“Bubble Trouble”
November 19, 2013
11.18.13
The market moved from strength to strength last week, with the indices advancing an average of ~1.5%. The action started slowly since Monday was Veterans Day [the bond market was closed]. The midweek highlight was Janet Yellen’s confirmation testimony. This seems to have convinced the markets that Fed asset purchases will continue indefinitely [although she conceded that QE cannot go on forever]. The S&P is now up 26% so far this year, with the smaller stock averages up in excess of 30%. This is the best year for the S&P since 2003.
Barron’s cover story over the weekend did a good job putting this year’s advance in context: the broad market advance includes several pockets of exuberant excess [cloud, 3D printing, etc.], yet stocks are still the most attractive broad asset class. Note that the level of margin debt, investor complacency [VIX index] and cash levels are some indicators which do require close monitoring.
Market veterans advise to “never short a dull market”, but that is exactly what some experts now seem to be advising. This includes [by implication] Barron’s headline scribe: “Bubble Trouble?” and several CNBC gurus. Corrections can occur at any time, but this Bull market still has room to run.
The anniversary of JFK’s untimely demise provides us with an opportunity recall one of his many memorable quotations:
“We dare not tempt them with weakness. For only when our arms are sufficient beyond doubt can we be certain beyond doubt that they will never be employed.”
–John Fitzgerald Kennedy’s Inaugural Address
Confidence
November 11, 2013
11.11.13
Last week was mostly positive for US equities with the exception being the Nasdaq. The Dow Jones was up 0.9%, the S&P 500 up 0.5%, and the Nasdaq slipped 0.1%. Interest rates moved higher for the week which put pressure on the Barclays Aggregate Bond index. For the week the “Agg” dropped 0.52% and remains negative 1.9% for the year.
Over the last couple of years, we have talked about the shrinking stock market. Initial public offerings (IPOs) have been minimal and companies have been purchasing their own stocks at record rates which has led to a decline in available stock for sale. However, 2013 may be a turning point. Flows into stock mutual funds have been the strongest since 2004 with net inflows of $76 billion this year. With market confidence up and stocks at record prices we have seen the IPO market return as U.S. companies have raised $51 billion in IPOs. That is the most since $63 billion in the same period of 2000, the year bubbles in tech stocks and IPOs both popped. Follow-on offerings by already public companies have been even larger, surpassing $155 billion this year. That is the most for the first 10-plus months of any year in Dealogic’s records, which start in 1995.
We are cognizant of this renewed confidence as an eventual concern. However, we see the equity markets as fairly valued and still a good investment for the long term.
“Confidence is contagious; so is lack of confidence”
– Vince Lombardi
If…
November 5, 2013
11.05.13
The market marked time last week, with the S&P and Dow slightly advancing while the Nasdaq declined half of one percent. The small cap Russell 2000 continued its recent correction by falling 2% [but it is still up 29% YTD]. Company specific developments did move individual stocks: AAPL fell 2.5% as investors listened to management discuss upcoming mobile margin pressure. Conversely, Bristol-Meyers climbed 6.7% on additional study details about its experimental anticancer drug. The Wednesday release of the Fed’s latest policy directive was telling. Although it was little changed from previous Fed statements, markets seized on the Fed’s housing comments [recent slowdown] and fiscal policy [a headwind to GDP growth] to put a lid on stock prices.
In the “glass is half full” department, it is worth noting that domestic manufacturing is showing signs of life. Wal-Mart announced that it will source some additional footwear, curtains and glassware from the US. Motorola and designer jeans are additional examples of on shore manufacturing. These shifts are occurring because of Asian wage increases, shipping rates and the benefits of rapid response. More automation by onshore manufacturers is also a factor. Macro confirmation obtains from Chicago PMI [up to 65.9%] and BLS manufacturing jobs up ~1/2 million since 2/10. In addition, the ISM reports that manufacturing sector activity expanded in September for the 4th consecutive month.
We can all agree that investing should follow a “Buy low, sell high” methodology, but on average investors do just the opposite. Note that 12/02 and 12/08 were two excellent opportunities to buy, yet equity mutual funds experienced net outflows during both of those time periods. As Kipling observed: “If you can keep your head when all about you are losing theirs …”
The Boston Red Sox beat the St. Louis Cardinals last week to win its 3rd World Series in the last 10 years (2004-2013). In the previous 85 seasons (1919-2003), the Red Sox had won no World Series titles (source: Major League Baseball).
