Thoughts {03.24.16}

Stocks have begun to trade sluggishly, with the major US indices on the verge of posting their first weekly declines in six weeks.  That can't be too surprising considering per our post yesterday that stocks have rallied right into that major level of resistance that's been in place now for well over a year. Mix into this the fact that we are very overbought and you have the recipe for a market where probability suggests at a minimum we mark time and consolidate the most recent gains.   

One thing the markets seem to have taken in stride was this week's tragic bombings in Brussels.  It is difficult to say this but the investing world seems to have hardened to this sort of thing.  That's not to try and minimize the carnage or the impact this event has had on those who experienced it or on the people of Belgium. However, once markets figure out there is no direct or substantial economic impact, they seem to go about their natural way.  That's not to say there's not some impact but since there was no follow-on to this event investors discounted the news and moved on.  Perhaps it shouldn't be this way but it is the way of humans when it comes to money.  As they said in the Godfather, "nothing personal but this is business".

Finally back to the markets, the debate right now among the media gurus is whether what we've seen constitutes a market consolidation, market top, the beginning of the next leg of the bull market or a bear market rally.  We have no idea which of these views is correct, although we laid our our most probable market scenarios back in February.  We simply let our indicators be our guide.  Right now those are saying overbought and we react accordingly.  I do know that if you are an investor that thinks the markets have experienced nothing more than a bear market rally then you have been handed an extraordinary gift as the markets have fought back to virtually even on the year.  If you're of that mindset then you should take this opportunity to de-risk your portfolio if you have not already done so.

If you're of the mindset that this is a consolidation before we head higher and are inclined to be a buyer into this small amount of weakness this week, then know that the market internals may not be in your favor in the short-run.  That is you may get the opportunity to buy the market lower in the weeks ahead.  Now I'm not saying that's going to occur and for all I know stocks will simply rocket higher.  I don't give out investment advice on this blog and anything you read here should be discussed with your own advisor or used in the context of individual research you will do on your own if you are not clients of my firm.  That being said, I do think investors should know the lay of the land.  I think investors need to be aware of what charts, money flows and history say happens in when this kind of set-up has occurred in the past.  That map is saying we're overbought and historically in these situations, stocks at a minimum have wanted to rest.  Of course it could be different this time but often in the past it is not.   No matter the environment, investors need to know themselves, know their individual appetite for risk and invest accordingly.

Markets are closed tomorrow for God Friday and the Easter holiday.  I will be out next week, so posting will be sporadic.  Look for us back here on a consistent basis the first week of April.  Until then for those of you that celebrate the holiday, Happy Easter, and to all others God Bless.

Chart Talk {03.23.16}

Chart is of the S&P 500's ETF {SPY}. And comes to us from FINVIZ.com.

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

Brussels

I had an entirely different thread that I was going to post today before the events in Brussels occurred.  I'm going to hold off on that piece for now.    Right now US markets are taking these latest terrorist bombings in stride.  Our markets are currently down less than a half percent.  That kind of decline might have been expected anyway given the rally we've recently seen and the fact that we are overbought right now.  

I'm going to wait and see how this unfolds today, what other news hits and the European response before making any other comments.  

Back later.  President Obama is speaking in Havana, Cuba as I type this.  Truly historic times.

Thanks Comcast

I'm still dealing with the fall out of having Comcast scramble my systems last Thursday afternoon and Friday, an event I'll chronicle here at some later time.  It's put me behind the eight ball today so I'm going to try to get everything else up to speed before I post back here.  

Markets look set to open flattish.  That's probably what we should expect for now after five weeks of straight up from the bottom.  Stocks are straight now into that level of resistance I've highlighted on the charts, most recently here.  I'll update that when I'm back from rewiring the system.

Hope to be back tomorrow.  Wednesday for sure.

Thanks Comcast  

Wow.

This statistic, if true, is amazing and gives you some hint how big is the United States.  

"It's so easy to get exotic animals in the US that there are more tigers in captivity here than there are in the wild throughout the world, according to Carson Barylak, who works on legislative issues for IFAW and heads their "Big Cats in Captivity" campaign. "

Link:  TechInsider.com "Armed Police Free Lions, Tigers & Bears".

Beannachtaí na féile Pádraig!

