Saturday, May 23, 2015

Never Forget

I don't know which poet wrote this, but I am thankful to them . . . as well as thankful to those who "paid the full measure" for the rest of us.

Reminder of what Memorial Day is all about…

It happens today, and in the past;
Sacrifice made, for ours to last.

Wives to widows, families torn;
Gave their lives, for them we mourn.

Gone forever, souls are lost;
Freedom comes, with this cost.

Enjoy the life, they did preserve;
Fate they suffered, did not deserve.

On this day, lest we forget;
To them we owe, our life in debt.

Thursday, May 21, 2015

Good News Is Not Bad News

The stock market is bouncing around record highs.  I hate that -- because investors start asking if it is time to sell.  "You know, it can't go up forever."

That's true - the stock market will go down . . . eventually.  But, I don't think it is going down significantly anytime soon.  Take a look at this graph:

Chart of the Day
Yes, we've seen this graph before, but it bears repeating.  There have been 13 major rallies over the last 115 years, averaging 8.8 years in length.  We are not near the average rally yet.  Plus, these rallies were after 30% bear markets.  We just had a 50% bear market, and rallies tend to be stronger after severe bear markets.

This bull still has room to run . . . let him run! 

Wednesday, May 20, 2015

One Single-Issue Voter

Political-type people hate "splinter" voters, who vote on the basis of one single issue, regardless of all other policy issues.  You know, don't bother me with the facts - plural - I only need one fact - singular!  For example, I have relatives who would gladly vote for Satan himself, if he would just outlaw abortion.

I am also a one-issue voter.  By my standard:  Presidents Reagan, Bush I, Clinton, and Bush II have all been failures.  Next month, I'll know whether President Obama is also a failure.

That's because loud commercials drive me crazy.  It is a type of home invasion.  It is a physical violation of my ears and mind.  I've spent years praying for a Steve Jobs-type person to develop some device that gives me complete control over the noise in my own home.  Lobbyists insist that I already have that control, because I have a remote, but that ignores the time between the noise invasion and whenever I find the remote and the mute button.  It also ignores the aggravation.

However, on June 4th, the latest amendments to the Commercial Advertisement Loudness Mitigation (CALM) Act become effective.  It requires a new algorithm that deletes silent time during the commercial in evaluating whether a commercial is in compliance with CALM.  When this law took effect in December of 2013, it required the "average" volume of the commercial to be no louder than the programming or the non-commercials.  But, advertisers need a sudden blast of noise to get your attention.  Therefore, they put a few seconds of silence at the beginning and end of their commercials, reducing the "average."  That practice stops next month . . . I pray.

Let's hope Obama is more than just another failure!

Monday, May 18, 2015

"Hard-to-Fill" with the "Hard-to-Find"

The American labor force is changing, and this could impact the actions of the Fed.  While most investors study the monthly Jobs Report on the first Friday of each month, most economists study the monthly JOLTS report.  This stands for Job Openings and Labor Turnover Survey.

While the number of Job Openings ticked down slightly in April, reflecting the lousy Jobs Report in March, it is still important to realize that the number of Job Openings is higher now than before the 2008/9 "crash."  In fact, 3.4% of all jobs are currently open and unfilled.  The National Federation of Independent Business (NFIB) reports that 26.7% of their Job Openings are "hard-to-fill."  This is up from 10% during the 2008/9 "crash."  Appropriately trained workers are hard-to-find!

All this increases the possibility of the Fed raising interest rates, because there are two types of inflation, and the Fed can only fight one of them.  But, they can preempt the other type!

There is "demand-pull" inflation, which occurs when the economy is over-heating.  The Fed can fight this by raising interest rates or tightening loan availability.  The other type of inflation is "cost-push" inflation, which usually happens when there are shortages in labor or materials.  This is a much more pernicious type of inflation.  The Fed has no authority to restrict wage increases or oil prices, for example.  It can only depress the overall economy, which they are loathe to do, usually waiting too long.

I still believe the Fed will remain loathe to depress the overall economy and the job recovery by raising rates this year . . . even if they should.

Wednesday, May 13, 2015

Breakout or Breakdown ?

