Category Archives: Elle’s Economy

2015-03-Faces-BannerTematica Chief Macro Strategist Lenore Hawkins provides regular insights and musings into today’s markets, economics and politics, while fighting for liberty with great wine & music, scores of stilettos and an excessive love of dogs



WEEKLY WRAP: The Drum Beat Carries On

WEEKLY WRAP: The Drum Beat Carries On


While the calendar has turned, the beat remains the same as the market rips higher and consumers go deeper into debt

While Mother Nature is once again having her way with part of the U.S., the Dow ripped past 25,000, the S&P 500 hit 2,700 for the first time and the Nasdaq broke 7,000 for the first time. We are in this bizarre world where three record highs in a week are yawnsville, but then again, we have to remember the S&P 500 has closed in the green for 14 consecutive months, an unprecedented record. The Dow is no slouch either, as it has crossed a new 1,000 point mark a whopping six times in the past twelve months.

While stocks make new highs, the short-term yields on Treasuries continue to climb, with the 2-year hitting a multi-year high. Longer-dated yields haven’t budged much, which has led to the spread between the 10-year Treasury and the 2-year to hit the lowest level since 2007. The same goes for the spread between the 30-year and the 10-year.

Stocks are partying like its 1999 but the 10-year Treasury and the DXY Amex U.S. dollar index are singing a very different tune with the 10-year rate having fallen rather consistently since late 2016 and the DXY near 3-year lows. The dollar has just concluded its worst annual performance in a decade! These mixed signals are meaningful.

The driving narrative for stocks as we kick off the first week of 2018 is the impact of tax reform on earnings and the overall economy. According to FedEx (FDX), the Tax Cuts and Jobs Act is estimated to increase earnings per share by $4.40 to $5.50 per diluted share for FY 2018 before adjustments. Looking at the broader market, Bank of America (BAC) boosted its 2018 EPS estimates for the entire S&P 500 by a full 10% (about $14) to $153 a share. That estimate reflects an increase of $10 from the lowering of the federal tax rate from 35% to 21% and another $3 increase from incremental buybacks induced by the tax reform.

Looking back at 2017, earnings in the U.S. improved by around 10% while stocks gained roughly 20%, so we’ve already seen some significant multiple expansion in multiples and over the last three months of last year the multiple on the S&P 500 rose to over 20x on expected 2017 earnings. On a forward basis, the market is currently trading near 18.6x expected 2018 earnings. With the impact of tax cuts already backed in, the forward multiples for the S&P 500 are already ahead of the multi-decade high of 17.5x – so we are dealing with a whole lot of optimism. Who doesn’t like to pay less, rather than more in taxes?  We are all for reducing the burden, but we have to be realistic when thinking through the potential impact of these cuts.

The trailing 12-month P/E ratio for the S&P 500 is today just shy of 23, a level rarely seen over the past four decades. This level wasn’t reached once in the last bull market ending in 2007. It was consistently above 23 during the last couple of years prior to the dotcom bubble bust, so we do have room to run, but let’s be clear – we are in rather heady territory.

This week’s sentiment survey from the American Association of Individual Investors found that bullish sentiment has increased to 59.75%, which is the second highest reading for bullishness of this bull market and marks the third consecutive week with sentiment over 50%. The bears are disappearing, with bearish sentiment down to 15.6% – the only week this level was lower was back in November of 2014 when it hit 15.1%.

The overwhelming optimism pushing share prices higher appears to be indifferent to the reality of a capacity utilization rate sitting at 77.1%, well below the 80%+ level from 2005 to 2008 and the 80%-85% range in the 1990s. While it may not be popular to say, the reality of the situation is with low utilization rates, the expected bump in capital spending is likely overstated no matter how much capital is freed up by tax reform.



Corporate America today is already flush with a historically high level of $2.4 trillion in liquid assets. Realistically, just what will be the marginal impact of that extra cash generated by tax reform? This was a topic we discussed at length on our Cocktail Investing podcast this week.

We aren’t alone in our thinking as this week’s release of the December Federal Open Market Committee (FOMC) policy meeting notes reveals that, (emphasis mine) “Many participants judged that the proposed changes in business taxes, if enacted, would likely provide a modest boost to capital spending, although the magnitude of the effects was uncertain…. However, some business contacts and respondents to business surveys suggested that firms were cautious about expanding capital spending in response to the proposed tax changes or noted that the increase in cash flow that would result from corporate tax cuts was more likely to be used for mergers and acquisitions or for debt reduction and stock buybacks.” This helps explain the Fed’s arguably muted GDP forecasts bumps for 2018 and 2019, and let’s remember the Fed tend to be cheerleaders for this kind of thing.

