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 2014 is a wonderful year!

God Bless!

This blast from the past shows the "old school" butter method of cooking a turkey.  Enjoy!

In The Things Are Getting Better Department

Despite all the naysayers earlier in the year, the US economy has defied many and grown since the winter related 1st quarter slow down at an accelerated pace.  See this from Bloomberg.com:

"The economy in the U.S. expanded more than previously forecast in the third quarter, reflecting bigger gains in consumer spending and business investment and capping the strongest six months of growth in a decade. 

Gross domestic product, the value of all goods and services produced, rose at a 3.9 percent annualized rate, up from an initial estimate of 3.5 percent, Commerce Department figures showed today in Washington. The median forecast of 81 economists surveyed by Bloomberg called for a 3.3 percent gain. After the 4.6 percent increase in the second quarter, it marked the biggest back-to-back advance since late 2003."

That kind of growth rate if sustained means that 2015 estimates have the potential of being revised higher.  It also brings up the more likely possibility of mid-year interest rate increases.

Just a reminder the next post here after "Turkey Day" will be next Tuesday.

Link:  Bloomberg.com: Economy in U.S. Expands 3.9%, More Than Previously Forecast.

an tSionna {S&P 500} Plus A Slight Change

Chart is from Finviz.com.

It has now been 29 trading sessions since the market cracked its lows back in mid-October.  What a difference a month can make.  Of course back then much of the financial media and blogosphere was taken up with practically every negative aspect of what was going wrong then and could go wrong in the future.  Back then we were obsessed with the end of the Government's asset repurchasing program, bleak growth overseas along with he constant conflict in Ukraine and the Middle East, Ebola and declining energy prices.  We listed a lot of what was bothering the market back on October 8th, which was also an echo of an article we posted way back at the end of June called "Time Off".  In that piece we listed a variety of late summer headwinds for the markets that ultimately carried over into the fall.  

Reflecting what we were doing in client accounts back then we changed our short term rating to NET MARKET POSITIVE.  We of course had no unique view back then what the markets would do going forward.  Indeed our most likely scenario we discussed on October 23rd when we suggested that stocks would have to deal with all the resistance created by the summer's sideways market.  We did note in that article that we now had end of year seasonal trading factors in our advantage.  Rather our indicators and the probabilistic analysis of the playbook suggested that certain areas of the market looked attractive at that juncture.  Reflecting these thoughts and disciplines, we were buyers of certain ETFs during this decline.  Our buys varied by investment strategy and also reflected our client's unique risk/reward perimeters.  That mid-October juncture has proven to be a good level of entry for most markets.  From it's lows on October 15, 2014 till last Friday's close the S&P 500 as reflected by its ETF, SPY,  has gained in excess of 13%.

Reflecting on that sharp rise leads us to the conclusion that on a short term basis at least, US equities are no longer as statistically cheap as they were a month ago and are now over bought by our work per many of our short term indicators.  Accordingly and again to reflect what we have been doing in client accounts, we will move our short term indicators for the US equity markets to NET MARKET NEUTRAL.  We will leave the short term indicators for foreign markets unchanged at NET MARKET POSITIVE and our intermediate and longer term indicators also remain unchanged at Positive.

Probability suggests that markets should have a quiet Thanksgiving week unless something unexpected comes over the transom.  Thanksgiving week has an upward bias with the day after {Black Friday for the shopping world} being positive something like 87% of the time.  We'll post tomorrow then we're off until Tuesday of next week.

It is important for readers of this blog to understand that 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.  A such you should also understand that in general you are seeing me discuss an overall approach to aggregate portfolio strategies that have already occurred and may now even be out of date depending on market conditions.  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 although positions can change at any time.

Sector Update

The chart above published by Bespoke Investment Group shows the percentage of stocks in each S&P 500 sector that are trading above their 50 day moving average.  The obvious laggard here is energy, reflecting the steep decline in oil prices this fall.  The other thing to note here is that when 82% of the S&P 500 stocks are trading above their 50 day moving average then the market is over bought at least in the short term.

Much has been made about the windfall to consumers of falling gasoline prices stemming from the decline in oil.  I normally don't pay much attention to the price of gasoline in regards to consumers because the 20-40 cent price variance that we've mostly seen in the past few years I don't think matters too much in the big picture.  On a personal level we don't drive that much so the usual small changes aren't that noticeable to my pocket book.  But I couldn't help but notice that gas cracked the $3.00 level for the first time here this week and I'm likely paying a dollar to 65 cents less for gas than I was a year ago.  That IS a big deal to folks when your saving 10-15 dollars each time you fill up.