There are many approaches to investing, one of which is usually called "channel" investing.  Basically, it holds that stock values normally move within a predictable range.  Unless something unusual happens, it will stay within that range.  So, a channel investor will buy the stock when it is near the lower level of the range and sell it when it is near the upper level of the range.

That approach also applies to the stock market as a whole.  Using this approach, we see the Dow is well within the range and should be expected to continue within the upward channel.  In fact, take a closer look at this graph:

Chart of the Day

You can see the Dow has clearly broken above its line of resistance (the broken red line in the top right).  This suggests a breakout to the upside is more likely than a breakout to the downside in the near term.

In the long term, it is admittedly a wide channel, but it is has remained upward sloping for the last hundred years.  Very little is guaranteed in the investment world, but I do guarantee there will be another recession and another stock market "crash" -- when that happens, just remember the long-term channel is upward sloping!

Tuesday, May 12, 2015

Bouncing Back ?

It is true of capitalism that the seeds of every recovery are planted during the last recession, and the seeds of every recession are planted during the last recovery.  However, it does seem ironic to describe Russia in terms of capitalism, but it is fair.

The Russian economy has been in free-fall for over a year.  GDP is probably down 8%, similar to the Global Financial Crisis of 2008/9.  Unemployment is not reported honestly but is believed to be approaching 15%.  Economists predict the Russian economy will continue to fall thru 2015, with recovery beginning in the second quarter of next year.

Among the "green shoots" is the fact that their currency is improving.  A year ago, a dollar bought 30-35 rubles.  A few months ago, it bought 70 rubles, reflecting a 50% depreciation in the ruble.  Today, a dollar buys almost 50 rubles.  This means their cost of their imports initially increased 50%, pushing overall inflation up, but those costs are now decreasing.  Their current rate of inflation is now estimated at a whopping 17% but can be expected to fall.

In addition to an improving currency, their inflation will be driven down by the difference in industrial production (down 0.6%) and retail spending (down 8.7%).  This means inventory levels are rising, which is not sustainable, and will lead to price-cutting to slash those inventory levels.

At 30% of Russian exports, it is also very important that the price of oil seems to have stabilized and is expected to improve slowly.  This is huge for their economy and cannot be over-estimated!

The downside risk to their economy remains in their political arena.  If peace doesn't return to the Ukraine, more economic sanctions can be expected.

Does all this suggest it would be prudent to invest in Russia this year, with the expectation of improvement next year?  Absolutely not!  (Investors are begging to be fleeced whenever they invest without the rule of law.  To understand Russian business, read Red Notice by Bill Browder.)

Does all this suggest that additional Russian aggression should not be expected this year but is a virtual-certainty next year?  Absolutely yes!

Monday, May 11, 2015

Success . . . I think

Surprisingly often, I remember a co-worker in Dallas from the late 1970's.  She was a cigarette smoker, who believed she could quit smoking whenever she wanted.  However, she also believed that the self-discipline or will-power to quit was like a muscle -- you have to exercise it!  So, she did not smoke on Fridays!  She exercised her self-discipline every Friday.

I also have an addiction problem -- with news -- I'm a newsaholic!  I watch it from early morning to late night.  So, to exercise my self-discipline muscle, I decided to spend Sunday news-free.  While I dreaded the day arriving, it was not as bad as I expected.

Yesterday morning, I avoided the Sunday newspaper and kept the TV off.  (My wife stayed in the bedroom to watch the news.)  In the afternoon, I actually went down to the beach to read a long-delayed book.  No withdrawal symptoms!  My hands didn't shake one time.

Late in the afternoon, a friend walked by me on the beach, telling me there was a three-way playoff in the golf tournament.  Was that news or not?  Or, was it drama?  I don't know, but I immediately jumped up and ran home to watch the golf playoff.  Still exercising self-discipline, the TV was turned off as soon as the playoff was over.

Excepting a little golf news, I spent a whole day news-free.  I was as proud of myself as my wife was annoyed with me!  Maybe, I'll exercise that self-disciple muscle again . . . by pushing the plate away . . . or maybe not!!

