Sunday, January 29, 2017

Dow - Twenty or Thirty Thousand ??

Barron's is a highly-respected weekly news-rag.  The cover article on their latest issue proclaims:

NEXT STOP:  DOW 30,000

Inside, the article begins with:

The Dow hitting 20,000 was no fluke.  Today's stock prices are well supported by solid prospects for corporate earnings and economic growth.  In fact, if President Donald Trump can avoid stumbling into a trade war - or a real war - there's no reason the Dow Jones Industrial Average can't exceed 30,000 by the year 2025.

First, it reminded me of Warren Buffett saying . . ."We always live in an uncertain world. What is certain is that the United States will go forward over time."

Then, I focused on the word "IF" -- IF President Donald Trump can avoid stumbling into a trade war or a real war.  That is not a snarky comment about the new president.  That is a concern that rapid change increases the odds of sudden mistakes.  That is also a reminder to investors not to get out of the market too soon.  Undoubtedly, sooner or later, President Trump will make a mistake - every president has - and the stock market will "howl bloody murder."   How should an investor react?

IF you are a long-term Buffett-style investor, you will sell nothing and try to buy more stocks as their sales prices decrease.

IF you are a timid investor, you will sell everything and undoubtedly miss the inevitable rally.

IF you are a normal investor, your level of cash will loosely reflect your level of anxiety.  As you lose more sleep, you should increase cash . . . but there is never a good time to be 100% cash.  

Most of all, avoid the company of timid investors and get ready for Dow 30,000 . . . someday.

Saturday, January 28, 2017

Slow and Steady . . . ?

The Commerce Department has just released their first estimate of GDP growth during the fourth quarter, showing a 1.9% annualized rate, which is about what was expected.  Although this is down substantially from the Q3 growth rate of 3.5%, it was expected that 3.5% was an aberration, due to agricultural imports.  For full year 2016, however, GDP growth was about 2.1%, which is also the average for the last seven years.

Two things struck me as interesting in this report.  Our average growth rate of 2.1% is the slowest GDP expansion since World War II.  It is also the longest expansion since then.  Is there a relationship between these two facts?  Does fast GDP growth shorten the business cycle between recessions?  There has been precious little economic research on this, primarily because it is so difficult to control exogenous variables.  But, I still wonder . . .

Also, is 1.9% the most meaningful number to gauge GDP growth in a period of strengthening currency?  As the dollar strengthened during Q4, American-made products became more expensive for foreigners to buy and, therefore, exports fell.  Conversely, a strong dollar makes foreign-made products cheaper for Americans to buy and, therefore, imports to rise.  Without the resulting huge trade deficit, our GDP would have grown a whopping 3.6% -- very close to Trump's promise of a 4% GDP growth rate.  (He is already on-the-record for saying the dollar is too strong, making him the first president to ever say such a thing . . . but he is right!)

Bottom Line:  our economy is stronger than the stated GDP growth rate of 1.9%, but does that therefore shorten the business cycle and hasten the inevitable next recession?  I think not!

Thursday, January 26, 2017

New Pejorative?

Like most people, I've been called a few names, including some colorful four- or seven-letter names.  Now, I've been called a "globalist" - someone who supports the notion of globalization.  I didn't know that word was a pejorative, but I will wear it with pride!

.25 or 20,000 - Part Two

For my thoughts on the Dow reaching 20 thousand, please read the blog of December 15, 2016.

It took a few extra weeks to get there, but that is a good thing, not a bad thing.

Wednesday, January 25, 2017

New Economist In A New Job

Peter Navarro is a brilliant Harvard-educated Democratic economist that has been picked by President Trump to direct the newly-created National Trade Council.  After running for office three times without success, he made the prudent move into appointee politics.  He is also the author of Death By China, which warned of war with the Asian giant, both militarily and economically.

Most economists support the notion of "free trade" and globalization, and so does Navarro, but he sees it as something that works in theory but not in practice, because it is so badly administered.  While nobody will argue there is no room for improvement, the current approach looks like a heavy-handed approach to brain-surgery.

Press reports that Mexico and Canada are open to "updating" NAFTA offer a definite WIN for the President and Navarro, but the devilish details won't be known for a long time.  He also feels multi-lateral deals are less effective than bi-lateral deals.  In other words, it would be better to negotiate new trade deals with each nation individually than to negotiate one deal with a group of nations, such as Europe. Bi-lateral deals allow nations to "arbitrage" trade differences between trading parties.

