Monday, October 15, 2018

Quote of the Day: What it Takes

Yep, pull backs and corrections are never fun, particularly if you're constantly monitoring your portfolio. Thing is, they're part and parcel to the business of investing -- there's simply no escaping them. If you find yourself stressed every time the market takes a multi-point dip, you might want to sit yourself down and come to terms with reality. Do you want to spend the rest of your life emotionally at the mercy of the market? If you determine that there'll be no peace for you while the market's in apparent turmoil, then you must do yourself a favor and either get out of the market altogether, or sell down to a point that you can emotionally manage. 

Sunday, October 14, 2018

Analysts Not Liking the Earnings Prospects for Financials and Materials, and That's a Good Thing!

Financials and materials are currently two of our top three sector weightings. As it turns out, Wall Street analysts are, on balance, presently not with us on those two picks. And, guess what, that's a good thing.

This Week's Message: Should We React?

Statistics such as the ones below provided by Bespoke Investment Group speak to why long-term investor-types tell you to never to sell into the kind of plunge stocks experienced last week.

Saturday, October 13, 2018

Quote of the Day: A Billion Bucks and Tens of Thousand of Jobs (just one company)

While not all clients and regular readers totally agree with me on the tariff topic, they do know exactly where I stand. Which is with Ford's Jim Hackett and United Technology's Gregory Harris:

Friday, October 12, 2018

Inflation Expectations Rising Among Businesses

Businesses (and they should know) see inflation rising going forward. Which supports the Fed's current stance, and, all else equal, bodes poorly for bonds and utilities, and well for financials (read higher interest rates) going forward:

Don't Call Your Friends Over Just Yet

As I type the Dow's up 300+ points, Nasdaq's up 2%, S&P 500's up 1.3%; very nice rally! Question is, should you believe it?

Thursday, October 11, 2018

What's 'Actually' Going On, minute by minute (video)

Watch this video if you're thinking too much about the market this week.

Looking at the volatility, and knowing how traders think, I planned to do a quick video for you this morning, but then I remembered I did one with the same message earlier in the year, just as, we know now, the market was bottoming after a 10+% dip.

Correcting the Narrative

You're hearing in the media -- not just from the President, but from no small number of market actors as well -- that the Fed essentially gets the blame for the latest turmoil in the markets. This morning's bounce in the pre-market on less than expected inflation news may embolden that narrative. While, in fact, it debunks it. 

Wednesday, October 10, 2018

Market Commentary: Underneath Today's Selloff (video)

You may find my comments on rotation (in the back half of the video) particularly interesting.

Once playing, click the icon in the lower right corner for full screen. Focus should occur after a few seconds; if not, click the wheel to the left of the YouTube icon to adjust:

Touching Base

To help you keep the latest in perspective, recall the note I sent to you last week, when the present decline was just getting underway:    emphasis mine this morning...

Tuesday, October 9, 2018

Outlooks Challenged (right out of the gate)

In this week's message we said the following about a potential headwind developing from forward outlooks this earnings season: 

Sunday, October 7, 2018

Ceding Influence to China

While I know I am somehow at odds with a few of my friends, colleagues and clients on the U.S.'s present positioning among its global partners, I suspect we can all agree (that is, if we are "all" paying attention) that while the U.S. pulls in, China is reaching out, big time.

Saturday, October 6, 2018

This Week's Message: Rough Road Ahead, Amid Still Bullish General Conditions

The ugly short-term setup exhibited in our last analysis played out as odds indicated, as equities tumbled to close the week.

This week's analysis, while nuanced as discussed below, shows near-term conditions only getting worse.

Here's last week's chart character and volume snapshot (right 2 columns):   click any insert below to enlarge...



Here's this week's:


Unlike the previous week, however, overall ETF flows to U.S. equities didn't confirm the ugly volume trends depicted in this week's charts, as U.S. ETFs, in the aggregate, saw net inflow.

Although, zeroing in sector by sector, last week's fund flows indeed confirm most of what the present charts indicate (right column is weekly flow):

On a positive note, per the above, retail and financial stocks, while experiencing net outflows on the week, saw strong reversals (one-day net inflows) on Friday (center column).