Sunday, May 10, 2015

Lesson From Wine Country

I was fortunate to be in Napa, California, last week, where a friend told me the story of the Mondavi winery and recommended The House of Mondavi:  The Rise and Fall of an American Wine Dynasty by Julia Flynn Siler, which I did read on the long flight home.  (I suspect the saga of the Mondavi brothers may have been the seed for the CBS soap opera Falcon Crest during the 1980's.)  There was certainly no end to the real-life drama in the Mondavi family.

A first-generation Italian-American family in Lodi, California, they moved into wine as Prohibition ended.  The two oldest sons later took control of the winery business.  (As was normal in those days, the two daughters were marginalized.)  Unfortunately, the oldest son was so obsessed with building the business that he permitted his ego to run rough-shod over the ego of his younger brother, with predictable results.  I strongly recommend this book as an insight into dysfunctional families, especially those with large family businesses.

However, as a CERTIFIED FINANCIAL PLANNER (r) professional, with particular emphasis on both estate planning and investing, the sad story of the Mondavi family was both predictable and preventable.

First, there was an obsessive focus on family-control, pointedly excluding professionals.  The surviving wife, Rosa, was unable to control her oldest son, who could not control himself.  A professional co-trustee would have done that, probably by empowering a Chief Financial Officer.  (The family employed accountants but no CFO!)  Similarly, passing on a family business to the next generation has a certain quaint charm but, considering the risk, is not enough reason to own a business in the first place.

Second, the Mondavi family had no respect for cash -- everything was plowed back into the business.  They went to the edge of survival numerous times, due to the predictable liquidity problems.  (Does anybody believe that financial problems have zero impact on the family harmony?)  More importantly, the Mondavis  had no respect for diversification -- their only asset was the wine business, leaving them 100% exposed to the wine industry alone.

The family always employed excellent, expensive attorneys, usually with political connections, but never used a CERTIFIED FINANCIAL PLANNER (r) professional.  They may have saved some money in the short run, but it also caused them a lot of emotional pain in the long run!

Saturday, May 9, 2015

drip . . . drip . . . drip . . .

Companies are required to disclose their financial results on a quarterly basis.  This is known as the "confession season."  Stock analysts estimate the company's total earnings and earnings-per-share beforehand.  Their estimates are then averaged and published.  Normally, a company's stock will increase if their financial results exceed the estimates or decrease if they don't.

The same reaction is true for the market indices, such as the Dow or S&P 500, compared to economic estimates.  Economists prepare the estimates.  If the economic data released is better than the  estimates by economists, the stock market indices usually increase.  If the data doesn't beat the estimates, the stock market indices usually decrease.

Yesterday's release of the monthly "Jobs Report" was unusual, because the data almost exactly met expectations, i.e., 223 thousand actual jobs compared to estimates of 228 thousand.  The stock market should have not reacted to hitting the estimates.  There should have been no reaction.  Instead, the Dow soared 267 points or 1.5%.

This tells me that the stock market didn't really believe the analysts' estimates and had not priced the securities to meet those expectations.  There must be a reason for this.  I think the slow drip of weak, but not bad, economic data coming out of the winter has worn down the natural optimism of investors, just like it did last year.

The final estimate of first quarter GDP is not yet available but is expected to be weak, even negative, just like last year.  Early estimates of the second quarter are in the 2.5% range, just like last year.

Now, do you really want to "sell in May and go away" . . . or just stop listening to the short-term dripping. 

Sunday, May 3, 2015

The Grieving Season ?

My mother died thirteen months ago, and I think about her several times every day.  All my friends, as well as the "experts," say it is normal to grieve the loss of a loved one, and I do!

But, I know the particular date that she died -- March 30th, 2014 -- which is a date-certain that many people don't have.  Having a date-certain makes the necessary grieving less difficult for me than those loved ones who don't have a date-certain.  My heart will always break for those who loved our POWs & MIAs in Vietnam.  They never knew when their loved ones met their end, which made their grieving far, far more difficult.

I attended a lecture last week on driver-less cars.  They discussed LIDAR, which is the image-capturing radar on the roof of driver-less cars.  It will take high-resolution photographs 360-degrees around a driver-less car, up to 100 meters or about 300 feet.  It can spot a squirrel sitting in a tree.  Anything showing through any open window, anybody going in or out of any building, anybody driving by, or anybody in the area for any reason will be captured forever.

