Happy Thanksgiving

Like much of America, I'll be taking some time off the next week.  Today I will head to Boston.  I'm going to hook up with my son to watch Notre Dame hopefully beat up on Boston College on their way to a showdown after Thanksgiving with Stanford.  If the Irish run the table there's more than a  decent chance they'll find a place reserved for them in the four team college football playoffs.  After the game, it's off to Rhode Island for the rest of the holiday.   As usual, we'll break in if events warrant a post.

I hope each and every one of you has a joyful and wonderful Thanksgiving holiday!  We'll be back posting on Tuesday, December 1!

PS.  The day after Thanksgiving the market, in an abbreviated session, advances something like 90% of the time.  No guarantees of course this will happen but it will be fun to watch and see if the string continues.

PSS:  Go Irish!!!!  {Ah Irish troid a chur suas!!}

*Long turkey and stuffing!!

Affordable Care Act

The problem with the Affordable Care Act {ACA}, President' Obama's signature legislation that aimed to bring the majority of Americans affordable healthcare never was the idea.  Whether you disagree with  having universal healthcare or think the way it was brought into being and it's implementation was flawed, nearly everybody can agree that what we had before wasn't working.  As most doctors will tell you we already had universal healthcare.  It was called the emergency room at your local hospital.    Over the years with kids I made more than my fair share of visits to the emergency room at Loyola Hospital in Maywood, Illinois.  One of those included an emergency appendectomy for my daughter at 2:00AM!  The emergency room at Loyola was plastered with signs in English, Polish, and Spanish saying that you could not be turned away for service for inability to pay.

It is not the place here to debate the morality of healthcare or the contentious and sometimes fictitious way ACA was fostered on the American public.  Rather I want instead to point out the economic problem that always was at the heart of ACA.  Instead of mandating universal healthcare which the Obama Administration knew it could never get through Congress, it instead implemented a series of healthcare exchanges.  In a nutshell whether on a state or on the Federal system people could pick from a series of insurance companies a health plan that fit into their budget and their needs.  People with insufficient resources could get their plans subsidized by the Federal Government.  

The flaw in the system always was that the exchanges were expected to be populated with poorer, older and sicker people.  It was feared these folks would sign up in much higher numbers than younger, healthier folks and that's exactly what happened.  Too force more of these younger people into the system, a series of financial penalties was enacted if they didn't sign up for a plan.  Yet even with all of that the system has turned out to be older, poorer and sicker than originally envisioned or sold to the American public.  Thus this year we have seen many insurance companies raise their premiums significantly and now, today, news is out that the insurance giant United Health is talking about possibly leaving the system in 2017.  This may be a real problem or the opening salvo by the company and the rest of the insurance industry for higher premiums and less coverage of the sickest Americans.  Either way it is indicative of a system that even in its early stages was poorly conceived on a financial basis and may already be broken.

We are told there is no inflation today in the United States.  The Consumer Price Index would seem to support that.  However, that cannot be the experience of the average American, particularly the large segment that has seen their wages stagnate these past 10 years.  Rent, food, college education and healthcare are large portions of their budgets that have seen their costs skyrocket.  Until we get a handle on these things or find a way to pay people more we will see the majority of Americans continue to struggle and economic growth stuck in a paltry 1-2% range.

Chart Talk {11.17.15}

One last thing.  The longer this range continues there is a much higher probability that any break {whether to the upside or downside} will be more meaningful.  Should the market break at some point to the downside  then a decline below last summer's lows would have the potential to be a more significant event.  A major breakout above this year's highs could be considered the next leg up in the bull market.  

Traditionally the last six weeks of the years are with the bulls.  Cynically, as I've mentioned in the past it is the last month of the year that determines whether or not Wall Street gets paid.  Thus, it wouldn't surprise me to see some strength going into year's end.  

Stay tuned!

Unabridged chart of SPY is from FINVIZ.Com.

Back Thursday.

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

Thoughts {10.16.15}

Aujourd'hui, nous sommes tous les Parisiens!

The are other and better places to comment on the horror we all witnessed Friday evening and that is not the bailiwick of this blog anyway.  My mandate is to discuss things in the financial realm and for the most part that is what we do here.  The French have now had their 9/11.  It remains to be seen what they will do with this and how they will react to this moment.  The geopolitical aspects of this event will be slow to emerge and may not be completely understood for years but the world has been tilted on its axis again I think, just as it was here after 9/11.  There are longer range potential implications to these events but we will not be able to sniff out these clues for some time.

In the short-term, stocks are set to open here flattish after a pretty good drubbing last week.  We tested resistance at the higher end of the markets range a few weeks ago and fell back.  {I will show that chart tomorrow.}  We were already oversold Friday so that may mitigate the reaction on the open and today.

