Happy Halloween!!!

Sadly there are no little ghouls living at our place these days but we'll wish all the others on our street a fun, pleasant but rainy evening!

Happy Halloween to all the little ghosts and goblins on Ashland Avenue and to everybody else as well!

an tSionna {10.31.2013}

From Chart of the Day.com. {subscription required to view their non-public charts}.  Below is their commentary:

"For some perspective on the current state of the stock market, today's chart presents the long-term trend of the Russell 2000 (small-cap stocks). As the chart illustrates, the Russell 2000 rallied from late 2002 into the mid-2007 and then effectively gave all of that back during the financial crisis. The seesaw continued during the immediate aftermath of the financial crisis with the Russell 2000 recovering all losses incurred during the financial crisis in a little over two years. Beginning in November 2012, the pace of the overall trend picked up to where it currently trades with in a relatively steep and narrow upward trend channel within which it continues to make new record highs."

My comment:  I am long the Russell via ETFs in certain select client accounts.  I do not own it across all client strategies because I usually prefer to have an overweight in Mid-cap ETFs all things being equal.  I'll discuss that more next week.  Never-the-less the long term charts of both look similar and you can see how these stocks broke out this year and advanced steadily higher.  

Link:  Chartoftheday.com: Russell 2000.

an tSionna: Gasoline

Ten year chart of gasoline courtesy of GasBuddy.com.  I think this is the one commodity where most Americans understand the price due to how deeply it's embedded in everybody's life.  I went back a decade on this chart to illustrate a point.  From 2004 to now gasoline is up 131% or roughly 13% on an annualized basis.  Huge inflationary spiral right?  Maybe not.  Most of the rise in gasoline occurred from 2003 to 2008 during the last expansionary phase of the economy.  In fact gasoline on an inflation adjusted basis in 1990 was roughly $2.25.  That's roughly a 50% increase and roughly a 2.25% annualized rise.  

Gas fluctuates with the seasons but it is currently trading lower than it was in 2007 and has been locked in a trading range since 2010.   Unless the Government imposes higher fees and taxes it's likely that gas will remain locked in this range given the technology that let's us extract oil from places that were formerly uneconomical to develop.  At the same time our cars are becoming more fuel efficient and electric cars are finally becoming a viable alternative to fossil fuels.  Without a foreign crisis to move the cost higher it's likely gas will stay in the range it's been in for the foreseeable future.

Active Managers Stink:

Excerpt from Barrons.com article.  {Excerpt with my highlights.}

Active Mangers Stink?  Blame These All-Too-Common Fund Flaws.

Chances are, your mutual-fund manager lagged the benchmark in recent years. Can you explain exactly why it happened?  Smead Capital director of research Tony Scherrer has an allergy to the standard Active management doesn’t work, just buy an ETF. He argues in a worthwhile look at the subject that the real explanation often has more to do with two or three unhelpful practices on the rise in recent years among active managers.

These are (1) a growth in the frequency of trading by fund managers, which is costly and (2) a drop in the number of managers whose portfolios are genuinely different from the benchmark. In order to beat a benchmark, you have to be different from it. And you can’t benefit from a stock’s rise if you’re constantly selling it out of your portfolios.

Those two factors, plus the impact of management fees, explain much of the recent poor performance versus the benchmark, Scherrer argues in the paper. Reduce or ideally eliminate one or more of these factors and a manager has a much better shot.

Train your eye on the upper grey portion of this graphic, which shows a steady shrinkage since 1981 in the proportion of fund-industry assets run by fund managers who exhibit “active share,” as the quality of being a manager who differs from the benchmark is called. Back near the beginning of the Reagan administration, it was around 60%. These days, it’s more like 30%

Scherrer’s chart, reproduced from the Financial Analysts Journal, shows the rise of “closet indexers,” which are the second and third groups from the bottom. It also shows the rise of purely passive investing vehicles — that’s the crosshatched portion at the very bottom of the chart. This passive group rises from the low single digits three decades ago to something close to 20% today.

Lump together the honest index funds and the active managers masquerading as active and you’ve got about 50% of the entire fund industry.