Consumer Headwinds
October 29, 2013
10.29.13
The S&P 500 closed the week at a record high as third quarter results have been received as mostly favorable. Adding to the market strength has been a change in outlook for the Fed’s unwinding of “Quantitative Easing.” Most prognosticators do not see the program winding down until April of 2014, compared to previous estimates of September 2013 not long ago. For the week the Dow Jones was up 1.1% and the S&P 500 up 0.9%.
Today we saw consumer confidence is at its lowest point in 6 months mostly due to the government shutdown and debt-ceiling debate. This data is consistent with the recent declines in consumer sentiment. Below is a chart of the University of Michigan: Consumer Sentiment Index showing the decline since August:
Wells Fargo & Company recently released a study conducted on middle class retirement. Here are a few statistics from their study:
• 52% of 1,000 “middle class” Americans (defined as having household income less than $100,000) surveyed in August 2013 have no money invested in the stock market, citing the volatility of equities as the main reason they avoid this asset class.
• 60% of middle-class Americans say that getting monthly bills paid is their top concern, up from 52% in 2012.
• 34% of middle-class Americans say that they will work until they are 80 years old, because they will not have enough money saved up for retirement. In 2012, the number of respondents with a similar opinion stood at 30%; and in 2011, this number was at 25%.
Wells Fargo Institutional Retirement and Trust summarized with the following comment, “We do this survey every year and for the past three years, the struggle to pay bills is a growing concern and the prospect of saving for retirement looks dim, particularly for those in their prime saving years.”
Real estate has been in recovery mode and the S&P 500 has doubled from it’s lows of 2009. Main Street is missing the boat.
Stink Bug
October 21, 2013
10.21.13
STINK BUG PROBLEM-WHAT COULD BE MORE APPROPRIATE FOR WASHINGTON?
We read in in today’s Wall Street Journal that reeking legions of the bugs have solidified their grip on the nation’s capitol. Actually this is no laughing matter since the stink bugs threaten up to $21 billion of crops. In a classic display of DC ineptitude, head of the USDA project team and seven of her eight staff were furloughed as nonessential employees. You really can’t make these stories up.
We wish the nasty bugs had attacked the bureaucrats who have harassed JP Morgan into a $13 billion civil settlement.
Moving to happier tales, earnings for the third quarter have been coming in slightly better than expectations (4% better). Leading the way have been financial services stocks, followed closely by technology and health care. Much of the earnings success has been through cost-cutting, as revenue growth has been modest at best.
The government shutdown pushed the employment report for September back to this Tuesday. The only economic report we saw today was for sales of existing homes. Sales dipped 3.1%, but prices are up 11.7% over the same month last year to an average of $199,200. One of the issues in real estate is a shrinking inventory of houses for sale.
“The basis of effective government is public confidence, and that confidence is endangered when ethical standards falter or appear to falter”
– John Fitzgerald Kennedy
Kick the Can
October 15, 2013
10.15.13
Recently the markets’ focus has been on the battle in Washington DC over the government shutdown. Last week a major economic report, the monthly jobs report, was postponed due to the shutdown. It is likely that more economic news will be delayed therefor shifting more importance to corporate earnings for the third quarter.
Initially, analysts were estimating a 6% increase for third quarter earnings but that has been gradually reduced to a 2% go ahead. If the shutdown continues on it will be a drag on fourth quarter earnings as well. Right now the solution seems to be to “kick the can” into next year.
Continuing the uncertainty does not bode well for consumer spending or corporate earnings in the fourth quarter.
“Do not yield to misfortunes, but advance more boldly to meet them, as your fortune permits you.”
– Virgil
Government Shutdown
October 7, 2013
10.07.13
The S&P 500 declined 0.2% last week following the partial shutdown of the U.S. government as investors try to figure out the negative implications to growth. Weakness Monday is attributable to the lack of any progress in Washington over the weekend. Most economists expect a 0.1% to 0.2% hit to GDP for every week the government is closed. Though none of us know when there will be a resolution, the markets are just 2.5% below all-time highs (the DJIA is down 4.1%) from September.
We expected uncertainty and increased volatility to continue until there is an agreement from Congress. However, monetary policy will remain accommodative, tapering is probably off the table until December or later and expectations for corporate earnings have come down to an achievable level. In addition, we see global economies improving, with better manufacturing data in the Eurozone and China. This is a positive tailwind which will be supportive of equities into year end and into 2014.
Several clients have been asking about the market implications from a government shutdown. The following chart should shed some light. Both the stock and bond markets have tended to look through past Federal government shutdowns as temporary ‘non-events’. The chart below shows that the equity market has tended to be choppy heading into and during past government shutdowns, but has strengthened markedly once they are resolved.