Bucking the weekly negative trend were communication services and industrials:

Long-dated treasuries saw investors screaming toward the exits:

I'm near-term bearish, intermediate-term neutral, long-term bullish on tech:

As I've been reporting the past several weeks, the internals for tech have been growing more and more suspect. Plus, my intermediate-term macro thesis does not allow for tech to continue the strong leadership it exhibited last year, and so far in 2018; with or without a protracted trade war. Per last week's action, it looks as though the "smart" money is beginning to agree. I.e., last week's drubbing of the tech sector (tech down 2.2%, vs financials, industrials and materials; up 1.6%, 0.68% and down 0.5% respectively) made perfect sense to me.

Non-US remains a mess, as, clearly, global growth has slowed and the world stresses over the threatened, and now occurring, disruption of long-held trade arrangements and strongly-rooted global supply chains.

While headline data suggest that the U.S. economy has remained immune to tariff effects thus far, our deeper analysis suggests otherwise, per my macro notes following the excerpts below.

I sympathize with the following published yesterday by Bloomberg:     emphasis mine...
Global manufacturing is growing at the weakest pace in almost two years and exports shrank last month for the first time since 2016. “The U.S. may be booming but the global economy is starting to slow,” said Janet Henry, chief economist at HSBC Holdings in  London.
The trade war is raising the biggest red flag. In the past few weeks alone Panasonic Corp., Ford Motor Co. and BP Plc have all highlighted the dangers of the escalating tensions, and those worries are starting to filter through into the broader economy.
Emerging market stresses from Argentina to Turkey, political uncertainty in the U.K. and Italy, and rising oil prices are among the other threats. While there’s no sense of growth coming to a halt, the crystallization of risks means the synchronized expansion of last year is a fading memory.
HSBC this week lopped its forecasts for 2019 world growth, mainly prompted by a downgrade for emerging nations struggling with the rising dollar. 
“About 50 percent of the value added that’s in Chinese exports to the U.S. comes from the rest of Asia,” said Fabiana Fedeli, global head of fundamental equities at Robeco. “Clearly other countries will also be impacted if the trade war continued to escalate.”
The confluence of factors may be enough for the IMF to trim the forecasts it’s maintained so far this year for the world economy to expand 3.9 percent in 2018 and 2019. The fund will update its World Economic Outlook from Bali on Oct. 9. It hasn’t revised projections down for a year ahead since October 2016.
.... even the U.S. may not be immune. Recent data showed the trade skirmish shaping up as a clear drag on growth last quarter, prompting economists at JPMorgan Chase & Co. and Amherst Pierpont Securities to pare their estimates for expansion.
Macro Readings:

Our PWA [Macro] Index sank 9.53 points to a yearly low of 28.57. The financial markets subindex was the culprit; plunging 41.61 points to a net score of -9.53, with the following 8 (of 23) data points deteriorating on the week:

  • Individual Investor Bullish Sentiment sprang to 45.7% (we consider 50+ to be dangerously optimistic on the part of the predominantly untutored, emotional, reactionary and inexperienced individual investor community). 
  • The VIX Curve moved from positive to neutral as volatility spiked markedly during the second half of last week. 
  • The Put/Call ratio (option trader sentiment reading) sprang 20 bps to 0.84. 
  • The consumers staples/discretionary ratio turned notably in favor of consumer staples. 
  • Overall breadth plunged (accounting for 4 of the 8 lower readings), with the S&P 500's advance/decline line rolling over, its % of members trading above their 50-day moving average falling below 50% (49.2), and sector readings showed marked deterioration among the cyclicals (save for energy). 
On the bright side, the economic subindex actually gained 4 points, as auto sales improved in September (moving to neutral on our chart, from negative), the chemical activity index, after flattening for a stretch, resumed its positive trajectory, rail traffic turned higher in similar fashion, and the Citi U.S. economic surprise index moved into neutral territory (from negative). Two readings detracted from the subindex's overall score; they were, Global PMI falling for the 4th straight month to a still expansionary 52.8 (moving from positive to neutral), and Citi's Japan economic surprise index moving from neutral into negative territory.