Speaking of the Federal Reserve, let us not forget that the Fed is expected to unwind about $420 billion of monetary stimulus in 2018 and another $600 billion in 2019. This means that by the end of 2018, about two-thirds of QE1 will have been siphoned out of the punchbowl. Obviously, those chosen to serve on the Fed aren’t exactly uneducated fools, but this is the most inexperienced Fed in decades with a decidedly hawkish bent. There are an unprecedented 4 of the 7 FOMC seats vacant, which means only 3 will have been around during the various rounds of quantitative easing.

The wild optimism has also had some rather interesting effects on asset classes, (a hat tip to David Rosenberg of Gluskin Sheff for calling this one out). The U.S. Utility ETF (XLU) is lost about 9.8% from its mid-November levels while the S&P 500 has gained 6.3%, leaving XLU with a 16.1% relative underperforming even as new record temperature lows are gripping much of the country causing energy prices to soar. The last time we saw this was in 2015, right before the mid-year correction. Prior to that was in 1999/2000 and many of us recall how things went after that.



On the economic front, this has been a great week with an ISM manufacturing report that was rock solid with 16 of the 18 industries on the rise versus 14 back in December. New Orders hit their best level since January 2004 with production rising to its highest point since May 2010 and the aforementioned weak dollar boosted exports to 58.5 from 56.

Jobless claims rose for the third consecutive week, up 250k from last week’s 247k and 10k above expectations. Claims remain low by historical standards, but we are above the cycle low from last November.

Auto sales came in better than expected at the end of 2017, as did Personal Consumptions, rising 4.5% year-over-year. But those auto sales included dealer incentives amounting to over 11% of the list priced, versus the historical norm of 7%. That holiday spending came at a price with the average American accumulating an average of over $1,000 in debt, about 5% more than last year according to MagnifyMoney’s annual post-holiday survey. That debt was primarily added to high-interest rate credit cards. Spending may be up, but wage growth remains elusive for most, the savings rate is at decade lows and with home prices rising roughly 2 times faster than income levels, home sweet home is becoming further out of reach for many. As we joked on this week’s podcast, before too long we could very well see housing land in our Affordable Luxury investing theme.

The bottom line is the economic data isn’t showing signs of rolling over, but the markets have priced in a whole lot of perfection while the consumer is giving very classic late cycle signals, which we described and discussed in this week’s podcast. We don’t see any immediate signs that market direction is likely to shift, but with volatility remaining incredibly low, portfolio protection is cheap while warning signs are aplenty.



Weekly Wrap: Retail Spending Figures Have the Financial Media Giddy, 
But Just How Strong is the Consumer?

Weekly Wrap: Retail Spending Figures Have the Financial Media Giddy, 
But Just How Strong is the Consumer?


The biggest driver for the markets in the past week has been the increased likelihood of getting some sort of tax reform bill passed before Christmas. As of Thursday’s close, the technology sector had gained more than 1.2% over the prior five trading days, reversing its slide earlier in the month. Telecom gained nearly 2.0% and Consumer Discretionary over 1.1% while Materials, Utilities and Financials lost ground. That being said, the S&P 500 ended Thursday on a less upbeat note, declining the most in one day since mid-November. Factoring in the move, the S&P 500 was on track to finish the week up roughly 6% quarter to date, which equates to it trading at more than 20x consensus 2017 EPS expectations.

While the market has been near-euphoric over the potential for tax reform, Tuesday’s elections made passage more challenging as Democrat Doug Jones won the historically red state of Alabama. Republicans now hold a mere 51-49 advantage in the Senate. Following a tight election, the Alabama votes now need to be certified, which will not occur until after Christmas, but no later than January 3rd. If the Republicans can push this bill through, as promised, before Christmas, the Republican incumbent Luther Strange will be voting instead of Doug Jones. If the vote gets delayed until 2018, we may see a split 50-50 vote since Republican Bob Corker is likely to oppose the bill. This would require Vice President Mike Pence to break the tie, that is unless one more Republican decides to defect. Talk about getting some political leverage!

Aside from the excitement over tax reform, the mindboggling price explosion that is Bitcoin got even more interesting this week as Bitcoin futures began trading on the CBOE on Sunday night. Unsurprisingly, it was an eventful debut with two temporary trading halts and crashes on the CBOE’s website due to the heavy traffic. Expect to hear a lot more from us in the coming months concerning the evolving cryptocurrency landscape as part of our Cashless Consumption investing theme. Despite the downplay they received by Fed Chair Janet Yellen during this week’s FOMC press conference, these technologies have the potential to utterly disrupt the way the global economy works, creating just the kind of tailwind we like to see for those companies properly positioned.