Click image to see larger version.
“The reason why worry kills more people than work is that more people worry than work.”
– Robert Frost
Regulatory Morass
October 1, 2013
10.01.13
Markets were mixed last week as the Federal budget building process careened toward impasse and a partial government “shutdown”. The combatants are involved in a game of chicken which is increasing uncertainty and the size of the so-called “Washington DC discount”. The S&P fell by 1.1% last week, while the bond market continued to strengthen on the taper postponement [which was probably motivated by the Fed’s “shutdown” concerns]. The 10 year treasury yield is down to 2.62%, giving up 11 BP over the last week.
The US economy is expanding, but at a lethargic pace. Higher taxes, slower Federal spending growth due to the sequester [which, if continued, will be positive in the intermediate and long-term], and more regulations are all dragging down the GDP growth. One interesting example is the “Jobs Act” passed in 2012.
The Jumpstart Our Business Startups Act [Jobs Act] was designed to expedite startup funding. The idea was to allow these rapidly growing companies [which are big jobs creators] to more easily access expansion capital, using 21st century tools such as Kickstarter or other crowdfunding alternatives. Unfortunately, the Washington sausage mill is producing an edifice which is in many ways worse than the Depression-era original. Investor requirements, filing timetables and penalty thresholds have become more onerous. Details of this ongoing counterproductive tragedy are available in a recent WSJ oped.
The good news is that our economy is growing in spite of these accumulating impediments. Just think about how well it will do when [if?] they are removed.
“Worry is like a rocking chair – it gives you something to do but it doesn’t get you anywhere.”
Fed Up
September 23, 2013
09.23.13
Markets advanced last week on news that the Federal Reserve will delay the start of any tapering of its asset purchase program.
For the week, the Dow Jones Industrial Average finished at 15,451 to close up by 0.49%. The broader-based S&P 500 closed at 1,710 for a gain of 1.30% for the week. The Nasdaq Composite closed the week at 3,775 for an advance of 1.40%. International markets fared better than the U.S. as the Dow Jones Global (ex US) Index gained 2.62% for the week (we see international equities outpacing U.S. equities for the next few quarters). The 10-year Treasury closed the week at a yield of 2.74% … down quite a bit from last week’s 2.90% yield (thanks to comments from the Fed).
Investors seem to be cheering the Fed’s decision to delay their tapering efforts. Strong home and auto sales along with better manufacturing and overall economic activity was not enough to persuade the Fed to begin taking away the punch bowl. The Fed remains concerned (who doesn’t … except the President and Congress?) about the anemic rate of job growth and the U.S.’s tepid GDP outlook. Of course, the Fed could quickly change their decision should the data indicate stronger employment and economic growth. St. Louis Fed President, James Bullard, indicated last week that the Fed could actually begin their taper process in October … thus contributing to Friday’s sell-off.
Now that the Syria situation has moved off the front pages, the next item on the worry list is the ongoing debt ceiling/budget debate in Washington. It is quite likely that the drama will continue this week, but we do not anticipate a government shut-down any time soon.
Third quarter earnings season should wind-down this week, and we expect earnings to be reasonable (as they have been for most companies who have already reported). A number of U.S. and international economic releases will take place this week … expect a lot of short-term “noise” from what will likely be conflicting news.
As always, we urge investors not to get caught up in the day-to-day noise of the markets. Instead, focus on long-term goals and enjoy the beginning of fall (yes, summer is really over).
“To conquer fear is the beginning of wisdom.”
– Bertrand Russell
Equity Markets Continued Their Advance
November 25, 2013
11.25.13
Last week the equity markets continued their advance with the S&P 500 adding 0.4% for the week and closing above 1800 for the first time. Earlier in the week the DJIA closed above 16,000 for the first time. This was the 7th straight weekly gain for the DJIA the longest streak since January of 2011. Money continued to flow into stocks with U.S. equity funds attracting $548 million in new cash for the week.
While some analysts say the stock market is overvalued and the PE ratio for the S&P500 has risen from 12.7 to 15.1 during the year that is still near the historic average. While a correction at any time cannot be ruled out the fundamentals of earnings, inflation and Fed policy are still positive. Strategists are taking a cautious but positive outlook for next year predicting an average increase of 4.1% based on modest increases in earnings and revenues for 2014.
Teamwork is the ability to work together toward a common vision. The ability to direct individual accomplishments toward organizational objectives. It is the fuel that allows common people to attain uncommon results.
– Andrew Carnegie