Happy Thanksgiving

We're going to be taking some time off the rest of this week as we do the traditional Thanksgiving thing.  We'll pick things up next week on Tuesday.  We'll break away from the food table though if anything important comes over the transom.  

Until then I want to wish each and every one of you a Happy Thanksgiving!  May your travels be safe if you're going over the river and through the woods to Grand Ma's house, your belly's full of laughter brought by family and that the rest of 2013 is a wonderful year!

God Bless.

Here's an oldie but goodie blast from the past to hopefully put you in the Thanksgiving mood.

20 Trends Part II

Yesterday I published a list of Business Insider.com's Twenty Trends That Will Dominate America into 2014.  Last year they published their inaugural twenty trends list.  Just for fun I decided to look back and see how prescient they were.  Today we'll take a look at that original list and give them a grade on how their predictions are panning out so far. The grade is to my "curve so to speak.  Others can feel free to agree/disagree with my results.

  1.  The end of the "Big Box" retailer.  Grade Incomplete.  Expansion may have slowed but these stores still exist and in the aggregate seem to be holding their own.  Too soon to judge how this will pan out.

  2.   America is aging.  Grade A.  Obvious from census data.

  3.   The mobile revolution.  Grade A.  I would add tablets into this category as well.

  4.   Weakening Infrastructure.  Grade A.

  5.   Epic rise of student loan debt.  Grade B.  Debt still an issue but has tapered in 2013.

  6.   US energy boom.  Grade A.  This also made their list in 2013.

  7.  Car culture on the decline.  Grade B.  Millennials not as interested in cars but car makers are on track to have a record year of sales again in 2013.

  8.   Political partisan divide grows.  Grade A.  Just read the papers the past year!  See Tuesday's headlines about the Senate's nuclear option regarding filibusters of judicial nominees.  

  9.   New health care mandate.  Incomplete.  Obamacare roll out fiasco makes this hard to judge.

10.   Pension crisis.  Grade B-.  Still and issue in many places but economic recovery has perhaps taken a bit of an edge off of this issue for the time being.

11.  High frequency trading domination.  Grade C.  Less of a trading factor in 2013.  However, to be fair, it's possible that their role has been masked by this year's bull market.

12.  Housing market recovers.  Grade A.  Housing prices are up double digits in many US markets.

13.  Manufacturing roars back.  Grade. B.  Manufacturing has come back as have some of the jobs but there are fewer workers in this sector of the market than before the recession began. 

14.  Much less profitable banking sector.  Grade D.  Banks and financials have had a stellar 2013.

15.  Agriculture and climate change.  Cannot grade.  Effects of climate change on US agriculture at least are so far unclear.  US will likely have something close to a record harvest in 2013 and it's unlikely that last summer's drought will ever be definitively linked to climate change.

16.  The end of the Post Office.  Grade C.  Still losing money but the mailman still shows up every day.  Efforts so far to streamline the system and make it more efficient via efforts such as deleting Saturday delivery have so far been stymied by Congress.

17.  American cities as economic juggernauts.  Incomplete.  Hard to judge how this will pan out.  For every Boston there seems to be a Detroit.

18.  Immigrants driving product innovation.  Not enough data for me to judge how this has panned out.

19.  Military spending under pressure.  Grade A.  Sequester hit Pentagon especially hard.

20.  The pharmaceutical industry's patent cliff.  Grade B-.  Data is out there on when a series of major drugs comes off patent but pharmaceutical industry has had a pretty good year market wise.

So there's the list with the grades.  By my way of viewing things not bad results.  We'll maybe come back in a year and see how both these lists have fared by then. 