On the economic front, it has been a busy week, as central bankers once again took center stage. The Federal Reserve announced, as expected, another rate hike on Wednesday. Thursday the European Central Bank left rates unchanged but raised the region’s GDP forecasts by 0.5% to 2.3% in 2018 and by 0.2% to 1.9% in 2019. The Bank of England also left rates unchanged as it faces continued political uncertainty amongst the BREXIT negotiations and mixed economic data.

Thursday morning, we learned that U.S. retail sales were stronger than expected, with 12 of the 13 categories reported by the Commerce Department seeing gains. Total Retails Sales were up 0.8% month over month in November versus estimates for 0.3%, ex autos up 1.0% versus expectations for 0.6% and ex autos and gas up 0.8% versus expectations for 0.4%. October’s numbers were also revised higher across the board, painting a rosier overall picture. Over the past three months, total sales have increased by 3.4%, the fastest 3-month pace since April 2014. The two categories with the biggest gains were gas stations and, in keeping with our Connected Society investing theme, digital sales. Those online retailers enjoyed their biggest monthly increase in sales since October 2016.

The data, along with the package volume surge reported by research firm ShipMatrix that shared that “consumers are buying even more online than even the carriers expected”, confirms the accelerating shift to digital shopping aspect of this investing theme.  Needless to say, we continue to feel rather good about the shares of Amazon (AMZN) and United Parcel Service (UPS) on the Tematica Investing Select List. Circling back to the November Retail Sales report, the only category to lose ground was Autos and Parts Dealers, and this should make next week’s earnings report from Carmax (KMX) far more interesting.

All that retail spending has the mainstream financial media giddy, but one has to wonder just how strong the consumer can be with the current situation index for Restaurant Performance is at a six-month low of 99.5, where anything under 100 is contractionary. The customer traffic sub-index sits at 97.0, compared to December 2007 when it was 97.2. In Thursday’s Retail Sales report, the reported year over year growth in retail and food services was 5.7%, but stripping out food services, standalone retail sales rose 6.3% year over year – more confirmation that all is not well in restaurant land. In keeping with our Cash-Strapped Consumer investing theme, we suspect debt rattled consumers are focusing more on saving and selectively spending on presents than indulging as they shop this holiday season.

The challenge with any data, including the monthly Retail Sales report is it measures aggregate spending, meaning for the nation as a whole, which can give an inaccurate picture of what different types of households may be experiencing. For example, while Household net worth has been improving, as the following chart illustrates, and has surpassed the prior 2006 peak, the improvements are not enjoyed evenly.



Only those in the 90th percentile and above of net worth have seen their net worth reach new highs. The 10th, 25th, median and 75th are still well below their peaks, proving that this really has been a time in which the rich get richer and the poor get poorer. (Hat tip to the WSJ Daily Shot for this chart)


This is fairly intuitive when we look at what has been happening with asset prices in recent years versus wage gains. Asset prices have been rising significantly, benefiting those who already owned assets. Wage gains have been weak at best, so those who improve their financial position by earning more continue to struggle, part of our Cash Strapped Consumer investing theme.

Earlier in the week, the Job Openings and Labor Turnover Survey (JOLTS) revealed an unexpected decline in the level of job openings in October, reaching a five-month low of 5,999k versus expectations for 6,135k. On a more positive note, hires rose to a new high for this cycle at 5,552k, up from 5,320 in September. Initial jobless claims fell by 11,000 this week, dropping below expectations for 236,000 to 225,000, just 2,000 higher than the cycle low of 223,000 reached in mid-October.

We also received the November release of the NFIB Small Business Optimism index on Tuesday which revealed that small business owners are the most optimistic going all the way back to 1983, making October the second highest level on record. With an already tight labor market, net plans to increase employment rose to the highest level on record at 24%, up from 18% in the prior month. Interestingly, plans to increase compensation dropped to a net 17% from 21% in the prior month – we read this as their going to hire more but fewer are planning to pay more in an economy in which the lack of available talent is often cited as one of companies’ biggest challenges. Also, rather odd is that while eager to hire more, only 23% of those polled intend to raise prices versus 24% last December.

Wednesday’s Consumer Price Index data supported the NFIBs finding that few intend to raise prices as it showed very little inflationary pressures with the Core CPI up just 1.8% year-over-year. However, the year-over-year changes in the Producer Price Index has accelerated across a range of categories with Goods and Total Price Inflation for businesses at the highest level since January 2012. Construction and Services Inflation is also near the strongest levels in recent years. Core PPI (ex food, energy and trade) rose 2.4% year-over-year

Thursday’s Markit’s Flash PMIs for much of the major developed economy manufacturing sectors came in well above expectations. The Euro area manufacturing and production PMI hit record high as did Germany, these along with France and Japan all continue to accelerate to the upside.