There are no little Irish dancers left for me to ferry about these days and so I find the first three weeks of March to be a low key period as opposed to all the hustle and bustle that used to come with "the season" as it's called in Irish Dance circles.  Fact is the Chicago area is home to well over a million people who claim some form of Irish ancestry and if you're an Irish dancer in March and you can't find a gig then you're in the wrong activity.  Time was I spent most nights in early to mid-March squiring a gaggle of young ladies to their next performance.  I think I've been in every West Side and North Side parish, Union Hall,  hotel and even the WGN studies during that period.  

While that part of my life has passed into happy memory we still honor St. Patrick's Day around here so I thought I'd update and reprint 10 facts about the Irish, the parade or about Ireland which are not well known. Just trying to have some fun with the season and we will get back to more serious matters soon. Irregardless if you are 100% Irish, part Irish (like my family) or just Irish For The Day- Cead Mille Failte!

1) Ireland is slightly larger than West Virginia. If it were part of the U.S. it would rank approximately 19th in terms of population between Wisconsin and Maryland according to 2000 census figures.

2) The Gross Domestic Product of the U.S. is in excess of $11 Trillion dollars & is ranked 1st in the world. Ireland is ranked 30th at $183 billion dollars. Chicago's GDP has been estimated at around 380 Billion.

3) According to the Chicago Tribune, "Corned Beef and Cabbage" is an Irish-American staple and more Budweiser is consumed in Ireland than Guinness.

4) Musicians with Irish ancestral ties include Paul, McCartney, John Lennon & George Harrison of the Beatles; Bruce Springsteen & Keith Richards.

5) 17 American Presidents have Irish Ancestry. This list not only includes obvious Presidents such as Kennedy and Reagan but also includes Andrew Jackson, Both Bush's, Bill Clinton and President Obama. Every elected President since 1960 claims Irish ancestry, although it appears that streak could end with this election.

6) New York City has the largest St. Patrick's Day parade in the world. Last year more than 150,000 marchers participated and it attracted roughly 2 million viewers. That is roughly 500,ooo more souls attended the parade than the combined populations of Dublin, Belfast, Limerick & Cork.

7) Michael Flately of Riverdance fame is credited with popularizing Irish Step Dancing around the world. It is widely assumed that Flately is a native of Ireland but in fact he was born and raised right here in the Chicago area. Perhaps because of this it is claimed that over 100,000 young women in Chicago and its surrounding environs actively participate in some form of Irish Dance.

8) George Clooney, Harrison Ford, Mel Gibson, Gregory Peck, Barbara Stanwyck, John Travolta, Spencer Tracy, Judy Garland & John Wayne all had Irish ancestors.

9) Guinness & St. Patrick's Day seem to go hand in hand. (At least they do in my neck of the woods). They also have a side business of that World Record Book. Almost 2 billion pints of Guinness are served each year. More Guinness is served on St. Patrick's Day than on any other day of the year.

10) Finally the best for the last. It is claimed that Ireland has never had a population greater than about 8 million people. The Irish have emigrated all over the world. The majority of their descendants are found in Canada, the U.S., Australia, New Zealand and the United Kingdom. 47 million Americans claim Irish Ancestry. Their descendants can also be found in more unexpected places like Chile, South Africa, Mexico, Argentina and even China. Former Mexican President Vincente Fox is of Irish ancestry. Altogether it is estimated that perhaps as many as 90 million people can trace some part of their family tree back to Ireland. This is over fourteen times the population of the island of Ireland itself!

And a special RIP and God Bless to the great Irish American actress Maureen Ohara who passed away last October.   I'll bet the Duke swept her away as she came up the lane straight into "White O Morn" on her first day in heaven.

Dia luas Maureen.

Beannachtaí na féile Pádraig!
{Happy St. Patrick's Day!}

Back Monday.

Thoughts {03.16.16}

Markets likely will flatline today ahead of the Federal Reserve's decision on interest rates.  Though no rate increase is expected today the market will want to hear about the likelihood of further increases down the road.  The June meeting is the one most flagged by the investment community for possible action on this front.  May see some fireworks after the announcement depending on what is said.

Last night's election results make it more likely than not that Donald Trump will face Hillary Clinton in the fall.  It's in the bag now for Mrs. Clinton as she crushed Mr. Sanders last night.  Trump still has some work to do but he now owns a commanding lead in the Republican delegate count.  Markets can live with a Clinton as President.  It is unclear in my mind what a Trump Presidency would do for the investor class.  In any event, polls show right now that in a head to head race Mrs. Clinton likely prevails.  A Clinton Presidency is likely the the presumed outcome now in the investment world and markets will discount this until an event or facts forces them to change their view.

