Sunday, January 31, 2016

Market Commentary (audio)

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Saturday, January 30, 2016

Oil, Stocks, Central Banks, The End of the Correction?? and Another Free Trade Bonus Section

At last (or, at the moment) oil and stocks have seen a, albeit somewhat, parting of the ways:    click to enlarge

Oil and spx the month of January 2016

So have the factors that joined the two suddenly dissipated? Good question! I guess we should try and determine what those factors are:

  1. Some believe that the oil industry in the U.S. has grown to the point where its pain more than offsets the joys of cheap gasoline, etc.

  2. Others believe it's a sign that the global economy is currently in recession, we're just too blind to see it.

  3. Others see it putting huge pressure on some emerging market economies (√° la #2), and, thus, their currencies (a source of potentially huge global volatility in equity and debt markets).

  4. While still others believe that the unserviceable debt many industry players incurred at $100+/barrel is sending the kind of stress through the fixed income markets that have been reliable foretellers of past U.S. recessions, and, therefore, stock prices need to be bid lower, much lower.


I'm thinking it's a combination of 3 and 4: After the nightmare that was the 2008 recession, and the memories of the late '90s "Asian Contagion", anything that smells of stress in the credit, and currency, markets is going to send the equity market into a tizzy. The chart below shows the high yield credit spread (the difference between high yield bond yields and that of the 10-year treasury) and the past three recessions.     click to enlarge

High Yield Credit Spread

That's scary!   

And here's a 6 month chart of crude oil, the S&P 500 Index, the JP Morgan Emerging Currencies Index and JNK (a high yield bond ETF):

OIL, HY, SPX, EM CURRENCIES

See what I mean in #3?

Of course, with regard to the first chart above, if we ex-out energy the chart would be less ominous, although it appears that energy is indeed weighing on other sectors. Here's a 6 month chart of the high yield spread for all sectors (the mountain) along with various other sectors (energy and materials at the top):

HY debt spreads by sector

So the question remains, since big bad bear markets are usually things of recessions, are we on the verge of recession? While I take very seriously the signals sent by the credit and currency markets, at this juncture I don't see great risk of a U.S. recession on the near-term horizon: Recessions tend not to begin when, for example, new and existing home sales (and prices) are on the rise, or when initial jobless claims are remarkably and consistently low, or when consumer sentiment and wages are growing, or, yes, when commodity prices are in the gutter (that typically happens during, and helps us out of, recessions).

Here's a link to my latest report (with charts) on key recession indicators...

Central Bankers to the rescue!

Even with Friday's monster short-covering rally (click here to see what I mean), the stock market just delivered its "worst" January since 2009 ("worst" in quotes because I think this is a much needed correction). And while periodic down markets are no sweat for you and me (right?), they sure do a number on the psyche of central bankers:

My, did Ben Bernanke ever leave Janet Yellen holding the bag! A bag bulging with $4.5 trillion worth of treasuries and mortgage backed securities---acquired from banks in exchange for cash that sits in their excess reserve accounts. Popular opinion has it that Bernanke and company did what they had to to avert the next Great Depression. Well, okay, but the job's not done until somebody figures out how to empty the bag so it'll have some room come the next recession---without bringing on the next recession in the process. Essentially, the Fed needs assurance that the economy can continue to grow while it, first, nudges the fed funds rate to a level that offers some semblance of normalcy and, second, begins to roll that massive debt pile off of its balance sheet. Hmm...

While I've expressed herein that the U.S. economy is presently not on the edge of the next recession, clearly, the Fed worries mightily about doing anything that would kill the wealth effect (folks do economy-growing stuff when their 401(k)s make them feel richer) and slow the presently modest rate of economic growth.

Add up the recent market volatility, the global landscape I described above, and the aggressive easing stance of other countries' central banks and you have the recipe for a (at this point) problematically  stronger dollar, potentially stressed credit markets and, therefore, a Fed that will be much more careful with interest rates than we thought just a few weeks ago. This realization (solidified by the Bank of Japan's adoption of a negative interest-rate strategy Thursday night*), along with a spike in the price of oil, sparked last week's short-covering rally in stocks...

*I've been asked to explain what it means to adopt a negative interest rate policy: I mentioned above that the Fed traded cash for bonds with the banks; and that the cash now sits in the banks' excess reserve accounts. Well, currently the Fed pays the banks 0.25% annually on all that cash; if the Fed were to adopt a negative interest rate policy they would turn around and charge the banks interest for sitting on all that cash. It would be like you putting a thousand bucks in a one-year CD with a 1% negative interest; a year later you'd cash out your CD for $990. Think maybe you'd find something better to do with that cash? Well, that's what the Japanese Central Bank is telling Japanese commercial banks. I.e., get that money out into the economy! And/or go exchange it for higher yielding U.S. dollars so the Yen will depreciate and make our exports cheaper for our customers. If you choose to just keep sitting on it, it'll cost you!

Is the correction over?

On January 20th the Dow saw an intraday decline of 566 points---followed by a 300 point rally---on heavy volume. Some speculate that that was the capitulation (click here for what that means) to end the current correction. While we can't know that for sure, we have to be skeptical. The potential for oil to reach back to the mid-20s is high at this point (suppose the Russians and OPEC can't come together), and I suspect, in that event, that we'd see that virtually perfect correlation to stocks spring back to life. Add in the ebb and flow of opinion over what the present state of global monetary policy means for markets at any given moment, and you have what has to be an extremely volatile environment for equities. Plus, as I've illustrated for you, not a single year in history that began like this one saw the market bottom in January. This very well could be the first, but we shouldn't hold our breaths... In fact, if you believe what I keep saying about corrections being very healthy phenomena, we should be very comfortable with the prospects for lower lows from here.

FREE TRADE BONUS SECTION

 Any other reason to tie oil to a weakening stock market?

I'm so glad you asked! Yes, there is, and this is one I doubt you've heard. And, were it advertised, this is one that too many misinformed Americans, alas, would prefer to dismiss (but they shouldn't). If you suffered through all of last week's update, you caught my little lecture on free trade. And you'll recall my view that when Americans buy foreign-produced goods they are expressing their patriotism in two most critical ways. One would be the simple fact that to be American means to be free, and to be free means to be able to transact wherever and with whomever on the planet you choose. Two would be that to send U.S. dollars beyond our borders is to support our U.S. exporters, as well as our financial markets.

As I'm sure you know, the U.S. is on the verge of energy independence. Wonderful!, right? Well, yeah, and, well, hmm...

Here's Bespoke Investment Group (emphasis mine) explaining how the fact that the U.S. now requires roughly $100 billion less oil from abroad equates to a net decline of roughly $100 billion in foreign purchases of U.S. assets (including stocks). And, as you well know, less demand for stocks means lower prices!
On balance, net asset purchases by foreigners across all assets have been negative to the tune of about $100bn over the last 12 months..

As the US requires less petroleum from abroad (down to just a bit less than $100 billion over the last 12 months), foreigners receive less dollars and that ultimately reduces demand for US assets.

