Quote of the day...

From Don Boudreaux's blog post on the first day his Principles of Microeconomics class 2014:

My goal – by teaching basic, foundational, principles of microeconomics – is to inoculate students against the bulk of the common economic myths that they’ll encounter throughout their lives – myths such as that the great abundance of goods and services available to us denizens of modernity is the result of a process that can be easily mimicked or understood in detail by smart people or planners – that the market value of goods or services can be raised by price floors (such as a legislated minimum wage) or lowered by price ceilings (such as rent control) – that benefits can be created without costs – that government is an institution capable of rising above the realities that ensure that private institutions never perform ‘perfectly’ – that intentions are results – that destruction of property is a source of prosperity – that exchange across political boundaries differs in economically meaningful ways from exchange that takes place within political boundaries – that the only consequences that occur or that matter are those that are easily anticipated and seen.

Today's TV Segment (video)

Market Commentary - QuickTake

Alaska trout trends say this could be a big year for stocks :)

You may recall a couple weeks back when I mentioned that I’d be away for a few days doing some market research --- I’ll share my findings at the end. 

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A few years ago I shared my experience with my (and now Judy’s) dear friend Matt Morrill, an enlightened Montana fly fishing guide whom I met by happenstance as the one-year window to re-book a cancelled airline ticket was about to close. I found myself in Yellowstone National Park, unexpectedly inspired by a true master, not only of his craft, but of how to live. If you’re new to the blog, you might enjoy God’s Greatest Work.

Over the years I’ve had the pleasure of having fished with many a guide --- most of them adept at what they’re paid to do --- but up until this past week, other than that first experience with Matt, I have not found myself plunked at my desk immediately upon returning home writing about anything deeper than maybe analogizing a jeep trail to investing in the stock market. Well, here I am.

There’s this guy in Kenai, Alaska, named Ben Hulbert. Ben, like Matt, is a fishing guide, and Ben, like Matt, never asked what I did for a living (I.e., his interest lied solely in the moment), and Ben, like Matt, has the utmost respect for the surroundings that allow him, at the tender age of 30, to earn his living amid nature’s breathtaking beauty.

We --- Ben, my wife Judy, and I --- recently spent two amazing days adrift glacial green waters as they flowed their way to the ocean via the great Kenai River. 

Shortly after shaking hands with our young tutor for the first time I whispered to Judy "I like Ben" as she and I entered the service station mini mart where we initially rendezvoused --- Ben insisted that we grab our coffee, etc. while he transferred the gear from pickup truck to drift boat. With slightly bent brows and through a puzzled half-smile she said "really? we just met him." "Yeah, but I got a good feeling. The kid’s really comfortable in his own skin.” Soon thereafter, Judy shared that sentiment completely.

Ben’s boat will never smell of organic bait; he calls his business "Kenai on the Fly", as in "fly fishing". At one point during the second day’s drift he noticed a small concentration of fishing boats motoring through a stretch of river. He promptly equipped a fly line with a dark-red colored bead that would emulate the salmon eggs he knew these gents were spilling onto the river floor --- and into the mouths of the gorging rainbows that follow their seafaring cousins to their spawning beds. He explained his tactic with some chagrin; the fishermen douse the eggs in all manner of chemicals (to give them color and, I presume, stickiness) that are ultimately toxic to the wild trout that Ben hopes to help his clients outwit, net, and gently release. He briefly mentioned the regulatory regime he operates under and compared the bait fishermen’s freedom to slowly poison the trout to some entirety senseless regulation. Honestly, I was so eager to put his ingenious plan to work --- to get that artificial fish egg that imitates a modified fish egg into the water --- that I didn’t quite catch the details of that particular senseless regulation.

I could, at this point, as I often do, dive into the ills of government intervention. Like when the Federal government instituted a program to subsidize Alaska fishing guides during a recession, while Ben’s business grew by 20%. Which, in essence, impedes the market process that uses economic slowdowns to separate good businesses from bad, leaving industries to emerge better, more efficient, and delivering higher than ever before quality to their customers, but I won’t.

To cut to the chase, yes, this is a commercial for Ben. He’s an absolute joy of a young man who happens to be far wiser than his years. If you ever find your way to Kenai Alaska, and would like to try your hand at fly fishing (he’ll get you quickly to the basics if you’ve no experience) for wild trout (and/or silver salmon if you insist), I promise you, Ben is your man! Go to  http://www.kenaionthefly.com/

As for my research into the correlation between the feeding habits of Alaskan trout and volatility in the stock market, well, this could be a big year! :)

This Week's Message: Amateurs, unwittingly, love forecasts...