Link:  Busines Insider.com 20 Big Trends That Will Dominate America's Future {2012 Edition}

20 Trends

20 Trends from Business Insider.com that according to them are set to dominate America's future.

  1.  The San Francisco Bay area is now the center of the universe.
  2.  The renting and sharing economy has legs and will continue to grow.
  3.  The Texas growth engine.
  4.  The great congealing of cities and suburbs.
  5.  Rise of the Robots.  {My comment.  I think this is an economic game changer both good and bad.  Robots have the potential to add to productivity but cost us jobs primarily in lower skills manual labor industries.
  6.  Energy costs have stopped growing.
  7.  Renewables {think wind and solar energy} are soaring.
  8.  Wearable technology.
  9.  Everyone's living alone.
10.  Everyone dates online.
11.  Stagflation.
12.  The future of housing is renting.
13.  Obesity is at a crossroads.
14.  The gun control debate is over and guns won.
15.  The war on drugs is over and drugs won.
16.  Old Hollywood is dead and old TV is dying.
17.  The education bubble has burst.
18.  Teacher evaluations.
19.  The unintended consequences of Obamacare.
20.  The end of men.

Link:  Business Insider.com 20 Huge Trends That Will Dominate America's Future. 

Financials

I like financials.  Probability indicates that a steeping yield curve {Which should happen if interest rates ever go higher again in our life times!} should be a good thing for this sector.  Even if rates stay about the same next year, I think that some of the headwinds that have bedeviled this group over the past few years are abating.  Here's a link to an ETF Trends article that seems to be in my camp and gives you an idea of what you might consider if you agree with this analysis.

Note:  This is just food for thought about what has the potential to be a positive development for this sector.  Not necessarily an endorsement of any of the stocks or ETFs that they mention in the article.  ***I am long financial ETFs in certain personal and client accounts although not necessarily those mentioned in the article above.  Please consult your own financial advisor or do your own homework before investing in any of the stocks or funds listed in the article.  Better yet, hire us and we'll help you sort through the clutter!

BlackRock: Go Abroad!

BlackRock {These are the folks that bring you iShares ETFs} thinks that some of the bigger investment opportunities going forward may lie abroad.  Here's what they say:

"Stocks in the U.S. have rocketed to big double digit gains for 2013, leaving investors wondering, 'when is it time to sell high?' Consider the options. For example, despite the recent emerging market stock rebound, EM equities were still trading at a 36% discount to U.S. stocks, and below their three-year average valuation, as of October 10, 2013, as measured by price-to-book ratios."  

In fact, BlackRock Chief Investment Strategist Russ Koesterich continues to like emerging market  stocks over the next three to five years.  See this link to BlackRock's Blog for his reasoning.  

Link:  BlackRock:  Equity Opportunity in Emerging Markets. 

*Long ETFs related to emerging markets in client and personal accounts.

Things Are Getting Better {Jobless Claims}

Bespoke Investment Group adds another piece of data to my argument that from an economic perspective things are incrementally getting better when it comes to the economy.  Todays piece of data is initial jobless claims.  Here's their take. {Excerpt because I didn't include all of the charts in their blog post.  My highlights at the end.} 

"Jobless claims for the latest week were released earlier this morning and showed a larger than expected decline.  While economists were looking for first time claims to come in at 335K, the actual level was 12K lower (323K).  This represents the lowest weekly reading for claims since late September.  With this week's decline, the four-week moving average dropped by just under 7K to 338.5K.  This represents the third straight week of declines for this reading since it peaked after the government shutdown.  Perhaps the best part of today's initial claims report was the non-seasonally adjusted reading (NSA), which fell to 322.5K.  For the current week of the year, this is the lowest reading since 2004, and it's well below the historical average of 389.6K for the current week going back to 2002."

Link:  Bespoke:  Jobless Claims Better Than Expected.

The Great Deleveraging

Chart from J.P. Morgan's 4th Quarter Guide to the Markets.  Chart shows how households have lowered their debt balances since the recession began back in 2007.  "The chart on the left shows the makeup of the household 'balance sheet' and the top-right chart shows what percentage of disposable income is spent on debt service, highlighting the consumer deleveraging we have observed over the past few years.  The chart on the bottom looks at household net worth, which is the sum of all assets, including home equity, less all liabilities."