He is certainly impressive and qualified, but I am concerned he may know more about economics than he does negotiation, and that he may be "obsessed" with China.  Let's give him the benefit of the doubt and wish him well.

Tuesday, January 24, 2017

Doll Thoughts

One of my favorite thought-leaders is Bob Doll of Nuveen Asset Management.  He maintains a strong hold on the long-term perspective and is not prone to panic.  His latest commentary contained the following:

1.  Corporate earnings are increasing nicely.  Consensus forecasts for this quarter is a 6.4% increase.
2.  Weekly unemployment claims hit a 43-year-low last week.
3.  Because most new presidents stumble when first taking office, eight of the last eleven new presidents have experienced a fall in the stock market during February, averaging a 4% drop.
4.  Increased policy uncertainty is a drag on the market, and the president's ambitious agenda is likely to increase this policy uncertainty, because it is not likely the Administration can move on so many fronts in short order.
5.  He retains "pro-growth, pro-risk" investment approach, and I agree!

Monday, January 23, 2017

Death By Spin

When I was doing graduate work at the University of Dallas during the last century, I met a fellow student that I've always remembered him as the "cheerful intellectual," because he wrestled with both facts and truth so optimistically.  He had been a high school math teacher and debate team coach in his prior life, but debate was his true love. He felt about debate the same way some people feel about art or fine wine.  Thankfully, he also taught me some of the rules of debate, such as:

1.  Know everything about the subject matter.
2.  Never interrupt, as windbags will be assessed a penalty by the judge, not you.
3.  Facts can only be stated twice - once during the argument and once in the closing.
4.  Emotions are permitted only in the conclusion.

I talked with him last week and could not resist asking what he thought about the presidential debates, and, as expected, he responded with "what debates?"  He explained that there hasn't been a real, presidential debate since Bush I and Clinton in 1992.  Since then, he said, debates have been killed by spin.  During a real debate, arguments can be mistaken for spin, but there is a difference.

Political spin is more often talking points tinged with emotion and posing as half-truths and repeated endlessly.  If you cannot defend a statement, don't debate it . . . just keep repeating it.

Today, the "cheerful intellectual" has more interest in fine wine than debate, and that's sad!

Thursday, January 19, 2017

Remembering the "War on Inflation"

In June of 1981, I was backpacking the Chisos Mountains along the Mexican border.  In those days, there was no news in the backcountry.  Cell phones were still unknown.  However, when we got down, I learned the then-Fed Chairman Paul Volcker has raised interest rates to a record high of 20%.  I knew that made a recession inevitable, and, sure enough, we experienced the recession of 1981-2, when unemployment rose to 10%.  Volcker was pilloried in the press.  Farmers blocked C Street in Washington with their tractors in protest.

Volcker did this because inflation had reached 14.8%.

Tuesday, the latest CPI inflation numbers from December showed inflation had spiked up from nothing to an annualized 3.6%.  Suddenly, there is concern that Yellen will start raising interest rates recklessly.  Even President-Elect Trump has warned her not to be reckless.  That's ridiculous!  Headline inflation is still only 2%.

It was only a year ago that we were worried about deflation, which is a much more difficult problem to control.  The slight "spike" we just saw reflects the increased fuel costs from gasoline and not much else.  There are those who expect four interest rate increases this year.  It ain't going to happen!

Humorously, I have to note that Tuesday's report speaks at some length about the widening difference between eating at home and eating in restaurants.  Of course, I will bring that up the next time my wife wants to go out for dinner . . .

Wednesday, January 18, 2017

Bye-Bye Bump

I predicted that the market would continue rallying until the inauguration, which is typically a time of good feelings, before reality spoiled the party.  Instead the party was spoiled at least two weeks early.  Maybe, it was just catch-up time for a party that go ahead of itself.  Maybe, it was the realization that Congress will hug the tar-baby of Obamacare, before fixing the Internal Revenue Code or stimulating the economy with infrastructure spending.  Or, maybe, the typical good feelings surrounding the peaceful transfer of power are already exhausted?