Now have a look at the second chart, which is reproduced from John Bogle’s Common Sense on Mutual Funds. This one shows mutual-fund portfolio turnover rising to something like 100% on average in recent years. This is a new phenomenon. Go back to the 1950s and fund turnover was one-fifth that rate. As recently as the early 1980s, it was half.

The previously cited Financial Analysts Journal study by Roger Edelen, Richard Evans, andGregory Kadlec shows the average annual costs associated with trading clocks in at an annual 1.44% for mutual funds. Break it down by category and some areas look especially bad. Small-cap managers averaged 2.59%.

“The most egregious offenders in this study handicapped themselves by nearly 2% with burdensome trading costs,” Scherrer writes. “These hidden costs may be the single largest factors of causation of active manager underperformance.” Throwing out the most egregious offenders in each of these practices yields a much better-performing group — and a stronger chance at outperformance.

 Link: Active Mangers Stink?  Blame These All-Too-Common Fund Flaws.

Posting Schedule:

I have a few things I need to take care of over the next several days and won't be able to post until early next week.  Look for something up here on Tuesday.  Should be back on a regular schedule after that.

Gold

Chart of the gold ETF-GLD .  GLD chart is courtesy of FINVIZ.com.  Gold's done nothing for a few years.  It collapsed this year as the world political and economic situation seemed to settle down.  Its now locked in the trading range shown on the chart above.  I own a little gold for a select few clients and am probably not a seller because of its hedging properties but I can't figure out why I'd want to buy more of this right now.

*Long GLD in certain client accounts.

International Indices

This chart representative of international and foreign indices comes to us courtesy of Freestockcharts.com.  It is of the Vanguard Total World Stock ETF {symbol VT}-an index that covers well established and still developing markets.   I am using this as a representation of foreign markets in general because it is a very broad based index.  First of all let me also apologize that this graphic lacks in a certain degree of professionalism.  I'm experimenting with different new chart forms and don't quite have my sea legs yet with these.  

Anyway back on July 15th, 2013 we noted that international markets had basically gone nowhere for years that's represented on the chart above by the horizontal red line from 2009 till last summer.  Back on that date we updated our indicators on international and foreign based ETFs to NET MARKET POSITIVE.  These markets have moved higher since this past summer but to be fair so has almost everything else.  Among the reasons we cited back then to become more interested in these names were the following reasons:

1.  Very out of favor asset class.  {Unloved by most investors today-bashed by the media}

2.  More favorable valuations.

3.  Most of the negatives were known.

4.  High dividend ETFs {Can be paid to wait}.

5.  Very oversold by my work....... 

6.  Finally there's this.  US markets have so significantly outperformed overseas assets that it seems to me that either US markets have to go to sleep at some point or over seas will catch up to us.  Since one of my principle arguments is that things are continuing in the main to get better at home from an economic standpoint, then I think there is a higher probability that markets "over there" may play catch up to us.

Investors have become more favorable on these investments since and they are not as out of favor as they were.  I would note though that from a fundamental standpoint, valuation basis and for the dividends these indices still carry many favorable aspects.  Perhaps you don't need to go out and take a look at these today given that they are overbought like everything else, but probability indicates that these become more attractive on market pullbacks.

*Long VT in certain client accounts.  Long other foreign or international based ETFs in client and personal accounts.

an tSionna {SPY}

We're going to spend some time over the next week or so taking a look at some charts that I think are important.  Below is a chart of the S&P 500 Index ETF SPY going back to the end of 2011.  {Chart courtesy of FINVIZ.com}

Not a lot of commentary to add to this chart because as you can see it has been a straight stair step march higher.  According to Bespoke Investment Group {subscription Required to view this report}, "the S&P 500 has now rallied 58.6% over a period of 515 trading days since October 3rd, 2011 without declining 10% from a high*."  Investors were much more negative back in 2011 which can be seen in the market's forward PE average which traded at just under 12 back then as opposed to around 15.5 today.  We took a bit more optimistic view back then, thinking that stocks had to potential increase by double digits in 2012.  

We're still optimistic on stocks albeit with the understanding that stocks aren't as cheap today as they were back then.  We still believe that a combination of improvements in technology, innovation, cheap energy, improvements in housing, the continued repair of balance sheets and the end of gridlock  in Washington equates to an economy that has the potential to grow 2-3% GDP in 2014.  That has the potential to drive stock prices higher unless we rob next year with a year end blow out rally in the markets.  More on that thought at a later date.