Consumers paring down their debt has been a substantial headwind on markets.  That may be starting to change.  The New York Federal Reserve noted last week that the deleveraging process has begun to decelerate and household debt balances have started to increase.  Now in one sense that could be a cause for alarm if we were seeing consumers resort to their wild spending ways that seemed to prevail from 2004-2007.  That does not seem to be the case.  The Fed in that report notes, " Delinquency rates overall have been steadily improved since the crisis.  Overall 90+ day delinquency rates are at 5.3%, much improved from the peak of 8.7% reached during 2010:Q1.  New foreclosures have finally reach pre-crisis levels and are now at the lowest levels since 2005…." 

I think on balance we put this in the "Things Are Getting Better" category.  I think it points to how the straw of low interest rates and a better economic environment is finally starting to stir the consumer spending drink.  This could have very positive implications for economic growth next year if it's true and continues to pan out.

an tSionna {Gasoline}

Interesting perspective on longer term gasoline prices from Chart of the Day.com. {Subscription may be required}  We showed a similar chart back at the end of October.  Here's their take with my emphasis:

"Today's chart {pictured above} provides some long-term perspective in regards to gasoline prices by presenting the inflation-adjusted US price of one gallon of gasoline since 1980. There are a couple points of interest from today's chart. For one, Middle East crises are often associated with major swings in the price of gasoline. Also, gasoline price spikes have often occurred prior to an economic downturn. It is also worth noting that gasoline prices have declined $0.65 per gallon over the past eight months -- a relative positive for both the economy and corporate earnings going forward."

*No positions.

Link:  Chartoftheday.com: Gasoline.

Note:  I'm going to be out so a bit the next couple of days so the next post here should be Tuesday.

an tSionna {SPY}

Chart of the S&P 500 ETF SPY.  Overbought on a short term and intermediate basis by our work.
Chart comes from FINVIZ.com.

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

Things Are Getting Better: {State & Local Governments}

Barry Ritholtz has a new column over at Bloomberg noting that state and local government hiring is picking up.  He points to housing as the key driver:

"The primary reasons for this are housing and employment. Residential investment was a tremendous drag on economic activity from 2005 through 2010. That has since reversed, because of tax incentives and the extremely low rates engineered by the Fed’s quantitative easing.

From 2009 to early 2013, state and local governments were also a drag on economic growth. There is a direct correlation between improving residential real estate markets and local governments fiscal health. As property registrations, mortgage tax filings and certificates of occupancy increase, so too do local governments coffers improve.

With improving housing comes increased local government spending. Net net, state and local governments are no longer an economic drag."

Go read the whole thing here:  Bloomberg: Is State & Local Austerity Ending?

Armistice Day

An earlier generation knows that the origins of our modern Veterans Day comes from  the commencement of an armistice that ended the hostilities on the Western Front during World War I.  The Armistice took place on the "eleventh hour of the eleventh day of the eleventh month" of 1918.  Today marks the 95th anniversary of that event.  Many parts of the world still take two minutes of silence at 11:00 AM to honor the more than 20 million people who died in that war.  Today's post is a repeat of an article we first published back in 2006:

Most of the world has never heard of John McCrae. A Canadian of Scottish descendant whose family had a history of military service, John Alexander McCrae was both a physician and soldier. McCrae served in the Second Boer War and World War I. He also taught medicine at the University of Vermont and McGill University in Montreal.

However, McCrae is not remembered for being either a soldier or a physician. McCrae was appointed as a field surgeon in the Canadian artillery and was in charge of a field hospital during the Second Battle of Ypres in 1915. There, touched by the battle death of his friend and former student, Lt. Alexis Helmer, and inspired by the red poppies that grew in profusion near Ypres, McCrae wrote one one of the best known poems to come out of the “War To End All Wars” It is still recited by Canadian school children……

In Flanders fields the poppies blow

Between the crosses, row on row,

That mark our place; and in the sky

The larks, still bravely singing, fly

Scarce heard amid the guns below.

We are the Dead. Short days ago

We lived, felt dawn, saw sunset glow,

Loved, and were loved, and now we lie

In Flanders fields.

Take up our quarrel with the foe:

To you from failing hands we throw

The torch; be yours to hold it high.