Summary:


Presently the market is facing headwinds from multiple fronts:

1. While Q3 earnings reports will reflect the strong profits that come with strong business conditions, I expect that they will be marred notably by uncertain outlooks due primarily to global trade concerns, which will exacerbate the otherwise typical inflation concerns that accompany a mid/late-stage economic expansion.

2. Rising inflation, as noted in #1.

3. An appropriately hawkish Fed (read rising interest rates).

4. Iran sanctions taking effect on November 4th, thus hampering the distribution of the world's fourth largest store of oil reserves. I.e., higher prices at the pump are likely during the coming holiday shopping season.

5. Uncertainty over mid-term elections.

6. Coming to terms with a slowing global economy and the inevitability/realization that the U.S. is in no way immune to the conditions impacting the other 96% of the world's population.

7. The real potential for further deterioration in U.S./China trade relations.

All of the above said, while our macro index is plumbing new 2018 lows, it still presents a scenario where odds favor continued expansion over recession going forward. Presently 49% of its components read positive, 20% negative and 31% neutral; with 53% of this week's negative readings occurring within the financial markets subindex. I..e., recent equity market volatility -- as opposed to current economic weakness -- has much to do with the overall index hitting this year's low.

The begging question -- for the experienced long-term investor -- of course being, will a near-term uncertain investing environment ultimately drag the economy into a recessionary state, or will generally strong economic conditions ultimately pull the market further into all-time high territory?

The receding conditions illustrated by our macro index that have prevailed since its peak on January 15 have (until, as noted above [and last week], very recently) had little to do with stock market conditions, and lots to do with the rising headwind against global trade flows. It appears as though, finally, investors are taking note of those risks; which is what we've suggested from the get-go is needed to inspire all sides to come to the table with the aim of hashing out a legitimate, working "solution".

Our analysis says that there remains ample time (ample conditions, that is) for a treaty to be fashioned and for stocks to resume their bull market march, which, therefore, dictates that we stay the course with our generally growthy sector weightings for the time being.

Just how long conditions will support such a thesis, as well as our present allocation strategy, of course remains to be seen. Which is why we perform our analyses religiously, week in and week out, and remain open to all possibilities.

Thursday, October 4, 2018

Touching Base

Away from the office currently, with spotty connection, but wanted to pop in, in light of today’s market action.

Clients and regular readers should not be surprised, nor should they expect that one day’s volatility will remedy the near-term imbalances we’ve been taking note of lately. 

Here’s from this week’s message:
The next few weeks (leading into mid-term elections), are, at best, likely to see a notable pickup in volatility. At worst, a pullback in the mid-single to low-double-digit % range.“
What ultimately counts, general conditions, clearly point to higher interest rates, but low odds of near-term recession. In fact, higher rates, at this juncture, confirm the presently positive longer-term setup. 

Wednesday, October 3, 2018

American Industry In Good Shape; From The Horses' Mouths

September's results for the Institute for Supply Management's Manufacturing and Services Sector Surveys are out, and, clearly, american industry is presently in very good shape. 

Tuesday, October 2, 2018

Makes Me Shudder, A Little...

When discussing the prospects for inflation this morning, Fed Chair J. Powell said the following:
"... many factors, including better conduct of monetary policy over the past few decades have greatly reduced, but not eliminated, the effects that tight labor markets have had on inflation."

Monday, October 1, 2018

Chart of the Day: I Like Our Present Mix

Referring to last week's action, in this week's message we said:
"Blame the rout in materials and industrials on heightened trade risks."

The Ultimate Lesson In This Morning's News

Looks like NAFTA (under a new name) is going to survive after all. Canada and the U.S. have reportedly come to terms that will have the trilateral agreement survive, after a fair bit of tweaking. Not to throw a wet blanket on the good news, but, well, looking into the details, let's just say it's a real head-scratcher.