hmm… Here’s how United Rentals stock responded to that earnings report in after-hours trading: From TheStreet.com:

NEW YORK (TheStreet) -- Shares of United Rentals  (URI) are spiking 10.25% to $77.02 on heavy trading volume Thursday afternoon after reporting second-quarter earnings and revenue that topped analysts' projections.  After yesterday's market close, the Stamford, CT-based equipment rental company reported adjusted earnings of $2.06 per share, beating analysts' estimates of $1.82 per share.  Revenues were $1.423 billion for the most recent period, coming in above analysts' estimates of $1.399 billion.

He sees fundamental weakness and doesn’t think investors are positioned accordingly. He thinks now’s the time to sell. What I found particularly striking about Mr. Johnson’s interview was his unwavering confidence. He offered zero prospects that he could be the wee bit off in his assessment of current conditions. Oh, and here’s an up-to-date look at Citigroup’s U.S. Economic Surprise Index (tracks actual economic results against economists’ predictions): Honestly, I have no problem with Mr. Johnson’s assessment. I actually appreciated the interview; it had me double-checking some of my own assumptions. Again, my amazement was not in his position, it was in his lack of humility. If you happened to be watching CNBC Thursday afternoon you watched Bank of America Wealth Management’s Chris Hyzy explain how the recent rally in stocks is “pretty much justified”. He cited the beginning of the year worries; “all of which have faded so far”: which were the China currency devaluation, the strong dollar (and the impact that it had on industrials, materials and energy), the collapse of oil prices and the threat of a U.S. recession. He says we're seeing earnings revisions go the other way because “the strength of the dollar is fading and the oil price collapse is fading.” Well... the white line is the dollar, the orange is oil. The arrows point from July 11^th: When asked if we’ll see a migration away from dividend payers and more flow toward cyclical stocks, he said “this is going to be a broad rally. This is not going not to be one of those targeted deployments of cash flow from one place to the next.” He said we’re going to have lower rates for longer and, therefore, the yield on stocks will continue to be something investors reach for. Well... the white line is xlk (technology stocks [cyclical]), the yellow is xlu (utilities [defensive dividend stocks]). The arrows point from July 6th: As with Mr. Johnson, I have no quarrel with Mr. Hyzy --- I appreciated his perspective. And, as with Mr. Johnson, aside from the “pretty much”, I find his unrelenting sense of certainty --- given the perpetual uncertainty of near-term market and economic movements --- to be utterly startling! So, how is it that two gents --- both having ascended to posts prominent enough to warrant the featuring of their mugs on the world’s most prominent financial networks --- can embrace embody such opposing opinions on the state of the financial world? I have a theory: Regardless of acumen or academic accomplishment, at the end of the day we’re all imperfect humans who are at the mercy of our upbringings, our impressionability, our physiology, our egos, our fears, our desires, and, for investors and advisers, the present positioning of our portfolios (let’s pray not our politics!). All opinions are, therefore, subjective. So then, the next time you hear a Mr. Johnson wax on about what’s wanting in the world, know that there’ll always be a Mr. Hyzy on another channel who’ll bring back the sunshine. The bloke whose position you identify with will say something about your upbringing, impressionability, physiology, ego, fears, desires and, dare I say (but I pray not), your politics… Here’s my subjectiveness on the markets Thursday morning:

Market Commentary (video)

Today's TV Segment (video)

Market Commentary (video)

Investing Globally (video)

Weekly Message: A homework assignment...

As you know, the Dow and the S&P have achieved fresh all time highs.     click each chart, then click again, to enlarge...   Although the New York Stock Exchange Composite and the FTSE All World Indexes aren't quite there yet: So then, all of those times you fretted over your portfolio --- thinking this time is different, that somehow all those years of piling that 10% into your retirement plan would be snuffed out by a bursting tech bubble, a real estate/credit disaster for the ages, a country attempting to break loose from a decades-old commercial alliance with its neighbors, etc., etc. --- were for naught. "Ah", you say, "but this time IS different! The world is so crazy right now! Things don't make sense anymore! Politics, terrorism, racial discord, automation (there go the jobs)! The world has lost its way!" I have a homework assignment for you: You are to load up Google and search "Gloomy headlines from the --- you pick the decade". There's also a bonus assignment if you need the extra credit (reminder/enlightenment): Google "Advancements of the --- you pick the decade". If after completing your homework you don't feel at least a wee bit better about the world we live in, and your portfolio's long-term prospects from here, well, my dear friend, I don't know what to tell ya. Well, actually, I can tell ya that while history to this point may indeed dispel your angst and inspire resolve, you will, alas, have many opportunities (market upsets) to test that new found resolve in the days/weeks/years to come. A client said to me yesterday that she can no longer watch her chosen network. While she sympathizes with its bent, she finds it "just too depressing". Everything, according to the content its producers choose to feature, is "so damned gloomy". I assured her that if her side wins in November, the moment the results are announced the sun will start shining on good ole Fox News. And a 4-year major storm will descend upon previously sunny MSNBC. Yeah, politics is a --- you pick the adjective --- business. Me, I'm with Matt Ridley. Here's a little something I wrote back in April:

Look left, look right, then look around… When I look left I see a mammoth power-hungry establishment that seems somehow adept at convincing a large swath of the populace that it stands equipped to better their lots by slicing mammoth power-hungry establishments down to size. Hmm… When I look right I see, well, ditto! Hmm… A client told me recently that when the campaigns began revving their engines her son played her a few Trump on the stump videos and said “mom, this guy makes sense!”. Since then the son has changed his mind, Bernie Sanders—“a true champion of the people”—is his man. A complete 180 you say? I think not! “Power hungry” defines both of these gentleman (and, of course, the rest of the field). The young man, in his admirable quest to cast his best vote, exposes a lack of peripheral vision that is the side effect, the curse actually, of years of intellectual feeding through the elders, instructors and media outlets of his life, all of which who bend to the faulty—and utterly pernicious—notion that society’s thriving is a top down, planned, affair. When I look around I see what Matt Ridley sees. From his 2015 book The Evolution of Everything: 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. Beware the grand planners!

Have a wonderful weekend! Marty P.s. If this wasn't markety enough for you, watch Tuesday's and Thursday's video commentaries.

Market Commentary (video)

Market Commentary (video)

Your Weekly Update: Are we there yet?

This week’s commentary is an easy one. The U.S. stock market is bumping right up against all-time highs due to the simple fact that the predominate market fear has been the “fear of losing”, which has been evident in weak investor sentiment and underweight stock positioning among many professional fund managers. As fickleness is a well-documented condition that afflicts individual investors, short-term traders, and professional managers whose livelihoods hinge on short-term performance, when you catch the masses huddled on one side of the fear boat it’ll be merely a matter of time before they grow impatient and rush to other side. Of late that would be moving from the fear-of-losing to the fear-of-losing-out, as I described in this video... That said, of course there’s a whole chorus of “experts” --- who’ve been singing a bearish tune --- who tell us not to believe this rally, not for a minute! Friday’s jobs number was huge. But if, for example, you listened that morning to one of the world’s most respected bond fund managers it was nothing to write home about --- in that average hourly earnings increased by merely .1% and the workweek remained unchanged at 34.4 hours. Plus, the second quarter average was just 147,000 per month versus 196,000 for Q1. All of what the gent said was true, and eh hem, he is a bond fund manager (bonds do better when the economy doesn’t, hmm…). In Thursday’s video I mentioned weekly unemployment claims and recent Institute for Supply Management Survey results that pointed to a high probability that June’s number would exceed analysts’ estimates. 287,000 was more than I would’ve guessed, but the beat should not have been a big surprise to anyone. In my view it, save for Mr. Bond Fund’s points, was an impressive report on a number of fronts. Per Bloomberg:

June's strength is led by a 38,000 gain for professional & business services, a closely watched area that is especially sensitive to changes in labor demand. Telecommunications, which fell 32,000 in May during the Verizon strike, rose 28,000 in a positive reversal for June. Manufacturing shows a rare gain and a sizable one at 14,000. Other industries posting gains include retail, government and also finance. The unemployment rate rose 2 tenths to 4.9 percent but reflects strength, not weakness, in the labor market as discouraged workers, who stopped looking for work in May, re-entered the labor force in June.

The fact that the stock market surged on the news (Dow closed 250 points higher, SP 500 up 1.5%) --- on very strong breadth (498 of the SP 500 [505 actually] rose on the day) --- tells us that, as I suggested in Thursday’s video, good economic news, at least on Friday, is good news for the stock market. The irony is that the scare that was/is Brexit, in my view, had a lot to do with Friday’s rally --- in that it obliterated the chances of a Fed rate hike any time soon and, thus, allows traders to feel comfortable with such a robust jobs number. Although the odds of a hike reflected in fed funds futures trading on Friday did jump from 11% to 20% (still very low) for December. So then, are we there yet? Are we at last going to move above the May 2015 all-time high, establish support and work our way to levels that’ll catch our portfolios up after what have essentially been two nauseating years of flatness? Well, no, we’re not there yet: The S&P 500 closed Friday at 2,129.90, the all-time record close is 2,130.82. At one point Friday it did get to 2,131.71, but, alas, it just couldn’t hold it. So, we need a close 0.92 points higher than Friday’s to get there. “There”, that is, in terms of a new all-time high. Sustainability, on the other hand, is a whole other can of worms that I’ll be dissecting for you in commentaries to come. All this, and the video below, speaks to the prospects for U.S. stocks. You’ll be receiving a video soon where I'll touch on some of the reasons why I believe that thinking globally will be essential to our investment success going forward. Have a great weekend! Marty P.s. Here’s Jim Paulsen making the case for the second half of the year. This should sound familiar to regular readers:

Wells's Jim Paulsen on 2nd Half Prospects (video)

Market Commentary (video)

Dick Bove's Take on the Present State of the Banking Sector (video)

Here's Dick Bove on the recent bank stress tests and his concerns over what he views as the entirely flawed narrative over the prospects for bank earnings in this interest rate environment:

Today's TV Segment (video)

Market Commentary: Careful what you ask for gents! (video)

How to make "big money"...