Janet Yellen’s Jackson Hole speech on Friday essentially echoed the sentiment I’ve been sharing with regard to the economy of late. That is, things are indeed improving, but not at some breakneck inflationary pace. The initial reaction to her commentary was about a 70 point decline in the Dow, as I type (it’s Friday morning) the Dow’s up 90. Won’t guess where it’ll end the day, don’t really care actually.

What I do care about are the prospects for earnings going forward for the many companies whose stocks occupy the mutual and exchange traded funds that we hold in client accounts. Their share prices will meander all over the chart while these companies search the world (yes, the world!) for opportunities to sell their wares. At this juncture, the next recession appears to be somewhere beyond the foreseeable horizon, at least to my eyes. And being that emotionally-impacting bear markets tend to need recessions, while volatility has to pick up going forward, the economy doesn’t suggest that we should be losing any sleep these days. That said, if you’re our client and you ever lose sleep over your portfolio --- regardless of market conditions --- I demand that you call Gladys the next morning and schedule us a meeting.

As this bull market grows older, out of the woodwork will come more and more soothsayers and snake-oilers offering up their guaranteed forecasts on stocks, gold, oil, currencies, etc.

Here’s Alexander Elder in his timeless 1993 book Trading for a Living telling it precisely how it is:

Nature's Law is the rallying cry of a clutch of mystics who claim there is a perfect order in the markets (which they'll reveal to you for a price). They say that markets move like clockwork in response to immutable natural laws. R. N. Elliott even titled his last book Nature's Law.

The “perfect order” crowd gravitates to astrology, numerology, conspiracy theory, and other superstitions. Next time someone talks to you about natural order in the markets, ask him about astrology. He'll probably jump at the chance to come out of the closet and talk about the stars.

The believers in perfect order in the markets claim that tops and bottoms can be predicted far into the future. Amateurs love forecasts, and mysticism is a great marketing gimmick. It helps sell courses, trading systems, and newsletters.

Mystics, Random Walk academics, and Efficient Market theorists have one trait in common. They are equally divorced from the reality of the markets.

Have a great weekend!

Marty

Audio Commentary

Quote of the day

Whether it's protectionism (erecting barriers to international trade, immigration, etc.), the pros and cons of a minimum wage, of government spending, of regulation, etc., our busy lives and varied interests I'm afraid compel us unwittingly to adopt a crowd think that risks us taking ill-conceived sentiments to fruition. Politicians, and the special interests that support them, alas, know this all too well. As Gustov Le Bon warned back in 1895:

Crowds are only cognisant of simple and extreme sentiments; the opinions, ideas and beliefs suggested to them are accepted or rejected as a whole, and considered as absolute truths or as not less absolute errors. This is always the case with beliefs induced by a process of suggestion instead of engendered by reasoning.

The characteristics of the reasoning of crowds are the association of dissimilar things possessing a merely apparent connection between each other, and the immediate generalisation of particular cases. It is arguments of this kind that are always presented to crowds by those who know how to manage them.

Today's TV Segment (video)

Market Commentary: What the Fed frets over (video)

Quote of the day

If I only had a nickel for every time, over the years, a client asked me what I think of so and so's prediction that the market is about to crash (I use the negative example because it's those that seem to catch our clients' attention). Well:

Fear sells. Fear makes money. The countless companies and consultants in the business of protecting the fearful from whatever they may fear know it only too well. The more fear, the better the sales.

DANIEL GARDNER, The Science of Fear

Ed Stavetski describes my view perfectly (HT Robert Mortorana):

You must have an independent view of the markets or the media will force a view upon you. 

Quote of the day

The indices for equity markets are roughly 10 times higher than they were in 1986, unadjusted for inflation and dividends, and the yield on the U.S. 10-year Treasury note is one-fifth of what it was. Of the top 10 companies by market capitalization in 1986, only General Electric, AT&T, and Exxon Mobil remain in the group today. Google, Amazon.com, and Facebook were not even dreams. In 1986, Microsoft, Oracle, Adobe, and Sun Microsystems went public. 