*Bespoke Investment Review, Market Recap, "515 Trading Days & Counting",  October 21, 2013.

**Long ETFs related to the S&P 500 in client and personal accounts.

The Case For Stocks {One Man's View}

That one man is Jeff Saut of Raymond James.  This post comes to us via Business Insider.com.  According to Saut:  {Highlights in the quote below are not mine.}

"On the earnings front, the bottom up operating earnings estimate for the SPX is currently $107.58, leaving the SPX’s P/E ratio at almost 16x. Next year’s estimate is $121.66. If the SPX continues to trade at that P/E multiple it renders a price target of 1946. Moreover, so far of the 190 companies that have reported earnings, 60.5% of those companies have beaten estimates and 50.9% have beaten revenue estimates. As far as economics, as stated the numbers are probably going to be ignored for a few months because of the shutdown. However, I believe GDP growth will accelerate to 3% in 2014 driven by a capital expenditure cycle because companies like GM are running their plants flat out 24/7 and the equipment is wearing out. Finally, with Janet Yellen at the helm of the Fed it should be steady as you go. That implies no tapering and plenty of liquidity. And, a number of other things are going right in this country."

My comment: Our midpoint S&P 500 earnings estimate is $107.75 for 2013. and $114.75 for 2014.  My "14" estimate may be too low but $121.66 strikes me as aggressive.  One could counter that 2014 numbers may be low if we see GDP growth north of 3% next year.

*Long ETFs related to the S&P 500 in client and personal accounts.

Link:  Business Insider.com:  Jeff Saut's Bullish Case for Stocks.  

It's Over {And A Ratings Change}

Well the debt ceiling/government shutdown crisis {if you could call it that} is over.  The politicos in Washington and investors behaved pretty much in line with what we outlined here last week.  Monster rally in the markets yesterday was the result.  Forget the folks that are worrying that we're going to be doing this all over again next winter.  I'm in the camp that says we're now moving away from debt-ceiling hostage taking.  Since the Republicans didn't pull the default trigger this time when one could argue that they had the best ammunition to do so with the rollout of the Affordable Care Act, then they're unlikely to do so again the next time around.

As we noted above the markets rallied hard yesterday, although they are giving some of that back today.  Probability and the playbook would indicate that stocks have the ability to rally into the end of the year.  I've been taking the volatility and market movement these past few weeks to put some new money to work for clients and reposition accounts.  To better reflect what we've been doing we are going to change one of our indicators.  We are going to move our intermediate term indicator to NET MARKET POSITIVE.  This is the same rating we carry on our longer term money flow indicators.  We will keep our shortest term indicator at NET MARKET NEUTRAL.  You can go here for a definition of what these terms mean.  Any changes we make in these indicators are based upon probabilistic analysis of market conditions and are meant to solely reflect the NET activity that has occurred in our client accounts.  We do not use these changes as a market timing mechanism.  If you are a casual reader of this blog, you should not construe these changes as a trading strategy that we employ across the board with all of our clients or attempt to emulate anything here as a personal strategy.  I have and continue to warn against this and therefore assume no responsibility if you ignore my advice.  

We lowered our intermediate and short term indicators to NET MARKET NEUTRAL back on February 21, 2013.  If you had taken this as an excuse to sell out your portfolios then you would have missed a pretty good rally in stocks as the S&P 500 is up about 14% since then.  Our change back then simply reflected that we were on balance neutral in our buying and selling of equities {as represented by ETFs} in client accounts.  On balance we've carried relatively lower cash positions during what are statistically seen as the weakest months of the year because we've felt that the underlying fundamentals of the markets were positive and warranted such an approach.   Again to reflect what we were doing for clients, we raised our indicators on foreign based ETFs to NET MARKET POSITIVE on July 15, 2013.  You can look at a chart of foreign based ETFs to see how they've done since mid-July.  I will not discuss individual security purchases or sales here but I'm happy to have a discussion with clients or readers about what we did in this area if you want to give me a call.

**Long foreign based ETFs in client and personal accounts.  Long ETFs related to the S&P 500 in client and personal accounts.  Also as a point of disclosure since we discussed foreign based ETFs today, you should know that we have an interest in adding to positions in certain of these which may or may not be occurring as we post if certain conditions are met.

