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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.
Computer Tutor
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.”
Merrill Memo
Charles Merrill issued the aforementioned memo to clients on March 31, 1928. At the end of the first quarter in 1928 the D-J Industrial Average was around 240. It subsequently rose to a September 3, 1929 peak of 381.17, which was the price peak for the Industrials that would not be surpassed until 1954, not that we are predicting anything like that here.
A Point of Parliamentary Procedure
We have always liked the clip from the movie Animal House where in the “Deltas on Trial” scene the smooth talking Eric “Otter” Stratton get up and says, “Point of parliamentary procedure.” From there Otter goes on a diatribe ending with the comment, “Isn’t this an indictment of our entire American society?
The Importance of Productivity Growth
Economists view the growth in labor productivity, or output per worker, as the single most important variable in an economy. It’s what lifts the standard of living, helps keep prices low, reduces government budget strains, and drives corporate profits. Over the next few decades, achieving faster productivity growth will be key as labor force growth slows. The outlook is encouraging, but uncertain.
The October Employment Report
As expected, nonfarm payrolls rebounded from hurricane-related effects. The unemployment rate edged lower, but that may have been noise. Leisure and hospitality was the sector most affected by Hurricane Irma, which might explain the choppiness in average hourly earnings (up 0.5% in September, flat in October).
Sittin' on the Dock of the Bay
So I am sittin’ on a dock of the bay here in Boca Raton Florida watchin’ the tide roll away as I wait to speak at a conference of insurance CEOs and CFOs. I have spoken at this annual event for the past 10 years, and it is always a “gas” because the attendees are terrific people.
Anticipating the Anticipations of Others
We have used the aforementioned quote many times over our nearly 50 years in this business, but surprisingly, it is just as relevant now as it was when first written. Bet it surprised you that the quote is dated 1935! Read it a few times away from the maddening crowd and reflect on it, because certain phrases will grab you with their wisdom.
No Money, No Life!!
Money is a vital life enhancer. If you have it, you can enjoy life incomparably more than if you don’t. The great storehouses of travel, leisure, rest, refinement, appearance, health, above all, peace of mind – all of these are open to you if you have money.
Through the Noise: More of the Same
Beyond all the twists, turns, and quirks in the economic data reports, the overall picture appears largely the same. Growth remains on a moderate track, somewhat beyond a long-term sustainable rate (as the job market continues to tighten).
Better, Faster, Cheaper
I first became aware of Frederick “Shad” Rowe, captain of Dallas-based Greenbrier Partners, by reading his brilliant comments in Forbes magazine decades ago. While Shade no longer writes for Forbes, his stock market insights are available via his monthly letter to the clients in his investment partnership.
The September Employment Report
As expected, hurricanes Harvey and Irma had a significant impact on the nonfarm payroll data. However, it’s impossible to say exactly how much. The distorted September payroll figures were never going to be a factor in the Fed policy outlook. There will be two more employment reports before the mid-December policy meeting and we can expect a recovery from hurricane effects.
Career Risk vs. Portfolio Risk
We recalled these sage words from GMO’s (Grantham, Mayo & Van Otterloo) Jeremy Grantham as we watched the end of the quarter performance gaming and portfolio restructuring late last week. His comments are particularly cogent now that we have entered the month of October, since many money management firms close their fiscal year “books” at the end of this month.
Inflation and Consumer Spending
Investors don’t pay much attention to the monthly report in personal income and spending. We already have a good handle on income from the employment report. Unit auto sales and the retail sales data tell us a lot about consumer spending.
Fed Policy: Balance Sheet Normalization
As expected, the Federal Open Market Committee left the federal funds target range unchanged (at 1.00-1.25%) after its September 19-20 policy meeting. The FOMC also announced the beginning of balance sheet reduction. The Fed had outlined how this would work in mid-June, and officials did a good job of telegraphing when it would start.
Managing Risk
“Managing risk,” what a novel concept, but regrettably many investors fail to do just that. My father taught me to manage risk, a trait emphasized in the sentinel book by Benjamin Graham, The Intelligent Investor, which Warren Buffett has deemed, “The best book ever written on investing” and where the aforementioned quote resides.
Random Gleanings at 38,000 Feet
Reflecting on the months of travel as we wing our way back to Tampa at 38,000 feet, one of the more interesting encounters in those travels was spending time with Steve Forbes (Forbes Magazine). Although Steve is a staunch Republican, he suggested that Republicans worship at the altar of the CBO (Congressional Budget Office).
Transitory
In her post-FOMC press conference, Federal Reserve Chair Janet Yellen is expected to provide a concise evaluation of the current economic situation. That includes a discussion about the recent trend in low inflation and the economic impact of hurricanes Harvey and Irma. She is not expected to signal what the Fed will do with short-term interest rates in the months ahead.
The Fantasy Football Portfolio
I have written before how fantasy football is one of my favorite hobbies. For an analytical, data-obsessed sports fan like myself, it doesn’t really get any better than diving into statistics to try to draft a team of players that will beat my friends and win the trophy at the end of the season (and yes, we do have a real trophy).
Graham & Dodd vs. Edwards & Magee
The development of a personal trading or investing philosophy is usually an evolutionary and highly personal process. Through a combination of experience, trial-and-error, and the attainment of knowledge, successful market participants hone their skills until they find a strategy that works for them and that is consistent with their general mindset.
Dysfunction Junction
The exodus of CEO support following President Trump’s response to Charlottesville shook the foundations, but the stock market outlook has remained constructive. Every administration has its share of difficulties early on, many self-inflicted, before settling down.
Graham & Dodd vs. Edwards & Magee
The development of a personal trading or investing philosophy is usually an evolutionary and highly personal process. Through a combination of experience, trial-and-error, and the attainment of knowledge, successful market participants hone their skills until they find a strategy that works for them and that is consistent with their general mindset.
It's the End of the World as We Know It (and I Feel Fine)
Right now, we don’t know if we can put this North Korea news in the same category of past market shocks, but looking back at history, major market collapses generally occur because of economic and financial deterioration, not geopolitics.
Inflation and Productivity
The July CPI data were a bit softer than anticipated, due partly to a drop in the price index for lodging away from home. Granted, if you exclude everything that went down, the CPI always looks higher, but the underlying trend is not far from the Fed’s earlier expectations (of a gradual move toward the 2% goal).
The Ambergris Factor
Ladies and gentlemen, investing is a lot like whaling. Investors are constantly searching for that whale of a stock with the “right stuff” . . . aka the “ambergris factor.” Indeed, there have been many such “whales” on the Street of Dreams since the Royal Bank of Scotland’s “sell everything” advice at the January/February of 2016 stock market lows.
Painful Ups and Downs
One hour after beginning a new job which involved moving a pile of bricks from the top of a two story house to the ground, a construction worker in Peterborough, Ontario suffered an accident which hospitalized him. He was instructed by his employer to fill out an accident report.