Samhain…er Halloween. How Much We Spend.

Fun stuff from The Atlantic.com on how much Americans spend on Halloween!

"Kicking off the end of year spending season is Halloween. Just how much do Americans spend on trick-or-treating and other Halloween festivities? The National Retail Federation (NRF) forecasts total Halloween spending—including candy, costumes, and decorations—to come in at $7.4 billion this year."  

Here the articles breakdown of that 7.4 billion spent on Samhain er…. Halloween based on the graph they provided.  I've included for comparison how this breakdown to other country's GDP in Green.

Halloween Total Spending-$7.4 Billion {Just under the GDP of Haiti}. 

Candy-30% or $2 Billion  {Equivalent to the GDP of the Central African Republic}.

Costumes 38% or 0r $2.8 Billion {Roughly Equivalent to the GDP of Guyana}.

Cards and Decorations 32% or $2.6 {Slightly below the GDP of Eritrea}.

Link: The Atlantic.com: Wait Americans Spend How Much on Halloween?


Happy Samhain….er….Halloween to all the Little Ghosts, Goblins and Elsas tonight on Ashland Avenue!

{And if you don't know who Elsa is then you've either not seen "Frozen" or you don't have kids, grandkids, a soul or a spouse who is a teacher!  Finally Jimmy Kimmel at this link tells you how you handle all those Elsa costumes when they show up tonight at your house.}


Next post here Tuesday as I will be out the first of the week.

In The Things Are Getting Better Department

Bloomberg News: US Economy Up 3.5% in 3rd Quarter, Capping Best 6 Months in Over a Decade.

an tSionna {10.29.14}

From Chart of the Day.  Here's a historical look at Price to Earnings Ratios {PEs}.

Note that I think they are using trailing PEs in the chart.  That is they are showing PE ratios based on reported earnings and not on estimates.  Forward looking PEs take about 3-4 points off of this index.  In the end though it doesn't matter.  Whether using historical or expected PEs, stocks are trading within a normal band of valuation, albeit at the higher end of that range.  Even that has to be taken within the context of historically low interest rates.

*Long ETFs related to the S&P 500 in client and personal accounts although positions can change at any time.

Link:  Chart of the Day: Historical PE Ratios.

Mid-Term Elections

The markets probably need a catalyst to project themselves higher into year-end.  I think the midterm elections have the potential to be the event that leads to a rally.  This is more likely if the Republicans somehow gain control of the Senate.  I don't really think it will matter much on major policy changes.  The Republicans, if they win, will not have the 60 votes necessary to override a presidential veto.  Psychology though is different and just the thought that we might have a more pro business agenda out of Washington could be enough to ignite the animal spirits going into 2015.  

We'll have to see the results of the elections.   I think there's a higher probability of a rally regardless of who wins the Senate but the path is clearer for that to happen with a GOP victory.  I'm also assuming in this scenario that there's no other major event washing up on the shores.

Link:  Businessinsider.com: Most Important Charts in the World.

*Long ETFs related to the S&P 500 in client and personal accounts although these positions can change at any time.

401ks

Everybody that has a 401{K} should go read the article linked below from Vox.com.  I thought it was a nice summary of why these vehicles make so much sense.  The chart below should be memorized by everybody under the age of 35 that might decide that they can wait and invest later in life.  I realize that not everybody has the opportunity to do so or invest the same amounts as shown in the chart when they're young, but it is a great illustration of the compounding power of money.

Link:  9 Questions about 401{K}s You Were too Embarrassed to Ask.

Trading Range

I have no idea what the markets will do between now and the end of the year and neither does anybody else.   I think the range we use in our cone of probability {see the post immediately below this one for what all of that means} still is valid.  That range is 1,700-2,100 on the S&P 500.  For all I know, something is going to flash across the screen that for either good or evil will render that analysis moot.  Absent an unexpected event though, probability suggests that our current projections in terms of price ranges are likely to be within the expected distribution of where the S&P 500 will potentially shake out by the end of this year.  