The bottom line for this week is that we continue to see signs of improvement, but when it comes to households in the U.S., improvements are not broadly shared. We are seeing signs of inflationary pressures in producer prices, but little in terms of wage price pressures. On the consumer side, the great deflationary force that is online and mobile consumer shopping continues to overpower any potential inflationary pressures. The push-pull of these dynamics bodes well for companies that are riding the tailwind of our Connected Society investing theme, while addressing pain points being felt by Cash-Strapped Consumers.




Record High Debt and Slowing Incomes

Record High Debt and Slowing Incomes

With the holiday season upon us and the markets eager to see just how much Americans are will to spend this year, let’s take a look at just how much they can spend. Increases in spending are made possible by just two things:

  • An increase in income
  • An increase in borrowing

Today’s employment report gives us some insight into the direction in income levels as the 3-month moving average for hourly earnings for the 80% of the population included in the production and non-supervisory data shows that earnings continue to be on the decline, despite an unemployment rate that is the lowest we’ve seen since 2000.

Taking a step back and looking at the bigger picture it is easy to see why so many in America feel the American Dream is no longer attainable. The year-over-year increase in average hourly earnings for the 80% of the workforce included in the production and non-supervisory category have declined from an average of 7.0% in the 1970s, to 4.5% in the 1980s, to 3.2% from 1990 to 2007 to 2.1% from 2010 to today.

As for borrowing more to pay for purchases, Total Consumer Credit (excluding borrowings for real estate purchases) as a percent of Disposable Income has reached a new high.


We’ve also seen Consumer Confidence back near multi-year highs.


However, the savings rate has been falling and is near 10-year lows.

Historically, when the spread between these two peaks, the year-over-year rate of growth in spending declines.

The bottom line is the soft data, such as Consumer Confidence levels, are not what allows for increased spending. With revolving credit levels as a percent of disposable income reaching record levels and the trend in earnings on the decline, sustained increases in spending are simply not possible.

Size Matters – When it Comes to Employment

Size Matters – When it Comes to Employment

I have written quite a few posts this week about our investing theme of the Cash-Strapped Consumer, sharing data that explains why so many are still struggling and how this economic pain point creates investing opportunities. Yesterday I showed how the growth in income since the financial crisis has been well below historical norms, which has (in part) led to weaker retail sales and a lower savings rate.

One of the reasons we’ve seen slower wage growth has been the shift in the makeup of employment by company age and size. Wage growth tends to be more rapid at younger, smaller companies. Those that have been around for decades tend to have more methodical and slower paced career advancement and more sedate wage gains over the years.

In 1993 firms with more than 250 employees accounted for 49.3% of employment with those with less than 250 employees accounting for 50.7%. In 2015 instead of the majority of jobs being in smaller companies, only 46.2% were in those with fewer than 250 employees with 53.7% in those with greater than 250 employees. In fact, in the wake of the financial crisis the number of businesses one-year-old or less plummeted to a record low, (the data goes back to 1994). The number of jobs created by businesses less than one-year-old also fell to a record low.

Today the employment gains from new businesses remain more than 50% below the 1999 peak.


This is rather intuitive if we look at the number of companies that are one year old or less by year.

To see just how important these new companies are for jobs, this chart shows the contribution to employment by company age.

A robust economy needs entrepreneurship as new businesses generate a disproportionate level of the innovations that drive both productivity and economic growth. The data shows that as the level of new business formation has declined, so has productivity. In a healthy, dynamic economy, resources are quickly reshuffled around as businesses are born, grow and die. With fewer companies forming, growth slows as labor and capital remain stagnant in old industries.


Boom or Gloom? What’s in Your Wallet?

Boom or Gloom? What’s in Your Wallet?

We keep hearing about how the economy is accelerating, yet many are still struggling to make ends meet as our Cash-Strapped Consumer investing theme remains strong. Just yesterday President Trump told reporters that he believes it is possible for the economy to reach 6% annual GDP growth rate, which would be 2.6 times the average rate of growth over the past four quarters. Global GDP growth looks to be around 3.7% this year and is forecasted to grow between 3.8% and 4.0% in 2018. That all sounds great but…

As we mentioned earlier this week, we continue to see consumers under duress, a real anomaly at this stage of the business cycle and particularly odd when unemployment is at a 17-year low of 4.1% versus the 10% we experienced at the peak of the crisis. So what is happening?