Finally I will not be posting tomorrow.  Also as a heads up I will be away next Friday and possibly part of the week after.  Expect posting the week of October 28th to be sporadic.  

And Now All That's Left is for The Republicans to Negotiate the Terms of Their Own Surrender.

GAME ALMOST OVER: Boehner To Let The Senate Debt Ceiling Deal Come To The Floor {Source:  Business Insider.com}

This was the only way this game was ever going to end.  Markets have moved higher on this news.

Daily Market Volatility

From Bespoke Investment Group:

"If the hour to hour up and down moves from the market in reaction to headlines coming out of Washington have you frustrated, just remember that it could be a lot worse.  The chart below shows the S&P 500's absolute average daily percentage move over a 50 trading day rolling period since 2011.  As a result of the stalemate in Washington, the S&P 500's average daily percentage move has increased from +/-0.43% up to +/-0.55% since mid-September.  

Looking at the chart below, even after the recent uptick in the average daily move of the S&P 500, it is still less than a third of the day to day volatility (+/-1.92%) that we saw back during the 2011 debt ceiling debate.  In fact, it is actually much closer to its lows of the last three years than it is to its highs.  It may be raining now, but it is far from pouring."

My comment:  Volatility has dropped on an absolute and relative basis since the 2008-2009 period.  In fact volatility as measured by the VIX-a popular measure of the implied volatility of S&P 500 index options-has traded at historically low levels in 2013.  This is further evidence that investors still don't believe Washington will allow the US Government to default.  Watch this change though if against all expectations Washington goes off the rails.  

*Long ETFs related to the S&P 500 in client and personal accounts.

Link:  Bespoke Investor Group:  It Could be Worse.

Earnings

From Dr. Ed's Blog:

"S&P 500 forward earnings rose to a record high of $119.73 last week. It tends to be a great year-ahead indicator of actual earnings when the economy is growing. However, it doesn’t provide a heads-up for recessions. The forward earnings of the S&P 400 MidCaps and S&P 600 SmallCaps also rose to new record highs last week....."

Forward earnings are on a rolling going forward basis so these estimates are likely out to the end of the 3rd quarter, 2014.  If these estimates would hold {and they seem a tad aggressive},  then the S&P 500 is trading with a 14.19 forward PE and a 7% earnings yield.  If these estimates prove to be accurate it would imply an S&P 500  out next year with fair value of 1,800-1,915.  That's a potential increase between 6-12% between now and then. 

Now I'm not saying we're going to be there a year from now.  For one thing as I noted above I think those estimates could be too high.  But it does show that this year's market rise is based on estimates rooted in reality.  We'll be talking more about what our own estimates say for 2014 in a post at a later date.

*Long ETFs related to the S&P 500 in client and personal accounts.

Link:  Yardeni: Blissfully Ignoring the Headlines

Blackrock: Two Statistics

Two statistics from Blackrock I noticed this week that I found interesting.

Statistic 1:  The Inverse Relationship Between Wealth and Savings.  

"As stock, bond and housing values rise, consumers tend to feel wealthier, leading them to spend more. That increase in spending comes about not from rising incomes but because consumers are saving less. However, without growing incomes, the economy remains too vulnerable to financial market conditions such as interest rates."

Statistic 2:  Housing Prices Up in September.

We'll put this in the "Things Are Getting Better Category".  {Highlights are from Blackrock.}

11.5%: Increase in asking home prices year-over-year

"Asking home prices jumped 2% across the US in September, helping contribute to an 11.5% year-over-year gain, the largest increase since the housing crash. However, the overall trend shows that both price gains and rents are slowing down. Last month 11 of the 100 largest cities had quarter-over-quarter price decreases. Keep in mind that asking prices lead sales prices by about two or more months."

Posting Note:  I will be out on Monday but will be back here bright and early Tuesday morning!