Afterwards, I brought up the issue of privacy and was told "Privacy is already dead.  Don't be silly, hoping that you will ever again have any privacy.  Just get over it -- let it go!"

Maybe, that was the date-certain that I needed -- April 29th, 2015.

Maybe, it is past-time to begin that grieving process.  

Friday, May 1, 2015

In Praise of Proctologists

Would you rather go to the airport and deal with TSA . . . or go to your proctologist's office?

You don't have to arrive two hours early to see your proctologist.

It is easier and less expensive to park your car at the proctologist's office.

Your proctologist doesn't exchange pleasantries just to hear if you have a foreign accent.

You don't have to pass thru a metal-screening device to see your proctologist.

You are more likely to meet a decision-maker in a proctologist's office than the airport.

Your proctologist usually has his qualifications posted on a wall, unlike TSA.

Your proctologist is unlikely to insult your intelligence, by banning toenail clippers while permitting 12 inch knitting needles.

Lastly, you'll probably get a nice nap while you're in the proctologist's office.

Thursday, April 30, 2015

Sell In May -- No Way !!

For those who have seen the movie Great Gatsby, you have some appreciation of how sweltering the summer heat can be in New York City.  For many decades, those who can afford to flee the city for the seashore have done so.  The result is that there are fewer people doing anything on Wall Street.  Therefore, it shouldn't be surprising that the stock market just saunters along without purpose during that time.  Wall Streeters urge each other to "sell in May and go away."

There is some justification to this, as shown on this graph:

Chart of the Day

You can see the gold line, representing performance of the S&P 500, is relatively flat-lined between May and November most every year.  History suggests you should not expect much good news from Wall Street during the summer . . . nor bad news either.  So, take the summer-off from your everyday worries about the sky falling,  and . . . go to the beach!

But, don't sell everything before you go, as that would be market-timing, and we all know what happens to market timers.  They miss it!

Wednesday, April 29, 2015

Roping The Fed ?

Libertarians rail against the Federal Reserve System.  Both Ron & Rand Paul want the Fed audited as a predicate to eliminate the Fed, even though over 800 audits are performed on the Fed every year.  This animus toward the Fed by Libertarians grows out of their belief that capitalism is supposed to be efficient, which means completely unfettered (forgetting that Karl Marx agreed with them that capitalism is efficient but is doomed because that efficiency also makes it cruel).

A more moderate discussion is whether the Fed should be "rules-driven" or not.  This would require the Fed to take a particular action if a certain set of economic conditions existed.  This would be a blessing for Wall Street, which has created a cottage-industry is guessing the Fed's next action.  I listened to a lecture on this today by John Taylor.  He is a former Under-Secretary of Treasury, where he labored to make the Iraqi & Afghanistan monetary systems work again.  He is now an economics professor at Stanford and is best known for the "Taylor Rule" to limit the Fed's discretion.

A good deal of "the sky is falling" school of investment thought today grows out of the fact that the Fed has undoubtedly done some things very new and very unproven, in the aftermath of the Global Financial Crisis of 2008/9.  Because nobody has ever seen the Fed unravel quantitative easing before, they assume the Fed will fail to do it properly, and the sky will indeed fall.

My thought is that requiring familiar predictable actions by the Fed is fine, as long as they face familiar predictable economic conditions.  Setting arbitrary rules for the Fed now, when we don't know what financial conditions may present themselves later, just doesn't make sense to me.  I don't want their hands tied, especially when fiscal policy is impotent.

Monday, April 27, 2015

We're # 2 !!!

Was it yesterday or even today?  Maybe, it will be tomorrow.  We know it will be any day now.

In 2013, economists estimate the global GDP, for the entire world, was $101.8 trillion.  The United States represented 16.5% of that total.  China represented 15.9%.  However, the size of their economy is expected to eclipse our economy this year.

Does that really mean anything?  Some argue that GDP per person is much more important.  The U.S. has 4.4% of the world population, compared to a whopping 19.1% for China.  This drives down their GDP per person.  In the U.S., it is about $54 thousand, easily eclipsing China at only $12 thousand.

Maybe size doesn't matter, but I do think it means China can afford more aircraft carriers as their economy gets bigger!

