I’ll Go Along With the Rest of the Boys!
You might think institutions with their large staffs of highly-paid and experienced investment professionals would be a force for stability and reason in financial markets. They are not; stocks heavily owned, and constantly monitored by institutions, have often been among the most inappropriately valued.
The May Employment Report
Nonfarm payrolls rose by 223,000 in the initial estimate for May, stronger than expected, but not statistically outside of the moderately strong trend of the last year. We need a little less than 100,000 jobs per month to absorb new entrants into the workforce. Hence, it’s no surprise that the broad range of data has indicated a further tightening in labor market conditions.
I can’t quite remember how I met Craig Drill, captain of Drill Capital Management, but meet him I did over a decade ago and we have become kindred spirts. Maybe it’s because we both have been in the business a long time, or maybe it is because of our connection to First Boston in a life gone by.
The Beverly Hillbillies?!
Readers of these missives should know our fundamental energy analysts have been bullish on oil for quite some time, as have we. In fact, we have been bullish on commodities in general, often noting they are the cheapest relative to equities as they have been since the 1960s. Yet last week crude oil’s decline spooked energy investors, raising the question, “Is the crude oil rally over?”
Oil and the Economy
The rise in oil prices is expected to have mixed effects on the U.S. economy. Higher gasoline prices will restrain consumer spending growth to some extent. However, increased energy exploration implies more capital spending, adding to GDP growth. For Federal Reserve policymakers, the key question is whether higher costs of transporting goods may be passed along to consumer prices.
Just One Thing
We have always liked the movie “City Slickers” and particularly one scene. It’s the scene where Curly (Jack Palance) turns to Mitch Robbins (Billy Crystal) and says, “Do you know the secret of life?” The punchline is, “It’s just one thing” (one thing). For investors we agree, all you need to know is just one thing.
The Job Market, Inflation, and the Fed
The April inflation reports were a bit on the soft side of expectations, reducing somewhat the fears that we’re on the verge of an upside breakout in inflation. There’s no sign that a strong economy is putting much upward pressure on consumer prices.
Today, we revisit the military preparedness question following President Trump’s nearly $700 billion military budget to attempt to make our military readiness better. We think the recent weakness in the defense sector stocks provides an interesting entry spot for investors.
In Search of Teenage Mutant Ninja Turtles
So we headed to NYC early Thursday morning in search of the “Teenage Mutant Ninja Turtles.” After touching down at LaGuardia we climbed into a yellow taxi held together by duct tape, rode over potholed streets with our cell phone cutting in and out (gosh I love New York City), and arrived at Grand Central Terminal around 11:00 a.m.
The April Employment Report
Nonfarm payrolls rose by a little less than one million in April – that is, prior to seasonal adjustment – up by 2.932 million from January to April (vs. +2.708 million for the same three months a year ago). Seasonally adjusted, the trend in private-sector payroll growth has remained strong in recent months.
GDP, ECI, ULC, and the FOMC
Real GDP rose at a 2.3% annual rate in the advance estimate for the first quarter, a bit stronger than anticipated (the median forecast was +2.0%), but “close enough for government work.” These figures will be revised, but the underlying story is unlikely to change much.
Wheat, First Securities
“A long time ago in a galaxy far far away” I was running three separate departments at then Richmond-based Wheat, First Securities. Subsequently, Tom Dorsey and Watson Wright decided to leave Wheat, First and form the now legendary firm of Dorsey Wright. When they left, that department fell under my management.
The Fed Policy Outlook
The Bureau of Economic Analysis will report the advance estimate of 1Q18 GDP growth on April 27. These figures will be revised, but the underlying story is not expected to change much. Growth was likely moderate, not horrible, but far short of the lofty expectations that some had put forth at the start of the quarter. Nobody appears too worried about that.
Like Sands Through the Hourglass…
The March reports remained consistent with the view that inflation will move toward the Fed’s 2% goal, perhaps sooner than expected. The FOMC minutes were not expected to surprise, but several Fed officials felt that it might be appropriate to move the federal funds rate above a neutral level for a time.
Two of the Most Important Investing Paragraphs We Have Ever Read
These are two of the most important paragraphs we have encountered in more than 47 years of studying markets. DO NOT read them just once. Go off to a quiet spot that invites contemplation and READ THEM SEVERAL TIMES. Then reflect on all of the mistakes you have made in trading and investing.
Down the Rabbit Hole
When we were kids, we used to love having our parents read to us, especially from books written by Lewis Carroll. Through the Looking Glass and Alice in Wonderland were our two favorites. One of the quotes that has always stuck with us is, “Down the rabbit hole,” which is a metaphor for an entry into the unknown, the disorienting, or the mentally deranging, from its use in Alice's Adventures in Wonderland. Unfortunately, the same can be said about the stock market recently.
The March FOMC Meeting
Financial market participants took the Fed policy meeting outcome as “dovish,” but the end result was a little more hawkish. The Fed’s revised economic projections weren’t much of a surprise, but they illustrate the thinking behind the expected monetary policy outlook. Of course, there are risks, notably a major misstep on trade policy. Gulp!