Sideways markets --- the past two+ years for globally diversified portfolios would be the definition --- can be supremely frustrating periods for long-term investors. Jesse Livermore, a famous trader who won and lost several fortunes during his lifetime, knew a simple truth (even if he couldn't adhere to it himself). Ran across this yesterday:     click, then click again, to enlarge

Weekly Update: Brexit and dead cats...

I guess if you drop a dead cat from a high enough altitude it'll bounce, right? That --- the "dead cat bounce" --- has been the oft-chosen metaphor of those who bet Brexit would've dealt huge pain to the stock market (they could still be right!) and who seek to explain the quick rebound in stock prices. I'm trying to picture a dead cat falling from above in my mind; I don't imagine even the slightest bounce. Actually, I envision a splat! You see, Brexit was billed as the bomb that would destroy global economic life as we know it --- were it to actually detonate. The world --- that is, the financial markets, odds makers and even the politicians who crafted the bomb ---- just knew that they could convince its would-be detonators, who were anything but suicidal, that it would be, well, suicide, should they light the fuse. Apparently the risk was not apparent to those who were itching to pry themselves from under the proverbial thumb of the EU bureaucrats in Brussels. I've fielded a number of emails from my freedom loving friends with links to articles galore that laude the accomplishment of those freedom loving Brits --- the 51.9%, that is. But, in the wake of the great explosion that --- at this very early-in-the-game juncture --- wasn't, it turns out that the 51.9% want to retain the good stuff that comes with EU membership (the "free" trade) and free themselves from the perceived bad stuff (the lack of border control). Well, leave-champ Boris Johnson, merely hours after the Brexit vote, suggested that the borders would remain wide open. Within a few days he removed his name from the running for the next prime minister. Hmm… Beware --- all ye protectionists --- the politician who sings your tune during campaign season! I’m thinking, assuming they go through with it, that the same logic --- humans’ aversion to pain --- that had me thinking Brexit was virtually unthinkable will make it a relatively painless affair for all affected parties. I know that’s dangerously presumptive and flies firmly in the face of the impending doom the perennial doomsayers have promised, but, hey, time will tell (and we’ll revisit it plenty). And I’m not --- as many of my friends are --- in the camp that says Brexit signals some great global populist revolt that’ll make for surprise outcomes in elections the world over. Sorry. In fact, if anything, it, literally overnight, swayed Spaniards into voting the status quo in their election last Sunday.

Spain voted on June 26 with polls suggesting that the populist progressive Podemos party would overtake the traditional Socialist Party, PSOE, as the main left-wing opposition to the center-right Popular Party, or PP. Some thought the electoral math might even favor a progressive government headed by Podemos leader Pablo Iglesias. That didn’t happen. Brexit may have had an impact. Opinion polls seem so routinely wrong in Europe these days that their predictive failures merit little explanation. Perhaps we should just get over these glorified horoscopes. Yet it may be the case that the polls reflected a mood that changed at the last moment. The Brexit referendum was viewed as a disaster in Spain. One of the few things that unites all four major parties (and almost all of the nationalist parties, too) is that staying in the EU, however flawed, is better than leaving.

 

Emilio Sáenz-Francés, professor of history and international relations at Madrid’s Comillas Pontifical University, believes that while many factors were in play, Brexit may have acted as a cautionary tale for some voters. “It may have had an effect when it came to persuading a certain proportion of voters to return to traditional Spanish voting values and to the more conventional and traditional parties like the PP and the PSOE,” he said. “I think that Brexit has had an awareness-raising effect on Spanish voters and has highlighted the danger of voting purely on the basis of protest.”

Oh, and, in case you’re wondering, I have literally zero affinity for either candidate in the U.S. race! Moving on: You clients out there know that I believe lands outside our borders --- where 96% of the world’s population (and over 50% of its stock market capitalization) lives --- offer up opportunities that a balanced diversified investor should never overlook. I recently overheard a colleague suggest that foreign stocks in general presently offer more attractive valuations than do the U.S.’s, but that they have more problems to deal with. And of course he’s right. And of course he had just explained why foreign stocks presently offer more attractive valuations. Valuations are generally measured by things like price-to-earnings and price-to-book-value ratios. When the price of a company’s stock is historically low relative to what the company is actually earning, or relative to what the company would be worth if it sold all of its parts, it is said to be attractively valued. And, of course, if a company’s stock price is not reflecting what its earnings, or its assets, would normally call for, then something is perceived by the market to be amiss. In other words, if foreign companies, or the economies of their respective domiciles, didn’t have visible challenges to deal with, well, then their stocks would be trading right up there --- valuation wise --- where they typically do. So then, problems equal opportunity! Right? Just ask Warren Buffet… Bottom line, as of the moment, Brexit hasn’t dented my long-term optimism over the non-U.S. portion of our clients’ portfolios. In fact, quite the opposite! Happy Independence Day! Marty P.s. In case you missed it, here’s me getting underneath the headlines to explain why the big post-Brexit rally: