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.