Annual wage growth in the U.S. has averaged 2.2% since the crisis and has never been more than 3%, while the pre-crisis average was well over 3%. Ouch. According to a recent study, over the past 12 months, 52% of American employees did not have any increase in wages either through a pay raise or through a new job. For workers aged 53 and older, 64% received no increase. No wonder there is so much frustration!

Those in the U.S. have it pretty good as wages in the Eurozone are rising at almost half that rate (1.4%). We’ve rarely ever seen wages grow this slowly in the region, having averaged 2.3% pre-crisis but just 1.7% since, even as the unemployment rate has plunged. For the U.K. it has been even worse with workers there currently in the longest fall in living standards since World War II.

The chart below shows how changes in real compensation have been much weaker since the crisis than has been the historical norm and has been declining for the past four quarters.

The wage share of national income remains at near record lows and has been falling for decades.

As Americans have struggled through the weakest income growth in over a half century, 57% have less than $1,000 in their savings account and 39% have no savings at all. 76% of Americans are concerned about their ability to achieve a secure retirement, according to the National Institute of Retirement Security. Nearly 40 million working-age households (45%) have no retirement assets. Across all households, the median retirement account balance is $2,500 for all working-age households and $14,500 for near-retirement households.

I’d also like to point out that people tend to respond to incentives. When it comes to anything leftover in the wallet after paying for all the necessities, the trade-off is between spending today (new shoes!) or saving it and having more in the future. As interest rates fall, the benefit of savings declines, making the benefit of holding off today for more tomorrow less attractive. The chart below can attest to this relationship.

Disposable household income has grown much slower than has been the historical norm, leaving retail sales also weaker than has been this historical norm.

The Tematica team is a glass-is-half-full kind of group, but we can’t get away from the reality of the data, despite what you might read in the mainstream headlines. Our Cash-Strapped Consumer investing theme is unfortunately still going strong, which while frustrating for those Americans struggling to make ends meet, also presents investment opportunities for those looking beneath the headlines:

  • While brick & mortar have been getting hit hard, teen and tween discount retailer Five Below (FIVE) blew away estimates in its third quarter, delivering better-than-expect revenue and net income for the fifth consecutive quarter while also opening a record number of new stores.
  • Big Lots (BIG) also reported better-than-expected results for the third quarter and raised its full-year forecasts. In a challenging retail environment, same-store sales rose 1%.
Dollar General Addresses a Pain Point in Rural America

Dollar General Addresses a Pain Point in Rural America

One of the key aspects of our thematic investing approach is to look for pain points and identify those companies that are able to address them. Here is an example of one that is addressing the economic hardship that has continued in much of the more rural parts of the U.S., part of our Cash-Strapped Consumer investing theme.

By now you have probably read about the shrinking middle class in the United States. Part of this is driven by reduced mobility of the American workforce. In the 1990s, 3% of Americans moved out of state every year. Today that rate has fallen to 1.5%, with U.S. mobility at its lowest level since World War II. In rural areas, the shift has been even more dramatic. In the late 1970s, 7.7% of people in rural areas moved across a county line. In 2015, that rate was down to 4.1%

This lack of mobility has created a pain point for those living in smaller towns that have suffered from the decline of manufacturing and farm consolidation, making jobs in these rural areas harder to come by. The number of employees on manufacturer payrolls is today only about one-third of what it was 10 years ago according to the U.S. Census Bureau, with the majority of the job losses in rural areas. Unemployment in such regions has average 7.7% over the past year compared with 4.7% nationally.

When we see pain points, we look for those who are able to address them. In this example, we see retailer Dollar General (DG) bucking the downward trend in brick and mortar retailing by focusing on ways to serve those in this struggling communities. Their customer base is more insulated from the Amazon effect in that their typical customer is less likely to go online to stock up on the necessities but rather gets only what he or she needs only when absolutely necessary. While Wal-mart (WMT) has continued to focus on large stores with lots of “big-box” type products, Dollar General has followed a different strategy.

While many large retailers are closing locations, Dollar General executives said they planned to build thousands more stores, mostly in small communities that have otherwise shown few signs of the U.S. economic recovery.


The more the rural U.S. struggles, company officials said, the more places Dollar General has found to prosper. “The economy is continuing to create more of our core customer,” Chief Executive Todd Vasos said in an interview at the company’s Goodlettsville, Tenn., headquarters.

These numbers tell the story.

Pain points can often create opportunities for investors as is evident in the performance of shares of Dollar General versus the S&P 500.

DG Chart

Dollar General is expanding because rural America is struggling. With its convenient locations for frugal shoppers, it has become one of the most profitable retailers in the U.S. and a lifeline for lower-income customers bypassed by other major chains.