The President-Elect enters the office with the lowest approval rating in memory -- only 40%.  I also never recall a President or President-Elect saying the dollar is too strong.  While I agree with that, I've never heard a US leader actually say it.  It is a clear call to the Fed to stop raising interest rates.  It is also a clear message to the Chinese that we can and will cheapen their our currency, just as the Chinese do.  So much for letting "the market" decide on the currency exchange rates?

The "Trump Bump" is over slightly sooner-than-expected.  Now, it is back to normal . . . darn it!

Monday, January 16, 2017

You Are Cordially Invited . . .

. . . to view our new website at

Okay, okay . . . this blog is not yet linked to the website, but you'll get the idea anyway!

Your thoughts would be appreciated!

Greed in a Bull Market

An ancient Chinese proverb by Tao Te Ching says "change your thoughts -- change your world."  Nowhere is that more true than the area of finance called behavioral finance.  Your attitude and assumptions toward money and investing have a huge impact on it.

The best known example is during bear markets, when investors panic and sell out, which is a mistake!  If your total portfolio was worth a $100 at the peak of the bull market but only costs $50 now at the depths of the bear market, doesn't that just mean you need to invest more?  Is the pain of seeing daily market values so great that you'll pay anything to end it?

But, bull markets cause just as much consternation for some investors as bear markets.  In a bear market, you're afraid of losing more.  In a bull market, you're afraid of not making more.  The investor moves from fear in a bear market to greed in a bull market.

If the Dow went up 8%, why didn't my portfolio go up 8%?  First, 40% of the growth in the Dow after the election was due to Goldman Sachs.  Without that one stock, you would not have come close to 8%.  And, why don't we own that one stock?  Maybe, because we avoid money-center banks, due to their books of derivatives.  That is a risk that should not be taken.  But, who cares about risk, when the sun in shining?  Instead of asking how much profit did I make, try asking how much risk did I take?

More importantly, the Dow is only of many market indicators.  That are only the 30 largest U.S. companies in the Dow.  Why not the broader S&P 500?  Nasdaq usually outperforms both of those.  And, since 52% of corporate profits come from abroad, shouldn't you compete against that index as well?

Maybe, greed creates myopia?  Changing your thoughts fixes it!

Sunday, January 15, 2017

2016 - In - Review

My quarterly column for Inside Business has been released, and you can read it here: 

Wednesday, January 11, 2017

Educated Company

One big loser in November's election was gridlock, and I'm glad.  The other big loser was globalization, and I'm sad . . . very sad!

At least, I have good company.  According to research by The College of William and Mary, my old alma mater, there is an inverse relationship between educational level and disdain for globalization.  In other words, the more education a person has, the more likely they are to support globalization.

56% of high school graduates or less think globalization is a bad thing.  50% of those with some college don't like it.  39% of college graduates have disdain for globalization, and only 36% of those holding postgraduate degrees don't like it.

The more educated a person is, the more likely they are to understand the arithmetic of "comparative advantage" and to have been exposed to educated foreigners.

I'm so afraid we are going to "throw out the baby with the bath water."

Monday, January 9, 2017

Interesting Research

Vanguard has done some interesting work.  They looked at the stock market for every single day from 1990 until 2015.  During that 25-year period, they identified the 20 best days and the 20 worst days.  What they learned is that these 40 different days, both up and down, tended to be clustered around geopolitical events and within a month of each other.  Take a look at this chart:

There is a real lesson in this.  If you over-react to geopolitical events and sell, you are very likely to miss the major up day in the near future, usually within a month!

The only caveat I would add is that I would not sell if Russia invaded another country for example or China shot down one of our planes, but I would sell, notwithstanding this research by Vanguard, if the Bank of England shut down for example or the Shanghai market collapsed.

Fear not geopolitical surprises.  Fear not normal recessions.  Fear only financial collapse!

When Was America Great?

President-Elect Trump' s excellent campaign slogan of "Make America Great Again" begs the question of when was America great before?  A friend sent me an article by Karl Malentes in The New York Times entitled "Vietnam: The War That Killed Trust."  It was sobering a read, for example, that 65% of Americans are too young to remember the war.

While the article doesn't say this, I think the last time that America was great, at least in the Trumpian sense, must have been that time between World War II and the Vietnam War.  Our economy was growing nicely.  The American dream was born.  A comfortable middle-class life was possible with only one salary.  College campuses were peaceful.  The quality of life was good.  Most importantly, Americans trusted America to do the right thing!