Saw this the other day on States with the Highest Tax Rates.  Good Old Illinois tops this list as the most expensive state via taxes with a whopping 14.54% tax rate.  That distinction, according to the study,  is nearly 36% above the national average.  I'd note that if you live in the Chicago region your tax rate is probably higher than the state average as property taxes here are more expensive than in the rest of Illinois.  Illinois also ranks 46th in terms of the unemployment rate.  We're tied with West Virginia with only the District of Columbia, New Mexico, Alaska and Mississippi faring worse.  Did I also mention Illinois is broke.  Perhaps the last two statistics have something to do with the tax situation.  

Back tomorrow with something for the Irish in all of us.

On The Presidential Candidates

I was asked a couple of times over the weekend where I thought the Presidential candidates stand in the race and how the market might react to each.  I thought about it a bit and decided to share those ponderings this morning.  Before we get into that though I'll point out that I am in no way endorsing any candidate but trying to assess the probability of any of them becoming President.  My own philosophy is irrelevant to the business of investing.  Also when thinking about the markets, understand that investors hate uncertainty and that could spill over into how markets trade later in the year depending on who makes the final cut on the Republican and Democratic sides. With that being said here's my short assessment of each.

Democratic contenders:

Bernie Sanders:  I would say the probability that Mr. Sanders can win the Democratic nomination is less than 10%  He can delay Hillary Clinton's process of locking up the delegates and he is forcing her to the left.  However, she has all of the Democratic Party super delegates and most of the Democratic establishment in her corner.  His one possibility for winning I suppose would be if Mrs. Clinton is in deeper trouble with the government over the emails on her private server than we currently know or she all of a sudden has a health issue.  Even in those instances, I believe the Democratic establishment would view Mr. Sanders as too far to the left for the middle of the road Americans that will ultimately decide the general election.  In that event I think the party would possibly look at somebody like Vice-President Biden.  That being said a Sanders nomination would be deeply troubling to Wall Street and would likely impact markets in the months leading up to the election, especially if the investment world starts to worry that he could win.

Hillary Clinton:  Highest probability of winning her party's nomination.  Very high probability of being elected President.  Markets have already discounted much of this and have already discounted the impact of a 2nd Clinton Presidency on the financial system.  Wall Street expects and would likely get a status quo President out of her in regards to the issues that concerns it.

Republican Contenders:

Donald Trump:  Is viewed as dangerous by the Washington and financial establishment.  I think that the Republican Party will destroy itself at the Presidential level this cycle before it allows Mr. Trump to be it's nominee.  Mr. Trump would likely not fare well in the general election against Mrs. Clinton. {We will use her the rest of the way as the Republican nominee because in my book she is the presumptive Democratic nominee.} We also cannot discount the possibility that Mr. Trump would run as a 3rd party candidate.  If he does this then it would virtually assure a Clinton Presidency.

Ted Cruz:  Deeply disliked by the Washington establishment.  Not sure what the financial world thinks of him.  Less than 50% probability of getting Republican nomination.  Low probability of winning versus Mrs. Clinton.

Marco Rubio:  Former Washington establishment favorite after Jeb Bush dropped out of the race.  Right now Mr. Rubio must win in Florida on Tuesday.  If he does not then the race is likely over for him.  Would be considered market friendly if he somehow wins the Republican nomination.  Would likely lose a close race to Mrs. Clinton by our analysis but it could depend on who he chooses for a running mate.

John Kasich:  Current Washington establishment favorite as the betting is shifting from Rubio to him.  Has the least amount of delegates and would need a brokered Republican convention to emerge as his party's nominee.  Is seen as the most moderate Republican in the field and would probably be friendly to the financial community as well.  Mr. Kasich, however,  has the potential to fare the best against Mrs. Clinton in the November general election.

There at this point now exists a very high probability that the Republican convention to be held this summer in Cleveland will be contested.  That throws open the possibility that another candidate like Mr. Romney could emerge at the last moment and potentially wrest the nomination away from any of the four listed above.  Markets could become more volatile depending on who would emerges from this process  in Cleveland but that remains to be seen.  The Republican ticket with the highest probability of defeating Mrs. Clinton in the November elections seems to be a ticket with the combination of Mr. Kasich and Mr. Rubio.  However, it remains to be seen whether the two could ever unite after such a long and contentious primary season.  It could be helped by the fact that neither has spent much time attacking the other.  In the event one of these two is not on the ticket then Gov. Nikki Haley of South Carolina could add heft to the race.