Another present credit market concern is a seeming lack of liquidity in the treasury bond market. The financial regulation overhaul---post the 2008 recession---has made holding and, therefore, trading treasuries more difficult for bond dealers. As you may know, foreign entities have traditionally been huge buyers of U.S. treasuries (helping maintain a very liquid and, thus, low interest rate environment); should we embrace protectionist measures that would discourage the purchase of foreign-made products, we'd be depositing less claims on U.S. goods, services, assets and securities [U.S. dollars, that is] into the global marketplace and we'd be, therefore, exacerbating the liquidity risk that already has the attention of the Treasury Department.  

So, please, while today's candidates (you can easily identify at least one on each side) try to exploit the incredibly crazy and destructive myth that protectionism would in any way benefit the U.S. consumer, know that he/she is presuming that you and I are clinging to one of the grossest and most pernicious---yet, sadly, common---misconceptions.

Wednesday, January 27, 2016

Market Commentary (video)

Apple's Prospects (videos)

In total, the below offers up a balanced look at Apple going forward:



Continuation of the above. Watch this one: it's a thoughtful commentary for the analyst ranked #1 on Apple



CEO Tim Cook on China

Today's TV Segment (video)

With regard to Apple, that would be "product cycle", not "profit cycle"... And add "if you're in it short-term" where I say "I don't think I would judge anything ("if you're in it short-term") until we get later in the year when that iPhone 7 comes out"... Long-term I remain very bullish on Apple's prospects.

Monday, January 25, 2016

The Retired "Investor"...

Having counseled retired folks for many years, and through many market cycles, I so appreciate how corrections and bear markets can impact their psyches. No longer collecting a steady paycheck, by itself, elicits a strange, perhaps uncomfortable, sensation; bring on a rapidly falling stock market and, well, you can forget "strange" and put "uncomfortable" in bold uppercase!

While my perpetual lecture on long-term thinking helps our still gainfully employed clients keep their wits about them, there's something about taking from a portfolio (a good percentage of our retired clients take monthly distributions)---when its value is declining by thousands more than the monthly withdrawal---that can test the resolve of even your most seasoned investor.

Our experience with clients, and our findings from back-testing, divulges what is probably the most critical aspect of a disciplined retirement portfolio strategy. Which is: never sell the stocks of a diversified portfolio to generate income during down markets. Which ought to be intuitive, given that market history proves that every down cycle is to be followed by an up cycle. And the way to ensure that this aspect of a disciplined strategy is followed is simply to maintain ample cash and/or short-term fixed income securities to draw from as equity markets sell off. I.e., if you're retired and your portfolio is balanced, and you’re not overdoing it in terms of your distribution rate (I'm generally comfortable with 4-5%), history suggests that you should be sleeping just fine, even during times like these.

Good enough (you retirees)? Not quite? Okay, let's try this:

So you retire, you begin receiving social security and, maybe, a pension, and you've accumulated $XXX in retirement plans over the years. The social security, etc., doesn't quite get you there in terms of financing the lifestyle you dreamed of, so you'll be taking from your retirement plan.

The only way to guarantee that you'll never stress over down markets is to stay out of markets altogether---which would include the bond market, particularly if you think interest rates are ever to rise again. Which leaves you doing some simple math; you'll divide $XXX by the amount of additional monthly income you'll need and you'll know exactly for how many months you'll be living the retirement life of your dreams. Now, if your $XXX looks to run out at an age in which you expect that your physical capacity will allow you to continue enjoying the retirement life of your dreams---and that notion doesn't work for you---you'll be doing some soul searching.

You understand that income is generated through the process of exchange; the income recipient produces a good or service that someone will desire enough to exchange dollars for. So, if you're the inventive sort and you've got an idea, you'll want to pursue it and hope that the world will want what you've got to the point where it will pay for you to produce it. In which case, of course, you'll no longer be retired. Or you could offer up your services; surely your talents are still in demand somewhere within your area code. In which case, of course, you'll no longer be retired. Hmm.... Since we're assuming that your objective is to stay retired, now what?

Again, income is generated through the exchange of a good or service for dollars. So then, is there a way to participate on the receiving end of the dollars without having to come out of retirement? Well, yes there is; by investing in a company that produces goods and/or services in return for a percentage of its growth over time, its income, or both.  Problem is, the risk: You could, alas, invest your life savings into a company that ultimately fails, leaving you no choice but to come out of retirement and leverage your inventiveness, or your services, or both.

So, the notion of investing in one company doesn't set well when one's looking for greater assurance that he/she can stay retired in a manner that he/she hopes to become accustomed to. Now you're wondering if there's a way to invest in a number of companies and, therefore, eliminate the risk that the failure of one, or even a few, forces you out of retirement---or into a lifestyle you'd prefer not to become accustomed to? Well, yes there is. It's, are you ready?, the dreaded (or lately dreaded) stock market.

Yep, you can become an owner of the companies you buy your stuff from. And when you do it through investment funds, you do it in a hugely diversified way. For example, if you happen to be one of our retiree clients, you’ll get a slice of the dividends and whatever growth Procter and Gamble can realize by selling:

Product Images P&G

And whatever GE can realize by selling:

Product Images GE

And Kroger can realize by selling:

Product images Kroger

And Merck can realize by selling:

Product images Merck

And CVS can realize by selling whatever's inside there:

Product Images CVS

And Johnson and Johnson can realize by selling:

Product images JnJ

And Apple can realize by selling:

Product images Apple

You’ll even get a slice of whatever this guy can produce:

Product images Buffet pic

Of course the above is the very short list of what resides in your portfolio.

So, while the prices of the stocks of what will continue to be the world’s finest companies fluctuate as generally short-term thinking market participants trade amongst themselves, you approach the world of investing like the gent in that last photo.
There seems to be some perverse human characteristic that likes to make easy things difficult.

I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.

Time is the friend of the wonderful company, the enemy of the mediocre.

We believe that according the name 'investors' to institutions that trade actively is like calling someone who repeatedly engages in one-night stands a 'romantic.'

Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years.

All Warren Buffett

Market Commentary (audio)

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Friday, January 22, 2016

Your Weekly Update AND Times Like These (the return of the gloom gang)... Plus, a bonus section on free trade...

WARNING! The China section (after the first two paragraphs) gets a bit wonky. If you're not in the mood, skip to "The Fed" and continue. I think you'll find the "What else?" section interesting. And please keep an open mind when you get to the bonus section---this is the season (occurs every 4 years) where our minds tend to fixate, which makes it easy to lose sight of the big picture...

The all-too-usual suspects for this weekend's commentary would be: The presently tight correlation between oil and stocks, China's "predicament(s)", and the Fed (I'll insert corporate earnings next week). Being that these subjects are indeed "all-too-usual" (these days), I'll keep the following as concise as possible:

The oil/stock trade:

I'll continue to hammer this one into submission during my daily commentaries. I.e., nothing to add for now.

China:

If you've been reading this blog, you know all-too-well my view on the China economic rebalancing story. I'll add that while I do not share the view that China is on the verge of a debt-induced collapse, I am now of the opinion that we very well could see the Yuan trend notably lower going forward. This trend, by the way, will have no relation to the manipulative rants of at least two of the fascinating characters currently eyeing the seat of the leader of the "free world" (amazingly, the two I'm referring to seemingly sit on opposite extremes of the political spectrum, yet they trumpet the same utterly-destructive protectionist rhetoric*)---They would have you believe that China has been aggressively "cheating" us Americans by devaluing its currency so as to deliver us more affordable China-made goods (Oh I wish it were true!)---a claim they, as well as past candidates, have been making for years.