Then, Vietnam came along and demonstrated clearly that our leaders and institutions would lie to Americans - repeatedly.  The deficit spending to finance the war brought inflation to Americans.  Two salaries become necessary.  College kids "dropped-out and tuned-out."  America was no longer great!

The only good thing that came from losing 58 thousand America boys in Vietnam was that the  war proved that racial integration can work.  Soldiers who depended on soldiers of other races learned to help each other.  Call it a silver lining.

How will President Trump return us to the sanguine 1950s, when Dwight Eisenhower was President?  I don't know!  I'm still wondering if I want to go back there at all.

Sunday, January 8, 2017

Swamp Lawyer

The Securities & Exchange Commission is charged with the responsibility of protecting America's investing public.  Since the Great Recession, they have been aggressively policing stockbrokers and financial advisors . . . very aggressively!  I think it had something to do with shutting the barn door on a timely basis.

The problem with such aggressive policing is that it focuses almost entirely on process, not results.  The purpose of their process is to demonstrate a "culture of compliance."  The more obsequious you are, the more likely you can avoid large fines for trivial matters.  If I was chairman of the SEC, I would advocate for less trivial regulation and more violent punishment for those who cheat investors. Today, Bernie Madoff is sitting in a warm prison with three meals a day, free health care, and TV.  He should have been shot!

President-Elect Trump has announced that the new SEC chairman will be Jay Clayton, a big time securities lawyer on Wall Street and represents Goldman Sachs - so much for "draining the swamp."  But, he will be a sharp departure from the last few chairmen, who have been prosecutors, more interested in shaking down investment firms with heavy fines and light jail terms for the actual wrongdoers.  At least, Clayton is a deal-maker, and that will be a big improvement.

It is time for a change, and I wish him well!

Saturday, January 7, 2017

Bragging Rights

Politicians receive too much credit when the economy is good and too much blame when the economy is bad.  President-Elect Trump will take office when we already have full employment.  President Obama "produced" twelve million jobs during his tenure.  There is no way his successor can be so lucky.

For the last twelve months, our economy has produced 180,000 jobs each month.  For the last three months, it has produced 165,000 jobs each month.  Last month,it produced 156,000.  The slowing trend is not Trump's friend.

Economists argue that the slowing trend is a good sign, reflecting the tightening labor force, and they are right.  But, there are two things for the President-Elect to consider, in order to win real bragging rights.  First, wages have started to rise, as employers try to retain and recruit employees.  Average earnings are up 2.9% on a year-over-year basis for the last year.  This is the highest rate of wage increase since the Great Recession of 2008.  If the new president can accelerate that, he deserves legitimate bragging rights.

Second, Republicans tend to focus on the Labor Force Participation Rate, or what percentage of the potential workforce is either working or looking for work.  Before the Great Recession, it was about 80%.  Most everybody worked in those days, except retirees and housewives.  Today, it is only 62.7%.  Democrats point out that Baby Boomers are retiring.  Republicans point out that unemployment insurance and generous welfare encourages people to stay out of the workforce.  However, getting these long-term unemployed back into the workforce will not be easy.  Most of them have been unemployed so long that their job skills are obsolete.

It is alleged that the President-Elect is no stranger to bragging, but he will earn legitimate bragging rights if he ignores the unemployment rate and ignores job creation and instead focuses on (1) increasing average wages and (2) increasing the Labor Force Participation Rate. 

Wednesday, January 4, 2017

2017 -- Off To A Good Start

For the last six months or so, the economic data has been generally improving.  Yesterday's ISM report is a continuation of that pleasant trend.  It indicates that the manufacturing sector is the strongest it has been in two years!  This comes despite the disturbing 5% rise in the dollar since the election and weakening global growth.  Employment in the manufacturing sector has also reached an 18-month-high.  (This could create another pleasant surprise in the latest "Jobs Report" due out this Friday.)  In addition, corporate earnings began improving in the fourth quarter, ending the so-called "earnings recession."

The cautionary details are that inventory levels are down while delivery times are up, suggesting some capacity limits and creating some inflationary pressures.  Stay tuned . . .

It is not clear to me that this bull market is merely a "Trump Rally" of good feelings.  It is supported by the improving economic data, improving corporate earnings, AND the end of gridlock in Washington.  There are many reasons to be bullish right now.  So, enjoy it for now, because the bears are just resting.