Credit Suisse's Mike Mauboussin in his August 6 letter. (HT Josh Brown)

Lots of folks seem to  yearn for the past fear change. They really shouldn't! mm

Market Commentary (video)

Weekly Message: August So Far

You’re receiving this week’s message way early. There’s market research I need to perform that will take me away from the office for a few days. It seems that there may be some correlation between the feeding habits of the rainbow trout that inhabit Alaska’s Kenai river and volatility in the U.S. stock market. I know, it’ll be an exhausting study, but somebody’s got to do it! Don’t laugh --- can’t be any crazier than the popular Super Bowl Indicator:

An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in the stock market for the coming year, and a win for a team from the old NFL (NFC division) means the stock market will be up for the year.

Yep, that indicator’s been right 80% of the time! And if you think for a minute that it is indeed tradable (or investable), I think you are indeed crazy! As for the Kenai trout indicator, on the other hand, there may be something to it. I’ll let you know…

As for this week’s message, I thought I’d share some of the month-to-date titles of the content pages I’ve placed in my August Current Trends file. I title many of these with my interpretation of what they signify:

·         Most world markets overbought, better dividends abroad, realized volatility low in U.S.

·         The evolution of S&P sector weights shows how services dominate the U.S. economy.

·         Bank of England rate cut, and ECB’s bond buying bullish for U.S. corporate bonds.

·         High yield spreads paint a sanguine picture.

·         Iron ore and steel rallying steadily, largely on China stimulus.

·         Crude inventories up, gasoline’s down, gasoline demand off the charts. Slow seasonality coming.

·         Crude technicals better than the fundamentals; shouldn’t inspire too much bullishness (for oil) for now.

·         1^st week of August data shows mixed economic signals, with slightly upward bias.

·         Really good July jobs report! Upward June revision. Wages/hours up, labor force participation up slightly, more full-time jobs.

·        Confidence among 35 year-olds much higher than 54+ year-olds. Change in employment for 24-24 year-olds is 2^nd highest in over 30 years.

·         Jobless claims below 300k for 74^th straight week. Ties for longest streak since 1973.

·         ISM Manufacturing components all above 50. Services ISM shows job growth not keeping up with demand --- could bode well for coming jobs reports.

·         Manufacturing ISM new orders and inventories rolling over a bit, something to keep an eye on!

·         Truck tonnage down slightly sequentially but remains near all-time high. Port traffic soft.

·         Huge issues of Japanese long-term corporate bonds suggests belief that rates will finally start rising.

·         China foreign reserves holding steady. PBOC doing good job managing foreign exchange regime.

·         Capital expenditure weakness partly, if not largely, about low oil and high dollar --- that set up is, therefore, for an increase going forward.

·         Ford and GM missed July estimates, but seasonally adjusted and year over year comps good. Other makers had very good results.

·         U.S. auto sales may not be peaking just yet, per consumer survey.

·         Tech and industrials lead on beats as earnings season winds down. Utilities in last place; that’s a positive growth sign going forward.

·         Some (few) are making a bullish case for the pound; I’m somewhat the contrarian here as well!

·         This headline should scare those who worry about Turkey’s Erdogan’s dictatorial tendencies!

·         Wholesale trade data paints an upbeat picture for the economy.

·         Iran looking to allow iPhones; Apple looking to tap that market once sanctions are eased.

·         Japan and emerging mkts best performers since Brexit, in US dollar terms.

·         UK stocks on a post-Brexit tear, but not so much in dollar terms.

·         China sentiment sanguine despite potential red flags.

·         Q2 earnings and revenue beats best in years, with one week left in earnings season.

·         Financial sector technicals improving.

·         Small business optimism improving, but definitely not ebullient!

·         The JOLTS (job openings and labor turnover) report shows openings below the high set in April, quits are stubbornly low, but layoff and discharge rates are extremely low.

·         Brick and mortar retail softened in July, but online remained very strong.

·         Online sales are taking a larger and larger share of total retail sales.

·         Online taking share from electronics, clothing and general merchandise, but building materials holding strong.

·         Stocks are no longer tracking oil prices.

·         Even high yield spreads are no longer tracking oil.

·         High yield spreads at yearly lows is bullish for stocks.

·         Market breadth still good, but new 52 week highs have been contracting of late; something to watch!

·         Energy breadth (52-week highs) showing a bullish divergence. However, industrials, tech and discretionary showing bearish divergences by same measure.

·         Intraday and intraweek price action tells a compelling bull market story.