Here's a 10-year chart that unequivocally dispels that myth:     (And, folks, the notion that any rung on the U.S. economic ladder would be somehow enriched by limiting the global reach of U.S. businesses and the freedoms of U.S. consumers [to transact anywhere on earth they choose under the most favorable terms], is utter pernicious garbage. It's a playing on age-old fears that politicians have been exploiting for centuries. Please send me a message if you need convincing and I'll do my darndest [I'll include a primer at the end below]. Or simply ask yourself this American [Great American!] question: Will the proposed policy expand or limit my personal freedoms? Also [although that last question ought to be enough], understand that when it comes to commerce, any policy that would limit your access to imported goods under anything but the terms you and the supplier agree on, or that would limit a U.S. business from exploiting any and all global opportunities to achieve the greatest efficiencies, not only flies in the face of true American values [liberty, for example], it is---as virtually every non-political economist agrees---utterly destructive from a macroeconomic perspective!---As I attempt to illustrate in the video at the bottom...)

click to enlarge

Remnimbi in USD terms

As you can see, the Yuan rose steadily for years against the dollar. As for the plunge in mid-2015, while some were screaming "unfair devaluation" (or, "unfairly" offering U.S. consumers a price break on China-made goods [how dare they try and save us money!]), the fact of the matter is that China aimed (and succeeded) for its currency to be accepted in the IMF's SDR (Strategic Drawing Rights) basket of world currencies (along with the U.S. dollar, the Japanese Yen, the Euro and the GB pound). To gain acceptance they had to allow the Yuan more float (i.e., a more market-determined value). Plus, as China's economy slows (per the rebalancing), capital has been looking for the exits. Maintaining the old peg to the dollar (the rate the Chinese central bank held) has become ever more expensive.  Dropping the "daily fix" by 2 percent better accommodated present market forces, plus the new practice of adjusting it (the daily fix) to account for the previous day's close is yet more evidence that they're serious about allowing the market more say in the pricing of the Yuan.

As for why I see the Yuan possibly falling further: The extent to which the central bank has had to prop up the currency (a practice that is the complete opposite of what those candidates claim), even after last year's "devaluation", clearly signals that capital is fleeing the country. That propping depleted reserves by over $half a trillion last year. The chart below illustrates the decline, plus the fact that while $3.3 trillion (green line) remains a huge war chest (the world's largest, in fact), it only amounts to 16% of China's total M2 money supply (yellow line). I.e., I see China allowing for further careful depreciation, assuming capital continues to leave the country, as opposed to greatly depleting a reserve base that is sufficient to pay off their short-term dollar debt, times 5, as well as purchase all of their imports for the next two years running, according to Nomura Holdings Inc.     click to enlarge

China FX Reserves to M2 Ratio

This is the perfect segue for my present view on the Fed:

Recent global market turmoil, plus the prospects for the dollar to appreciate even further (to the perceived detriment of the export side of the U.S. economy)---potentially exacerbated by potentially higher rates and the China story I just told (all of which flies firmly in the face of the Fed's inflation objective), makes the odds of the Fed achieving its goal of 4 rate hikes in 2016 highly unlikely. A scenario I suspect the equity market will heartily welcome.

What else?

Well, in times like these, the gloom gang always shows up in full force. Prognosticators claiming uncanny predictive prowess seem to come out of nowhere with their auguries of Armageddon. Of course market crashes do occur from time to time, and, my!, how incredible you'd be (or seem) if you could accurately predict one.

So, if you aim to be viewed as credibly incredible, why not give it a shot. And then keep shooting, because ultimately the market will have a "crash" and you can tout your incredible self as an all-seer whose books should be bought, newsletter should be subscribed to, and whose counsel should garner top-dollar.

Here's the link to  Michael Johnston's A Visual History of Market Crash Predictions.

A few snippets:
In that interview, Nenner predicted challenging days ahead:

It is going to be very difficult few years to make some money. … I don’t expect the economy to pick up until 2020.

For anyone who listened to him, making money was indeed difficult. Those who held the market came out fine though; the Dow has added almost 8,000 points since that prediction.

In late 2011, Dent made headlines by predicting that the Dow was eventually heading to 3,000. (CNBC has mercifully misplaced the image titled “chart_scary.jpg,” perhaps after renaming as “chart_neverhappened_758.”)

Dent is selling a number of different products, including The Great Crash Ahead (published 6,700 Dow points ago) and The Demographic Cliff: How to Survive and Prosper During the Great Deflation of 2014-2019 (published 1,600 Dow points ago). 

Dent’s company also offers a number of newsletters; a lifetime subscription comes at the bargain basement price of $7,500.

Farrell, a former investment banker, has authored nine books. One of those, Think Astrology & Grow Rich, seems to recommend making investing decisions based on the positions of the stars. This is, unfortunately, not a joke; they guy splashing “stock crash” headlines across one of the most widely-read financial sites in the world wrote a book with this advice:

When Uranus and Neptune go into Aquarius, I look toward information and technology.

Fast forward 11 months to June 2015, and two things have changed: the stock photo of a bear (now much less menacing), and the price of the Dow (up about 1,500 points). Everything else is about the same; Cook is calling for markets to drop by about 25 percent, using some back-of-the-envelope math from 1987.

In addition to the book he co-authored with Michael Sincere, Cook sells trading seminars designed to “maximize your trading personality with an approach tailor made to you.”

Robert Prechter was described at the time of his 2010 call for Dow 1,000 as a “market forecaster and social theorist.” Echoing the words of George R.R. Martin, he made a dire prediction that the rally from the market bottom was setting investors up for more heartache:

I’m saying: ‘Winter is coming. Buy a coat.’ Other people are advising people to stay naked. If I’m wrong, you’re not hurt. If they’re wrong, you’re dead. It’s pretty benign advice to opt for safety for a while.

Following Prechter’s advice was anything but benign; the Dow had added almost 2,000 points before the end of the year.

Additional advice from Prechter is available in many forms, including a “Financial Forecast Service” ($59 per month) and the “Elliott Wave Trader’s Classroom” ($49 per month).

Mark Hulbert, a journalist who monitors and reports on the performance of investment newsletters, has at times found it tempting to make a few predictions of his own. In late 2013 — about a year after a similar prediction — he warned that another 1987-like crash was “inevitable.”

 subscription to Hulbert’s newsletter costs $59 for the first year.

David White, a financial planner in Michigan, predicted in early 2012 that the Dow would fall by nearly half to 7,000 by the summer. The Dow finished the year above 13,000.

In August 2011, longtime market bear Bill Strazzullo appeared on CNBC and advised “investors” to wait until the Dow hit 9,000 to buy and then sell around 11,500. The Dow never even dipped below 10,000, but has continued to run far higher than his sell point.