One of the most promising factors we have going for us is that the market is just entering its most favorable statistical period of the year.  We have written extensively over the years on market seasonality.  You can go here if you want a refresh on what we've said on this.  One of the chief takeaways from that article should be that the only print for Wall Street that matters is what posts at 4:00 PM Eastern Time on December 31st {or the last trading day if the 31st is on a weekend}.  The cynical among us knows that more than anything Wall Street wants to get paid and so a lot rides on decent market performance going into year end.  Down or disappointing years are bad for bonuses.  

One of the advantages to a pullback like we've seen is the market has given us a road map of sorts.  The market broke its decline in an area of support that dated back to last spring.  Basically it turned around right in a zone where probability suggested that at the very least a reflex rally would ensue.  Instead stocks have performed the typical "V" shaped rally that has been so common during every corrective phase since 2012.  Today is no exception as stocks are up nicely as I'm writing this.  Traders will now look to last week's market bottoms as a "line in the sand" of sorts.  Traders would initially expect and probability would suggest that any retest of the lows should now hold somewhere in the range I've highlighted in the green box above.  A break substantially below this box would get a large amount of the investment community worried that the discounting mechanism of the markets was foreseeing a worsening economic picture into 2015.  Right now this is not a concern as stock prices have now risen substantially above these lows.

The other side of this map shows something interesting, illustrated by the area highlighted in the red box on the chart.  The September-October decline left months of trapped longs.  That is nearly everybody that bought stocks from roughly late April to last week held a losing position.  Now it's possible that none of that is going to matter as we've rallied hard in the past five trading sessions. but probability suggests that we may find the going a bit tougher the closer we get back to the old highs, purely on a money flow basis.  On the other side, if we ignore the past few months and power higher into the year's end, that could be signaling potential positive in the economy that we are not yet aware of.  We will watch the markets for clues in the next few weeks.  I for one though wouldn't be surprised if markets trade flattish for awhile.

Next post will be Monday.

*Long ETFs related to the S&P 500 in client and personal accounts.  Please note these positions can change at any time without notice.

an tSiona {Long Term}

The market has declined from peak to trough about 10% since the beginning of the latest sell off, though we've recaptured about half of that after yesterday's action.  I thought today I'd put up a longer term chart of the S&P 500's ETF {SPY} for reference.  

I'm posting this chart that goes back to 2007 without any commets.  There are short term actions and longer term trends.  I'll leave it to the reader to see what he or she wants see in this chart.  More on this at a later date.  Chart is from FINVIZ.com  

*Long ETFs related to the S&P 500 in client and personal accounts.  Please note these positions can change at any time without notice.

Valuation {10.21.15}

I thought we could gain a bit of perspective by checking out the valuation of the S&P 500 after its current decline.   As yesterday's close, the S&P 500 is trading at 1,904.  That is a decline of around 6% from it's highs  and is a 4% decline from when we last reviewed this subject back on 09.13.2014.  Below is our current analysis.  Please note that the forward PE for the index is now based on year end 2015 results.  From now on I am gong to use a simple color code to give you some reference for these numbers.  Green will indicate that the valuation on the index on a strictly historical basis has become more attractive from the last time we did this review.  Red will indicate the opposite. 

Our Midpoint S&P 500 Earnings Estimate of $118.75 {Through 12.31.2014}

Current PE:                     16.03

Earnings Yield:               6.23%

Dividend Yield:               1.85%

Rolling Four Quarter Estimate  $129.34 {Through 10.18.2014 via Fundamentalis.com}

Current PE:                   14.72

Earnings Yield:               6.79%

Dividend Yield:              1.85%

Current Expected Price Cone of Probability,   10.21.14:   1,700-2,100.

The current yield on the 10 year US Treasury is 2.19%.  