·         Global CDS spreads denote healthy credit markets.

·         Import and export prices, ex-energy, denote steady global demand.

·         Bloomberg consumer comfort index declined sharply the first week of August.

·         PPI lower, not confirming the positive signal from import-export data.

·         Business inventory to sales ratio looks good coming into q3.

·         University of Michigan consumer sentiment survey up fractionally, with expectations jumping, but current conditions sentiment falling.

·         Oil rig counts rising of late, bearish indicator in terms of price.

The above suggests that stocks are currently on the pricey side; while there’s the potential for improved earnings going forward to fix it (it’ll ultimately be better earnings or lower stock prices). The services side of the U.S. economy continues to expand (that’s most of the economy btw). Commodities are hanging in there. The economy overall is okay. Market technicals are still decent, but have deteriorated a bit for some sectors --- although financials are finally looking up. Amazon is killing it! Stocks are no longer tethered to oil. Apple continues to expand its reach. Global credit spreads are sending no economic red flags. Consumer sentiment’s a little iffy. Brexit hasn’t hurt global investors in the least, at least so far. Short-term price action in stocks says the bull market is still alive (but, please, expect corrections [some big] as time goes on).

Let’s just say that the overall picture remains mixed, maybe a little muddled, but with a positive bias. I’m expecting that my Alaska trout study will help us put all the pieces together. :)

Have a great week!

Marty

Read Only If You Mean It When You Say "I like someone who tells it like it is"

My stepson Jonathan is a free thinking, free market advocate --- funny how all of our children seem to be of that ilk (I'm sure they were just born that way) --- who loves to place his stepdad in the oft-uncomfortable position of seemingly having to defend the principles he's come to adopt (not that he's not an adept debater himself, it's just that one tends to lack credibility with one's friends/peers. It seems that with grizzle comes credibility). 

Over dinner the other evening he informed me that he's inviting a childhood friend to our house for a "game night". It's not that the young man is some gifted artist who would be the ace brought in to guarantee victory for the all-male pictionary team (Jonathan's not above such deck-stacking by the way) --- oh no! --- it's that he wants to rope his friend and yours truly into a debate on the merits of freedom versus collectivism. Apparently the articulate young philosophy major has become a proud communist. If it comes together I'll let you know it went...

In the meantime, I followed up with Jonathan via text encouraging him (again) to read Don Boudreaux's blog Cafe Hayek. I told him he'd gather huge material for future discussions, and I suggested that he direct his buddy there and ask him to address the points Don makes. Which brings me to why I'm penning this message this morning.

I often say in these politically charged times that the world needs another Milton Friedman, or another Frederick Hayek! Dr. Friedman in particular was a gifted communicator of free market principles. I don't know the number of his interviews I've read and watched (search "Milton Friedman" on YouTube) over the years (dozens and dozens for sure), but I can't recall a single time when I wasn't convinced that he had at a minimum got a number of readers, viewers and/or audience members rethinking their views on enterprise, politics and freedom. The many works of Hayek are timeless, and critically important, classics that I'm sure will live on for generations to come.

Well, we actually do have a living source of the sort, and I'm going to suggest that you, dear reader --- particularly if you at all buy into what you're hearing on the stump these days --- go to cafehayek.com and after reading today's posts subscribe via email in the upper left corner. Don Beaudreaux, an econ professor at George Mason University, is in my view one of the world's few credible authorities on the economics of politics and freedom. 

Over the years my senses have become keenly honed to the political biases that infect so much of what the public is fed with regard to government and the marketplace. For example, very recently I heard an economic consultant to a current presidential candidate cite the Economic Policy Institute's claim that the North American Free Trade Agreement has cost the U.S. 700,000 jobs --- a claim I know to be patently false. Without looking I knew that the Economic Policy Institute would be the tool of some special interest group. Of course I took a quick look and found that the eh em "nonprofit, nonpartisan think tank"'s board is riddled with characters from the sources of a great deal of its funding, which would be labor unions. Yep, the Chairman of the Board is none other than Richard Trumka himself, the president of the AFL-CIO. The International Association of Machinists Union and Aerospace Workers, the Communications Workers of America, the United Steel Workers Union, the Service Employees International Union, the American Federation of State, County and Municipal Employees AFL-CIO, the United Auto Workers Union, the United Food and Commercial Workers International Union, and --- believe it or not --- yet more labor union presidents have found their way to board seats at the "nonpartisan" Economic Policy Institute. Suffice it to say that labor unions are notoriously no fans of free trade, or, let's say, of allowing you and me access to affordable goods from other nations or U.S. businesses access to other labor markets. 