Government Shutdown Day 10

From Chart of the Day:  {My highlights in Green}

Last week's chart illustrated how the stock market tends to perform after a government shutdown begins. Today's chart provides further perspective by focusing on how the stock market tends to perform after a government shutdown ends. Today's chart plots the average S&P 500 performance for the 20 trading days (approximately one calendar month) before and 60 trading days (approximately 3 calendar months) after a government shutdown ends. As today's chart illustrates, the stock market has tended to struggle prior to the end of a government shutdown due to the fact that investors fear the unknown. Following this, the stock market has (on average) trended higher over the ensuing three months in what amounts to a relief rally. It should be noted that today's chart is an average performance chart and that following the last 17 shutdowns, the stock market traded up 60 trading days after a shutdown ended on 12 out of 17 occasions (i.e. 70.5%).

Link:  Chartoftheday.com: Post Government Shutdown

*Long ETFs related to the S&P 500 in client and personal accounts.

The Dilemma

Dilemma-"a situation in which a difficult choice has to be made between two or more alternatives, esp. equally undesirable ones."  {Thanks to Google's on line dictionary for this definition}

Investors right now are faced with a series of dilemmas, the situation in Washington and the one regarding their own investment portfolios.  We're going to discuss today portfolios.  Enough ink's already been spilled over Washington and in the end that's not what this blog's about.  Instead we'll deal with the choices as we see it regarding your money.

The game plan that most investors have been using regarding the debt ceiling and government shutdown debates is to look back at the summer of 2011 when we last had a similar event.  Back then stocks had rallied until April, plateaued during the summer as the rhetoric out of Washington came to a head and then fell 16% in about a six week period.  Stocks rallied out of that decline and never really looked back.  Buying stocks in August/September of 2011 proved to be a pretty good bet.  The S&P 500 is up nearly 50% since then.  Like now the economy was improving, inflation was tame and interest rates were low.  In fact interest rates collapsed during that crisis and have never really moved higher.  This came in spite of the credit agencies downgrading US debt from its previous AAA status.  

Similarly in 2013, stocks had a pretty decent rally at the beginning of the year and have since traded flat.  As I pointed out yesterday, stocks have gained no ground since May.  Stocks have now declined eleven out of the last fourteen days.  Yesterday was the first day though that it really seemed to matter to investors.  A lot of companies yesterday staged declines in excess of one percent.   This came as the Washington rhetoric became increasingly vile and the impasse between the two parties seemed to widen.  More stocks and ETFs are now trading below their 50 and 200 day moving averages and we are beginning to see some oversold signals in the markets {see this above attached chart from Bespoke Investment Group}.  

The investor's dilemma becomes what to do now.  If the 2011 scenario pans out then the markets are in danger of a further sell off.  If the markets need to have a double digit decline for Washington to pay attention then there is the potential for more downside risk.  Most investors would prefer not to see that sort of event take place.  There's also the complacency issue.  Wall Street right now assumes that the US will not default on its credit obligations.  While the probability of that event is still very low, it is not zero.  In fact there may be more danger of a default today than is assumed because the political parties in Washington are seemingly more polarized today than they were in 2011.  A default would catch Wall Street leaning the wrong way as the prevailing view is that some sort of deal will be struck at the 11th hour.  The 2008 market crash occurred in part because the Street assumed that the Government would not let Lehman Brothers fail and were therefore caught leaning the wrong way.  I'm not saying that a theoretical default will lead to a crash but I am suggesting that this is not the scenario most investors are currently assuming.  Should a default occur then it's likely that stocks at a minimum will be in for a period of volatility.

Yet when we step back and take a look under the economic hood we see a different picture.  A combination of low interest rates, lower energy costs,  advances in productivity and a rebound in housing suggest that the US economy is running at an improved rate versus 2011.  Were the Government's issues out of the way, we would be focusing on these things as opposed to potential fiscal drag.  In that world things look much better and the economy is expanding.  It isn't growing as fast as we all might like but there is nothing to suggest that the recovery is in jeopardy assuming Washington gets it's house in order.   On a rolling four quarter basis the S&P 500 is trading with a 14.2 PE and a 7.04 earnings yield.  This is on data that is a week old and may be somewhat at risk the longer the impasse lingers in Washington.  However, this is not data that's indicative of a wildly overpriced market on economic news.  Finally to sell substantial portions of portfolios not only brings in possible capital gains consequences {its been a pretty good few years now in stocks and there's likely substantial capital gains out there} but also runs the risk of the markets taking off with investors positioned with too much cash.