As horrific as Friday's events were, the world will move on today.  As crass as this may sound, the events of Paris will not have any bearing on how many cups of coffee Starbucks sells, diapers Procter and Gamble sells or iPhones Apple sends out the door.  That is the grim reality of the world.  The dead, rightly honored and mourned, now belong to the past.  Markets look towards the future.  In the cold calculus of money, Friday's events, while horrific and tragic, probably aren't enough to affect the short economic calculations here in the US.  Unless we have an economic event that changes this equation, we think markets will continue their meandering ways.  That could change of course as the facts change but we need to go with what we see today and last weeks events for the most part will not have a bearing on the overall economic well-being of the US.  As such we think stocks are stuck in the same trading range we've been discussing since last summer but Friday's events make it more probable that the high end of the range is capped.

"Play La Marseillaise.  Play it!"

*ETFs in which we have investments likely hold positions in Starbucks Procter and Gamble and Apple.

Meanwhile In The Things Are Getting Better Department

We've seen some pretty decent economic statistics over the past several weeks that are showing decent employment growth. All charts are from the Federal Reserve Bank of St. Louis.

First up above is the Civilian Unemployment Rate which at its current 5% rate is holding at a level that's long been considered close to full employment.  You have to go back to 2006 or 2007 the last time this index was below this level.

Next up above in the docket is Total Non-Farm Payrolls.  Currently there are more people employed than there ever have been since somebody started keeping track of these numbers.  I know all the adages about low skill jobs and part timers etc.  But I also know that more people are working now than have been and some of those part-timers are finally getting full time work.  That's important because people with jobs spend money.  Oh and all this has been happening without much help from governments around the nation hiring people.  

In the chart below you can see that government jobs have leveled off and finally started to slowly move up.  That's important because governments jobs tend to have decent pay and even better benefits.  Again people that have jobs spend money.

Finally below is the 4-week moving average of Initial Jobless Claims.  Now these numbers can be volatile and seasonal but again notice these numbers are at a 40 YEAR LOW.  Thats a 40 year low as the country gears up for huge seasonal hiring as we lurch into the holiday season. 

Now I know that there are a multitude of problems out there and I know these numbers that we've seen in the past few weeks virtually assures us that the Federal Reserve is going to raise interest rates in December, something stocks don't like.  But it's hard for me to get to negative on that or on the economy when these overall numbers are so good.  Maybe that will change in 2016.  Until it does all the people that grumble about poor economic growth, particularly as it relates to employment, need to show me the hard numbers about why overall it's so bad.  From my perch I'll through out my constant refrain which is things are still getting better.

Posting Monday, Wednesday and Thursday next week.

Armistice Day

An earlier generation knew the holiday that we now call Veterans Day came from  remembering the commencement of an armistice that ended the hostilities on the Western Front during World War I.  The Armistice began on the "eleventh hour of the eleventh day of the eleventh month" of 1918.  Today marks the 97th anniversary of that event and has become a remembrance of all veterans past and present.  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.  

God Bless them all.

On Valuation

Sam Ro over at "Business Insider" does an excellent job summarizing the belief among many that we are about to see a trough in corporate earnings growth this quarter.  One of the main reasons that stocks have struggled this year with almost no appreciation up to this point has to do with the decline in corporate earnings.  In general stock prices advance and PE multiples expand when earnings are growing and the opposite occurs when these are contracting.  In a year like this when there's been a lot of uncertainty over earnings you get indecision, something investors hate.   This rolling over of earnings has been attributed mostly to the earnings collapse in energy names and commodities companies as the prices of their underlying products have plunged this year, the decline in exports related to a stronger dollar and to slowing sales growth in places like China and other emerging markets.   

Many think this could be on the verge of reversing.  China and other parts of the emerging markets world could start to grow again in 2016, there is a belief among some analysts that the worst of the commodities and oil cycle may be behind us now and there is also an argument that a stronger dollar could be a tailwind for corporate profits next year.  I'm not so sure I agree about the effects of a stronger dollar on earnings but let's just assume for a moment that part is also correct.  

The thing not often mentioned in this overall flattening of profits is that earnings growth in sectors like, technology and health care have been pretty healthy, so the thinking goes that if some of these other sectors at least stabilize then we may see stronger earnings in 2016.  I'm in that camp unless energy prices experience another leg down.  If that's the case then consensus estimates for the S&P 500 at around $124 per share may be too low.  That could burn off some of the higher PE valuations we've been seeing in the market this year and at a minimum could possibly put a floor under stock prices going into 2016.

Like I said, I'm in the camp that earnings will be better in 2016 but only time will tell.

Link:  Sam Ro, Business Insider.com:  "Here's the Inflection Everyone in the Stock Market is Praying For."

*Long ETFs related to the S&P 500, China, emerging markets in client accounts.  Clients and personal may also have exposure to oil or energy related names, commodities and or any of the other sectors mentioned above.  Please note these positions vary depending on individual client investment mandates and can change at any time.

