Wednesday, August 31, 2016

The Rules. . . they're a'changing

Mark Twain once said "History doesn't repeat itself - at best, it sometimes rhymes."  I thought of that when studying this chart, which clearly shows that September has historically been the worst month of the year for the stock market, averaging the years since 1950.  The message to investors is "brace yourself for another stomach-churning month."
Chart of the Day
There's only one problem.  Since 2010, September has averaged a slight gain, not a big loss.

Rules of thumb were helpful guideposts for many years but now seem to be less helpful, especially since the global financial crisis of 2008/9.  Regular government-released economic reports also seem to have more measurement questions than before the crisis.  There is no conspiracy about all this, but there has been a fundamental change that we are not measuring correctly.  I cannot articulate what that change has been, but I'm glad some serious thinkers are working on it.

The good news is that the last three months of the year are historically very good months in the stock market.  I suspect it may be a little less good this election year, as the market has already pulled the post-election gains forward to the Spring/Summer, thinking it knows that Clinton will win.  

Tuesday, August 30, 2016

What Could Go Wrong ??

What could be wrong with this stock?  Revenues are down, and it lost $369 million for the first six months of this year.  The founder received a pardon from the President of the United States years ago, and even worse, some investment pros think it poses a systemic risk to entire world financial system.

Yet, the stock doubled in value this year!

One of the biggest mining companies, this London-based company has had a reputation of too-cozy relationships with some of the world's least-revered national leaders.  Revenues are down because commodity prices are down and, more importantly, because the company is intentionally shrinking its asset base.  This has allowed it to decrease its use of derivatives, thankfully.  And, the loss of $369 million is a big improvement over the $676 million loss for the same period last year.  I suspect the increased scrutiny resulting from this year's troubles will be good for the world.

Whew . . . but, does that mean Glencore is off the radar screen?  Not a chance!!

Open Letter to Colin Kaepernick

Colin Kaepernick is another rich NFL quarterback, who wears a football uniform for the San Francisco Forty-Niners.  Last week, he chose not to show the basic courtesy of standing for the national anthem, as a protest against continuing racial injustice in America.

Dear Mr. Kaepernick,

Often attributed to Voltaire in error, it is nonetheless true that "I disapprove of what you say, but I will defend to the death your right to say it."  You exercised your freedom of speech by showing no respect for the national anthem.  After all, sitting on your butt requires so much courage.

I defend your right to say whatever you choose -- in a speech somewhere, in front of a courthouse, or on the village square.  I even defend your right to sit on your rich butt during the national anthem.  I'm not offended by the exercise of your right to free speech.  I am offended by your lack of taste or manners or tradition.

The national anthem was born when America was under attack in Baltimore.  Tears run down the cheeks of many Americans when they hear the anthem, because they remember those who wore a non-football uniform, because they remember the original "noble experiment" in democracy, because they remember the countless volunteers who work to make neighborhoods better everyday, and because they appreciate good.

Yes, you have the right to disrespect all of that.  Indeed, you have the right to disrespect everything that is good in life, but we have the right to disrespect you for such selfish stupidity.  In my case, I frankly don't care if you rot in Hell, where I presume you will continue your protest.

Jim Flinchum

Monday, August 29, 2016

Cartoon Wisdom?

Cartoons can simply entertain the kids when we don't want to be bothered.  Or, cartoons can actually teach us something.  Here is one of the latter:

Gold cartoon 06.17.2016

This cartoon shows a bear market on the left and a bull market on the right.  The bulls have small gold rings in their nose, while the bear has large solid gold teeth, containing more gold than mere gold rings..  The message is that gold may be more valuable during a bear market, but it also has a place in a bull market.  Rising gold prices are sometimes cited as an indicator of an approaching bear market (and prices have been rising this year).  As the value of your portfolio falls during a bear market, gold will increase and become a larger and larger portion of that portfolio.

Some investors believe every portfolio should have 5% gold.  After all, because gold is both a commodity and a currency, it can be included in either asset class.  So, why do so few portfolios contain gold?  I think the reason is that the lunatic-fringe of investors always seem to be occupied by  "gold-bugs," people who are irrationally exuberant about gold.   As we are all judged by the company-we-keep, who would want to be judged by any association with the breathless gold-bugs on the lunatic fringe?

