Mornings with Maria

Mornings with Maria

On Friday October 21st I was on set with Maria Bartiromo, Kat Timpf and Dagen McDowell with a variety of guests. Here are a few clips from those three hours on set… with only one bathroom break… starting at 6am… and a lot of coffee…know my pain.

We spoke with JMP Securities President Mark Lehmann on the stocks to watch in the tech sector and the election’s impact on the markets.

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We also spoke with Alan Dershowitz, author of ‘Electile Dysfunction,’ on the impact of WikiLeaks on Hillary Clinton’s campaign. While I’m not a fan of lawbreakers, and hackers certainly count amongst those, these days the electorate is reasonably mistrustful of those in power and these hackers are giving us confirmation that we are correct to mistrust …which is one of the reasons I am in favor of smaller government. The more power government has, the more opportunities there are for graft, and the bigger the temptation to give into such. I prefer smaller government out of respect for the frailties of human nature. I’m in good company here with James Madison who explained it best in Federalist Paper #51.

It was a long chat with Mr. Dershowitz…

As a proponent of the free markets, which also means free trade, I’m a fan of Donald Trump’s plans to reduce taxes, but not a fan of his threats to significantly reduce free trade and to use the power of the presidency to force private companies to bend to his will. As the second largest exporter in the world, our economy needs a healthy level of international trade. We spoke with political economist Andy Busch on Donald Trump’s and Hillary Clinton’s competing plans.

Finally we spoke with S&P Global Market Intelligence’s Rich Peterson concerning the outlook for M&A activity, particularly given the current political environment. As we discussed earnings results so far, I brought up my concerns that the improvement in earnings per share really doesn’t tell the whole story, as companies have been buying back their own shares at record levels. This means the denominator, shares outstanding, keeps falling which makes EPS look artificially stronger than it actually is. I call this the spanx-and-push-up-bra strategy, whereby things may look better from afar, but fundamentally they really haven’t improved.

Risk On?

Risk On?

This morning I spoke with Matt Ray on America’s Morning News about the recent market action. Are we back to risk on? Here is a bit more detail on our discussion.

Equity markets have rebounded to an impressive extent after the recent correction, with the S&P500 less than 5% away from its all time highs, last seen in late May, while the VIX, the measure of volatility has closed in on a two-month low after having spiked up in August.

So were all those machinations between the summer and today much ado about nothing?  To answer that, we need to understand what drives returns.  The answer, like most things in life, is it’s complicated. Over the long-term, investment returns are based on fundamentals – ideally finding a company with an excellent management team that has products or services that are in high demand for a growing demographic with shares at an attractive price. But, in the short to medium-term, returns are all about risk – are investors seeking risk or withdrawing from it?

Today, the answer to the question of affinity for risk relies more and more upon bureaucrats, which makes the investor’s job an awful lot like a fortune-telling gazing into her crystal ball.

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Who the hell knows what insanity will get blurted out next… particularly if Donald Trump has access to a mic or a twitter feed!

The Fed has now become a primary source of uncertainty, (contrary to what they claim is their intent) while politicians and bureaucrats muddy the waters in countless ways, such as when Hillary Clinton took to twitter to bash biotech pricing.  I understand her outrage, but in today’s world of instant communication via social media, a few words can have an enormous impact and countless unintended consequences.

We’ve seen high profile investors like David Einhorn with Greenlight, John Paulson, and Michael Novogratz of the flagship Fortress macro fund, (which is now liquidating) struggling to live up to their reputations as fundamentals are easily overwhelmed by bureaucrat commentary and the market’s tendency to try to read central bank tea leaves.

So where are we today?  The S&P 500 is again closing in on its all-time high, but if we look a bit deeper we see that 63% of the stocks in the S&P 500 are still below their 200-day moving average and credit spreads remain elevated. When I see lack of breadth like this, meaning that indices are moving up based on a small group of stocks, and we see credit spreads still indicating that investors aren’t running towards risk, I remain cautious.