Back to Boudreaux: Spend some time on Cafe Hayek and you'll find that Don is the definition of nonpartisan. While you may not agree with him on every count, you can rest assured that what you'll be taking in is not designed to take you to either side of the political aisle. His blog posts, essays, articles, videos and books have profoundly, and invaluably, influenced my thinking on politics, economics and liberty over the years.

Here's a snippet from a Cafehayek post this morning:

Arguments for protection today – be these trumpeted by Trump, shouted by Sanders, cackled by Clinton, or read in any eminent newspaper or on prominent blogs – are no different or stronger or more refined than were arguments for protection 80 years ago, which themselves were no different or stronger or more refined than were arguments for protection 80 or 160 years before that.  Economists have shown again and again the illogic, the faulty premises, and the biased use of facts that are always to be found in popular arguments for protection.  Yet these arguments never die.  They are idea-zombies, largely because a failure to grasp fundamental economics makes mercantilism seem correct – in the same way that a primitive human being, never exposed to even the most rudimentary scientific thought and judging exclusively from his own personal experience – concludes that the earth is stationary and at the center of moving orbs and twinkly little lights.  This popular ignorance is greedily exploited by powerful producer groups to secure state privileges for themselves at at the expense of the economically uninformed masses.

There is nothing remotely progressive about protectionism.  It is regressive politically, ethically, and economically.  Buffoonish ignoramuses such as Donald Trump and knavish power-mongers such as Hillary Clinton surely don’t care about this reality, but, for heaven’s sake, people who aspire to be intelligent, rational, cosmopolitan, and unbiased ought not fall for the mix of idiocy and grasping-greed that is protectionism.

Okay, "nonpartisan" is probably an understatement! Please don't let your affinity for either candidate allow Don's characterizing to turn you off. Like I said, you may not appreciate every point, but if you mean what you say when you say "I like someone who tells it like it is", rejecting my plea to subscribe to Cafe Hayek (totally unsolicited btw) suggests what you really mean is "I like someone who tells it like it is, as long as it jibes with my biases". Which, I assure you, is what politicians and special interest groups are counting on!

Long-time readers know that I share Don's frustration with protectionism. The fact that it is forever such an effective weapon in the arsenal of political campaigns suggests that the everyday American has no idea how the world must come together to supply him/her with even what he/she surely views as today's bare necessities. Here's Matt Ridley, in his phenomenal book The Rational Optimist, describing what it takes to get him to 9 o'clock in the morning:

As I write this, it is nine o’clock in the morning. In the two hours since I got out of bed I have showered in water heated by North Sea gas, shaved using an American razor running on electricity made from British coal, eaten a slice of bread made from French wheat, spread with New Zealand butter and Spanish marmalade, then brewed a cup of tea using leaves grown in Sri Lanka, dressed myself in clothes of Indian cotton and Australian wool, with shoes of Chinese leather and Malaysian rubber, and read a newspaper made from Finnish wood pulp and Chinese ink. I am now sitting at a desk typing on a Thai plastic keyboard (which perhaps began life in an Arab oil well) in order to move electrons through a Korean silicon chip and some wires of Chilean copper to display text on a computer designed and manufactured by an American firm. I have consumed goods and services from dozens of countries already this morning. Actually, I am guessing at the nationalities of some of these items, because it is almost impossible to define some of them as coming from any country, so diverse are their sources.

More to the point, I have also consumed minuscule fractions of the productive labour of many dozens of people. Somebody had to drill the gas well, install the plumbing, design the razor, grow the cotton, write the software. They were all, though they did not know it, working for me. In exchange for some fraction of my spending, each supplied me with some fraction of their work.

Weekly Message: Uncertainty and Illusions

Every now and again someone will ask me what I think about so and so market guru’s prediction that stocks are either going to the moon or sliding into the gutter. As I’ve reported the past couple of weeks, some legit personalities have been in the market-sliding-into-the-gutter camp. The beauty of the equity market lies in its unpredictability: It is the quintessential humbler of mortals whose egos convince them that their past investment successes indicate that they’ve some unique and/or uncanny predictive prowess.