It is also interesting that income inequality is increasing in both nations but for different reasons.  In China, this is due to uneven and arbitrary industrialization.  In the U.S., this is due to reasons that apolitical people cannot discuss.

The Winner Is . . .

The award for the most creative T-shirt seen at the 2015 annual convention of the Investment Management Consultants Association in Las Vegas goes to the young man whose T-shirt read:

Financial Planning:   It is NOT just for baby boomers anymore.

Future Shock redux ?

I attended a lecture entitled "The Age of Abundance" yesterday.  That title reminded me of a book I read back in the 1970s called The Age of Leisure which argued that technology was making work unnecessary and that Americans were ill-equipped to deal with too much free time.  It never said "idle hands are the devil's tools" but it might have.  I concluded this was just mindless optimism on steroids and have rarely thought of it since then.

Yesterday's speaker is a unique person.  Peter Diamandis has degrees in molecular genetics and aeronautical engineering from MIT and a medical degree from Harvard.  He is a bright person, indeed.  He has started several hi-tech companies in Silicon Valley and has numerous university assignments.  He is most famous for orchestrating the X-Prize, which awarded $10 million to the first company sending a manned spacecraft into space twice within two weeks.

Some of his key points were:

1.  Mankind used to be "local & linear", meaning everything that affected him was in the general locality and change occurred at a linear pace, e.g., 1,2,3,4,5,6 and so forth.  Mankind is now "global & exponential", meaning we are affected by events around the globe and change is occurring at an exponential pace, e.g., 1,2,4,8,16,32,64 and so forth.

2.  Five billion more people will have access to the internet in 10 years, and IBM's monster computer called "Watson" will be available to everyone everywhere.

3.  If you are not disrupting yourself, you will be disrupted by someone else.  In 1920, the average age of the companies in the S&P 500 was 67 years.  Today, it is only 15 years.  In ten years, 40% of the companies in the S&P 500 will no longer exist.

Afterwards, I recalled reading Future Shock by Alvin Toffler in 1970, who argued that change is coming at a logarithmic rate, meaning the rate of change was getting faster and faster everyday.  Fast change produces even faster change.  Most of us would probably agree with that.  I think Diamandis is repeating Toffler's change but concluded with the statement that we haven't even seen 1% of the change yet.  Technology has big plans for us!

Sunday, April 26, 2015

The Value of Unhealthy Fast Food

People who make their living by buying one currency and selling other currencies often have a stressful life.  They make long-term bets but have to constantly and continually make course corrections.  For example, most believed the euro was in a slow, downward trend, which reflects their economy.  Then, the European Central Bank (ECB) announced a program of quantitative easing (QE), which would benefit the economy in long-run but kill the euro in the short-term.  Currency traders who did not instantly sell all their euros lost substantial money, especially because they are usually leveraged or bought with borrowed money.

Currency traders are also noted for their "gallows humor."  One of their favorite economic indicators is the Big Mac Index.  Since the fast-food sandwich is the same worldwide and needs the same amount of meat, lettuce, tomato and sesame-seed bun everywhere, we can compare the cost of a Big Mac in each country.

Assuming the unhealthy sandwich sells for $4.79 in this county, we see that it sells for 57.5% more in Switzerland, which means the Swiss franc is 57.5% over-valued, compared to the dollar at current exchange rates.  It does not necessarily mean the Swiss franc must come down, but it does mean the currency exchange relationship between the franc and the dollar is not at equilibrium and therefore must change.  The dollar may well increase in value against the franc while losing value against another currency, like the pound.

Continuing this examination, we can see the British pound is 8.8% under-valued, the euro is 11% under-valued, the Japanese yen is 30.1% under-valued, the Chinese yuan is 42.2% under-valued, and the Russian ruble is a whopping 71.5% under-valued.  Another way of looking at this data is that the dollar is that percentage over-valued against the currency.  In other words, the dollar is 8.8% over-valued against the pound.  Nonetheless, I do not see the dollar decreasing any time soon!

Bottom Line:  currency exchange rates are seldom static, but the current set of rates convinces me there is indeed a currency war going on, and we are losing.  A strong dollar gives export advantages to other nations.  It amounts to a subsidy from U.S. taxpayers to foreign exporters to the U.S.