Monty Hall and Door Number 1, 2, or 3
The Three Prisoners problem appeared in Martin Gardner’s “Mathematical Games” column in Scientific American in 1959. It is mathematically equivalent to the “Monty Hall problem” with the car and goat replaced with freedom and execution, respectively, and equivalent to, and presumably based on, Bertrand’s box paradox.
Secular Bull Markets
It has been said that an investor will experience three secular bull markets in their life time. In the first one you will not have enough money to take advantage of it. In the third one you will be too old to take the amount of risk to really take advantage of it.
“Smoot-Hawley Tariff was an act implementing protectionist trade policies sponsored by Senator Reed Smoot and Representative Willis C. Hawley and was signed into law on June 17, 1930. The act raised U.S. tariffs on over 20,000 imported goods.”. . . Wikipedia
Do You Have the Mental Fortitude to Accept Huge Gains?
What a great question! I recently reread the above quote from Bob Prechter. It’s an excellent quip and virtually everybody can identify with it. On the surface the question seems laughable; who can’t accept huge gains? But in order to set yourself up for such gains you have to possess the courage to take an oversize position and maybe even leverage it.
Inflation Fears Are Overdone (again)
Recent stock market volatility was partly blamed on fear that inflation will soon “take off.” Simple supply and demand arguments would suggest that pressure on resource markets (labor mostly, but also raw materials) would lead inflation higher.
Pullbacks, Indicators, Barometers, and Fear
So most know we took one of our South Florida speaking tours last week. Such tours consist of meeting with portfolio managers, presentations to clients of Raymond James, branch visits with our financial advisors, doing the media thing, well you get the idea.
Rethinking the Fundamentals?
The recent uptick in average hourly earnings (+2.9% y/y) and the surge in the government’s borrowing needs ($1 trillion plus in the current fiscal year) have had some implications for the underlying fundamentals. However, the outlook hasn’t been tumultuous enough to explain multi-100-point intraday swings in the Dow. Something else is clearly going on.
Bond Yields and Government Borrowing
Last week, Treasury announced that it expects to borrow $617 billion in the first half of 2018, vs. $75 billion in the first two quarters of 2017, and announced increases in the sizes of its regular monthly auctions of notes and bonds. It should then be no surprise why bond yields are rising.
Investment Strategy: “The 7% Solution”
We have long been big fans of the books about Sherlock Holmes ever since our misbegotten youth. Strangely enough, being a strategist/analyst is much like being a detective. One has to gather the evidence, pour through it, decipher it, eliminate the “noise,” and come to a conclusion that tips the odds of making money in our favor.
You’ve Got Mail
“You’ve Got Mail” is a 1998 romantic comedy-drama starring Meg Ryan and Tom Hanks. The film is about two people involved in an online romance who are unaware that they are also business rivals. In this morning missive, however, we are not referring to the movie, but rather some recent emails we have received.
This Too Shall Pass (maybe)
The economic impact of the partial government shutdown will depend on how long it lasts. Government workers will still get paid, but those supporting government workers (food service, etc.) will not. Economic data reports and Treasury auctions may be delayed.
Raising the Stakes
Retail sales figures for December showed a relatively strong trend in 4Q17, although part of that reflects a rebound from hurricane effects in 3Q17. Core CPI inflation was a bit higher than anticipated in December, but that doesn’t mean that the low inflation trend is over.
The Job Market Outlook
Nonfarm payrolls rose by 148,000, less than expected, in the initial estimate for December, but the increase was hardly “weak.” There is a fair amount of noise in the monthly figures, but the underlying trend is lower. Despite a tight job market, average hourly earnings were up just 2.5% year-over-year.
The Fed’s Outlook
Four times per year, at every other Federal Open Market Committee meeting, senior Fed officials submit projections for growth, unemployment, and inflation. They also put forth their expectations of the “appropriate” federal funds rate for the end of the next few years. What do the dots in the dot plot tell us about the course of policy action? Not a lot.
Investment Strategy: A History Lesson
In 1981, The Leuthold Group was founded by the sagacious Steve Leuthold. It is an independent stock/economic research firm that produces disciplined, quantitative financial and contrarian financial research for investors. The research team is led by CIO Doug Ramsey, who is one of Wall Street’s best and brightest.
The Fed, the Job Market, and the Risks
The appointment of Jerome “Jay” Powell as Fed chair should result in a smooth transition for monetary policy into early 2017. However, other personnel changes mean greater policy uncertainty as one looks beyond the middle of next year. This comes at a time when the risks of a policy error are increasing.
We have used the aforementioned quip from our departed friend Jerry Goodman (aka Adam Smith) a number of times over the past 47 years because of the wisdom it imparts. We dredged it up this morning after reading an article in Barron’s over the weekend titled, “Man and Machine,” which was an interview with Omar Selim, the CEO of Arabesque Asset Management, a quantitative and sustainable investment management firm.
Fully Invested Bear
So, we are now in the ebullient month of December and as often stated, “It is tough to put stocks away to the downside in December. It can happen, but it’s pretty rare.” In fact, there were only two years that saw negative returns for the S&P 500 (SPX/2642.22) in December.
A Wall Street Walk Through Time
Robert Penn Warren (April 1905 – September 1989) was an American poet, novelist, and literary critic who once said, “History cannot give us a program for the future, but it can give us a fuller understanding of ourselves, and of our common humanity, so that we can better face the future.”