My thought is that gold prices are too emotional and irrational to be recommended . . . but should not be discouraged either.  If it gives an investor comfort, 5% is not an unreasonably large share of the portfolio.

Sunday, August 28, 2016

Mandatory Loyalty

In 2009, ABC News presented some interesting research into the relative dental health of different sections of the country.  They found the worst dental health in America was in the Appalachian region.  This poor state of dental health is primarily due to a condition called "Mountain Dew Mouth," a result of too many sugary drinks and too little dental care.

As I have a large number of relatives living in the area, I made them aware of the region's dental health.  Instead of sparking interest, I sparked anger.  Instead of gratitude for the information, I received indignation.  I didn't understand!  Do you think the people of Flint, Michigan, were angry at the messenger when they learned life-saving information about their water supply?  Why were the people of Appalachia not relieved to know what sugary drinks were doing to them?  If I could keep some over-paid dentist from sticking sharp needles into my gums and rattling my head with a drill, why would I not want that information?  Why does additional information produce anger?

J.D. Vance is a successful investment banker living in California, who just penned his analysis of growing up poor in Appalachia, entitled Hillbilly Elegy:  A Memoir of a Family and Culture in Crisis.  Many people of that region trace their ancestry to the Scots and Irish who originally pioneered there.  Their values reflect that heritage.  They value loyalty above all else.  The logic is that I may fight and squabble with my family, but nobody else can -- without a punch in the nose.  If I cannot punch them in the nose, it is then obligatory that I disbelieve whatever I am told.  Truth is optional.  Loyalty is not!

Well, the same "logic" applies to the region.  Because I am a "city-slicker," I am authorized to criticize only the city.  It is an affront to the people of Appalachia if I "criticize" their area.  To simply present critical information made by others is just as disloyal as making the criticism myself.  Truth is optional.  Loyalty is not!  By repeating what I heard on ABC News, I was criticizing all my relatives who lived there, as well as their region.  It was something they did not want to hear.  Truth is neither convenient nor inconvenient.  It is simply optional.

J.D. Vance describes this culture fondly but worries that it is crumbling, which is sad for anyone like myself with roots in "the country."  He compares the slow death of the "country culture" to losing a religion, which came complete with a standard of values and perspectives.  Stung by globalization, the culture is becoming a "hollowed-out" society.  (I guess that also explains why the region is so enthusiastic about Donald Trump as President.)

This sensitive and exceptionally well-written book is required reading.  Take the time to understand a region of the country that has increasing poverty and declining church attendance, a region that doesn't trust "outsiders" . . . or their facts.  A people hurt by the continuing out-migration of young people, feeling their class is being betrayed by their own kids.  Deeply insulted by the stereotype of  "ignorant hillbillies," they will not open up and discuss this culture with you, but it has a beauty and symmetry that is well-worth knowing.

Thursday, August 25, 2016

Much Ado About Nothing

It is hard to defend an obsession, any obsession.  Wall Street is obsessed with the Fed raising interest rates.  They will be glued to the television tomorrow when Janet Yellen speaks at the Fed's summer retreat in Jackson Hole.  Everybody knows that rates have to increase, but why first and then when.

If you are a borrower, you like low interest rates.  If you are a saver, you hate low interest rates.  If you are a bond investor, you loved falling interest rates, because the value of your bonds increased.  Conversely, you will hate rising interest rates, because the value of your bonds will decrease.  That much is easy to see.

But, low interest rates cause a mis-allocation of capital.  Searching for yield, money has poured into stocks, especially large cap value stocks, because those dividends exceed the interest earned on ten-year Treasuries, just as an example.  Then, the excess cash spills over into other stock classes, such as more risky small cap growth stocks.

Consider that investors currently have a historically high level of un-invested cash sitting on the sidelines.  Wait, you might ask -- how is it possible that un-invested cash is at historic highs, while enough cash has spilled into stocks to drive those stocks to historic highs at the same time enough cash has spilled into bonds to also drive those bonds to historic highs?  It is due to the massive but necessary increases in the money supply, following the global financial crisis.