*Each of these sectors above is represented in some strategy of our investments for clients.

Link:  Bespoke: #EBE

Posting schedule next week will be light due to Thanksgiving.  Expect something here Monday-Wednesday and then we'll be back the following week.

Foreign Markets: Valuations

T. Rowe Price is out with their 2015 outlook which was reviewed over at Business Insider.com.  {You can click the link at the end of this article if you want to view the whole slide presentation.}  One of the things that stands out as presented in the slide below is how cheap emerging markets are compared to the US.

Long time readers here know I've been beating the emerging and foreign developed markets drum for a long time.   The last time we discussed this was here.   Too say that these markets have for the most part disappointed over the past few years would be an understatement.  This is especially true when comparing most of these to the US markets.  Yet I wonder if these may begin to start getting their due by investors.  Even accepting that many of these countries have some "hair on the dog" right now {Russia has a problem with the West and Ukraine, Brazil has an ongoing scandal with Petrobras and corruption}, valuations in many are compelling as are their dividend yields.  Compare the average PE above at 12.9 to the S&P 500's nearly 17 PE on a trailing basis and the average yield nearly a percentage point higher than the S&P.  I'll also say that there's some interesting things I'm starting to see in regards to money flows into these areas.  I might discuss that in detail at another time.  

Look for all I know these markets may be losers again in 2015.  They've underperformed much longer than I thought was possible and are probably the most hated asset class out there right now.  But that doesn't mean they shouldn't be on our radar screens and open to the possibility that 2015 just might again be their time to shine.

Link:  Business Insider: T Rowe Price 2015 Market Outlook

*Long individual ETFs related to China & Brazil and the S&P 500 in certain client accounts and strategies.  The rest of the countries shown in the above chart and Petrobras are represented in various  foreign ETFs we own in client and personal accounts.  Please note these positions can change at any time and without notice to readers here.

an tSionna {Divergences}

Almost any index or ETF related to US markets have seen substantial rallies since mid-October.  But while major indices like the S&P 500 continue to make new highs others under the hood have stalled out.  See below.  All indices represented by ETFs.

Here's the S&P 500 ETF.  Notice it's continued to rally recently.  Having said that, the trading range has narrowed over the past week.

Here's the Russell mid-cap ETF.  Notice it's stalled for now at the highs it previously hit back in September.

Now here's the Russell small-cap index.  Basically gone nowhere in 2014.  Notice that it's not only stalled out near its previous highs but so far failed at or near resistance {that purple line on the chart} now for the 3rd time.

Wanted to flag this divergence as probability suggests that if this doesn't correct itself and begin to follow other major indices higher then this could be negative for stocks.  This is something we'll pay more serious attention to going forward.  For now hard to tell what this means and we'll let our indicators guide us.  Markets are overbought right now so that could also be a negative tell.  Will remind readers that seasonal factors often trump money flow analysis this time of year.

Not a recommendation to buy or sell.  Just simply stating what our indicators are telling us.

*Long ETFs related to the S&P 500 and the mid-cap indices in client and personal accounts.  Long ETFs related to small-cap indices in certain client accounts.

Two posts today but I'm out tomorrow.  Look for something here Thursday.

Charts via FINVIZ.com.

The Loneliest President

From Peggy Noonan over at the Wall Street Journal.  {May be behind a paywall.}

The Loneliest President Since Nixon. {Excerpt}

"I have never seen a president in exactly the position Mr. Obama is, which is essentially alone. He’s got no one with him now. The Republicans don’t like him, for reasons both usual and particular: They have had no good experiences with him. The Democrats don’t like him, for their own reasons plus the election loss. Before his post-election lunch with congressional leaders, he told the press that he will judiciously consider any legislation, whoever sends it to him, Republicans or Democrats. His words implied that in this he was less partisan and more public-spirited than the hacks arrayed around him. It is for these grace notes that he is loved. No one at the table looked at him with colder, beadier eyes than outgoing Senate Majority Leader Harry Reid , who clearly doesn’t like him at all.

