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)