There are even insidious minor mis-allocations.  Low interest rates mean the portfolios set aside to pay the generous government pensions are no longer producing enough income.  This means municipal, state, and Federal budgets have to allocate a larger and larger portion of their revenue to prop up the retirees.  That means they need you to pay more in taxes.  Lower interest rates puts upward pressure on taxes.  Not counting municipalities and Federal shortfalls, another TRILLION dollars in revenue (read:  more taxes) is already needed for the states to pay those pensions.

Un-winding all this will take time and will be more difficult the longer we wait.  The Fed raised rates by a quarter-point last December, and I would like to see them raise rates a like amount this December.  A quarter-point each year is certainly not too much for the economy to withstand.

I worry that the Fed will delay raising rates, because it will strengthen the dollar, hurting exporters and posing an economic drag on the rest of the world.  Wall Street is afraid the Fed will start next month.  Big Deal!!

Tuesday, August 23, 2016

Biased Geeks ?

Republicans like to believe that journalists are closet-liberals, and I suspect there is some truth to that.  They also like to believe that professors are closet-liberals, and, with notable exceptions, there may be some truth to that as well.  But, I'm not aware of any similar sweeping generalizations about economists.

There are two main trade groups for economists, i.e., the American Economic Association and the National Association of Business Economics.  While there is considerable overlap in membership, AEA tends to have more academic and government economists, while NABE has more economists from the private sector.  (I have been a NABE member for many years.)

The latest survey from NABE found that 55% of the members think Hillary Clinton would do a better job than Donald Trump in managing the economy.   Only 14% thought Trump could do a better job.  Surprising, 15% thought Libertarian Gary Johnson could do a better job, slightly more than Trump.

One possible conclusion is that business economists are overwhelmingly in favor of Clinton.  Another possible conclusion is that they understand the economic plans of Clinton and Johnson, who have presented more detailed economic plans than Trump has.  Maybe, that now-tired bromide of "reducing taxes on job-creators" just doesn't resonate with economists as much anymore.

One impossible conclusion is that business economists are also closet liberals.

Sunday, August 21, 2016

A Real Local Legend

Luckily, I grew up on the beaches of Virginia Beach.  My perception of reality was an endless loop of Beach Blanket Bingo movies with Annette Funicello.  It was a pleasant perception of reality, indeed!

A generation before me, Ed Shames was born in 1922 in Virginia Beach and also enjoyed being outdoors as he grew up there.  His father died at age 42 from pneumonia in 1927.  The family owned a country store on Virginia Beach Boulevard, and Ed lived with them above the store, until Ed volunteered to become a paratrooper in World War II, where he became a legend.

A new book by Ian Gardner entitled Airborne:  The Combat Story of Ed Shames of Easy Company brings his heroic story back to life vividly.  Ed became one of the famous "Band of Brothers" who parachuted into Normandy on D-Day, landing behind enemy lines on a milk factory, and fought in some of the best known campaigns, including Bastogne at the Battle of the Bulge.  He was involved in the liberation of the horrible extermination camp of Dachau and the technically difficult capture of Hitler's Eagle's Nest, at the end of the war.  His bravery and heroism is beyond question.

I speculate that his perception of reality was very different from mine.  Reading his autobiography was like describing a pinball machine - a steel ball bouncing unpredictably across geography and between people.  Fortunately, Ed somehow survived to return to Virginia Beach, where he still lives.  While I have never met him, it would be my honor to salute him!

To better understand the horror of war, you should read this book.

To better understand how heroes think and process emotion, you should read this book.

Saturday, August 20, 2016

Insuring A 77% Loss

Some people think of their financial advisors as just that -- someone to discuss and "brainstorm" financial matters.  Some people think of us as someone to delegate and perform financial duties.  Some people think of us as economic or financial wizards to manage their investments.  I think we are paid to worry.  (Years ago, a dear client visited Greece and brought back a fancy set of "worry-beads" for me, because I was his "designated worrier."  He has now passed, but those worry-beads still hang beside my monitor, and I look at them every day.)

Good financial investors do worry, especially about risk -- all types of risk.  Investors want to see investment returns but rarely ask about risk-adjusted returns, which are much more important.  But, does a good financial advisor need to worry about a client who has a high probability of suffering a life-altering event over the next 25 years with an average decrease of 77% in their net worth?  Yes, of course!