We might as well act like a strong dollar is some cause for celebration this Fourth of July and have lots of parades with lots of flags.  Afterwards, we can all go to McDonald's for a dose of cholesterol?

Thursday, April 23, 2015

Unpaid Commercial and/or Cultural Announcement

It is true that music can calm the savage beast.  It can also bring peace to a tormented soul, at least temporarily.  It is a type of medicine for most.  I hate to see it suffer.

For the first time, I ask for your support of the Virginia Symphony (VSO) in general and their patriotic July 4th performance in particular.  Here is their request:

You are probably aware that the funding for the VSO July 4th Celebration has been withdrawn.  Williamsburg is one of only four places on the east coast (Williamsburg, Boston, New York and Washington, D.C.) that has a symphony playing wonderful appropriate music to enhance the celebration

We are trying to continue this symphonic enhancement of the Celebration for all of us to enjoy. In order to do that, Bert Aaron and Adam Steely have opened a KICKSTARTER crowd funding site. We urge you to please pass on this link to all of your contacts, media and otherwise. 

Click on this link to go to the KICKSTARTER site.

If you lose the link, just Google KICKSTARTER Virginia Symphony.  The more people who are aware the more the possibility of success!

Wednesday, April 22, 2015

Kindly Advice

Somebody needs to call Central Casting in Hollywood and tell them the perfect stereotype for a kindly uncle is Dr. Jeremy Siegel of Wharton.  However, his kindly demeanor hides his razor-sharp mind and legendary forecasting record.  Here are some of his latest thoughts:

Despite lower gas prices and improved consumer sentiment, consumer spending was disappointing during the first quarter.  He thinks GDP estimates for Q1 will be reduced a full 1% when released next week.  Largely because of this, he sees no chance of the Fed increasing interest rates in June and only a 50/50 chance in September.  (I think the odds of any increase this year are less than 50/50.)

He thinks the wild 280-point drop in the Dow last Friday was all about Greece, which will continue to unsettle the markets.  The EU will never expel Greece, and Greece will realize the impact of leaving the euro will hurt even worse than staying with the euro.  This is because their own currency, the drachma,would lose value so quickly that "hundreds of billions of dollars of Greek wealth could be destroyed in a day."  (I do feel sorry for the Greek people, but their older generations have robbed their younger generations.)

Corporate earnings have been better than expected so far, but the full impact of the strong dollar is only just beginning.  For example, it is costing P&G some 7% in corporate earnings.  The strong dollar will continue to hurt corporate earnings for the foreseeable future.  Nonetheless, the stock market is NOT currently OVER-valued.

You just have to believe anybody so kindly, don't you?   No, but I do believe this one!

Monday, April 20, 2015


Part of your job as a concerned American is to visit this website frequently: 

In fairness to those who can sleep well after looking at this website, it should be pointed out that the website does not show the declining ratio of debt-to-GDP, which is improving, unless you consider the present value of entitlements like Social Security and Medicare, which are getting worse.

Which is worse:  Tax and Spend . . . or Don't Tax and Spend?

Saturday, April 18, 2015

Quarterly Column

Inside Business is the Hampton Roads Business Journal, and I write a column for them each quarter.   Here it is: 

Thursday, April 16, 2015

Disproving A Negative

How can I promise the world will not end tomorrow?  How can I promise the stock market will not drop 50% tomorrow?  How can I disprove something negative?

A friend in Europe sent me an interesting article titled "Damned if they raise, damned if they don't:  The Dilemma of U.S. Central Bank" by Stewart Richardson.  It begins with a quote from well-known perma-bear Marc Faber, who lives in Thailand and writes the "Gloom, Boom, and Doom" newsletter.  Enough said!  Faber is paraphrased as saying:  "equity markets are going to fall a long way but it could be from a higher diving board."  How can anybody promise that will not happen?

It also quotes Ray Dalio, manager of the world's largest hedge fund, as saying …“We don’t know — nor does the Fed know — exactly how much tightening will knock over the apple cart,…What we do hope the Fed knows, which we don’t know, is how exactly it will fix things if it knocks it over. We hope that they know that before they make a move that could knock over the apple cart.”  Of course, we don't know!  If we knew everything, there would be no uncertainty.  In graduate business school, we called it "conditions of uncertainty."  There is always uncertainty!  And, Ray Dalio knows that as well as anybody.  (I don't know where his quote comes from but suspect it is taken out of context.)

