Category Archives: Weekly Wrap

Market Indices Push Up into Nosebleed Territory

Market Indices Push Up into Nosebleed Territory


As we move into the 101st month of the current economic expansion, the respective stock market indices have continued their climb further into nosebleed territory. On Thursday the S&P 500 avoided its first back to back daily declines in about a month after a rally into the close pushed it back into positive territory for the day, while today the Dow Jones Industrial Average touched a new all-time high. The headlines are all about ebullience in the markets, but in this week’s wrap up we’ll point out that there are plenty of yellow flags waving.

This week was seriously action packed from finally getting a tax bill proposal that the majority of House Republicans can support, to the issuance of indictments for Paul Manafort, Rick Gates and George Papadopoulos, to President Trump announcing current Fed Governor Jerome Powell as his pick for the next Chairman of the Federal Reserve and yet another brutal terror attack in Lower Manhattan. Mr. Powell will need to go through the formal Senate confirmation process, (otherwise known as politicians competing for airtime while sneaking in wholly unrelated topics they want to be seen as caring about and showing how they don’t really understand monetary policy) but is expected to be approved by a decent margin. If the current chair Janet Yellen does not stay on as a Governor, four out of seven Fed Board seats will have vacancies, giving the Trump team an unusually profound ability to dramatically reshape the Fed. If the markets have benefited to the extent we suspect from the Fed’s policies, a change in tenor is worth a close watch.

Thursday Apple’s stock gained over 3% after posting fourth-quarter results that beat expectations by a material margin at $2.07 EPS versus the consensus for $1.87 — and that doesn’t include sales for the iPhone X. We couldn’t be more pleased to have added Apple to the Tematica Investing Select List back on October 30th as shares have gained over 6.0% since then as of mid-day Friday. Of course, we’re even more pleased by the move higher in Disruptive Technologies company Universal Display (OLED) shares over the last year, which are up almost 185% since we added it to the Select List. While today that company is a “bullet” play to Apple’s smartphone adoption of organic light emitting diode displays, as that technology expands into TVs, automotive lighting and general lighting, we see OLED shares as just getting going.

Looking at the broader technology sector, it was by far the best performer in October, rising 6.5% while Consumer Staples took it on the chin, falling 1.6% during the month. In a telling indicator of the rather bipolar nature of this market, Utilities was the second strongest sector for the month, gaining 3.9% — talk about an odd couple.

That’s not the only oddity in the global landscape. The U.S. dollar has been strengthening, (watch out big cap stocks with hefty overseas revenue) but so have emerging market currencies. We’re seeing a stronger dollar, but also rising gold, oil and even basic material prices. Then there is my personal favorite, European junk bonds yielding less than U.S. Treasuries, because that makes sense. In this ZIRP world, the demand for any yield is so massive that risk-based pricing simply no longer exists.

The Federal Reserve Open Market Committee press release this week was pretty much the same as what we’ve been hearing for months, with the exception of more emphasis on core inflation remaining soft. On the other hand, it did reflect a view of a stronger economy, shifting from “rising moderately” back on September 20th to “solid rate” this week. Barring anything wild occurring between now and December, this makes it all the more likely that we will see another rate hike in December. Today the markets are pricing in about 90% chance of a hike versus back on September 8th when odds were more like 1 in 3. We’d point out that the bond market isn’t expressing the same optimism on the longer end of the curve and the spread between the 5-year and 2-year is down to just 40 basis points with the overall yield curve a mere two hikes away from inverting.

For all the headlines talking about a strong economy, the reality is the trend in after-tax, after-inflation, personal income on a per capita basis is less than 0.6% growth year over year. This long-term norm for this metric is more like 2.5% and we see this as a rather confirming data point that our Cash-Strapped Consumer investing theme remains strong.

For all the talk of a massive reflationary, pro-cyclical, risk-on rally, government bonds are giving a big yawn to the growth story. Look across the globe and you’ll see that 10-year yields haven’t shifted much at all despite all this supposed exuberance. But what about that jump in third quarter Employment Cost Index you ask? Looking into the details, the biggest pay increases were in those sectors that are most productive which means that when we look at it from a unit-labor cost perspective, inflation disappears.

Let’s get realistic about earnings while we are at it. While about 75% of S&P 500 companies that have reported have beaten their (let’s be honest here) lowballed estimates, earnings are on track for about 5% year-over-year improvement while the index is up more than 20%. The reality is that only about 25% of the total return for the S&P 500 has come from EPS improvement.

Let’s also look at those corporate balance sheets. Since 2010, the U.S. corporate sector has increased its debt load by a whopping $7.8 trillion with the median net debt now near a record high 1.5x aggregate earnings. Interest coverage ratios have been getting weaker and weaker over the past few years while earnings are down to less than 6x interest expense – that’s the weakest multiple since the onset of the credit crisis.

The bottom line is we are quite late in the cycle, which makes individual security selection all the more important. Same goes for reading beneath the headlines and understanding the dynamics of sentiment.  That Conference Board’s big jump in consumer confidence to 125.9 in October, the highest reading since December 2000? Recall what happened three months later? We were in a recession. Confidence also peaked in July 1989, December 1972 and December 1969 — all late in the cycle and typically a year or so before we entered into a recession.

Amid a better economic and earnings picture, concerns remain

Amid a better economic and earnings picture, concerns remain



The bottom line for the week is the economic picture looks better today than it did a few months ago. Earnings so far have been in general stronger than was expected, but we are still dealing with an equity market that is in over bought territory and valuations remain in the top 0.7% of all time with volatility depressed to an unprecedented degree. While we clearly prefer to see the market go up rather than down, we remain wary of such elevated valuations and exceptional conditions.

From an economic perspective, the big news for the week came this morning with the first estimate for third quarter GDP growth coming in at 3.0% versus the 2.5% expected. The significant beat was due in large part to inventory builds and a smaller trade deficit. The inventory build-up added 0.73% to GDP growth, compared to slightly over 0.10% in the second quarter. The weaker dollar during the quarter aided exports, which reduced the trade deficit, and added an additional 0.41% to GDP. Consumer spending slowed, in part due to the twin Hurricanes, slowing to 2.4% growth rate versus 3.3% in the second quarter. Home building contracted 6.0% after having declined in the second quarter as well. Pending home sales came in flat for September versus expectations for a 0.5% gain for the seventh month out of the past nine with sales flat or negative. The index for pending home sales is now at the lowest level since January 2015. The MBA mortgage application index confirmed the weakness in home sales this week with a 6.1% decline in purchases. On the plus side business investment in equipment increased 8.6%, the fourth consecutive increase.

Wednesday the US Census reported preliminary durable goods new orders shipments, and inventories which revealed that nondefense capital goods shipments ex-aircraft continue to accelerate to the upside on a 3-month over 3-month basis, reaching the strongest growth levels since 2014. The year-over-year pace is the best since 2012 and total inventory/sales remains at post-crisis average, which gives us comfort that the inventory build in the GDP report isn’t something overly concerning.

Thursday the Kansas City Fed’s October Manufacturing Survey beat expectations, giving the best reading since March 2011 and reaching the second highest level since the end of the recession. Under the covers, the report showed a few concerning signs though with a surge in raw material and finished goods inventories, the later of which was an unprecedented 24 point swing from -6 to +18. The bottom line here is that stockpiling is giving a rosy, short-term boost to the headline number, which pushes us back to being wary of the build up in inventory

The second biggest piece of economic news for the week came from across the Atlantic where the European Central Bank announced it would begin its version of Quantitative Tapering by cutting its asset buying in half to €30 billion starting in January and deferring, as was expected, the actual end of its buying program to September of 2018. The euro weakened in response to the ECB’s statement that rates are “to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases.” The U.S. Dollar Index (DXY) has now gained 4.0% from its September 8th low and pushed above both its 50-day and 100-day moving averages to reach a 3-month high, which will present a headwind to those companies who have benefited in prior quarters from the falling dollar. To put this into perspective, the dollar had dropped nearly 11% since the start of the year through to the September lows. We suspect we will be hearing more about this dollar strength and what it means over the next two weeks when more than 2,000 companies report their quarterly earnings.