The press doesn’t especially like the president; in conversation they evince no residual warmth. This week at the Beijing summit there was no sign the leaders of the world had any particular regard for him. They can read election returns. They respect power and see it leaking out of him. If Mr. Obama had won the election they would have faked respect and affection. 

Vladimir Putin delivered the unkindest cut, patting Mr. Obama’s shoulder reassuringly. Normally that’s Mr. Obama’s move, putting his hand on your back or shoulder as if to bestow gracious encouragement, needy little shrimp that you are. It’s a dominance move. He’s been doing it six years. This time it was Mr. Putin doing it to him. The president didn’t like it."

10 Truths Mutual Funds Can't Admit

Nice synopsis by Barry Ritholtz over at the "Big Picture" of an original "Marketwatch.com" article  by Ian Salisbury titled "10 Things Mutual Funds Won't Say".

Here's Barry's Summary of the original article:

10 things mutual fund companies won’t say

1. “Cheap funds often outperform pricey ones.”

2. “We can’t beat the market.”

3. “When skill fails, we just double (or quintuple) our odds.”

4. “People aren’t buying our product…”

5. “…except when we pay them kickbacks.”

6. “Hedge funds are our idols.”

7. “Our boards are rubber stamps.”

8. “Blame us for runaway CEO pay.”

9. “We played a starring role in the financial crisis.”

10. “Our lobby crushed bipartisan efforts at reform.”

I'll add perhaps the most important point to this list that should have been included but wasn't,  ETFs are for the most part much cheaper than your average mutual fund.  Point 1 in the original article is talking about cheap mutual funds relative to their more expensive brethren.  

Probabilistic Approach To Investing

Anybody who has spent some time here knows that we take a probabilistic approach to investing.  It is the basis behind our playbook and our game plan.  Here is how Cullen Roache over at "Pragmatic Capitalist" describes the same principle.  Our definition of this is a little different but he manages to hit the main point. 

"The smartest investors know that they’re actually not that smart.  That is, they recognize the fact that they’re going to be wrong a lot.  But in realizing this they also acknowledge a more important fact – they don’t have to be right all the time to succeed.  They just have to be right about the right stuff when it matters."

I suggest you read the rest of the short article at the link below.

Pragmatic Capitalist.com:  "Great Investors Think in Terms of Probabilities." 

I will be out tomorrow so the next post here will be Monday.

Elections And The Stock Market

Dr. Ed Yardeni over at his blog notes that the year following mid-term elections is usually positive.

Dr. Yardeni's notes:

"(1) Mid-term elections. Last Monday, I noted that our analysis of mid-term elections found that since 1942, the S&P 500 rose on average by 8.5% for the subsequent three-month periods, 15.0% for six months, and 15.6% for 12 months. There was only one out of the 45 periods that was down, and just for three months! One has to go back to Depression-era market losses to find two periods when this indicator did not give consistently positive results. 

(2) Presidential third terms. I extended last week’s analysis of the presidential cycle from 1951 back to 1928 using daily data for the S&P 500. The average gain for the third years of presidential terms was 13.4%, well ahead of the averages for the first (5.2%), second (4.5), and fourth years (5.5). Of the 21 third years, only two of them were down during the Great Depression. The 22 first years and 21 second years each included 10 downers. The 21 fourth years included six negative ones. 

(3) Years ending in “5.” There have been eight years ending in “5” since the start of our daily S&P 500 data. They all have been up with an average gain of 25.3% ranging from 3.0%-41.4%. By the way, the two-year gain for years ending in “5” and “6” averaged 37.6%, with seven of the eight periods having double-digit gains and only one period down by 5.2%."

Link:  Yardeni.com: Political & Other Cycles Driving S&P 500 {Maybe}

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 96th 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 descent 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.

Seasonality: A Reprint.

I talk a lot about seasonality and usually link it to various past postings.  Today I thought I'd reprint what I said about this is a post from back in 2012.  The complete post is below.

FRIDAY, APRIL 06, 2012

Q&A {Part III}

Today is part III of our Q and A.

You place a lot of emphasis on market seasonality.  Why is that?

We have touched on this in past client letters here   here  and here.  Basically  there  are seasonal variations or patterns that come into play in most years. The study of these bullish and bearish phases means that I accept as a given that stocks at some point this year will experience a sell off between 8-20%. This is simply the normal course of how markets behave in most years. It is part of the seasonal variation of how in a normal investment year stocks will cycle between bullish and bearish phases as measured by money flows.  While market declines can come at any time, statistically stocks are most prone to major sell offs in between the months of March and October. 