Pain created an opportunity for this company, its investors, and perhaps even more importantly those customers who are very much in need.

DG data by YCharts

Source: How Dollar General Became Rural America’s Store of Choice – WSJ

Economic Data Continues to Point to an Economy that is  Good, Not Great

Economic Data Continues to Point to an Economy that is Good, Not Great



What a week it has been! Domestic and geopolitical politics are seriously heating up, we’ve seen phenomenal bitcoin volatility all while the equity markets continue to grind higher and higher even after the quick pullback in trading today. That slippage reflects not only the delay in the Senate tax reform vote, but also the revelation that former Trump national security adviser Michael Flynn pled guilty today to lying to the FBI about conversations with Russia’s ambassador and disclosed that he is cooperating with the special counsel’s office. All of this should make for an interesting weekend and what transpires over the next few days is poised to set the tone for the market next week.

In reviewing the week, on Tuesday the Senate Budget Committee just barely passed the Senate’s version of tax reform, a 12-11 vote that was unsurprisingly along party lines. U.S. equities surged on the news with the S&P 500 gaining 1%. For most of the year, shares of lower-taxed companies have been outperforming those of higher-taxed companies, which told us that the market was skeptical that tax reform could become a reality. Sentiment has been changing recently as shares of higher taxed companies are now outperforming.

A plan to vote on the bill early on Thursday was scratched due to a serious of problems, including nonpartisan assessment of the plan that found the plan would add $1 trillion in budget deficits over the next 10 years. Who ever thought this was going to be easy? By this morning there was still little clarity, and as we mentioned above with the news of Michael Flynn’s guilty plea, things have gotten even murkier.

Wednesday’s equity moves were all about sector rotation, with those stocks that have provided the most leadership year-to-date, such as the FAANG stocks, getting hit the hardest while the weaker performers gained for the most part. We even saw this in the clicks versus bricks battle as traditional retailers such as Sears (SHLD), Macy’s (M) and J.C. Penney (JCP) gaining at least 12% recently while Amazon (AMZN) has lost ground. We chalk that up to Thanksgiving through Cyber Monday results for those brick & mortar retailers being not as bad as feared, but Tematica’s Chief Investment Officer, Chris Versace, and I hashed all that out on this week’s Cocktail Investing Podcast. Exiting Wednesday, the Nasdaq lost 1.3% and tech fell 2.6%, its third worst day of the year. That being said, the Nasdaq has made more record highs in 2017 than in any year prior, even 1999!

Sentiment continues to be incredibly bullish with the spread between bulls and bears in the Investors Intelligence poll at 47.2 percentage points, just shy of the record spread in 1987 of 50 points. Apparently, no one is concerned that we have a potential government shutdown on December 8th if the Democrats decide to gift President Trump and the Republicans some serious coal in their stockings this year. I can imagine many a retail CEO is praying that saner heads prevail as holiday shopping would likely get a tad less rosy if D.C. gets into an end-of-year rumble. Then there is that pesky North Korean nuclear missile situation that delivered yet another yawn reception from U.S. equities.

This has me somewhat compelled to once again share the chart that has me continually shaking my head. Talk about unchartered territory.

A recent report from JPMorgan’s head quant Marko Kolanovic showed how exposed various categories of investors are to equities relative to history. First off, margin debt is at a record high, so that’s clearly in the 100th percentile. Sovereign wealth funds and systematic strategies are also at all-time highs at the 100th percentile. U.S. mutual funds and hedge funds are in the 98th percentile while U.S. households in the 94th percentile. The only time households have been more exposed to equities was back in 2000. Near record high sentiment and equity exposures at the highest or near highest ever seen. Who’s left to buy if the market gets jiggy this holiday season?

With all that bullishness, volumes have seriously declined over the past decade. Average equity trading volume on the NYSE in 2017 is down about 51% from 2007 levels. During that time, the market cap for the NYSE has gained 28%. The U.S. stock market capitalization is today about 135% of GDP, the highest level we’ve seen since 1999/2000.

Sentiment isn’t the only thing riding high as the Conference Board’s consumer confidence index has gained for the past five months to hit a 17-year high. This coming at a time when the unemployment rate is at 4% and the savings rate is at a 10-year low of 3%. A high level of confidence and a low savings rate smack of a consumer that has done a darn good job of satiating any sort of pent-up demand, something we typically see near the peak of a cycle.

Speaking of indicators of peak satiation, was anyone else scratching their head over the expose article titled “Domino’s Tracking App Tells You Who Made Your Pizza—Or Does It?,” on the front page of the Wall Street Journal on Wednesday. Seriously? The utter trauma that a tracking app may not be accurate when it tells you who is making your pizza or gives the time to delivery is worthy of the front page? Talk about the curse of an affluent society. When something like this gets the front page, we’ve got to be near some sort of a peak!