If ye break faith with us who die

We shall not sleep, though poppies grow

In Flanders fields.

In 1918, while still serving in the same field hospital, McCrae caught pneumonia and meningitis and died. Poppies, particularly in Commonweath Countries are still used as symbols of the Great War and are still closely associated with Veteran’s Day here in the United States.

Please take a moment today to remember all of our soldiers past and present. Especially remember those who have made the ultimate sacrifice in the service of our country.

Europe's P/Es

Europe has been getting better all year.  Here's an excerpt of what Dr. Ed Yardeni thinks:

"The rebound in forward P/Es has been widespread among the major stock markets of the euro zone. They are mostly back to 2009 levels prior to when Greece hit late that year and early in 2010. In other words, investors no longer seem to be worrying about a “Grexit” or any other threat to the integrity of Europe’s monetary union. The question is whether there is more upside for the region’s valuation multiples. 

I think there might be, but forward earnings, which has been flat-lining since 2011, as I noted yesterday, needs to show some signs of life. That, in turn, requires that European economic indicators show that the region’s economy hasn’t just bottomed, but is actually recovering. The latest batch of these indicators does show a recovery, but a slow-paced one that may already have been discounted by the rebound in valuation multiples."

Signs of economic improvement have been manifest for months.  The latest indicator that things may be getting better over there comes the news that Ireland predicts a December exit from its international bailout program.  Europe's not out of the woods yet but all indicators seem to be indicating that the worst may have passed.  European ETFs have under performed the US over the past several years and perhaps it's time to ponder whether that same scenario will continue going forward.  Not saying that's going to happen of course, but we may need to consider whether there will be better growth in Europe and abroad next year than in the US.

Link:  Yardeni: More Upside for Euro Zone's P/Es?

*Long European related ETFs in client and personal accounts.

Smidiríní

Peggy Noonan-Wall Street Journal-Obama's Catastrophic Victory.
"We have a huge piece of U.S. economic and social change that debuted a month ago as a program. The program dealt with something personal, even intimate: your health, the care of your body, the medicines you choose to take or procedures you get. It was hugely controversial from day one. It took all the political oxygen from the room. It failed to garner even one vote from the opposition when it was passed. It gave rise to a significant opposition movement, the town hall uprisings, which later produced the tea party. It caused unrest. In fact, it seemed not to answer a problem but cause it. I calledObamaCare, at the time of its passage, a catastrophic victory—one won at too great cost, with too much political bloodshed, and at the end what would you get? Barren terrain. A thing not worth fighting for."

In the "Things are Getting Better" department, per Bloomberg.com:  "Economy in US Expands at a 2.8% Rate".

ECB Cuts Interest Rates.  {Reuters.com}

The Workforce is Even More Divided By Race Than You Think.  {The Atlantic.com}

Secret Rebalancing

Excerpt of an article I saw today over at a new blog I'm following, Capital Spectator.com.  By-the-way, I found this via the Reformed Broker.com.  {My highlights in green.}

The Biggest Little Secret In Money Management

"It happens all the time. A new strategy emerges from the obscure recesses of the research caverns and morphs into an ETF, mutual fund, or a separate account program..... But when you peel back the details and drill down into the core of the strategy du jour, you’ll typically find a familiar combination of variables: rebalancing with one or more factor tilts.

Product vendors trying to sell new funds don’t like to talk about this, but most of what passes as enlightened money management is linked rather closely with rebalancing the individual holdings back to a fixed-weight benchmark with a particular bias.......

A simple example is comparing the standard S&P 500 stock market index to an equal-weighted strategy that's applied to the same pool of companies. As a cap-weighted benchmark, the basic S&P index is commonly described as a “passive” measure of US equities. To some extent that’s true, particularly with regards to rebalancing: there is none. Granted, individual companies come and go in this index for a variety of reasons through time, but let’s ignore that for now. When you buy an S&P 500 ETF, you’re purchasing a strategy with a specific set of rules: no rebalancing, which promotes large-cap and growth tilts.