The Cone of Probability is our current assessment of the trading range within which we think stocks have the potential to trade during the described time period.  It is a probabilistic assessment based on a many factors.  Some of these inputs are: Earnings estimates, also are those estimates rising or falling, dividend yield, earnings yield and the current yield on the US 10 year treasury.  This is not an exhaustive list of all of the variables that are used in creating the cone.  The Cone of Probability is used solely for analytical purposes.  It will fluctuate with market conditions and changes to the data inputs.  Index prices can and have traded outside of the range of the cone.  The data supplied when we discuss the cone is for informational use only.  There should be no expectation that this price range will be accurate and there are no guarantees that this information is correct.

*Long ETFs related to the S&P 500 in client accounts, although positions can change at any time.  

I have to be out tomorrow so the next post here will be on Thursday.

an tSionna {10.20.14}

Updated chart of the S&P 500 ETF {SPY}.  We like to use this as a proxy for the market because it is a highly liquid ETF that many individuals own.  Notice this pullback has stopped and found support in places where that has made sense.  Now on a few of those occasions the market took out that support but at those levels the market at least tried to make a stand.  We will take our clues in the coming days on possible market direction by how the market responds to these levels.

One thing to note now is all the resistance in the index at higher prices.  Basically anybody who bought this index from June-through early October is now under water.  That represents resistance-disappointed buyers at higher prices-who may be tempted to sell as the market moves higher to the levels where they may have bought the index.  Probability suggest that based on money flows, stocks will have to take some time to eat through this resistance.  Not saying market can't go higher.  It does suggest that it may take some time for stocks to move back towards their previous highs.  Another way of saying that this time it may not be a straight shot back to new highs.

Update:  We have been buyers of certain ETFs during this decline.  Our buys have varied by strategy and client risk/reward perimeters.  In order to reflect what we have been doing we will change our short term rating back to NET MARKET POSITIVE.  Our longer term and intermediate indicators are remain at NET MARKET POSITIVE.  We last changed this indicator to neutral on August 5, 2014.  We do not use these changes as a market timing mechanism or trading vehicle, nor do we claim these as such.  This is simply our way of trying to reflect to our readers what we on an aggregate net basis have been doing in client accounts.  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.  In general we will also not discuss any specific ETF, strategy or any other security we might have purchased or sold.  If you want those sort of specifics you need to hire us!  You can go here to get a better understanding of what these  terms mean.

*Long ETFs related to the S&P 500 in client and personal accounts.  Please note that positions can change at any time without notice. 

Why Folks Don't Feel The Economic Recovery

Very interesting article over at the "Atlantic.com" on "Why People Can't Feel the Economic Recovery".   The article hits several key points that have been covered elsewhere, but one of my take-aways is this chart that offers a visual representation on the affordability of many categories of things that people purchase.

This graph points out something I've commented on over the years.  One of the differences I've noticed that's different between now and when I was growing up is that things like college, health care and a home were relatively affordable back in the day while gadgets like televisions and microwaves etc were relatively expensive.  When I was a kid, you bought a TV and kept it till it died and couldn't be repaired.  Today you just throw it away as the cost to repair {if repairing it is even an option} is more than buying a new one.  The new TV by-the-way is likely cheaper on a relative basis and much better than the one it's replacing.  Of course you can't even discuss computers or cellphones because when I was a child these were the subject of science fiction.  The communicator that Spock, Kirk and McCoy used on "Star Trek" isn't as sophisticated as my iPhone {which is itself now two generations old}.

So today the "toys" are cheap but the basic goods have become much more expensive.  College education has soared beyond the point of comprehension for most folks and health care cost can ruin families.  In the long run, for most Americans, it may not matter if your new cellphone can hold 10,000 pictures or your new 80 inch 4K HD-3D TV can pick up a pimple on an actor's nose or gives you 300 channels if you can't afford where you live, you can't pay for your kid's college or you worry that your one step away from bankruptcy court if you get sick.

Anyway the article is informative and short.  I recommend that you give it a once over if you want to get an idea of why the average American is so downbeat about the economy.