According to AAA, there is a 33% probability you will get divorced, compared to a mere 25% probability you will have a serious car accident in the next decade.  (67% of second marriages fail, proving people don't learn from their mistakes.)  We would always advise clients to have car insurance, but should we advise them to also buy marriage insurance?

One insurance company is preparing to launch such a product.  Obviously, we could never recommend it until the details are published, but do we have an obligation to protect our clients from divorce?  We are designated worriers, not designated busy-bodies!  We already do estate planning for the possibility of divorce, including pre-marital and post-marital financial counselling, and are very careful with account titles, but do we have the responsibility to recommend insurance for that type of risk, as we do for life insurance, auto insurance, and property insurance, etc.

I think we do, especially for younger female clients, but watch this space . . .

Friday, August 19, 2016


Bullying is getting the condemnation that it deserves.  Saying hurtful things to some poor kid is simply wrong.  Yet, saying hurtful things about some government official is somehow viewed as patriotic.

Hurtful and ignorant things are said about the Fed every day.  The stock market obsesses over every word and comma in Fed minutes.  Now, put yourself in one of the vacant seats on the Fed's Board.  You know you need to raise interest rates, because low interest rates hurt savers, mostly old people.  You also know that rising rates typically cause the economy to slow somewhat, which hurts the unemployed.  You know that deflation is a much worse problem than inflation and that raising rates pushes us closer toward deflation.  Importantly, you know that raising interest rates makes the dollar stronger.

Many people view a strong dollar as a patriotic objective, but those people are not exporters (down 4% for the first half of this year).  This makes our balance of payments more negative, which actually subtracts from GDP.  A stronger dollar is bad for employees in export-related industries.  If the Fed raises interest rates, savers will be happy, but export workers will be unhappy.  The Fed must pick which people are winners and which are losers.  Theoretically, the Fed is insulated from political considerations and can pick winners and losers on the basis of the greater good, and I believe they are.

But, there is no shortage of Fed-bullies!  Libertarians hate the Fed precisely because the Fed can pick winners and losers.  Tea-partiers hate the Fed because they hate everything about the government, any government.  Establishment Republicans privately support the Fed but are too cowed to defend it.  And, Democrats are too fixated on employing every last American to even discuss an interest rate increase, much less actually raise rates.

Now, how would you like Janet Yellen's job?  Did you enjoy being bullied as a kid?

Wednesday, August 17, 2016

Wise Advice From The Left

Arianna Huffington is a highly successful businesswoman and founder of The Huffington Post.  Therefore, I assumed she was just another political hack and not worth reading.  Then, I read a review of her new book entitled The Sleep Revolution and decided to buy it.  I recommend you do the same.

Everybody knows sleep is important, but she writes about numerous scientific studies and anecdotal evidence that strongly suggest it is not just more important than you think -- but is far more important than you ever suspected.  The most important thing you can do each morning is to plan for and protect your sleep for that night.

Everybody knows the basics of sleeping better, i.e., don't eat a heavy meal, go to bed earlier, cut off the TV and other electronic devices, etc.  Now, do you follow those rules faithfully and religiously . . . or only when convenient?

Everybody knows alcohol is bad for you. but did you know that, while it can increase the quantity of your sleep, it reduces the quality of your sleep?  Higher quality is more important than higher quantity.

She does pose an interesting question:  when there must be trade-offs between eating, exercising, and sleeping, why is it that sleep is the first to be short-changed?  In our competitive society, why do we brag about how little we sleep, instead of being ashamed?  What is the value of eating and exercising intelligently, if you sleep stupidly?

How can you manage your health if you have a flippant attitude toward sleep?

Tuesday, August 16, 2016

We Deserve Better

Our government can shape our economy with both monetary policy and fiscal policy.  Monetary policy is controlled by the Fed and is concerned with interest rates, changes in the money supply, management of its huge portfolio of Treasury debt, and so forth.  Fiscal policy is controlled by Congress primarily and the President secondarily.  It includes budget policy, debt policy, trade policy, and tax policy.

While the world is transfixed by our clownish presidential election, Congress has gone home, and there is no budget for the new fiscal year beginning in six weeks.  When they return, they will only have seventeen working days to agree on the budget.  That means we will have yet another government shutdown October 1st, or Congress will string together enough "continuing resolutions" (CR) to keep the doors open and to minimize our national embarrassment.