We shall see.  Back Wednesday.

Thoughts {03.10.16}

Mario Draghi, President of the European Central Bank {ECB}, brings the stimulus bazooka this morning.  Stocks like the latest hit of ju-ju juice.  See here and here.  Basically ECB is paying banks to take money from it and push it into the European economy.

I like this Business Insider article on why home ownership rates are currently so low.  When it comes to Millennials though I wonder if a another reason they have such  a reluctance to buy is what for many of then has to be the negative experience watching their parents struggle with mortgage payments, foreclosures and houses that became worth less than what they paid.  There's a lot of emotional damage that has to have to this generation having grown up in the teeth of the Great Recession and the home ownership experience of their parents has to rank up at the top on the negative side for many of these young adults today.

Go read in the Atlantic "The Obama Doctrine".  It's a pretty candid assessment by the President of what's gone right and wrong with his foreign policy.

Stocks are currently short-term overbought by our work and this morning's pop only adds to that status.  Probability would suggest that stocks at least now mark time before advancing further.  {Note that this is just an observation of money flows.  We aren't trying to predict one way or the other what the markets will do.  You're on your own if you use any information here in your own investment process!}

Possibility that I may post tomorrow but if not will be back in the turret on Monday.

Valuation {03.08.16}

The S&P 500 closed yesterday at 1,993.60 which is a decline of 2.48% for this year and is a decline of 4.12% from a market close of 2,079.36 from when we  last reviewed these numbers back on November 2, 2015.    Below is our current valuation analysis.  We are using a current earnings range of $121-124 with a mid-point of $122.75 on the S&P 500 for 2016.  It is likely that this estimate is too high right now but we will wait for the end of the 1st quarter to make any revisions to our numbers.    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 $122.75. {Year End 2016}

Current PE:                     16.24 {down from previous review of 17.47}
Earnings Yield:                 6.15% {up from previous review of 5.72%
Dividend Yield:                2.17% {Estimated and up from previous review of 1.96%}

Current Expected Price Cone of Probability {COP}:   1,700-2,150.  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 $122.75.*:

Current PE:                     Same as above

Earnings Yield:               Same as above. 

The current yield on the 10 year US Treasury is 1.85%.  That is a decline of 32 basis points 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.

Next post will be Thursday.

Go Read!

I have to unexpectedly be out this morning so I won't have time to post what I originally had planned for today.  Instead go read from Bloomberg:  "The ETF Files:  How the US Government Launched the $3 Trillion ETF Industry".

Markets are opening a bit soft today.  This shouldn't be a surprise given the rally we've seen and the fact that we are now overbought.

Chart Talk {)3.03.16}

Here's an update of the S&P 500's ETF SPY.  Chart is from FINVIZ.com.  Note the following:

1.  Short-term now the market is overbought.  Market clues on direction will be garnered on how the market handles the next level of resistance right above where it's currently trading.

2.  Yellow shaded areas represents overhead supply.  This level of trapped longs goes now back to last spring and has the potential to be tough slogging for the index as the market moves closer to those prices and tries to slog its way higher.  Theory states that these levels are full of "trapped longs," investors who bought at higher prices and will be anxious to sell the closer price returns to their cost basis.

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

Back Monday.

Chart Talk {Foreign Markets-Again No Place To Hide}

We showed a chart on Monday of how similar the major US averages had traded since last spring.   I decided to take a look at some major foreign indices and some foreign indices that are dividend payers to see how they've looked.  Here's that chart with the S&P 500 as comparison.  Notice how similar all of these look.  The only real difference is the degree of volatility and in this chart the degree of loss.  The S&P 500 is the World's Fair having lost only about 8% through Monday.  Note you can double-click on these charts to make them larger.

Below here's a longer term version of the same thing.  This time we go back to the beginning of 2015.  Basically again we see world markets trading in lock-step with the only real difference again the degree of volatility and the degree of loss.  It seems that the risk on risk off mode of investing is firmly in place these days in most asset classes.  It seems that when investors want out the only key difference is how much will an asset go down in a bearish time period.

  

Charts  are from Stockcharts.com.

*Long ETFs related to all the various indices listed above with the exception of Latin America.   Please note these positions can change at any time without notice. 

Break-In

Just a quick "Super Tuesday" note.  I recommend you read this article in Politico Magazine, "Why Trump and Sanders Were Inevitable".  

Also as a side note, February marked the fourth consecutive month where global stocks declined.

Back tomorrow.