Pondering Energy

I've spent a bit of time pondering bigger picture aspects of what we've seen since the calendar rolled into fall.  I'm not quite ready to put all of my thoughts out here yet but there is one thing that stands out and that's the decline {some might say crash} in oil and energy related stocks.  Here's a chart of the energy sector ETF, XLE to illustrate what I'm talking about. {Chart comes from FINVIZ.com.}

The decline here represents a bit over 20% since the summer highs with most of that coming since Labor Day.  The decline has also accelerated in the past week.  There's a lot that this could say about the global economy and much of that would be negative.  Lower energy prices have traditionally been associated with lower global economic growth rates or over production.  I think there's something to that as we know that growth has slowed overseas.  But I also wonder if any of the following is starting to also have an impact.

Gasoline sales that plateaued for years here in the US have collapsed in the past decade.  Add to that cars get much better mileage today than they did ten years ago and the fact that millennials seem to have no interest in driving or at least not as much as their parents did at their age.  I had three young people in their 20's over the weekend visiting my house.  Only one of them needs a car for work and even he doesn't drive all the time, spending three out of five days working from home. 

The cost of solar power continues to dramatically decline.  Renewable energy is also finding increasing acceptance.  The wind farms along I-65 between Chicago and Indianapolis are evidence of this.  

Energy prices will not decline forever and this sector is currently over sold, but I'm beginning to wonder longer term if we've reached a tipping point in how we're going to look at energy.  On another level the decline in energy costs is not a bad thing.

"Business Insider" quotes Deutsche Banc's  Joe LaVorgna who notes that "every one cent change in the price of a gallon of gas is worth approximately $1 billion in annual US household energy expenditures".  That savings according to LaVorgna in the same article is an annualized rate of $40 billion or the equivalent of almost three-tenths on annualized GDP  growth.   The chart above also from the same article shows a high correlation between the change in retail gas prices and the change in household energy consumption.   That's real savings and is likely to be reflected later on in other levels of the economy.  

*Long ETFs related to energy in certain client and personal accounts depending on client risk/reward perimeters and portfolio strategies.   

an tSionna {10.14.14}

We've recently run these performance charts of multiple asset classes as represented by ETFs.  I thought it was worth a revisit for perspective given how horrible the markets have performed over the past three trading sessions.  Yesterday's drubbing near the close may have been influenced by the holiday trading than any particular news.  Right now {30 minutes after the open} we've erased a pretty good chunk of those losses.  First charts are performance from beginning of July till yesterday.  Charts are from Stockcharts.com.  You can double click on these to make them larger.  I can save you the effort because the only asset classes that have made you money during that time were short term bonds and cash.  Folks, that's not a bull market environment.

This second set shows how we've performed since the end of summer.

*Note that with the exception of the bonds we have exposure in one form or the other to most of what you see in these charts.  Note also that the distribution of these assets isn't uniform across all of our accounts due to different investment strategies and also note these positions can change at any time.

an tSionna {10.08.2014}

Yesterday's sharp drop in the markets brought into clearer focus for the average investor that stocks have been having a tough go of it lately. We've been talking about a certain uneasiness in the markets since last summer.  See here and here.  That uncertainty as well as seasonal factors are several of the reasons we downgraded our short term indicators back on August 5, 2014.   There's been a lot to digest the past few days so I want to sit back for a day or so and think through the implications from what we've been seeing recently.  I'll put out my thoughts on markets through the rest of the year out early next week.  I won't be posting until Tuesday next week as I have client events to attend Thursday and Friday while the markets will have a truncated session on Monday due to the Columbus Day holiday weekend.  In the meantime here are a few ETF charts for you to review and a few brief comments.    You can double-click on the charts to make them larger.  Charts are provided by FINVIZ.com.

Add caption

Major indices like the the Nasdaq 100 {QQQ} and the S&P 500 {SPY} have held up the best.  In fact they really have only started rolling over in the past week or so.  The process has been more pronounced the further you travel down the capitalization chain and the risk spectrum.  Josh Brown over at the "Reformed Broker" had a piece discussing this yesterday.  

Above is the chart of the iShares Russell Mid-cap index {IWR}.  It's sell off gathered energy in the past week and is now testing support.