David Stockman was Ronald Reagan’s budget director and a former Michigan congressman. In March 2013, shortly after publishing The Great Deformation, he penned an op-ed in the New York Times warning of a coming economic meltdown and advising investors “to get out of the markets and hide out in cash.”

Marc Faber is a Swiss investment advisor and author of the Gloom, Boom & Doom Report ($300 per year). He’s made a number of bearish calls over the years, including a prediction of a market crash in 2014.

In early 2011 Brady Willett encouraged subscribers to Fall Street ($180 annual subscription) to sell stocks, based on the premise that Warren Buffett had begun a “hibernation process” that involved moving to cash. Buffett has, of course, continued to do deals and has maintained exposure to U.S. stocks. Since this article was published, Berkshire Hathaway (BRKB) has gained about 65 percent.

Be back soon...

*P.s. Here's a little something I wrote and illustrated back in the fall of 2011 (BONUS SECTION ON FREE TRADE):
Where Left and Right Merge

Plain and simply, the imposition of what the consumer will be fooled to believe are punitive (U.S. job saving) tariffs on foreign imports - per the coming proposal from a bipartisan (left and right merge on this one) band of manipulators (lead by Democrat Shumer and Republican Graham), at the behest of Presidential-wannabes Mit Romney and Michele Bachman - would, if passed, only serve to hurt Americans employed by American exporters, Americans who work for American businesses that benefit from our discretionary spending - and virtually every other American consumer through higher prices of everyday items. I.e., the net result of protectionism is forever the taking of money from the consumer-at-large and the handing it to a select (politically powerful) few.

Thus, the mere suggestion that this politically-inspired proposal, were it to pass, would do anything other than severely hurt our already limping economy, is an utter insult to our intelligence. Shumer, Graham and the candidates are either profoundly ignorant or assume so of us.

Of course non-competitive U.S. industries lose jobs to trade, but other (competitive) industries benefit mightily. Here's my rendition of a story Don Boudreaux tells in his book Globalization (a great read!):

Imagine there are only two countries in the world, China and the U.S... And China wants absolutely nothing from the U.S.. Therefore, being that U.S. dollars offer them no value, the Chinese refuse to sell U.S. citizens a single item. That's a bummer, because we really want their tires. However, when a third country, Australia, enters the story, opportunity presents itself. Australians desire U.S. software, while China wants Australian wool. So then:

1. China sells tires to the U.S....
2. China now has U.S. dollars to buy wool from Australia..
3. Australia now has U.S. dollars to buy software from the U.S....

Now I'll add the manipulation: The United Steelworkers Union cries foul (actually happened in '09 by the way), buys favor with a U.S. President (Obama) - who points to the trade deficit with the surely-cheating China - and Voilà! we tariff Tianjin Tires. And, alleluia, we save American (tire manufacturing) jobs. And, alas, we destroy American (tech industry, etc.) jobs.

Here's me illustrating the above:

Market Commentary and Why the Market Bounced... (videos)


Wednesday, January 20, 2016

Market Commentary (audio)

[video mp4="http://www.betweenthelines.us/wp-content/uploads/20160121-070720.mp4"][/video]

Market Commentary and Capitulation Explained... (video)

Be sure to stay with the video until the capitulation talk, or fast forward to the 3:20 mark if you like... (When I say "it doesn't happen every time" I'm referring to market bottoms that coincide with big capitulations. I.e., the market indeed bottoms every time, just not always with that super high volume selloff)...

Today's TV Segment (video)

Market Commentary (audio)

[video mp4="http://www.betweenthelines.us/wp-content/uploads/20160120-082029.mp4"][/video]

Tuesday, January 19, 2016

Market Commentary (audio)

[video mp4="http://www.betweenthelines.us/wp-content/uploads/20160119-094140.mp4"][/video]

Saturday, January 16, 2016

On the market, oil, the economy, etc.

So how do we address the "worst" start to a year in stock market history? I put "worst" in quotes because, as I've been preaching of late, periodic breaks (or breakdowns) are in my view essential to the long-term health of the market. Although I won't go so far as to incite the wrath of my readership by proclaiming it the "best" start to a year in history. How about "interesting", "startling", "shocking" or simply "$#@&!!"...

Last week I offered up a look at some simple technicals (here and here), which, digging beyond what I illustrated for you, point to a deeply "oversold" near-term signal (could see a near-term bounce), and potential trouble on a forward trend basis.

Of course the question is, is the market ultimately sending a new-bear-is-upon-us signal or is it simply doing a little housecleaning while remaining in a longer-term bull market? We await the answer...

So, while we're waiting we might as well mess around with the data and see if it offers any clues:

History suggests that if we're worried about deep, prolonged bear markets, we should worry about the timing of the next recession. Being that the Fed's current interest rate policy is on the shortlist of market concerns, we should consider what history says about the time span that has separated the first Fed rate hike in a tightening campaign (like last December 16th) and the onset of the next recession: As it turned out, the average over the past 4 decades has been 32 months; with 15 months being the shortest (those back to back early-80s recessions) and 50 months being the longest. The yellow line represents the Fed funds rate, the blue shaded areas are recessions:     click to enlarge

Fed Funds and Recessions

 

Of course lately it's a lot about oil. Armies of experts have been telling us that oil has to bottom before stocks can find their footing. Perhaps, but if we're concerned about cheap oil bringing on the next recession, well, history doesn't yet support that concern. In fact, I'd say cheap oil, as well as other commodities, has been a huge stimulator out of past recessions (orange line represents crude oil):    click to enlarge

Oil and Recessions

 

Here's Bespoke making the point, and addressing a few other inconsistencies :
Typically, the price of oil and gold both rise or are quite stable in the start of bear markets. This is because these assets tend to hold their value during periods of high inflation; high inflation and commodity price appreciation are generally signals of an overheating economy with a Fed chasing it down, rather than an economy growing at a modest mid-expansion pace. Commodity prices and the equity market have had a positive correlation of late, to be sure; but historically the opposite has been true, with high commodity prices reducing consumer spending, real incomes, and choking off activity with Fed rate hikes consistently providing a double-whammy of pain.

CPI growth in this current experience was the lowest leading in and the lowest since, which looks quite different from behavior of other bear market tops. The opposite is true for housing which has grown much faster over the last 24 months and since the bull market top relative to past experiences. Nonfarm Payrolls, Industrial Production, and real personal consumption all look quite robust versus prior experience. The one indicator that does not look healthy versus past experience: ISM manufacturing, which is at its worst level (relative to the start of the bear market we may or may not be in) of any bear market since 1987. That said, it is declining from a much higher level, with no great collapse like 2002 and 2009 ahead of the equity market’s decline. Notably, all other ISM Manufacturing series registered below 45 within two years of the start of that bear market; that’s not a pattern we’ve seen so far, but one we’ll keep an eye on with ISM below 50.

There's so much we can explore on the economy and what it speaks to with regard to past markets; in a nutshell, some sectors are showing pretty solid strength, others real weakness and, on balance, things look just okay for now. Steve Liesman does a good job of summing it up:



The media is always on fire during times like these. The platform is raised for every guru with an opinion. I never cease to be amazed at how, with so many factors at play, so many of these characters seem so utterly committed to their prognostications---positive or negative.