Budget policy is important, because it allocates funds across sectors of the economy.  For example, infrastructure-related companies will be hurt if infrastructure funds are instead allocated to Medicare spending.  How do you allocate funds across the economy determines whether you eat your seed corn in the short-term or plant it for the long-term.  Budget policy is very important, and Congress only has seventeen days to develop a thoughtful budget . . . fat chance!

Debt policy has become important since the U.S. decided to become the only nation with an arbitrary ceiling on the amount of debt issued by the central government.  Since it has become a pointless exercise in partisan brinkmanship, the debt ceiling has been temporarily suspended, but it returns next March.  Unless either party wins the presidency and both legislative houses, it is unlikely this ridiculous relic can be eliminated.  Another bitter, nonproductive partisan battle can be expected.

So, if you are hoping for less partisan bickering when you get out of bed on Wednesday, November 9th . . . just go back to bed!

What a way to run the greatest country in the world!

Thursday, August 11, 2016

The TINA Effect

Probably, before the first investment strategist was ever born, investors were asking if the stock market was over-priced and headed for a collapse.  Today, the most common response is in terms of the price-earnings (PE) ratio.  It is the same as the PE ratio for individual stocks.  You take the market price of the stock and divide it by the earnings-per-share (EPS) for that stock.  Tallying up all the stock PE ratios, you find the overall market's PE ratio.

Looking at this chart, you can see the market's PE ratio has broken above an important resistance line, which is 22 times or 22X.  This suggests the stock market is indeed over-priced and headed for a fall.

Chart of the Day

Of course, nothing is ever as simple as it first appears.  This chart looks at earnings in the rear-view mirror.  As EPS have dropped slowly for the last five quarters, the simple arithmetic  has driven up the PE ratio.  Now, most strategists expect EPS to start rising this quarter, which will decrease the market's PE ratio, hopefully back below 20X.

Another argument is that PE ratios were a useful benchmark when we had a "free market economy" instead of a "monetary policy economy." which is driven by the Fed.  Frankly, I think that lends too much significance to the Fed's actions, but it is clear that abnormally low interest rates do boost EPS and increase demand for those stocks paying dividends.

This is called the "TINA" stock market, meaning There-Is-No-Alternative to stocks.  If investors want income, they have to buy stocks, since bonds pay less than stocks.  This alone will push the PE ratio above the resistance line.

So, is the stock market over-priced?  Yes, based on current earnings, but not by much.  No, based on projected earnings.  Is the sky falling?  No, not today . . . but tomorrow is always another day!

Wednesday, August 10, 2016

August All Twelve Months

The August projections from the august and imperial Goldman Sachs (GS) are as follows:

1.  GDP growth remains stable in the U.S., rising from 1.9% this year to only 2.0% by 2018.  (I'm guessing they expect a Clinton victory and a continuation of current economic policies.)

2.  In Japan, it rises from 0.4% this year to 1.1% in two years.  (This nice increase is driven by debt.)

3.  European GDP growth will bump along from 1.3% this year, 1.2% next year, and 1.6% in 2018.

4.  Post-Brexit Britain will drop from 2.3% last year to only 0.2% next year but up to 1.3% in 2018.  (This is what happens when you shoot yourself in the foot.)

5.  China's growth continues to drop from 6.9% last year, 6.4% next year and 6.1% in 2018.  (This reflects the Law of Large Numbers.)

6.  Significantly, advanced economies will grow at a 1.7% level, while the world will grow 3.1% this year and 3.8% in 2018.  (This is an important shift!)

7.  The S&P 500 will decrease a minor 1.2% over the next twelve months, while European stocks will drop 1.6% and Japan's will drop 2.1%.  (A nice improvement in Japan's GDP growth rate, but their stock market will have a slight decline.)

8.  Interest rates will increase 0.73% in the U.S., 0.53% in Europe, and 0.35% in Japan over the next twelve months.  (I don't believe this, especially for the U.S.)

9.  The euro will drop 8.9% against the dollar over the next twelve months, compared to the pound dropping another 4.5% but the Yen appreciating a 17.6%.  (Start planning your next European vacation.)