 Above is the iShares Russell 2000 or small-cap index.  It has experienced a precipitous fall since the summer and is now testing even longer term support.

Here's a broader index of international markets.  It shows a sell off similar to the US mid-cap index.  

For me the jury is out on where we go from here.  US markets are at least growing, even if the rest of the world is sputtering a bit.  Hard to ignore the seasonal factors and their negative effect on stocks around this time of the year which we've discussed  ad nauseam  over the past few years.  We've been quiet in client accounts for the most part, having identified levels of rebalancing over the summer and been content to let our indicators guide us these past few weeks.  Like I said, I'll have more to say on this next week.  

One last thing.  In a post from June 26, 2014 that was titled "Time Off", I listed several things that could bother the markets going forward.  I listed these in the article:  The economy, Iraq, Immigration, the election cycle and interest rates.  I ended that article by saying this:

"Of course it's likely that the thing which will finally give markets a pause and even lead to some sort of a decline isn't even registering on any body's radar.  That's the way it is sometimes.  Nobody for example thought at the beginning of the summer in 1990 that Iraq would invade Kuwait.  Or it could be that stocks have already taken all this into account, discounted the outcomes and nothing will come of any of it.  We'll have to see." 

I'm hoping that Ebola isn't the great unknown that will wash over the gunnels, taking the market down with it.  I don't think this is a major economic concern right now, even as it is a humanitarian crisis in West Africa.  But this could have much greater implications should it spread beyond the region and begin to work its way into the developed parts of the world.  We're watching this even more closely now.

See you Tuesday.

*Note  we have exposure in one form or the other to most of what you see in these charts.  Note also that the distribution of these assets isn't uniform across all of our accounts due to different investment strategies and also note these positions can change at any time.

On Allocating Assets

From the Blog "Pragmatic Capitalist". {Highlights are mine}

"Vanguard now manages $3 trillion in assets which is the same as the entirety of the hedge fund industry (see here for more).  This is fantastic news.  It means that low fees are winning.  When one considers that the S&P 500 generates just a 6.5% real, real return historically you have to be increasingly mindful of how much of that result is due to your fee structure.  When you’re paying 10, 20, 30% of your returns per year to a manager then you’re probably paying too much.  This is likely to be even more important going forward as bonds are likely to generate lower returns than we’re all used to so this means that high fees will cut into your returns even more than they used to.

It’s a wonderful time to be an asset allocator.  Products have never been more accessible at such a low cost.  You just have to make sure you’re being smart about your approach.  Know that even when you use low fee index funds you’re making an implicit forecast.  Know that you’re making active allocation choices.  Know that if you pay someone to do this on your behalf then you’re essentially paying for their ability to manage that allocation process for you.  The necessity of actively managing ones portfolio isn’t going away just because the fees are coming down.  So go into all of this with your eyes wide open and don’t assume that low fees necessarily lead to a better process."

*Long ETFs related to the S&P 500 in client and personal accounts although positions can change at any time.

Link:  Pragmatic Capitalist:  "Three Things I think I think."

Eight Financial Rules

Piece I saw earlier this week over at "Business Insider" on eight personal financial rules.  I liked the article so I'll list the rules.  Go read the whole thing here.

1.  Spending money to show people how much money you have is the surest way to have less money.  Ok this is the only part I'll talk about other than the rules and that's because I love the response the money manager gave to being sued by the singer Rihanna for not doing her job when she found herself effectively bankrupt in 2009.  "Was it really necessary to tell her {Rihanna} that if you spend money on things you will end up with things and not the money?"

2.  Wealth is completely relative.

3.  The goal of investing isn't to minimize boredom, it's to maximize returns.

4.  The only way to build wealth is to have a gap between your ego and your income.

5.  The most valuable asset you can have is a strong propensity to not care what others think.

6.  Spend more time studying failures than successes.

7.  People are flawed so a lot of stuff makes no sense.

8.  Anything can happen at any time for any reason.

The Midwest

I'm a native of Indiana and have lived in Chicago since 1985.  That makes me a "Midwesterner" by birth and disposition.  My roots as the "Patrician" once said grow four feet thick and four feet down.  Thus I found this article "41 Maps and Charts that Explain the Midwest" a fun read.  Go take a look at it.  Come on it's Friday!  What else do you have to do!