In light of what's been coming at you in the press, you might be wondering, as a friend of mine was recently, what, if anything, in your portfolio might be on the verge of total collapse. So, with that, and you investment clients, in mind, here's how a typical client (TC) portfolio looks in terms of recent trouble-spots (of course there's some variability client by client):

Areas of present concern, per the gurus (not to be facetious, there are indeed legitimate concerns in these areas):

High Yield Bonds, Energy (debt and equity), Materials/Commodities and Emerging Markets.

To begin with, TC has zero direct high yield bond exposure.

As for energy, TC's equity portfolio will range from 5 to 10% energy-related stocks. The energy sector ETF TC holds is comprised of 40 positions, with 70% of its assets in its top 10. Which are: Exxon Mobile, Chevron, Schlumberger, Valero, EOG, Pioneer Natural Resources, Conoco Phillips, Phillips 66 (Buffett's been buying this one hugely of late), Tesoro, and Halliburton.

The energy fund currently pays a dividend in excess of 4%.

We don't see an all-out collapse in these names. In fact, long-term, we see potential opportunity. This is an area we expect to slowly increase as 2016 unfolds...

As for materials; TC's portfolio will range from 7% to 12% of equity exposure. The materials sector ETF TC holds is comprised of 27 positions, with 67% of its assets in the top 10. Which are:

Du Pont, Dow Chemical, Monsanto, Ecolab, Lyondell Basell Industries, Praxair, PPG Industries, Air Products and Chemicals Inc., Sherwin Williams and International Paper,

The materials fund currently pays a 3+% dividend.

Same story as energy... in terms of all-out collapse odds and possible opportunity going forward...

As for Emerging Markets; TC's portfolio ranges from 4% to 8% of equity exposure---typically divided among two emerging market ETFs. One holds 2,953 stocks, the other holds 293. They currently pay dividends of 3+% and 5+% respectively. The average price to earnings ratios of the stocks they hold are presently 11.7 and 8.7 respectively (that's low).

In essence, the companies they hold presently sport earnings and cash flows sufficient to pay very attractive dividends. In a collapse scenario you'd tend to see massive dividend cuts and possibly (it happened with energy) price to earnings ratios rising as earnings plunge at a faster pace than stock prices. All that said, the decline (or "collapse", if you will) in share prices we saw last year, and this, has been stunning.

Do I believe there are huge opportunities to be had in emerging markets going forward? I absolutely do! Do I see huge volatility along the way? I absolutely do!

So, depending on how one might define "collapse", if it means something other than the inevitable, at times dramatic, downward volatility the market has periodically delivered since the beginning of market time, I think TC's in good shape---as long as he/she has a long-term perspective.

Of course we can't close a discussion on the present state of the market without touching on China. Which has been a topic I've addressed consistently, if not ad nauseum, herein for quite some time.

In the following interview Nicholas Consonery does a good job articulating the basis for China's contribution to present-day global market uncertainty, while Stephen Roach's commentary with regard to the rebalancing of the Chinese economy should sound very familiar if you've been reading this blog over the past couple of years.



Be back shortly...

Friday, January 15, 2016

This should sound familiar... (video)

You know how you always tend to like people who agree with you… Well, I’ve featured Wells’s Jim Paulsen here before, and I know it’s because I really like him—and I’m guessing that’s because he and I have been on the same page for some time.

If you’re reading and listening to my commentaries, Jim's views regarding last year's correction (not hanging around long enough to do any good), the need to re-set valuations (i.e., this correction is ultimately a good thing), the present state of the market and where the opportunities lie going forward should sound very familiar to you:

Holding support?? (video)

"A financial world re-set. Not a harbinger of real-world economic weakness" (video)

Zach Karabell is an economist who has been on the right side of economic realty for years. Here he is this morning:

Thursday, January 14, 2016

Market Commentary (audio)

[video mp4="http://www.betweenthelines.us/wp-content/uploads/20160115-074601.mp4"][/video]

Good if You're Gloomy!

Are you feeling pessimistic about the market going forward? Well, if so, who could blame you? Stocks aren't cheap. The Fed threatens to raise interest rates 4 times this year. China's a mess, some say. Commodity prices are plunging and that says really bad things about the global economy, some say. It's an election year and the current cast of characters represent a nightmare of uncertainty, I say.

So, again, are you feeling gloomy? Well good! That's a positive signal for the market going forward. I know, crazy! But true. Read on:

The American Association of Individual Investors publishes the oft-quoted AAII Investor Sentiment Survey. Here's their description:
The AAII Investor Sentiment Survey measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market for the next six months; individuals are polled from the ranks of the AAII membership on a weekly basis. Only one vote per member is accepted in each weekly voting period.

The long-term averages are: Bullish 38.67%, Neutral 31.06%, Bearish 30.27%.

Here are the survey results for the week ending 1/13: Bullish 17.9%, Neutral 36.6%, Bearish 45.5%. Dang!

So, assuming you're gloomy, you're right there with the pack. 

According to Bespoke Investment Group, that 17.9% is the lowest weekly bullish reading since April 2005, and it's one of only 28 weekly occurrences---during the 29 year life of the survey---when bullishness read below 20%. Here's what happened during the one, three and six month periods following each occurrence:
One month: Positive returns 70.4% of the time. Average return for all periods: +2.05%

Three months: Positive returns 92.6% of the time. Average return for all periods: +6.51%

Six months: Positive returns 96.3% of the time. Average return for all periods: +13.38%

So how can it be that when the individual investor is most pessimistic about the market, that the market tends---the great majority of the time (historically speaking)---to deliver handsome returns shortly thereafter?

Well, think about it: At what point would you expect folks to have the least exposure to the stock market and, thus, the most exposure to cash; when 83% of them are bullish or when 83% are neutral to bearish? And at what point would you say the market has the greatest odds of moving measurably higher; when 83% of investors are already in the market (bullish), or when 83% are flush with cash? You got it; when everyone's sour on stocks, there's plenty of cash to pile in at the first sign of a bottom.

So, yep, if you're an individual investor, your market expectations should generally fly directly in the face of your mood. 

As for the moment; while yesterday and, especially, this morning, smelled (technically-speaking) bottomy, as I type oil's trading lower and U.S. stock index futures are trading right along with it (Dow future down 139 points). Which, per yesterday's presentation, is perfectly okay with me... 

Market Commentary (audio)

[video mp4="http://www.betweenthelines.us/wp-content/uploads/20160114-085715-1.mp4"][/video]

Wednesday, January 13, 2016

"We Need a Breather" (video)

Brian Belski essentially tells the tale I've been telling you. Not that I'm all in on his 20-year bull market thesis, but I couldn't agree more (as I've been preaching) with Brian that "we need a breather". I.e., a good correction:

 

Careful What You Wish For!!

I know what you're thinking, what you're "wishing for" I should say. You have vague recollection of past periods when the market sold off hard for a few weeks (I say "vague" because---during times like these---you have a tough time leaning on those memories that would otherwise have you sleeping like a baby [meaning, the market has always recovered from those past periods]). You're wishing that you'll wake up tomorrow to a Dow Jones Industrial Average that's up 700 points because something somewhere somehow brought back all that cash that people accepted for the stocks they sold on the way from Dow 18,000 down to 16,000. Well, you shouldn't!