The news from the ECB also kicked off a drop in European bond yields and made European stocks shoot up. We’re also seeing economic indicators in the European region continuing to improve. Italian economic sentiment has reached the highest level in a decade and both consumer confidence and manufacturing confidence have come in above expectations. Spanish unemployment also came in better than expected. Today (Friday), we learned that the Spanish Prime Minister had dissolved the Catalan parliament after they vote for independence. This is going to get interesting.

We got some good news out of Japan this week with Prime Minister Shinzo Abe’s victory in Japanese national election with his partner & coalition partner taking around two-thirds of the seats in the lower house which drove the Nikkei to levels not seen in over 20 years. While much of the rest of the world is knee deep in political instability and uncertainty, Japan will enjoy stability for at least the next four years which is good news for asset prices. While much of the rest of the world is experiencing rising nationalism and negative trends when it comes to immigration, Japan is moving in the opposite direction, which is good news for future economic growth given the nation’s aging population.  For more on that topic, be sure to listen to this week’s Cocktail Investing podcast where we do a deep dive on our Aging of the Population investing theme.

Abe’s victory also means that Kuroda will likely be reappointed in April, which means the yen will likely remain depreciating which will be good for the nation’s exports. On top of that, Japanese citizens are becoming more interested in owning equities at a time when valuations are nowhere near the lofty levels of U.S. equities, which bodes well for stock price appreciation.

Earnings this week have been pretty solid with Alphabet (GOOGL), the Tematica poster child for the intersection of our Connected Society, Cash-Strapped Consumer and Disruptive Technology investment themes, Amazon (AMZN) and Microsoft (MSFT) all reporting strong-than-expected earnings, which pushed shares of each to new all-time highs. Amazon added nearly $62 billion to its market cap – not a bad day. On the other end of the spectrum, the death of the mall continues with J.C. Penny (JCP) trimming its 2017 forecasts, causing shares to tumble 20%, reaching an all-time low. Shares of Caterpillar (CAT) surged as well when it reported better than expected third quarter results and boosted guidance.

All in all 850 companies reported this week, and looking back over the week the market moved up or down in response to the days’ earnings news. With 2,000 plus reports ahead of us over the next two weeks, odds are the bobbing and weaving seen this week will be with us at least in the short-term.

WEEKLY WRAP: At some point investors will have to pay the piper

WEEKLY WRAP: At some point investors will have to pay the piper

The markets continued their record-setting trends of new highs and record low volatility this week. This comes despite continued signs that the economy has passed its peak for this cycle, even at a time when the geopolitical arena is anything but peaceful. Wednesday the Dow closed above 23,000 for the first time ever and as of Thursday’s close has made 51 new record highs in 2017. Global stocks hit new all-time highs Friday morning with Japan’s Nikkei 225 Stock Average up for the 14th consecutive day, matching the index’s longest winning streak on record.

While the market continues to melt higher, Thursday marked the thirty-year anniversary of Black Monday, the single worst one-day market crash in history when the Dow plunged 22.6% on volume that was nearly double the prior record. In the days leading up to Black Monday, the market had already lost 11%, which meant the Dow lost 34% in just ten trading days.  In contrast, on October 10th, 2008, the single worst trading day during the financial crisis, the Dow fell just 7.9%.

October has historically been the market’s most volatile month, yet October 2017 is on track to be the least volatile month in history. Yes, you read that right. Not only is this the least volatile October so far, but the least volatile month EVER! The Dow has not experienced a down-day of 1% or more in 43 sessions, with its average daily move this year in absolute terms less than half the norm. The chart below just gets more and more staggering with every passing week.