Yes, if the Fed doesn't raise interest rate enough and soon enough, we do risk asset inflation, especially in the stock market.  Yes, if the Fed raises interest rates too much and too soon, we do risk going into another recession.  And, yes, that is always true anyway.  This is not a unique situation.  Since the Fed was born in 1913, it has occasionally erred between too tight or too easy.  But, the last time I looked, we're still here?

So, the argument becomes -- until we have perfect certainty, bad things may happen.  Just the opposite, I can promise that bad things will certainly happen --  but does that mean they will happen tomorrow?  Does that mean anybody knows which particular bad things will happen?  (Believe or not, there is more to life than stock markets.)

Rather than ask for a promise against uncertainty, think about an action plan for when something bad does happen, because it will.  In the meantime, continue as if the bad things will only happen later.  The alternative is to go back to bed, pull the blanket over your head, and suck your thumb!

"The New Oil Order"

The research department of Goldman Sachs just did an excellent analysis of the oil industry.  They explain that the $60/bbl decline in oil prices over the last year is due to three reasons -- normal supply & demand fundamentals, cost deflation, and technological shifts.

$25 of the $60 decline was due to increased supply, $10 was due to decreased demand, which explains $35 of the $60 decline.

Shale oil mining turns out to be easier, less costly and less risky than expected.  "There is no such thing as drilling a dry hole."  This reduced the cost of oil by another $25.

Improved, less expensive technology decreased the demand for capital needed to drill, leaving this industry over-capitalized.  I know that is a little nerdy, but it means a smaller share of revenue is due to capital, further reducing costs and ultimately prices.  The impact of this goes into the future, deferring a new point of equilibrium until early next year.

They believe oil will remain near $40/bbl most of this year, before establishing a new equilibrium price of about $65/bbl next year.  And, they should know!  After all, nobody ever said Goldman Sachs was not "oily".

By the way, guess which legendary Wall Street investment bank just announced great quarterly earnings this morning, crushing forecasts . . .

A Cut In Pay

Imagine your boss telling you that he needed to cut your pay by 7% -- you would probably survive, but you would not be happy, and that job would be a whole lot less valuable to you.

Johnson & Johnson, the huge multi-national consumer staples company announced their quarterly earnings this week.  Sparring you the many details, one item jumped out at me -- their profits were down 7% because of the strong dollar!

Also, the International Monetary Fund routinely estimates GDP growth of most countries.  They just cut our 2015 GDP growth estimate by half of 1%.  That doesn't sound like much, until you recall our estimated growth rate was only about 3.5%.  That means our GDP growth is expected to decrease by about 14%, due to the stronger dollar.

Now, what is so patriotic about having a strong dollar?  Tell me again!

Does this mean stock prices will necessarily drop?  No, history shows us that a rising dollar usually accompanies a higher price multiple.  In other words, investors are willing to pay more for each dollar of earnings when the dollar is high.  This is probably because a strong dollar sounds so patriotic??

Does that mean our exports will decrease?  Yes, because we sell our exports for dollars, which are now more expensive for foreigners to purchase, to pay for the stuff we export to them.  If your job is making stuff to be exported, update your resume.

Tuesday, April 14, 2015

First Quarter Slow Down

The four pieces of economic data released today confirmed what we already knew, i.e., that the first quarter was a disappointment -- not a tragedy, just a disappointment.

Today,we learned that retail sales increased less than expected.  Expecting higher sales, retailers naturally increased their inventories.  Not surprisingly, today we learned that inventories rose more than expected.  Holding inventory is not without cost to retailers, suggesting lower retail profits later.  Today, we also learned that small business optimism decreased broadly, which should not be surprising with disappointing retail sales.

The fourth piece of economic data released today was that the producer price index actually rose this month, after dropping three straight months due to dropping oil prices.  Firmer prices in the supply chain suggests some firming of demand, which might be the "green shoot" we're looking for.

Knowing the first quarter was a little slow is simply confirmed by today's releases.  More importantly, how does the second quarter look?  So far, so good . . . stay tuned.