There does seem to be a controversy over what states exactly constitute the Midwest.  I'll answer that once and for all by the way we were taught in geography class way back at West Side Middle School.  It's illustrated pretty well by this chart below from the same article.

The Midwest states are those that were originally part of the Northwest Territory.  That's how we were  taught in school and that's the definition that's going to stick!  Everything to the west of us is part of the Great Planes.  Everything beyond the Ohio River belongs in the South.  East of Ohio is part of the East Coast.  There's one exception to this which is…..Iowa!  Why Iowa?  Because Iowa is part of the original Big 10 Conference!  Sorry Pennsylvania and everybody else added since.  You don't make the cut.

See you Monday.

A Variant View On Bonds

One of my original muses is a fellow I refer to as  the bondman.  He's been in the bond business for over forty years and has forgotten more about that trade craft than I'll ever know.  He has a variant view on interest rates.  While the world expects US interest rates to rise next year, he's not so sure.  He gave me three reasons on Monday why that might not happen.  These by-the-way are not in any particular order.

1.  World interest rates are lower than  in the US and expected to stay that way overseas.  He thinks it will be hard for rates to go much higher here when the rest of the world is still in easing mode.

2.  The Federal Reserve has added by his calculations something like four trillion dollars of bonds to their balance sheets with all of its bond buying over the past few years.  He doesn't think the Fed is going to trade against itself by willingly raising rates on bonds.

3.  The economy is still fragile and he doesn't see the "Feds" raising rates until it's on better footing.  I think this is his most important point.  A lot of business and commerce has been done over the past few years on the backs of historically low rates.  I bought a car in 2013 with zero money down and at a 0% interest rate.  That's saving me a lot of cash over the life of the loan.  Multiply me by the 15 million cars sold last year and you see how this has rippled through the economy.   Or take a look at the home mortgage market.  Housing has been problematic over the past five years without rates rising.  Hard to imagine what happens there if rates were to rise.  The fact is that the low interest rates of the past few years have been pure economic stimulus for the consumer that can take advantage of them.  Low rates have not only put money back in peoples pockets {lower rates means less money spent on interest service} they have also allowed consumers and businesses to repair their balance sheets by refinancing. Bondman doesn't think the "Feds" will be willing to take that away so quickly.

Just passing this along for the good of the Corp.  I think we could see a moderate rise in rates next year.  Maybe 100 basis points, which I don't think would be a drag on growth but Bondman thinks I'm wrong.  Irrespective of this though, his bond portfolios are short term in duration-in the 3-7 year range. 

Market Returns Q3.2014

Here's some performance charts from Stockcharts.com that shows how different markets faired in the 3rd quarter of 2014.  You can double click on the charts to make them larger.

Heres the market by sector.  Cyclicals and energy had a rough go of it.  Utilities also took it on the chin as the markets began worrying about rising interest rates.  Once again the summer months lived up to their reputation of being part of the statistically weakest period of the year.

Performance of select ETFs in the two charts below.  Bad news for gold, bonds and most foreign based ETFs.

*Note that with the exception of the bonds we have exposure in one form or the other to most of what you see in these charts.  Note also that the distribution of these assets isn't uniform across all of our accounts due to different investment strategies and also note these positions can change at any time.

Market Returns Year To Date

For comparison against the quarterly charts published above, here at the year to date charts of the same sectors and ETFs listed below.  Looking out this far shows that market returns in most sectors and ETF major indices are still positive.  You can double click on the charts to make them larger.  Charts come to us from Stockcharts.com.

*Note that with the exception of the bonds we have exposure in one form or the other to most of what you see in these charts.  Note also that the distribution of these assets isn't uniform across all of our accounts due to different investment strategies and also note these positions can change at any time.