By contrast, an equal-weighted S&P 500 ETF—the Guggenheim S&P 500 Equal Weight (RSP), for instance—has a rebalancing regimen that periodically moves the weights for each of the individual names back to something approximating a 1/500 allocation. In turn, that simple strategy promotes small-cap and value tilts—tilts that have delivered a handsome premium in recent years over the standard S&P index, by the way. In any case, these tilts are conspicuous mostly in relative terms—relative to the cap-weighted profile of the standard S&P 500 index. The point is that by adding a rebalancing strategy to a portfolio of S&P stocks, the strategy generates different results.

Some clever managers (and their marketing departments) repackage rebalancing and the associated factor tilts as their own home-grown strategies..... And just to be clear, this rebranding and repackaging (R&R) knows no bounds in the money game. Repurposing a variation of the S&P equal weight strategy as something new and improved is merely the tip of the financial iceberg. Virtually all asset classes witness some form of R&R. You'll also find this activity in the growing field of multi-asset class products.........

The bottom line is that quite a lot of what appears to be a good deal in the exploding list of “enlightened” strategies in the land of ETFs and mutual funds is just an excus to charge more for something that can be accessed less expensively and more efficiently through other means. There are exceptions, of course, and those exceptions are worth every additional penny charged. Unfortunately, finding the exceptions takes work. Par for the course in a world that’s overflowing with high-priced mediocrity that's masquerading as creative and pioneering portfolio design."

My comment:  For many of the reasons stated in this article the Guggenheim S&P 500 Equal Weight ETF {RSP} is one of our largest holdings.  I also own RSP in personal accounts.

Link:  The Biggest Little Secret in Money Management.

an tSionna {Sector Performance}

Snap Charts of all sectors of the S&P 500 from Business Insider.com and via Goldman Sachs showing performance year to date how each sector has done.  Charts show that defensive sectors have underperformed, which you would expect in a year when the market's been red hot.  What I've found interesting is how well Health Care's performed even with all the negatives surrounding the roll out of the Affordable Care Act and it's expected crimp on medical expenses.  The chart in the top right corner is Goldman's recommended weightings for each market sector.  They currently overweight Financials and Industrials.  We like those sectors as well although we don't weigh sectors exactly as they do.

Link:  Business Insider.com:  Market Sector Performance.

**Long ETFs related to the S&P 500 in client and personal accounts.  Long certain of these sectors listed above in client and personal accounts.

Earnings Outlook

Thomson Reuters points out this week that 3rd quarter S*P 500 earnings {excluding JP Morgan} are expected to grow 4.2% over same quarter last year and 69% of these companies are reporting earnings above analyst expectations.  At the same time only 53% of companies are reporting revenue above expectations.  This highlights that growth is still hard to come by.  The forward rolling four quarter PE is 14.9%  That implies earnings out to then of 118.21.  The current PE for the S&P 500 is about 16.5%.  That's pretty much in line with historical averages and implies a current earnings yield of around 6.1%.  

Taking that PE out a year on that 118.21 estimate implies fair value for the S&P 500 of around 1,950. , assuming those earnings gains materialize.  That's potentially a 10% gain from where we trade right now out to then.  Keep in mind that I think that earnings estimate is a tad aggressive.  

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

Funds of Funds.

Interesting read in the Financial Times on Fund of Funds for Hedge funds.  These are the guys that normally take your money and allocate it amongst different hedge funds, usually charging a hefty fee {something like an additional 2% management fee and 20% of the profits} on top of what the hedge funds charge.  Those fees are usually the same, so in effect if you use one of these guys, you're cumulatively paying 4% management fees and up to 40% of your profits!  That's good work if you can get it!  Anyway, seems their performance is nothing to write home about.   According to the Financial Times, "$100 invested at the beginning of 2008 would be worth $96 today.  By comparison money invested in most major indices would currently be in the black and the average hedge fund manager would have turned that $100 into $114".  

Anyway if this sort of thing interests you go read the whole thing here:  Financial Times:  Funds of Hedge Funds Recast Dismal Model.