Alex Krainer, in Mastering Uncertainty in Commodities Trading: Generating sustainable profits in forex, commodities and financial markets through trend following, tells the story of two Wall Street wizards who once lost their way:

…in early 1995, Jeffrey Vinik, the manager of Fidelity Magellan, then the world’s largest mutual fund, got trampled by the markets as the internet technology boom was about to take off. At the time, Vinik held over 40% of the fund’s assets in technology stocks, proclaiming that most of his investors "have invested in the fund for goals that are years away… I think their objectives are the same as mine, and that they believe, as I do, that a long-term approach is best." But only six months after he wrote this, Vinik dumped almost all of his technology shares, selling close to $ 19 billion worth in two frantic months. In retrospect, it’s clear that Vinik was right on the money with his large allocation to technology companies, but fearing that the already “overvalued” tech stocks were due for a large correction, he deprived his investors of the windfall from one of the most spectacular bull markets ever. At the other end of that same bull market, another star manager made a similar and equally unfortunate mistake. While working for George Soros in 1999, Stanley Druckenmiller accumulated a significant short position in internet stocks he believed to be stupidly overvalued. He was right, of course, but the Nasdaq's meteoric rise eventually made him blink, cover his shorts and join the bulls on the long side. Shortly thereafter, the dot-com bubble burst and 75% of the internet stocks Druckenmiller shorted eventually went to zero. The rest of them fell between 90% and 99%. Instead of making an absolute killing in 2000, Stanley Druckenmiller ended up with the biggest loss in his career.

Tim Richards, in Investing Psychology: The Effects of Behavioral Finance on Investment Choice and Bias, issues a timeless warning:

All too often, spurious patterns and superstitious thinking accidentally produce the right results and then get dressed up as good investment advice. Smart investors need to hone their critical faculties to detect these fake tools, in just the same way they need to be wary of people who claim to have a perfect investing strategy.  

And helps us understand how the stress of market uncertainty --- and the human need to control --- can trigger illusory thinking that acted upon would in all likelihood do great harm to our bottom lines:

Uncertain conditions are those that are most likely to cause us to generate the random connections between events that, to all intents and purposes, look like superstitions. The key to these superstitions is that they allow us to try and exert control over the uncontrollable: they turn the unknown unknowns we can't control into knowns that we can. As investors, this means we start thinking we can predict the future, when the truth is we haven't got a clue. What do you think happens when an investor starts making investment decisions on the basis of illusory patterns? Yep, they tend to lose a ton of money.

So, please, never ever, evereverever, get fooled into believing that the blokes who I featured in my August 4^th and August 9^th videos (below) can know what they would have us believe they know.

Now, those featured guessers just happen to be among the ones who have the market heading to the gutter. We must also apply the very same skepticism to those mavens who have it heading to the moon.

Have a great weekend!

Marty

Market Commentary: What's the market saying about the economy? (video)

This Week's TV Segment (video)

Quote of the Day

French social psychologist, sociologist, anthropologist, inventor and amateur physicist (dang!) Gustove Le Bon made sense in his 1895 book The Crowd: A Study of the Popular Mind --- whether we’re talking crowd mentality related to markets or, well, hmm:

The first is that the individual forming part of a crowd acquires, solely from numerical considerations, a sentiment of invincible power which allows him to yield to instincts which, had he been alone, he would perforce have kept under restraint. He will be the less disposed to check himself from the consideration that, a crowd being anonymous, and in consequence irresponsible, the sentiment of responsibility which always controls individuals disappears entirely. 

The second cause, which is contagion, also intervenes to determine the manifestation in crowds of their special characteristics, and at the same time the trend they are to take. Contagion is a phenomenon of which it is easy to establish the presence, but that it is not easy to explain. It must be classed among those phenomena of a hypnotic order, which we shall shortly study. In a crowd every sentiment and act is contagious, and contagious to such a degree that an individual readily sacrifices his personal interest to the collective interest. This is an aptitude very contrary to his nature, and of which a man is scarcely capable, except when he makes part of a crowd.

Market Commentary: Bubbles?? (video)

Quote of the day...