As I've said in the past {see link above} one of the reasons I think this pattern works is the philosophy behind how most of what we refer to as institutional money is invested. Institutional money is a generic term for large institutions such as pension plans and large asset managers such as mutual funds. It is managed on a relative basis usually tied to a specific benchmark and is also managed so as to not give up the assets. By relative basis I mean as an example in a market that loses ten percent, institutional accounts that go down only 8% are said to have outperformed their peer group. That influences how their portfolios are set up. Institutions generally start a year with similar economic and valuation expectations for stocks. 

Institutions have a very strong incentive to be heavily invested in the early months of a new year. They are afraid to fall too far behind their benchmarks. Their thinking is similar to that of a baseball manager at the beginning of a long season. The manager knows you don't win a pennant in April but you can lose one during that time. As the year progresses and in particular if stocks have advanced in the first few months, equities begin to look less attractive on year end expectations. Stocks will either need unexpected positive news {i.e. better than expected earnings news or higher economic forecasts for example} or prices will begin to stall out.  One of my concerns right now is that the markets have had such a strong move that much of the economic expectations are already priced into stocks.  If companies don't excessively move the needle higher on earnings and sales going forward than investors, especially those with a shorter term horizon,  may begin to lock in their profits.  

Stocks will fall of their own weight unless there are marginal new bidders for their shares. Summer is typically a down period for Wall Street as the news flow often dries up {unless it’s bad news. It is amazing how many international crises begin in the late spring/summer period. Both World Wars, the Korean War, 9/11, the First Gulf War and the 2008 banking crisis are examples of this.} 

Summer is also when analysts begin to fine tune their expectations for stock prices as clarity begins to enter the picture about year-end economic activity. Stocks will also begin to discount any lower revisions or negative economic news during this period of seasonal weakness. Once this discounting process is completed stocks will usually then begin to rally sometime in autumn. The cynical amongst us also know that the only print that matters for most money managers is the one shown when the market closes on December 31st. To put it simply Wall Street wants to get paid. So there is a strong incentive to boost share prices during the 4th quarter of the year.

Link:  Solas!  Q&A Part III

Note:  The Q & A was part of a faux interview that was used as a basis for a letter to clients and a series of blog posts.  It is a formatting form and I'm not implying I was interviewed for anything.

In the Things Are Getting Better Department

US Payrolls Rise as Jobless Rate Drops to Six Year Low.  214,000 jobs created.  Unemployment rate falls to 5.8%.  {Source Bloomberg.com}

And from Business Insider.com. {Emphasis Mine.}

"The drop in the unemployment rate takes this number {Jobless Rate} to its lowest since 2008, and the "U-6" unemployment rate, which also includes those working part-time for economic reasons, fell to 11.5% from 11.8%. Unrounded, the headline unemployment rate came in at 5.756%. 

In a note to clients following the report, Paul Ashworth at Capital Economics wrote that, "Although the 214,000 gain in non-farm payrolls in October was slightly below the consensus forecast at 235,000, this was still, on the whole, a strong employment report. A massive 638,000 surge in the alternative household survey measure of employment pushed the unemployment rate down to only 5.8%."

The household survey is a broader employment measure that includes self-employed workers with unincorporated businesses, unpaid family workers, and agricultural workers. This reading, however, has a larger margin to error than the headline establishment survey.

Friday's report showed that average weekly hours worked edged up, in-line with expectations, to 34.6 hours. 

Wage growth remained somewhat disappointing, as wages grew 0.1% month-on-month, missing expectations for growth of 0.2%. Year-over-year, wages grew 2%, below expectations for a 2.1% gain. 

The labor force participation rate, which is also closely watched by the market, rose slightly from last month, to 62.8% from 62.7%. The employment-population ratio increased to 59.2% in October, the highest level since 2009. 

And on Twitter, Reuters' Jamie McGeever said that this is the 49th consecutive month of job gains, a record streak dating back to the 1930s. 

Additionally, this is the longest streak of 200,000+ payrolls gains since a 19-month streak that was seen from 1993-1995."