While we are looking at peaks, Bitcoin has doubled in the last two months alone and has appreciated in value to a degree that makes the famous tulip bulb bubble look pedantic – and that’s coming from someone who is seriously fascinated by the potential of cryptocurrencies. This week we saw a pullback as Bitcoin tumbled about 20% then recovered a touch. This area is still in its infancy and not a place for the faint of heart. Bitcoin has a history of racing to peaks, then pulling back with each successive low higher than the one before and the next high surpassing the previous, but the ride along the way can be dizzying.

The data from Europe this week was quite mixed with German retails sales declining 1.2% in October versus expectations for a gain of 0.3%. Swiss retail sales also took a hit, falling 1.5%. Denmark says its economy actually contract by 0.6% in the third quarter, the worst showing since 2011. On the other hand, German unemployment declined for the fifth consecutive month. Euro area inflation came in at 1.5% year-over-year versus expectations for 1.6%.

The U.S. Labor market continues to vex employers, or perhaps we should call them would-be employers as this month’s Beige Book from the Federal Reserve found that across the country companies are reporting challenging labor shortages which are pushing them to raise wages. Put another notch in the going-to-hike-rates column for the Fed this December, and we’ll look for confirmation in the forthcoming JOLTS report later this month. On the plus side, the Beige book found that retailers are generally more optimistic heading into this holiday season, a confirming data point after we saw fewer promotions Black Friday through Cyber Monday than were offered last year.

The revised GDP for the third quarter from 3.0% to 3.3% showed corporate profits gaining 18.4% quarter-over-quarter on an annualized basis which looks great but digging into the details paints a less rosy picture. The story is very sector specific, as domestic financial profits gained 67.3% which nonfinancial domestics experienced just 4.5% year-over-year improvements. Keep in mind that the S&P 500 has gained over 22% during this time – multiple expansion anyone?

This week’s data on U.S. trade is bound to throw a serious monkey wrench into estimates for Q4 GDP as the trade deficit expanded to $68.3 billion in October versus expectations for $64.1 billion. Despite this year’s falling dollar, the AMEX Dollar Index (DXY) is down 9.1% since the start of the year, exports declined 1%. Following weaker than expected October spending and consumption data, economists, both public and private slashed 4Q 2017 GDP expectations. While the ever up beat Atlanta Fed GDP Now survey fell to 2.7% from 3.4% the prior week, JPMorgan slashed its forecast to 2.5% from 3.0%.

Bottom line for the week is the economic data continues to point to an economy that is doing good, not great, but we are seeing indications that the 2017 global acceleration may be weakening. Nothing to get overly stressed about just yet, but it is on our radar. The economic activity boost from the natural disasters appears to be waning as well so Q4 and into 2018 isn’t likely to keep a 3 handle. The market continues to give mixed messages and remains in heady territory, but we’ve seen this play out before and it can continue well past anything that resembles sanity. It is unlikely that we’ll see any meaningful pullback before the end of the year, barring some insanity from any one of the crazies around the world bent on wreaking havoc with the western world.

Enjoy your eggnog, (why oh why can’t we have that all year?) look for those more elusive deals on line this year and enjoy the magic of the holiday season as we keep an eye on things for you.



The Challenge for Cashless Consumption

The Challenge for Cashless Consumption

Despite the ubiquitous nature of smartphones in much of Europe coupled with a digital payment system that is (in my opinion) superior to what is available in the United States, consumers in the Eurozone still use an awful lot more cash than one would expect.

ECB study shows most point-of-sale payments in the euro area are cash, but more people say they prefer to pay by card.

So are those crazy Europeans financial Luddites? After all, it is certainly much easier to pay for purchases with one’s fingerprint or a simple glance at one’s smartphone than to have to keep hitting the ATM and risk misplacing your cash.

For those of you who have spent significant time in the Eurozone, the answer to this riddle is probably intuitive. Hello VAT! The dreaded Value Added Tax is likely the culprit here. It is akin to a sales tax and in most Eurozone countries is well over 20%! How do you get around such a painful tax burden? Cash. In my second home of Italy, it is common practice to pay for dinner at a restaurant at which you are a frequent guest in cash, paying less in the process.

There is also in some parts of Europe greater concern with protecting privacy when it comes to where one spends and upon what. Nations that have lived under totalitarian dictatorships tend to be more wary of the consequences of having much of one’s live known to those in positions of power.