What you should be wishing for---if you're wishing for the market to bottom---is what you saw today, only "worse"! That would be a huge selloff for a few days on huge volume. Today, in my view, was merely a big selloff on big volume. It might very well be enough, but I'm thinking the money that's lying in wait wants to make sure your mom and pop give up the ghost and get the heck out of the market once and for all. That's the hallmark of a market bottom---huge panicky selling on huge volume. From there an extended rally can begin that lasts until the next time some house cleaning needs to be done. Again, I'm not convinced we're there just yet.

As you've heard me say, last year's correction didn't count. It didn't last long at all! And here we are with the second one in 6 months (down 10.6% from the November peak [the previous correction bottomed on August 24]). That's virtually unheard of! But, again, in my view, the last one didn't hang around long enough to pull any weeds. I know it sounds crazy, but unless you're trying to get rich trading the market short-term (better to play the Power Ball!), you want this.

Per that stock market conversation (click here for the whole thing):
Investor: Will that help the market?
Adviser: What do you mean? Help it go up, or help it go down? Both are important.

Investor: What do you mean?
Adviser: You can’t have one without the other. Down trends are essential for the long-term survival of the market. Kind of like taking a rest every now and then. The longer the market stays up without any sleep, the harder the sleep when it finally comes. The good news is the market has always woken up.

Investor: Can’t you be a little more helpful and just give me a forecast for 2008?
Adviser: Trust me, my forecast won’t help you. And does it really matter?

Investor: What do you mean, of course it matters?
Adviser: What do you want the market to do – go up or go down?

Investor: Now there’s a brilliant question – I want it to go up, of course!
Adviser: Now or later?

Investor: Huh?
Adviser: Let’s forget about up for a moment and think about down. Since the market is for sure going to go down every now and then. Would you rather it go down now or later? Are you going to need the money you have in stocks now or later?

Investor: Later.
Adviser: Okay then, since we know the market will always go down, and since you’re not selling your stocks till later – better that the market go down now rather than later, don’t you think?

Investor: Okay I get it. But I still don’t like it.
Adviser: I understand. Most people don’t. But it’s my hope that, with a healthier perspective, you’ll stress less going forward.

Market Commentary: Stocks, Oil and the Technicals (video)

Today's TV Segment (video)

Saturday, January 9, 2016

At what point is enough enough? Or, when do we bail out of the market? (video)

Your Weekly Update

Did you know that Native American rain dances actually worked 100% of the time? Well, they actually did! How's that possible? It's because the natives refused to stop dancing until it started raining.

Today's native doomsayers---whose prognostications are, in a rough market environment, destined to generate huge numbers of clicks and, thus, inspire the advertiser-customers of the outlets that feature them---are getting lots of love these days from the media.

I'll refrain from directly picking on any of them today (I've done that plenty over the years---here's the latest, here's the one before that), and simply suggest that the next time you hear someone claim that he/she is an uncannily accurate seer of the future---and sees the dimmest of times ahead---you google his/her name and add "past predictions". You'll either discover that he/she's been making virtually the same prognostication for years (that's if he/she's smart and has solved the mystery behind the success of Native American rain dances), or, he/she's been flat out wrong the majority of the time. Of course when we're talking strictly about the perennial doomsayers, it's both!

That said, there are indeed a few present day pessimists who deserve more than a passing dismissal. They're the ones who have a history of guessing in either direction and who actually trot out legitimate data that points to a present trend that they feel will continue---and, for the moment, therefore signals that the next recession is virtually upon us. One of the more popular, and legitimate, trends being trotted out of late is the flattening yield curve. Numerous times over the years I've heralded the yield curve (the slope of treasury debt yields from short to long-term) as one of the best-ever economic indicators. When the curve inverts---when short-term yields exceed long-term yields---history suggests that we should brace ourselves for the next recession. I track it religiously and, yes, the curve has been flattening of late.

The problem I have with the notion that the present spread between 2 and 10 year treasuries (the "2s/10s spread" as it's called) virtually assures we're on the cusp of some serious trouble, is that, as my chart below illustrates, we've been right here, or worse, many times over the past few decades without soon entering a bear-market-inducing recession (the red circles are those telltale inversions, the white circles are all the times we've been right where we are today, or worse):     click to enlarge

Inverted Yield Curve 2s 10s

With (history as our guide) 2.5 years being the shortest distance between the current (or flatter) yield curve and recession, I don't think the 2s/10s spread signals any issues just yet.

The following statement from Bespoke Investment Group (their release yesterday inspired me to produce the above chart) speaks to what, along with the non-threatening yield curve, should for now alleviate any great concern over the odds of impending recession:
With total income continuing to grind higher at unspectacular but stable rates it’s hard to see where a demand shock (lower consumer spending, 70% of the economy) could come from. Debt levels are modest and the cost of servicing that debt is at an all-time low; not the stuff recessions are made of.

Given that we just endured the roughest first week in U.S. stock market history, I thought I'd start this weekend's message with the above look at recession probabilities, as---historically speaking---great bear markets are things of recessions.

So what was last week all about? As I stated right out of the gates (and again here), stocks simply weren't cheap to start the year (they're cheaper now). Which, by itself, isn't a bad thing if interest rates and inflation stay low. Get where I'm going? Yep, the Fed just raised its benchmark rate, and early in the week two voting members said they're going to keep it up regardless of whether inflation rears its head soon or if the stock market threatens a fit leading up to each FOMC meeting. I'm thinking the balance of the voting members aren't too keen on those comments right about now.  So then, if interest rates are to rise, stock valuations must come down. Which, in the absence of a belief that corporate earnings are about to rise, means share prices must come down. Within minutes of the release of Friday's impressive jobs number I received a CNBC news flash that featured the employment report and the Fed in its title. As in, 'good job growth makes for a more aggressive Fed'.

Plus, there's China. The now freer floating Yuan (China's currency) is struggling to stay above water as the economy it represents is showing weakening growth in its once defining sector (manufacturing)---which sparked a massive selloff early in the week that led to the triggering of a newly adopted circuit breaker, which abruptly called a close to two trading sessions. The circuit breaker was wisely abandoned after Thursday's session, which, along with China's central bank propping up the Yuan, led to an impressive 2% rally in the Shanghai Index on Friday. And while a stabler China did spark a 200 point jump in Dow futures overnight, it wasn't enough to avert yet another shellacking during the U.S. trading session to end the week.

Plus, while I continue to resist the popular notion that low oil prices are an inherently bad thing for the market, or the economy, Friday's action in stocks clearly followed oil's intraday moves. And, true correlation or not, they both got creamed for the week.

Plus, and lastly, I think traders are nervous about the coming earnings season.

Bottom line for the moment:

Fundamentally-speaking, stocks just got cheaper and, thus, more attractive.

Technically-speaking, the charts show a market that's substantially "over sold", which would suggest a near-term bounce is in store. There was, however, some real technical damage done this week (smashing through prior support levels), that---if there's no firm bounce and reaffirmation of previous support sometime soon---heightens the possibility of a re-testing of last August's lows.