10.  Oil will increase 24.8% to $57/bbl over the next twelve months, while gold will lose 5.4% and copper will lose 19.3%  (The increase in the oil price makes sense, but I don't understand how copper could drop so much unless there is a recession, which they are not predicting.)

Tuesday, August 9, 2016

Good Things Are Not Always Good

When President Kennedy cut taxes, the economy boomed and the GDP grew nicely.  When President Reagan cut taxes, the economy boomed and the GDP grew nicely.  Since two dots make a line, does that mean that all tax cuts make the economy boom and GDP grow nicely?  If so, why didn't the two Bush II tax cuts do the same?

Below is the Laffer Curve by Arthur Laffer, the father of Supply-side economics.  Now study it!  If the economy is left of the vertical red line, you can increase taxes and government revenue will also increase.  If the economy is right of the vertical red line, any further movement to the right or any increase in tax rate will actually lower revenues to the government, because taxes will begin strangling the economy.

Laffer argues the economy is somewhere far to the right of the vertical red line already, and any tax cut will actually increase revenue to the government.  That's what happened when Kennedy and Reagan decreased tax rates.

The difference between Republicans and Democrats is that Republicans think the economy is on the RIGHT side of the vertical red line, while Democrats think the economy is on the LEFT side of that line.

But, what explains the success of Kennedy and Reagan, along with the failure of Bush II?

Taxes never exist in a vacuum.  There are always other factors.  Kennedy and Reagan were lucky enough to have a weak labor market and a low national debt-to-GDP level, which meant increases in the national debt were bearable.  Bush II was not that lucky, and our national debt spiraled from his tax cuts.  Another tax cut now would have the same effect - another explosive increase in our national debt without improving an already strong labor market.

Go to 

No, stop what you are doing and go there . . . NOW!

Monday, August 8, 2016

Great Advice!

One of the smartest things my father ever taught me was the importance of being informed, especially about international affairs.  Of course, he had no way of knowing the burden of being over-informed would ever become so great, especially about politics.

The smartest thing I've done this year is to put myself on a news-diet by declaring Saturdays a news-free zone.  That means no network news, plus no Fox News, no CNN, and no MSNBC.  (Is there really anything more you need to know about the "truthiness" of either Clinton or Trump?)  The initial withdrawal pangs of being news-free will be quickly replaced by an improved ability to both breath and think.

I must confess to making an exception for local news, primarily for weather and sports.  Another murder down the street is no more depressing than another joke about the size of Trump's hands.

Banal, repetitive news is only going to get worse over the next three months, between now and election.  Do yourself a favor -- find a news-free zone!  Do your spouse a favor -- create a news-free time to be together!  Do the world a favor -- cut off the television!

Besides, a tormented mind is not a useful tool for decision-making, especially about your portfolio!

Saturday, August 6, 2016

Just Another Great "Jobs Report"

Economists have been hard-pressed to find something they don't like about yesterday's "jobs report."  I found two.

Expecting 180 thousand jobs, America produced 255 thousand jobs in July.  This repeated the same happy surprise in the June jobs report.  Where is the recession?  Is the economy really as slow as indicated by the GDP reports over the first two quarters?  No!

So, what is not to like in yesterday's report?

Primarily, the U-6 level of unemployment actually increased slightly to 9.7%.  This is that heartbreaking level of unemployment of those people who are unemployed, plus those people who are under-employed, plus those people who want full-time work but can only find part-time work, plus those people who have just given up.  It has been falling faster, thankfully, than the more widely-discussed U-3 level of 4.9%.  Why did the unemployment rate for the most desperate workers stop decreasing and actually tick up?

Secondarily, the Labor Force Participation Rate (LFPR) is barely moving.  Only 62.8% of working-age Americans are contributing to the GDP.  Over a third of working-age Americans are not working.  Republicans argue people have been made lazy by welfare payments.  Democrats argue that huge numbers of baby-boomers are retiring and no longer contributing.  Austrian economists argue that anything that encourages people NOT to work is un-American.  We call it Social Security.

Thursday, August 4, 2016

The View From The Bottom

Mega-bank Wells Fargo does an excellent Small Business Survey each quarter, and I look forward to it.  The latest is interesting on two points.