Valuations are also making records – while the S&P 500 is getting a nosebleed trading at more than 19.5x expected 2017 earnings, the Shiller Cyclically Adjusted PE ratio reaching 31.2, moving above the 1929 peak of 30. The only time this measure has been higher was when it reached 44.2 during the dotcom “this time it’s different” mania.



Thursday the S&P 500 opened down around 0.5%, but in the seemingly eternal melt up, managed to close at yet another new all-time high. As of that close, the S&P 500 has gone 349 trading days without a pullback of 3% or more. If the low volatility and melt up continues for just 22 more trading days, this will be the longest streak on record going back to 1928! The Dow’s 14-day relative strength index is at levels exceeded only 0.1% of the time in the past 100 years – talk about a high-altitude market– but we’ve been at such heady heights four other times since the November election. This year is one for the record books.

Thus far 3Q 2017 earnings have been good, but this morning reports from General Electric (GE), Proctor & Gamble (PG) and NCR Corp. (NCR) are poised to throw some cold water on things as we head into the earnings heavy next few weeks in a market that is arguably priced to perfection. As we’ve seen in the past, in times such as this, it doesn’t take much to jar investors and remove some of the steam that has been powering the market higher. The question being asked the last few weeks as the market has climbed higher has been, “What’s the catalyst that will take some wind out of the market’s sails?” More earnings reports like the ones we’ve gotten this morning are a likely candidate.

While equity markets are popping those champagne corks on a seemingly regular basis, Treasuries remain utterly unimpressed. The yield on the 10-year T-note is sitting right on its 200-day moving average with neither bulls nor bears making much impact in October. The Dow and S&P 500 continue to notch record high after record high, yet the highest yield the 10-year can rally to is a measly 2.3%. Imagine what a material drop in the markets could mean for yields!

We’d also like to point out that despite the cries from Inflationistas, the 10-year’s yield has been making lower highs throughout the year. The yield curve is also highly unsupportive of the inflation story, with the difference between the 10-year and 2-year rate hitting 75 basis points during the week. If we do get a hike in December, we’ll be just two hikes away from a flat curve and that is bound to get some chins wagging about the next and eventual downturn.

When we look at bond yields, let’s not forget that the nonfinancial debt-to-GDP ratio for the G20 countries peaked at 212% in 2007. Today it has reached a record high of 240%. Such a debt burden can’t help but have an impact on growth and yields. For example, a one percent increase in average interest rates is estimated to pull about 2.5% out of the domestic economy to cover debt service costs. And yet the Fed is looking like it is hell-bent on moving interest rates higher up to 4 times over the next 15 months even though it sees GDP in the range of 2.0%-2.2% in 2018-2019. That noise you hear is team Tematica scratching their collective heads.

The extraordinary conditions aren’t going unnoticed by investors. The Yale School of Management’s monthly investor sentiment survey of both individual and institution investors reveals there is rising concern in the markets – which is a relatively positive sign. According to the survey, confidence that the market would be higher a year from now peaked at just shy of 100% for institutional investors and over 90% for individual investors mid-year but has since dropped to below where it was prior to last year’s election. Both individual and institutional investors find today’s valuations the least attractive in the survey’s history going back to 2001. On the other hand, when the Barron’s Big Money poll finds that 87% of money managers expect tax reform within the next 12 months, we think there is still too much optimism.

That less optimistic investor sentiment is confirmed by the EPFR Global report that revealed investors pulled roughly a net of $36 billion out of U.S. stock mutual and exchange-traded funds in the third quarter. According to their report, in 2017 investors have on net pulled money out of such funds, despite the equity markets making new highs again and again. Where is the money coming from then to boost the major indices? In the second quarter, S&P Dow Jones Indices reported that companies in the S&P 500 bought back $120 billion worth of their own shares in the second quarter and look to have been on pace for something similar in the third, although the complete data has yet to be released. In 2016 foreign investors pulled $3.5 billion out of U.S. stocks but in 2017 through August, have put around $40 billion into U.S. equities.