Chart Talk {11.09.15}

Unedited chart comes from FINVIZ.com.

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

Volatility And Risk

We're going to take some time in future posts to discuss the concepts of volatility and risk.  The investing public for the most part views both of these as the same thing.  They are not.  Today as an intro go read this article over at Greenspring Wealth.  To me this is the key takeaway:

"As an investment industry  we tend to look at a statistical metric called standard deviation.  That measures how much volatility you can expect with a specific data set.  The problem is that standard deviation is almost always quoted over a one-year period.  But what investor has a holding period of one year?  In reality, most people are investing for 10, 20 or 30 plus years.  What should matter to them is not what volatility their portfolio could experience over one year, but over their entire investing holding period.  Investors only realize losses after they sell.  If they don't have to sell, no losses have actually been realized.  As we have often said, there are really only two days that matter when you invest…the day you buy and the day you sell.  Everything in between is just noise."

Warren Buffett also weighed in on risk and volatility in his spring investment letter:

"The unconventional, but inescapable, conclusion to be drawn from the past fifty years is that it has been far safer to invest in a diversified collection of American businesses than to invest in securities — Treasuries, for example — whose values have been tied to American currency. That was also true in the preceding half-century, a period including the Great Depression and two world wars. Investors should heed this history. To one degree or another it is almost certain to be repeated during the next century.

Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskier investments — farriskier investments — than widely-diversified stock portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions. That lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray."

I think this is important concept to understand because most investors hate, absolutely hate, volatility.  The reason for this is they constantly worry that whatever market decline they are in at the moment is the beginning of another bear market.  We noted here in our most recent client communication what you usually have to see for one of those to occur.  We'll be talking about this more as we go along to try to educate investors about the differences between the two and some strategies to deal with each.

Currently scheduling posting Monday, Wednesday and Thursday next week.

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

The Double Nickel {You Too Clayton}

Happy double nickel Birthday to this little guy.  Such a square head!

Smidiríní:

Some articles that caught my attention in the past week:

Barry Rithotz:  "On the Hunt for the Financial Free Lunch? Don't." {Via Washington Post}  In particular I liked these points.

"Of so many free lunches, this is the hard truth:

●You are not going to win the lottery.

●Hot stock tips are worthless (the only exceptions are those especially costly tips that will get you sent to federal prison).

●You are not going to buy an iPad from one of those deal sites for $3.

●No, you are not likely to buy in early to the next Apple or Netflix, and if you do, you are unlikely to hold it long enough.

●No, you are not going to make $10,000 gambling at fantasy sports.

●You (or your kid) are not going to be the next Michael Jordan or Adele.

●The odds are radically against you finding the mutual fund manager or stock broker who is going to make you fabulously rich.

●Indeed, the odds are against you stock picking, market timing or investing in a venture fund, private equity fund or hedge fund that, over the long haul, is going to outperform a simple index fund.

Liz Ann Sonders of Charles Schwab on Why diversification is essential for investors' financial and emotional well-being.  I like the diversification quilt in the article that shows the crazy-wild volatility this year.  {*Note that Charles Schwab is our firm's primary custodian.}

Bloomberg:  "The Incredible Shrinking Hedge-Fund Fee."  I've long thought paying somebody 2% on the assets plus 20% of the performance was nuts and it looks like maybe I'm not the only one that thinks this now.  {Note In disclosure I manage a small investment partnership that is family money and closed to outside investors.  Also note that the partnership does not charge a "2 and 20" fee.}  

Valuation

The S&P 500 closed Friday  at 2,079.36  which is an advance of 6.57% from 1,951,13 when we last reviewed these numbers back on September 3, 2015.    Below is our current analysis.  We are leaving our 2015 earnings estimates unchanged at this point.  We are using a range of $118-121 for 2015 but have modified slightly lower our mid-point range to $119.00 from earlier in the year.   We also 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 $119.00 {Year End 2015}

Current PE:                     17.47

Earnings Yield:                 5.72%

Dividend Yield:                1.96% {Estimated.} 

Current Expected Price Cone of Probability {COP}:   1,750-2,200.  While energy price and the dollar have been headwinds for earnings other economic data is supportive of evidence showing that the economy is still growing. 

Rolling Four Quarter Estimate for the S&P 500, Our Estimate $124.00*:

Current PE:                     16.76

Earnings Yield:                 5.96% 

*We are using our current estimate as we believe that earnings from the energy sector will be better than the market expects and the dollar is becoming less of a headwind for corporations.  The change in our view is not material to earnings analysis. 

The current yield on the 10 year US Treasury is 2.17%  and a decline of 1 basis point since the last time we did this review.    

The Cone of Probability {COP} 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.