Link:  "Unemployment Rate Falls to 5.8%" 

Smidiríní: Election Edition

I may have more to say about these elections after the dust settles in a couple of days.  I want to sit back and do some thinking before I put those thoughts out to you.  When I do talk about this it will only be about the elections in relation to the economy and the markets.  In the meantime here's a sampling from around the web of what others are saying.

Oh and one final thought.  My state of Illinois is often called a deeply blue Democratic state.  That's not correct.  Chicago and its immediate environs may be that way but the rest of the state is as red as the rest of the Midwest.  How Red?  Well on Tuesday Illinois elected a pro growth businessman named Bruce Rauner.  He won every county but Cook.  If Cook county was excluded from the state then Rauner won in a landslide.  With Cook in the equation he merely won by 5 percent.  Remember also this is the President's home state.

The Wall Street Journal:  Why the Democrats Lost.  "For decades after World War II, the U.S. economy had an annual average growth rate of 3.3%. Here are the growth rates for each year of the Obama presidency (World Bank data):  2009: -2.8%; 2010: 2.5%; 2011: 1.8%; 2012: 2.8%; 2013: 1.9%You preside over that performance, you lose. The 2014 growth uptick arrived too late to save the Democrats. The economy was a spent political force for them."

Vox:  Nine Takeaways From the 2014 Election. 

New Republic.com:  Democrats Had a Winning Message in 2014-And Promptly Forgot It.

Washington Examiner:  28 Senators Who Voted For Obamacare, Who Won't Be Part of the Senate.

Washington Post:  Democrats' 2014 Defeate is Worse Than it Was in 2014.

Finally just looking at the raw data derived over at Politico.com shows how bad a night it was in Illinois for Governor Pat Quinn.  Quinn lost  the popular vote in the state to Governor-elect Bruce Rauner roughly 51-46%.  Quinn lost every county in the state but Cook-which is in essence Chicago. If you strip out the votes in Cook County then Rauner beat Quinn by my analysis 61-35%.  Take away 3rd party candidates and Rauner garnered nearly 65% of the vote.  Remember that the next time you hear some pundit call Illinois the deepest of blue {i.e. Democratic party states}.  Outside of the Chicago area and a few enclaves, Illinois looks a lot like the rest of the Midwest.

.....& Finally....Brad Paisley and Carrie Underwood at last night's CMA awards figure out the real reason the Democrats lost!

Market Seasonality

You know we talk about market seasonality quite a bit.  We last posted on this here.  Looks like others are beginning to get on this bandwagon.  Here's a post from Ryan Detrick who ran some numbers and came up with the conclusions listed in the chart below.  He took each six month period back to 1950 via the calendar year and ranked them best to worst.  Best was November-April.  Worst was May-October.  You know we don't exactly break it down this way and our thoughts on why markets usually run bullish at the end of the year have more to do with Wall Street wanting to bet paid.  However, his conclusions are similar to ours.  You can follow the rest of his thoughts at the link here.  

One thing we need to think about is whether this phenomena is becoming so well recognized that just like the "January Effect"-the traditional period of stock out-perfomance at the beginning of the year that seems to have gone somewhat by the wayside recently-it to will be discounted earlier each year.  Bob-Pisani over at CNBC touched on this a bit earlier this week and it's something that bears watching going forward.  Probability though suggests that as long as we are seeing positive economic growth  there is at the minimum support for stocks, especially on downdrafts into year's end.  We of course dot know what will happen.  That's why we prefer to let our indicators be our guide.

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

Election Day

Research over at Dr. Ed Yardeni's Blog suggest that buying on election day in the mid-term  congressional elections has a high probability of a positive outcome.  For those of you not interested in politics or were never "poly-sci" majors at DePauw University, these elections are today.  We also talked about this last week.

Here's Dr. Ed's conclusion as to why markets may be positive after these elections:

"Why has this mid-term cycle been so consistently bullish since 1942? The most likely explanation is that mid-term elections tend to increase gridlock in Washington, DC. While the debt-ceiling political crises of August 2011 and late 2012 suggested that too much gridlock is bearish for stocks, it has been quite bullish historically. Jim and I believe that it might be again after tomorrow. It would be bullish to see that our Founding Fathers’ system of checks and balances, designed to limit the folly of our foolhardy politicians, is still working." 

Link:  Yardeni:  "Congressional Cycle is Bullish."

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

Happy Birthday

Happy Birthday to this little guy!  

You too Clayton!