We are using the current environment to redeploy certain assets and to gradually invest cash positions, especially in newer accounts where we have not seen much opportunity to become more fully invested.  While understanding that there is the potential for some more downside in the markets, probability suggests that Washington will eventually resolve its issues.  The choice of not doing so will become too unpalatable for the political parties as this event wears on.  When the pain becomes too intense then we will see the outlines of a deal emerge.  

A few final notes.  We are not changing any of our indicators at this time.  I would also suggest from a tactical perspective that we are likely to see the rhetoric out of Washington get worse over the next week or so.  Look for the low points of this drama to occur over the weekend, perhaps coming to full froth on the Sunday morning talk shows {Meet the Press, Face the Nation etc.} I also would not be surprised to see temporary steps to avert a default as the 17th draws near.  Finally in regard to that October 17th date, don't set it in stone.  The real date is likely sometime between the 17th and the 1st of November when Social Security checks have to go out.

*Long ETFs related to the S&P 500 in client and personal accounts.

Money Flows

Here's what our money flow analysis is saying.

Stocks trading above their 200 day moving averages has now fallen to 48%.  This is oversold in the context of the past year or so but is nowhere near absolute low levels.  For comparison sake, this indicator fell to a low of 11 back in August of 2011 which by the way was around the last time we had a debt issue crisis.  

Stocks trading above their 40 day moving averages comes in at a reading of 52%.  This is at best neutral.

Our main readings of money flows into and out of stocks have finally turned negative but are not yet at oversold levels that typically signal a tradable intermediate bottom in stocks.

Short term sector readings have retreated from overbought levels to a more neutral stance.

Our shortest term money flow indicator is neutral as well.

The S&P 500 is now down 10 of the last 13 trading days and has lost a bit over 5% in value as of yesterday.  That move however has to be put in context.   There was a big  spike higher on September 18th when the Federal Reserve announced it's no "Taper" policy.  If you take away that spike then stocks are down about 2% and have fallen back into the trading range we've seen since April.  Stocks are now in essence trading flat with where we've been since May.  

So far it looks as like we've been correcting more by time than price.  Will have to see if that holds up the longer the Government shut down stays in effect and the closer we get to a debt default.

*Long ETFs related to the S&P 500 in both client and personal accounts.

Oil Productiion

From Dr. Ed Yardeni's Blog:

While Washington is mired in gridlock, the High-Tech Revolution, which started in the early 1990s, is evolving into a New Industrial Revolution. Innovations produced by the IT industry are revolutionizing lots of other ones including manufacturing, energy, transportation, health care, and education. 

High-tech tools certainly have contributed to the extraordinary productivity of the US energy industry. Gushers in the oil patch could more than offset gridlock inside the Beltway. In just the past two years, US crude oil field production is up 40% from 5.8mbd to 8.1mbd through the week of September 20. That’s the highest since October 1988. US exports of petroleum products rose to a record 3.3mbd. Net imports are down to 6.5mbd, half as much as at the record peak during 2005. 

America isn’t on the brink of energy independence, but it is heading in that direction at a faster pace. The Naysayers say it won’t happen because much of the surge in production is attributable to fracking of old oil wells that deplete in a few months after they are tapped for a second time. Maybe so, but let’s not underestimate the ability of entrepreneurs to use both high-tech and low-tech to boost oil production. 

Link:  Dr. Ed Yardeni: Oil Production.

*Long ETFs that invest in oil producers and production.

Government Shut Down Day 3

From Chart of the Day.com:

"Monday marked the beginning of the 18th government shutdown in US history. For some perspective, today's chart plots the average S&P 500 performance for the 20 trading days (approximately one calendar month) before and 60 trading days (approximately 3 calendar months) after a government shutdown began. As today's chart illustrates, the stock market has tended to struggle prior to and during the initial three days following a government shutdown. Following this, the stock market has (on average) trended higher over the ensuing three months. One explanation for this particular average pattern is that the market abhors uncertainty. So as the shutdown approaches, investors fear for the worst. However, after the shutdown begins and investors notice that the economy continues to function coupled with the fact that the shutdown may be short-lived ultimately encourages a stock market rally as investors worst fears are not realized. It should be noted that today's chart is an average performance chart and that following the last 17 shutdowns, the stock market traded up 60 trading days after a shutdown on 10 out of 17 occasions (i.e. 58.8%) with the average shutdown lasting 6.4 calendar days."