Looking back on the Black Monday, unlike back then, this time we have a group of central bankers around the world vested in the stability of equity markets with a track record of providing a floor. Investors know this and have come to expect this. At some point, that faith will fail, but we are not seeing signs of that happening just yet.

On the economic front, we continue to see more evidence that we are post-peak in many sectors. Wednesday’s housing data was soft even if we take the impact of the recent hurricanes into account with housing starts down by 4.7% versus expectations for a decline of just 0.4%. Starts are now down in 6 of the past 7 months, having peaked in October 2016 and are today down over 15% from then. Multi-unit structures are down 35%. Permits were also down more than expected, declining 4.5%. The Architectural Billings Index, which tracks the trend in noncommercial construction activity fell to at 12-month low of 49.1 in September from 53.7 in August.

Industrial Production rebounded 0.3% in September after having fallen for two consecutive months, but the gains were mostly thanks to a 1.5% increase in utilities output thanks to the hurricanes. Industrial output looks to have peaked in June and has contracted at a 2.3% annual rate since then. Manufacturing activity appears to have peaked in April, declining 2.1% since then.

The markets may be steady eddy, but geopolitics are anything but with Brexit talks reportedly not making much progress, the Trump Administration’s hardline on NAFTA talks and North Korea apparently mere months away from having the ability to drop a nuclear bomb on mainland America. The continued uncertainty around Brexit impacts investment and growth plans for businesses in Europe and all this NAFTA talk affects capex plans back home. Keep in mind that the U.S. enjoys a trade surplus with its NAFTA partners when we look at combined goods and services and a recent report by ImpactECON found that the termination of NAFTA would likely cost Canada 125k jobs, the U.S. 256k jobs and Mexico 951k jobs.

The bottom line is that while we do not see signs that a recession is around the corner, the economic data rolling in continues to indicate that we are well past the 7th inning of this business cycle. At some point, the markets will have to pay the piper for their extended period of record high valuations and record low volatility, but we are not currently seeing the kind of euphoric sentiment that typically occurs in the run-up to a crash-worthy peak. In fact, the chorus calling for a crash in October was rather large, making a crash this month highly unlikely as the market is infamous for making fools out of as many people as possible.

This week’s news that the more dovish Jay Powell may be the next Federal Reserve Chair coupled with the Senate’s adoption of a $4 trillion fiscal 2018 budget resolution, (just barely passing at 51 to 49) has pushed the accelerator pedal for risk on. For those paying attention, now is the time to plan your exit strategy for when we do get the inevitable major pullback and put together your shopping list for when shares go on sale.





WEEKLY WRAP: October Singing to the Same Tune We’ve Been Boogying To All Year Long

WEEKLY WRAP: October Singing to the Same Tune We’ve Been Boogying To All Year Long

This week we learned that Mother Nature isn’t quite yet done with slapping the U.S. around. As California suffers through the most deadline wildfires in history, our hearts go out to all those affected. This has been a year to try the internal strength of many, but over on Wall Street, life is more like the ending of a Disney animation, (we’ll not discuss that other studio over in Hollywood that’s had a week more like the Paradise Ridge Winery in Sonoma).

The second week of October sung essentially the same tune we’ve been boogying to for much of the year:

  • Big boys in stocks pulling more than their
  • An unprecedented degree of calm pervades the market despite some seriously wacky stuff in the geopolitical
  • While the economy continues to deliver a resounding ho-hum rate – neither tragedy nor victory – just a resounding


As of Friday’s close, 76% of the trading days when the CBOE S&P 500 Volatility Index (VIX) closed below 10 occurred just in 2017. Both the S&P 500 and the Dow Jones Industrial Average indices are on track for record or near record lows for average daily moves in 2017 – the hyper calm is becoming unnerving. The S&P 500 has now gone 235 trading days without a correction of more than 3%. The record is 241 days back in 1996 when the Federal Reserve was easing rates and the economy was a mere 4 years into the cycle versus today’s 8+ years and the Fed not only raising rates but embarking on Quantitative Tapering.