If we look at history to get an idea of probabilities, the S&P 500 has found itself below its 200-day moving average with more than 50% of the stocks within it also under their 200-day -moving average 24% of the time.  Annualized returns when the market has been in this position have been 9.7%, which sounds pretty good, except the maximum interim loss during those times has been 50%! (Hat tip to John Hussman for his data) So you may get decent returns, but there’s a good chance you’ll lose your lunch in the process.

If we look at the economic fundamentals, we have more cause for concern:

  • Total US business sales are down 3.09% year-over-year
  • US capacity utilization is also down year-over-year, (we are using less of our ability to make stuff than we did last year)
  • Industrial production contracting in 8 of the last 9 months
  • The producer price index is down 1.1% year-over-year, not exactly a sign of impending inflation)
  • Retails sales fell yet again in September
  • The Federal Reserves GDPNow currently estimates 3Q GDP to be 0.9%, (not exactly an overheating economy)
  • This morning we also learned that China’s GDP growth rate slowed to 6.9%, which is the weakest since the Great Recession. That will hurt Germany (major exporter to China) which is already suffering from Russia’s slowdown (big exporter to them as well) as it tries to keep the rest of the Eurozone afloat.  Mario Renzi is doing his best to get Italy turned around, but give the man a break!

If we look at earnings so far with 58 companies having reported, it isn’t exactly inspiring either

  • The percentage of companies beating on earnings is above the average, which sounds pretty good until…
  • The percentage of companies beating on revenues is below average
  • This means that earnings beats are coming from cost-cutting and financial engineering with things like share-buybacks – no indicative of long-term growth
  • As far as valuations, today the forward price-to-earnings ratio is 16, which above the 5-year and 10-year average of 14.1, which means that despite the dour fundamentals, stocks are still rather pricey.
  • Within the S&P 500, nine companies have offered weak December quarter outlooks compared to only one that has raised expectations

With fundamentals not giving us much to go on, in the short-to-near term it is all about that risk, which means investors need to be focused on how will the major indices behave as they approach their 200-day moving averages?  If they blow right past the 200-day AND if we see credit spreads (the different between the risky stuff and the safer stuff) get narrower, then it is back to game on, likely through the rest of the year, regardless of what is happening under the covers.

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Growth or Trust

This morning I had the great pleasure of joining Maria Bartiromo in studio for the last hour of her show on Fox Business. We discussed a wide range of issues from the Federal Reserve to removing the restrictions on oil exports, but given where we are in the election cycle, the subject of Hillary and her emails naturally came up.  The question is, should voters focus on growth or trust?  We spoke with Don Baer, former President Bill Clinton Communications Director, about what he thinks are the key issues for voters.

Spoiler alert – I disagreed!  Shocking I know, me, having an opinion…

The economy is facing some enormous challenges with the number of job openings continuing to be at record highs, while at the same time more and more people are giving up and leaving the workforce, thanks to a deeply structural skills mismatch.  We have a tax code that is so insanely complex that more people are employed in the tax preparation industry than in the auto industry – not exactly a recipe for a productive economy!  We have a regulatory regime that has become so burdensome that many small business owners simply give up or never even get their idea off the ground.

All that being said, I cannot evaluate a political candidate based solely on what they say.  Hillary Clinton put our nation’s security at risk based on her claim that it was more convenient for her.  For the love of Pete!  You carry a purse!  Cell phones aren’t that big and you have an entourage that could carry them both for you should you choose.  Many of the rest of us manage to survive the horrors of carrying two mobile phones.  Her excuse sounds pretty weak to me, which leaves me wondering what the real reason was and calls into question my ability to trust what she says.  So even if she did have compelling ideas for improving the economy, how could I know she’d follow through. The rest of the nation already views those in D.C. with well place suspicion, we don’t need more reasons to doubt the legitimacy of those we elect to govern.

Clinton Email – the final straw?

This morning I had the great pleasure of joining Stuart Varney and his team for an hour in New York. One of the topics we discussed was the fallout Hillary Clinton is facing over her use of a personal server for communications in her capacity as Secretary of State.  She claims she used a personal server so that she didn’t have to carry two phones. Seriously?  And she wants to be President?  She is going to risk national security for her personal convenience yet believes she’d be a great leader of the most powerful nation on earth?  Where does one start?