Now, should the latter inspire a YIKES! or a YES!? Well, like I keep saying, last year's correction was in my view a non-event. Thus, while nobody likes to see their share values decline*, since such declines are ultimately inevitable and would likely set the spring for an ultimate move to higher highs, I'll be trying my best to convince you it's a YES!---if we get there. Particularly if there's no recession on the near-term horizon...

*Watch the whiteboard lesson at the bottom of  Thursday's blog post to put declining values into perspective...

Friday, January 8, 2016

Market Commentary (audio)

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How the likes of Warren Buffett became the likes of Warren Buffett...

What would you say if I offered you an investment opportunity that involved taking a diversified position in the industry that moves the machines, lights the ways, fuels the factories, heats the homes and provides the materials for a wide array of consumer products the world over when its cost per unit is roughly 50% below its recent high---and, best of all, will pay you a 4% annual dividend while you wait for the price to come back? Yeah, me too!

Would you worry if it takes, say, a few years for its price to move into the next uptrend, while, again, you’re getting paid handsomely to wait? Yeah, me neither!

I just described XLE, the Select Sector SPDR Energy ETF that occupies most of your (you clients) portfolios (although the "few years" part was simply to gauge your patience). And, if it doesn't (occupy your portfolio), don't worry, many of the stocks it holds are held in the large cap value allocation of your portfolio.

What I also just described is the logic that has made the likes of Warren Buffett---the bastion of long-term, patient, buy-when-there's-blood-in-the-streets investing---the likes of Warren Buffett. Make no mistake, you want that to be you! Otherwise you become the other side of the trade for the likes of Mr. Buffett.

Seriously, who do you think is waiting patiently for the individual investor to throw in the towel and offer up the stocks (of the companies that will be here [profitably] for many tomorrows) in his/her portfolio at their lowest prices in months? Yep, that's how the likes of Warren Buffett became the likes of Warren Buffett. Oh, and, in case you're wondering, the likes of Warren Buffett held their existing positions right through the last peak, I assure you...

Now, all that said, I know how stressful down markets can be for some folks. In my view, it's those times when the individual investor learns if he/she has the stomach to be in the market. And, by the way, there's absolutely nothing wrong with not having the stomach for the market, life is too short! Here's a snippet from that stock market conversation that makes this point:
Investor: Okay, but what if the market keeps dropping?
Adviser: It will keep dropping, I guarantee it.

Investor: What do you mean?
Adviser: I mean it will always keep dropping and it will also keep going up. It’s inevitable.

Investor: How could it keep dropping and keep going up?
Adviser: What I mean is, the market will always have periods when it drops and periods when it goes up. That we know for sure.

Investor: Okay, I get that, but what about my portfolio?
Adviser: Your portfolio will keep dropping and it will keep going up. If you’re a long-term investor, you’re in luck. The market has always kept going up more than it has kept going down — over the long-term.

Investor: But I don’t like the uncertainty?
Adviser: How much do you not like it? Are you losing sleep?

Investor: Yes.
Adviser: Then get out of stocks.

Investor: But I’ve been told they’re the best investment long-term?
Adviser: You’ve been told right, the best investment long-term – not always the best investment short-term. But is it worth losing sleep over?

Investor: But if I get out of stocks, what do I do with the money?
Adviser: Buy CDs and save every penny you can. You’ll likely have to save more to reach your long-term goals, but you’ll sleep much better.

Investor: I don’t think I’d sleep well only earning what CDs pay.
Adviser: Then learn how to sleep owning stocks

Click here for the entire conversation...

Zack's on the silver linings to market selloffs...

Here's Zack's Research on the silver linings to market selloffs (this remains my mantra):
3 Benefits of a Stock Sell Off

Some stock selloffs are a precursor to the next bear market. The vast majority are nothing more than pauses before the next run higher. The evidence is plentiful in the many, many sell offs endured over the past 7 years of this bull market.

Gladly there are 3 distinct benefits created by these painful selloffs:

1) Better Value Proposition : Lower stock prices, while the earnings outlook is unchanged, means that stocks become a more attractive value.

2) Flight to Safety : Investors will run to the safety of bonds during these times, which lowers the interest rate. This too makes stocks a better value proposition compared to their main investment rival in bonds.

3) Lowered Expectations : The next move for the market is typically predicated on how economic data compares to expectations. As stocks go down, fear goes up which also lowers expectations. This makes it easier for the next round of economic data to impress investors which acts as a catalyst to push stocks higher. This part is important as earnings season kicks off next week.

Consider the above 3 points when deciding your investment strategy at this time.

Best,



aka Steve Reitmeister

Executive Vice President, Zacks Investment Research

Market Commentary (audio)

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Thursday, January 7, 2016

Market Commentary (audio), A Stock Market Conversation, and Never Confuse Volatility With Loss (video)

[video mp4="http://www.betweenthelines.us/wp-content/uploads/20160107-135520.mp4"][/video]

 

After all of the analysis, the economic statistics, and the explaining that low commodity prices, particularly oil's, have a stimulus effect that ultimately offsets the ill, it's time to get down to what truly matters most in the business of long-term investing.

In 2008 (during the heart of last bear market) I published what I believe remains my most important essay. Here's that hypothetical conversation between an experienced adviser and his client:

Investor: My gosh, the Dow was down 250 points today! What happened?
Adviser: Stock prices fell.

Investor: Why?
Adviser: Because shareholders wanted to sell their stocks and no buyers would pay yesterday’s prices.

Investor: Why wouldn’t they pay yesterday’s prices?
Adviser: Because they didn’t see value in yesterday’s prices.

Investor: Why not?
Adviser: Perhaps they felt that yesterday’s prices were based on earnings assumptions that may not materialize this year, due to the slowing economy.

Investor: Will the economy continue to slow – will we have a recession?
Adviser: What do I look like, a fortune teller?

Investor: Uh..... so, my portfolio's been dropping almost daily since the start of the year. Why?
Adviser: Because stocks are falling.

Investor: But why are they falling?
Adviser: Because no one wants to pay last year’s prices.

Investor: I know, you told me that already. But yesterday the Dow was up over 100 points. Why?
Adviser: Because investors wanted to buy and shareholders weren’t willing to sell at day before yesterday’s prices.

Investor: Why wouldn’t they sell at day before yesterday’s prices?
Adviser: Because they saw more value in their stocks than the day before yesterday’s prices represented.

Investor: Why?
Adviser: Maybe they felt that the day before yesterday’s prices didn’t fully reflect the upside earnings potential of the underlying companies.

Investor: How could their attitudes change so much in one day?
Adviser: Now that’s a good question!

Investor: Okay, but what if the market keeps dropping?
Adviser: It will keep dropping, I guarantee it.

Investor: What do you mean?
Adviser: I mean it will always keep dropping and it will also keep going up. It’s inevitable.

Investor: How could it keep dropping and keep going up?
Adviser: What I mean is, the market will always have periods when it drops and periods when it goes up. That we know for sure.

Investor: Okay, I get that, but what about my portfolio?
Adviser: Your portfolio will keep dropping and it will keep going up. If you’re a long-term investor, you’re in luck. The market has always kept going up more than it has kept going down --- over the long-term.