While today cash is the workaround to high tax burdens, serving as a headwind to our Cashless Consumption investing theme. This is unlikely to remain the case for long as cryptocurrencies become increasingly mainstream. These solutions are able to provide the privacy of cash with the convenience of cashless payment systems and are even able to provide benefits far beyond what is possible with today’s payment systems.

Be sure to keep an eye out as we delve further into the possibilities and evolution of these new forms of currency and blockchain technology.



Source: Europeans Still Love Paying Cash, Even if They Don’t Know It – Bloomberg

Tax Reform and the Markets

Tax Reform and the Markets

I have the good fortune of being invited to speak on various television news programs on a fairly regular basis. This month the main topic of choice has been tax reform and given that the Senate is voting on their version this week, I thought I’d present some thoughts and data on the subject.

I am often asked during my TV appearances if I think that any tax reform bill needs to be able to pay for itself. The short answer is yes, but there’s more to it – I am Irish after all! At the beginning of 2008, total public debt which includes federal, state & local was about 75% of GDP. Today it is over 110% of GDP. The interest rate we, the American taxpayers, are paying on that debt is incredibly low today by historical standards, but that debt is like an adjustable rate mortgage. We have no plans to ever reduce the debt, let alone pay it off so when big chunks of it come due, we need to get a new loan at current rates. If rates go up, that debt will cost us more and more. The more money that we have to pay on that debt, the fewer resources are available to invest in ways that can grow the economy.

I will point out though that rather than focusing on having tax cuts pay for themselves, we could look at ways to cut spending? In 1950 federal spending was 20% of GDP and the world wasn’t coming to an end. At the beginning of 2000, federal spending had grown to 31% of GDP.  This year it will account for about 36% of GDP. This level of spending comes at a time when unemployment is at 15-year lows. What happens when the inevitable recession comes? This is supposed to be the good times when we cut spending back and save up for the tough times.

What happens if we get bupkis from all this talk of tax reform? The current market valuations are so lofty and sentiment so lopsided bullish that there is no doubt in my mind that some level of cuts are already priced in, which means a hit if we don’t get them. The Republicans would likely have a tough time in the 2018 elections, which means that D.C. is likely to be even more dysfunctional as the Republicans try to shore up areas of weakness while the Democrats look to capitalize on the Republicans’ inability to enact reforms touted on the campaign trail.

Why do I think the markets are vulnerable? For starters, equities are really pricey: The trailing P/E ratio is higher today than at the 2007, 1987, 1976 and 1958 market peaks. The only time it was higher was during the 1999 dotcom lunacy. There is seriously lopsided sentiment with roughly 6 bulls for every bear. That is almost as lopsided as the all-time record pre-1987 crash. Even the c-suite has acknowledged that prices are inflated as share buybacks are at a 5-year low Finally, the US equity markets are a lot more expensive than many others around the world. Without tax reform, U.S. stocks will look less attractive than other international options as U.S. companies will continue to pay higher tax rates than the proposed rates.

Is Our Connected Society a Little Too Connected?

Is Our Connected Society a Little Too Connected?

This holiday season more and more of us are shopping using our seemingly ubiquitous smartphones. These devices have become the modern equivalent of Linus’ security blanket for most of us, including yours truly. Those rare moments I find myself having left my phone at home when I pop out to grab some groceries or the like are utterly nerve-wracking. What if!? MY GOD WHAT IF someone tries to get in touch with me and horror of horrors they cannot! This from the woman who regularly puts the thing in Do Not Disturb mode so that I can focus on work uninterrupted.

Logic and sanity have no place when it comes to one’s smartphone.

Smartphones are and have the potential to further change nearly every aspect of our lives, making us feel that they are increasingly indispensable. So just how obsessed are we?

Turns out, most of us are truly bonkers. Forget that morning smile or snuggle with your partner when you first wake up – gotta check my phone!

Softly whispering sweet dreams to your children and/or partner as you drift into sweet slumber? Nope! Gotta check Twitter and Facebook!

Various scientific studies have linked smartphone usage in bed to inferior quality of sleep, and yet, millions of Americans cannot resist the allure of checking their Twitter timeline one more time before falling asleep. According to research conducted by Deloitte, 14 percent of smartphone owners in the U.S. check their smartphone immediately before trying to go to sleep and 35 percent do so within 5 minutes.


And this obsession is global.

We get particularly committed the iPhone.

Yet there is plenty of room to add addicts to our ranks.

For the younger crowd, smartphone beats or nearly beats interest in watching TV.

While we may have our noses down on those little handheld displays, we are mostly driven to connect and learn about what is happening in our world.


Source: • Chart: America’s Favorite Bedside Companion? | Statista