Most major indices are ending the week relatively flat, while the SPDR Gold Shares ETF (GLD) has gained over 2% and the iShares 20+ Year Treasury Bond ETF (TLT) has gained just a little less than that. We are seeing the return of the mega-cap leads with the S&P 500 equal weight index underperforming the S&P 500 market cap weighted index as the FAANG trade of Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), and Alphabet (GOOGL) all outperforming the S&P 500 and the NASDAQ this week.

According to a weekly survey by the National Association of Active Investment Managers, the managers ranked as the most bearish are more than 90% long the market, versus typically having around a 93% net short position according to data going back to 2006. Today equity long/short hedge funds have built up their highest net-long exposure to the Russell 1000 since 2008.

That’s a lot of bull going around. For a reference on just how all this fear-of-missing-out exuberance has affected the markets, take a gander at one of Warren Buffet’s favorite indicators – Total Market Capitalization versus

U.S. GDP. The only time total market cap relative to GDP has been higher was during the dot-com bubble and today, we are well above the level reached prior to the financial crisis. This doesn’t exactly set the major indices up for enjoyable returns in the years to come.



The economic data this week continued to point to an economy that is in rather stark contrast with the ebullient market levels. We’d like to point out as we head into the 3Q earnings season that while EPS growth for the S&P 500 was 13.9% in the first quarter and 10.3% in the second, fiscal 2017 corporate tax receipts declined 1% year-over-year. The corporate Spanx of buybacks and non-GAAP earnings creativity strikes again!

While the week’s continuing jobless claims were the lowest since 1973, the JOLTS report (Job Openings and Labor Turnover Survey) from the Bureau of Labor Statistics revealed a few trends worth our attention. Job Openings fell to a 3-month low while New Hires and Voluntary Quits fell to 4-month lows. On the positive side, layoffs have declined for two consecutive months, but we continue to see a larger gap between quits and the unemployment rate than is normal, which indicates a labor market that isn’t quite what it ought to be.

Given the continuing record spread between job openings and hirings, which should indicate a tight labor market, the Earnings report on Friday reiterated that not is all as it would seem in the labor market. Real average hourly earnings on a year-over-year basis rose a whopping 0.7%, but that is across a wide range of income levels. If we look at year-over-year changes in real average hourly wages for the vast majority, who fall into the production and non-supervisory category, that rose all of 0.2%. Ouch. That means that the rise in hourly earnings was mostly for those on the hirer end of the income spectrum. The monthly trend is also a cause for concern as September real average hourly earnings fell 0.1% after falling 0.2% in August.

No wonder retail sales disappointed, rising 1.6% versus expectations for 1.7%. Keeping in mind earnings growth, no shocker that growth in savings account balances today is the lowest since the recession. This is right in line with Citibank (C) and JP Morgan (JPM) boosting reserves for consumer loan losses by the most in over four years. Spending can only increase if household incomes rise or they borrow more. If it’s all about credit expansion, at some point household finances get ugly.

Friday’s CPI report revealed that the Federal Reserve’s inflation target remains elusive yet. We just can’t resist pointing out that the hawks in the Fed have been telling us for FIVE years that their targeted 2% inflation is just around the corner. Hope springs eternal? CPI was up 0.5% in September versus expectations for 0.6% increase and up 2.2% over the past 12 months on a seasonally adjusted basis. BUT… if we remove food and energy, (which is what the Fed is looking for) it is up just 1.7% for the fifth consecutive month – not exactly signaling acceleration now is it?

The bottom line is we continue to have a market priced at levels that are in the upper atmosphere of historical norms in an economy that continues to be “meh,” with income levels rising about as fast as a tortoise through molasses. We know full well that stock prices can get even headier from here, but beware of “reversion to the mean” for volatility and the reality of upside potential versus downside risk from such heights.