Link:  Chart of the Day.com: Government Shutdown.

*Long ETFs related to the S&P 500 in client and personal accounts.

Government Shut Down Day 2

Second day of the Government's shutdown.  Futures responding by loping off about .75% at the open so we're likely going to see a down morning and most likely a down day in the market..  If this occurs then stocks will have been down eight of the last ten days.  There's been much discussion about the roughly 18% gains that markets have tacked on this year.  There's been less discussion about the reality that the S&P 500 is today roughly where it was in mid-May.

About the shut down, see this Politico article on how the debt ceiling and the shut down have now collided into one big mess.  Of course one of the reasons we're where we currently sit is the Republicans strident opposition to the Affordable Care Act or "Obamacare".   In that regard there's a theory making its way around the Street that Republican opposition comes from the fear that people will like it.  There may be something to that.  I'm beginning to wonder about the reality of what happens if Obamacare works.  Not enough time to elaborate on this today but I'm going to revisit this subject at a future date.

Back to the markets, the simple money flow problem is that stocks aren't oversold enough yet to mount any sustained rally.  Probability suggests that until we get to that point then stocks are likely to flounder.


 *Long ETFs related to the S&P 500 in client and personal accounts.

Government Shut Down

Government Shut Down......Or Why I Seem to Be the Only Person in the World Not Worried About This!!!!

So both the financial and regular news industry have nothing else to discuss than the government shut down today and the subsequent debt ceiling debate.  You would think from their constant braying on the subject that an asteroid was approaching earth, ready to extinguish life as we know it.  I'll tell you right now that based on what we currently know this shouldn't be a big deal for the economy.  There's one way it could be.  I'll get to that at the end of the bullet points.

Economic Debate:   American Kabuki.  A Kabuki dance is an activity or drama carried out in real life in a predictable or stylized fashion {thanks Wikipedia for the definition}.  We've seen this act before and it always ends up with the political folks who've taken away the punch bowl getting hurt.  In this case as is usual, it's the Republicans.  Look we live in a country where nearly half of us receive some type of governmental aid.  This includes everything from social security to farm subsidies as well as unemployment benefits.  You can't cut off this economic spigot too long before there's some form of blowback out in the hinterlands.  At the same time certain Republicans backed themselves into a corner with their objections to the Affordable Care Act so that it was next to impossible for them back down prior to the shut down.  Now that we've actually gone over the cliff so to speak, expect the grown-ups in both political parties to take charge and get a deal.

Wall Street is Concerned-Not!  Pundits will tell you that the markets are very concerned about this.  Stocks are down almost 3% from their highs via the S&P 500.  Except their not really down that much.   Stocks popped on September 18th when the Federal Reserve announced their "No Taper" decision.  Take that day out and stocks are down less than 2% since investors started focusing on this event and the debt ceiling.  The reason for this is that Wall Street assumes a deal is going to get done.   Stocks might be selling off anyway right now.  It's October after all which is historically not a good month for equities and stocks have been overbought to the point where some profit taking might be expected.  Underneath the hood economic conditions continue to improve.  That should be supportive of equities as long as this doesn't last too long.

The Safety Net.  The safety net for the market is that there's a lot of institutional investors-especially hedge funds that are behind their benchmarks this year.  They need a market pullback in order to make their year.  Don't be surprised to see strong institutional interest if the stocks pull back around the 5-8% level.  Most market play books assume in a year like this that stocks should behave positively in the fourth quarter.

The Caveat:  Humans Sometimes Don't Behave Rationally.  The above assumes that a deal on both the debt ceiling and budget gets done in I'll say the next two-three weeks.  It doesn't have to happen all at once but I'm basing these probabilities on all of this being out of the way by mid-October.  If for some reason these issues go longer than this, if for example the Republicans are willing to commit something close to political suicide over Obamacare {The Affordable Care Act} then all bets are off and you could see potential problems.  Probability suggests that won't happen.  Probability also suggests that stocks are a better buy on any further sell off arising from the shut down and debt ceiling debates.

*Long ETFs related to the S&P 500 in client and personal accounts.