Long-time clients and readers know that I believe humility sits atop the list of traits of successful investors and, especially, investment advisers. Per Tim Richards in Investing Psychology: The Effects of Behavioral Finance on Investment Choice and Bias (Wiley Finance):

... a study of professional traders exposed to fairly normal looking, but actually completely random, conditions concluded that many of the participants demonstrated illusion of control problems. Notably, the individuals who were most inclined to illusions of control were also most likely to perform the worst: they were more likely to see their successes as evidence of their skill, and to take more risks because of this— they simply failed to recognize the limits of their own abilities. In essence, the more deluded the individual trader was about their own ability to influence outcomes, the poorer their investing results were. Thinking we're in control when we're not is always a dangerous illusion. For investors it's a guaranteed way of losing money and the safest position to adopt is that in the short-term markets are always unpredictable. Many people find that almost impossible to accept: they shouldn't be allowed anywhere near stock markets.

(emphasis mine)

Weekly Update

Every month I create a new file titled “current trends”. In that file I place economic reports, fundamental and technical analyses, and other data that I track regularly. In many of the titles I include my opinion in terms of what the content signifies. Below are the titles --- arranged chronologically --- in my "July Current Trends” file. As you read through them you’ll begin to get a feel for what inspires my sentiment when I report to you on the semi-weekly videos:

· BOE (Bank of England) steps up while businesses step back on Brexit worries · Bond yields harbinger of bad things to come or simply capital flows? · Euro credit markets and liquidity remain fairly sanguine post Brexit · Online job postings in UK plunge after Brexit · Bull market now second longest and fourth strongest · Intraday action (U.S.) bullish for an upside breakout · Employment driven by full-time, not part-time, jobs · Average hourly earnings trending better · Employment cost index down vs year ago · Federal tax receipts up · NFIB Survey (small business) showing strength · Japan’s demographics worse than ever · Japan credit agency lowers Japan to AAA Negative (yen lower) · Japan aggressively buying U.S. treasuries · All sectors overbought, look for short-term pullback, but longer-term support looks very good · Short-term and very long-term charts look bullish for stocks · Sentiment improving but not yet dangerous · Breadth remains strong · Smallcap breadth improving · High historic valuations are a concern for stocks · Commodity bear market has been supply, not demand, driven · Fund manager risk appetite low · Fund manager hedging high · U.S. manufacturing showing real improvement · Breadth, in terms of new highs, strong, just okay on a by-sector basis · NAHB (homebuilders) sentiment mixed but on balance still optimistic · Housing looks good in terms of single family; multi-family contracting after huge runup · Multi-family decline due to tax credit expiration in NY, which caused spike up last year, which makes for tough comps this year · Housing starts data bodes well for the housing market and homebuilder stocks · Post Brexit PMIs showing UK weakness · Earnings revisions very negative except for energy and healthcare · Negative earnings revision is bullish for stocks · Negative earnings revision is bullish for stocks, even by sector · Analyst’s ratings by sector; utilities the highest bearish shift, financials the highest bullish · Sentiment continues to improve · International capital flows have seen huge selling of U.S. equities amid a flat market, imagine if buying begins! · S&P tends to do better when earnings are weak. I.e., it looks forward to earnings improving… then, when they do, it tends to do poorly · Strong breadth, per the A/D line, bodes well for returns going forward · Oil is suspect going forward · The Dollar’s poised to rally, gasoline is problematic here as well · China interested in Brazil’s infrastructure · Optimism for Brazil’s recovery · Housing starts very strong and says very good things about present state of the economy · EM (emerging mkt) flows very strong in July · Institutional Investors not confident in July · Tech leading, defensives losing, since Brexit bottom · August has been historically a tough month for stocks · August seasonality ugly · Brexit gets lots of earnings call attention · Earnings guidance spread slightly negative so far this reporting season · Under the surface of the weak Q2 GDP number tells a very different (positive) story · Healthcare has been holding down PCE inflation · Fixed investment likely to accelerate and push up gdp going forward · Private sector R&D exploding, which will lead to productivity gains going forward · Inventory to sales ratio dropping dramatically · Wage growth picking up · Household formations, low vacancies and high rents, and lack of inventory, support higher home prices going forward · Durable goods report mixed

The above suggests that the U.S. consumer is on firm footing, U.S. manufacturing is showing signs of life, the overall U.S. economy --- while not going gangbusters (although June’s and July’s jobs numbers were very strong!) --- is signaling extremely low recession risk, U.S. stocks are technically (presently) in a good place, valuations in the U.S. look a bit stretched (but presumably not dangerously so), emerging market stocks are at last getting some attention, Brexit is impacting (but not killing) Europe’s economy, U.S. interest rates are helped lower by international buyers of treasuries, and Japan’s strict immigration laws are showing up in extremely bad demographics (and, make no mistake, that’s not good for its economy). Essentially --- in terms of the U.S. --- the above supports the view I’ve expressed of late that the second half of this year will see economic results that will surpass most economists’ expectations. Which is precisely the story told by Citi’s U.S. Economic Surprise Index (tracks actual economic results versus economists’ predictions): Have a great weekend! Marty