Investor: But I don’t like the uncertainty?
Adviser: How much do you not like it? Are you losing sleep?

Investor: Yes.
Adviser: Then get out of stocks.

Investor: But I’ve been told they’re the best investment long-term?
Adviser: You’ve been told right, the best investment long-term – not always the best investment short-term. But is it worth losing sleep over?

Investor: But if I get out of stocks, what do I do with the money?
Adviser: Buy CDs and save every penny you can. You’ll likely have to save more to reach your long-term goals, but you’ll sleep much better.

Investor: I don’t think I’d sleep well only earning what CDs pay.
Adviser: Then learn how to sleep owning stocks.

Investor: How do I do that?
Adviser: Don’t think about your stocks. Hire a money manager and stick with your program.

Investor: When do you think the market will rise again?
Adviser: After it’s done falling.

Investor: Is there anything I can do in the meantime?
Adviser: Yes. Anything but think about the stock market.

Investor: Will the Fed lower interest rates?
Adviser: Of course.

Investor: When?
Adviser: When they see fit.

Investor: Will they lower interest rates at their next meeting?
Adviser: You’d have to ask them – but I’d guess yes.

Investor: Will that help the market?
Adviser: What do you mean? Help it go up, or help it go down? Both are important.

Investor: What do you mean?
Adviser: You can’t have one without the other. Down trends are essential for the long-term survival of the market. Kind of like taking a rest every now and then. The longer the market stays up without any sleep, the harder the sleep when it finally comes. The good news is the market has always woken up.

Investor: Can’t you be a little more helpful and just give me a forecast for 2008?
Adviser: Trust me, my forecast won't help you. And does it really matter?

Investor: What do you mean, of course it matters?
Adviser: What do you want the market to do – go up or go down?

Investor: Now there’s a brilliant question – I want it to go up, of course!
Adviser: Now or later?

Investor: Huh?
Adviser: Let’s forget about up for a moment and think about down. Since the market is for sure going to go down every now and then. Would you rather it go down now or later? Are you going to need the money you have in stocks now or later?

Investor: Later.
Adviser: Okay then, since we know the market will always go down, and since you’re not selling your stocks till later – better that the market go down now rather than later, don’t you think?

Investor: Okay I get it. But I still don't like it.
Adviser: I understand. Most people don't. But it's my hope that, with a healthier perspective, you'll stress less going forward.

Wednesday, January 6, 2016

Market Commentary (audio) and Stephen Roach's Insight Into China (video)

Stephen Roach, in the video below this morning's audio, has in my view the right current read on China...

[video mp4="http://www.betweenthelines.us/wp-content/uploads/20160107-071137.mp4"][/video]

What Fed Minutes Said (video)

Below, Steve Liesman gives us the long and the short of the Fed minutes. Here's my take:

In general, I think the Fed has a good handle on the economic landscape going into the new year. Breaking it down:

  1. I do think there's a decent chance that we hit their 2% inflation target later in the year.

  2. They mention that it's hard to fight deflation and that if they make a mistake it'll be to stay lower (with regard to their benchmark rates) for longer. That "mistake" means they believe they could run the risk of falling behind the inflation curve.

  3. I agree (as I stated on TV here) that the overseas picture improved enough leading into the meeting to give them the green light.

  4. I believe that they are justified in their concerns over the negative impact of a strong dollar. However, I don't think it'll pose nearly the headwind it has the past couple of years.

  5. Looking at the glut in many commodities, their concerns regarding "commodity weakness" is certainly understandable. Of course, ultimately, the cure for lower commodity prices is lower commodity prices (i.e., spurs demand).

  6. I too expect to see improvement this year in overseas economies. I'm seeing it already, particularly in much of the recently-released European data.

  7. Given this week's events, their concerns over China, etc., are understandable. Although, I still don't see some big implosion in 2016.

  8. I absolutely agree that there's a real silver lining in low energy prices.

  9. I also agree that the wage picture is positive going forward.

  10. The staff's concerns over high yield spreads, earnings and credit quality are definitely something to keep an eye on, despite the fact that much of those pressures are centered in the energy and commodities space.


Today's TV Segment (video)

Tuesday, January 5, 2016

Market Commentary (audio)

[video mp4="http://www.betweenthelines.us/wp-content/uploads/20160106-071216.mp4"][/video]

Market Commentary (audio)

Make that two thousand "sixteen"...

[video mp4="http://www.betweenthelines.us/wp-content/uploads/20160105-093856.mp4"][/video]

Sunday, January 3, 2016

Market Commentary (audio)

[video mp4="http://www.betweenthelines.us/wp-content/uploads/20160104-072136.mp4"][/video]

Friday, January 1, 2016

The Market Poses Problems to the Rational Thinker...

Time. Time is  perceived in two ways . . . as a cycle or as a line.  Cycle time is the time image that best describes nature. Seasons, days, seeds, and birth-death cycles are all part of the rhythmic pulse of nature. Linear time is an abstraction. It is the invention of humans who arbitrarily divide cycles into units. Unfortunately, once the division is made, the units are often perceived as being more significant than the cycles. They are, after all, more logical . . . that is, they are more addable, subtractable, and certainly more abstract. Cycles, on the other hand, vary. None of the cycles of nature occur consistently in terms of linear time. Days, tides, seasons, and gestation periods are all different in terms of linear time. As a result they pose problems to those who measure them in linear time---the rational thinkers. They pose no problems to those who accept cycle time, for these humans are closer to nature and to the metaphoric mind.

The above, from the second edition of Bob Sample's The Metaphoric Mind, elegantly explains what plagues so many individual investors: Linear thinking --- assessing their results on a per unit of time basis, typically a calendar year. All the while the market moves in cyclical fashion, meandering through the seasons without regard for man's calendar.

When comparing past cycles, we see each move through the normal phases---each a bit nuanced---but none occurring consistently in terms of linear time.

That linear thinking---the obliviousness to the market's cyclical nature---is the culprit behind the phenomenon Wesley Grey recently wrote about in the Wall Street Journal.

Here, again, is a snippet:
Imagine the following theoretical investment opportunity: Investors can invest in a fund that will beat the market by 5% a year over the next 10 years. Of course, there is the catch: The path to outperformance will involve a five-year stretch of poor relative performance. “No problem,” you might think—buy and hold and ignore the short-term noise.

Easier said than done.

Consider Ken Heebner, who ran the CGM Focus Fund, a diversified mutual fund that gained 18% annually, and was Morningstar Inc.’s highest performer of the decade ending in 2009. The CGM Focus fund, in many respects, resembled the theoretical opportunity outlined above. But the story didn’t end there: The average investor in the fund lost 11% annually over the period.

What happened? The massive divergence in the fund’s performance and what the typical fund investor actually earned can be explained by the “behavioral return gap.”

The behavioral return gap works as follows: During periods of strong fund performance, investors pile in, but when fund performance is at its worst, short-sighted investors redeem in droves. Thus, despite a fund’s sound long-term process, the “dollar-weighted” returns, or returns actually achieved by investors in the fund, lag substantially.

In other words, fund managers can deliver a great long-term strategy, but investors can still lose.