First, business confidence is now the highest since the Global Financial Crisis of 2008/9.  While they are accepting limited upside in revenue, they are keeping a tight rein on expenses.  (This is the main reason that business investment and hiring have been so slow to improve.)  They don't foresee any recession in the near term.

This economic data point is often used as a guidepost for the health of small cap stocks.  Right now, this latest survey reinforces the traditional notion that small cap stocks are more profitable in the long run, even if more volatile in the short run.  Given the slowing economies of Europe and Asia, we can expect weaker performance from large cap stocks, relative to small cap stocks.

Second, 87% of small business owners are paying close attention to the presidential election, with 54% saying they understand the positions of the candidates "very well or extremely well."  72% expect their businesses to be impacted by the election.

This is interesting when compared to the latest University of Michigan survey of consumers, instead of businesses.  36% of consumers think the election makes no difference at all,  Maybe, this difference between consumers and business can be explained by businessmen being more educated voters.  Maybe, it is the paranoia of businessmen.  Or, maybe not . . .

Things are not so bad . . . regardless of what the media says . . .

Wednesday, August 3, 2016

Following The Nose

Long ago, farmers and ranchers learned that the easiest way to control cattle and other large livestock was to put a ring in their nose.  They could then tether the cattle to a particular location or lead them around by simply controlling the ring.

The stock market has always had a ring in its nose.  Since the Global Financial Crisis of 2008/9, the Fed has controlled the ring and the market has faithfully followed the Fed upward.  However, since mid-2015, the oil sector has controlled the ring.  Taking a look at this graph, it appears that oil may be leading the market in the wrong direction again.

Chart of the Day

But  notice the long-term trend-line for oil prices -- that area between the red and green lines.  History suggests that oil prices will revert to the mean -- that it will come back within the trend-lines, at least above the green lower boundary.  If so, oil will release the nose-ring, and the market will wander aimlessly . . . until something else seizes the ring, like some geopolitical event or some technological breakthrough or some change in corporate tax rates or ... ?

More important than who is controlling the ring -- is whether the animal is still getting bigger and stronger in the meantime?

Yes, it will !!

Tuesday, August 2, 2016

On The Other Hand ...

Bob Doll is the highly-respected chief equity strategist at Nuveen Asset Managment.  In his commentary yesterday, he stated "a slowly growing economy, improving earnings, and low bond yields should provide a tailwind for U.S. equities."  Despite the unexpectedly low 1.2% GDP growth in the second quarter, I agree with him.

Yesterday, the equally-respected Jeff Gundlach of DoubleLine said "investors seem to have been hypnotized that nothing can go wrong."  He advocates selling everything and buying gold.  Despite the certainty of a recession somewhere in our future, I disagree with him.

One of the best practices in portfolio management is avoid making 100% bets, and selling everything is a 100% bet.  If you are that concerned, just increase your cash position to, say, 25% and allocate your remaining stocks into consumer staples, which normally weather recessions fairly well.

Another thought is "that's what makes a market!"  Every time you buy a stock, there is a seller who doesn't want it.  Every time you sell a stock, there is a buyer who thinks that stock is a good deal.  Investment strategists are the same way.  Some are bullish, and some think the sky is falling.  That's what makes a market for ideas!

There has never been a day in American history when somebody was not standing on a street corner, wearing a sign that says "the end is near."  Listen respectfully, and then . . . be brave!

Monday, August 1, 2016

Timing Is Everything

Last week, I wrote that the stock market would continue dancing as long as the band keeps playing the music -- meaning there are few worrisome near-term danger signals to the stock market from either the economic or valuation standpoint, as long as the Fed remains "accommodative."

A friend and faithful reader told me that was inconsistent with my oft-stated concerns about the debt level causing a "black swan event."  By definition, timing such an event is unknowable.  I still expect a "black swan event" or a "Minsky Moment" when there will be a sudden financial collapse . . . but not in the foreseeable future.  The only defense against the unknowable is acting fast when it starts.  And, how do you know when it starts?  When derivatives start defaulting . . .

There has never been a day in American history when there was not an upcoming recession.  There is always a recession out there somewhere . . . but not today.

In the meantime, may I have this dance?