Market Commentary (video)

Uncrowded Waters

The business I'm in, at least for me, is a 24/7 365 affair. This past week I've learned that a cell signal can be had at 9,000 feet --- if you're in a clearing and there happens to be a hot springs resort within 20 miles of your location, that is.

Yes, if there's a single filled bar followed by a "4G" reading in the upper left corner of my phone's screen, I'm gonna know what the dollar looks like against the pound, I'm gonna know if gold's trending, and I'm gonna know how U.S. utility stocks are reacting to Japan's latest stimulus package (yep, there's potential correlation there). 

I catch flack from clients/friends (synonyms to me [when your business is a 24/7 365 affair if your clients aren't friends you have no friends]) for staying connected when I'm supposed to be otherwise. But (I pinch myself) I absolutely love what I do! Me not checking the dollar, or futures, when I have a signal is like an avid golfer not golfing when he finds himself at the first tee box after having paid the green fee. Or, for me, it's like standing in the middle of the upper San Joaquin River, rod in hand, a number 12 green woollybugger at the end of my 6x tippet and not casting into the crystal clear pool above my feet (if that jargon makes sense to you, shoot me an email and you and I can share fish pics [i.e., brag]).

All that said, pondering markets and economies at elevations where the air is thin  seems to conjure up a whole different perspective versus when I'm near sea level, sitting at my desk, staring into 27” monitors, wearing shiny black shoes, with plenty of oxygen to breathe. In fact, I find that in the silence and beauty of nature (or on the 4-wheel drive road getting there) market metaphors abound.

It occurred to me the other day that when I'm behind another vehicle on a single lane, crazy-twisty, rock and pothole infested road that meanders along the side of one of those don't-look-down cliffs I feel much more secure than when I'm white-knuckling it all by my lonesome. Why? Because --- I'm ashamed to say --- I know that if there's one of those crazy jeepsters barreling down from the other direction, the poor soul in front of me is going to.... well, Yikes!!... instead of yours truly. Please know that I would never wait along the road for someone to take the lead for that purpose, it's just one of those realities of high mountain roads. But, you know, I've noticed that when I don't feel the security of others on the road to my destined trout stream; when, in fact, I encounter nary a single vehicle in either direction, when it's scary treacherous, when it appears that only the most foolish flyfisher would find himself on such a journey I virtually always catch more and bigger fish.

Such a journey this past week landed me along an amazing stream with sandy banks that were entirely void of human foot prints. And, yes, the results were incredible! 

BTW, this amazing creature survived our battle beautifully and made his way right back to the shelter of the submerged boulder I coaxed him from.

Ok, so what does this have to do with markets? Nothing really, just felt like bragging; remember my "friends" comment above? 

Just kidding :)

On the way to that beautiful trout's beautiful home, it occurred to me that following the crowd in investing is like following a caravan of jeeps down a twisty single-lane road. You think if everyone's doing it, it must be safe, it must be profitable; or else everyone wouldn't be doing it. When, in reality, folks always crowd where the fishing was good, not necessarily where it is good. Hence my commentaries leading up to the latest rally: You'll recall that I showed you what little bullishness there had been among individual investors and how actively managed mutual funds had been overweight cash and bonds, and underweight U.S. equities. I.e., everyone seemed to be staying off the stock market road. And here we are, at fresh new highs! 

We, in my view, can apply this logic to non-U.S. investing as well --- per my video from two weeks ago. By and large investing outside the U.S. has been relatively out of favor for quite some time --- as the road has been battered by relentless storms (think European debt crisis, Brexit, China currency and economic concerns, Brazil's populist politics and, thus, disaster of an economy, etc.) and appears to the crowd to be too risky to attempt --- which, therefore, has allowed opportunities in those uncomfortable places to grow ever larger. So then, if we can emotionally survive the twists, turns and turbulence that have kept most folks on smoother pavement these past few years, I believe our odds (no guarantees of course) of coaxing above average returns into our portfolios will improve exponentially.