The World In Pictures {06.29.17-Housing}

For much of the next month  I'm going to take a look at some charts or graphs that I think are important to understanding not just the investment markets but also the modern economy and the current state of the world.  These bigger picture views let us develop a broader interpretation of where things stand in a world that is rapidly changing.  Sometimes I'll have commentary and other times all let the charts talk for themselves.  Note that some of these, especially in the beginning of this series come from some of the brightest minds in the investment business today.

Today's chart takes on housing and is from Svenja Gudell, the Chief Economist at Zillow.  The chart comes from an article over at BusinessInsider.com.  The commentary under the chart comes from the article linked below.

"There are big differences between the market then and the market now: Then, loose credit, speculation, and overbuilding were ingredients in a recipe for disaster. Now, healthy home buyer demand is being driven largely by a stable economy and demographic tailwinds, which is exactly what we would expect in a healthy market. Supply has been slow to catch up to this demand, which is causing home values to grow at a faster clip than we might otherwise expect. 

Beyond that, the market's fundamentals look largely healthy. Homes are largely more affordable in most markets today than they were prior to the bust, and will remain so for the foreseeable future, even if mortgage rates rise. Americans clearly continue to see the value in homeownership, especially young Americans, which bodes well for the future."

My comment:  I largely agree with Svenja's view on housing.  There's a whole pent up generation of millennials that are starting to form families and will need to look for a home.  However, I'll note that she might be a bit biased since she works for a company that advertises homes for sale on the web.

Back Monday.

Link:  Business Insider: "PRESENTING: The most important charts in the world from the brightest minds on Wall Street"

Chart Talk {06.28.17}

Above is a chart of the iShares select dividend ETF.  I'm showing it this morning as a proxy for all dividend paying ETFs and want to use it to pose a question.    The question is why aren't bond proxies like this selling off harder if we're headed into an extended rising interest rate cycle?  I mean shouldn't these be under a bit more pressure if investors believe they can do better in bonds?  

The Federal Reserve says the US economy is doing well enough for it to not only continue to raise interest rates but end its accommodative policies regarding the bonds it has been buying since the depths of the financial crisis.  Yet, the bond market doesn't seem to buy into this argument.  Treasury bonds have barely budged in the past month.  Remember the Fed has raised rates in that period and its members have been out there talking up the economy.   So you would think you would see a bit of rotation out of these dividend bearing names.  So far that's not happened in any significant way.  I don't have an answer.  I'm just posing the question and I'll ponder that a bit over the next few days.

PS.  I know that the chart of DVY shows a rather significant drop yesterday but that's likely because somewhere in the past few days this ETF has gone ex-dividend.  Stocks and ETFs typically drop by the value of their dividend once it's been declared.

*Long DVY in client and personal accounts.  Please note positions can change at anytime without notice either on this blog or via other forms of electronic communication.  

Chart Talk {06.27.17}

A monthly chart of the S&P 500 going back to the year 2000.

A longer term chart shows the strength and duration of this bull market, currently up better than 250% since the lows in 2009.   This market has been probably the most hated bull market in history with the professional investment class fighting it all the way up.  All along pundits have given reason after reason why this run has been a mirage or been on it's last legs or been poised for a massive sell-off.  All along they've been wrong.  Someday they may be right, but listening to the negative crowd over much of the past decade has cost investors substantial amounts of opportunity cost.

Chart is from Tradingview.com.

*Long ETFs related to the S&P 500 in both clients and personal accounts.  Currently short SPY and ETFs related to the S&P 500 in a personal account related to an options strategy not employed in client accounts.  We reserve the right to change these investments without notice on this blog or via any other form of verbal, written or electronic communication.  

Amazon Buys Whole Foods {Part II}

So here's part of my take on the Amazon-Whole Foods merger and I'll flesh out my initial thoughts from Friday on this.

The retail experience in most places is about to change dramatically.  To understand what Amazon is going to bring to the table with Whole Foods watch this video:

Think about the possibility, soon likely coming to the mass market, of being able to go into a grocery with technology enabling you to put everything in your basket or cart and then just head out the door.  Also remember most shoppers are creatures of habit.  If you buy XYZ orange juice then the chances are you will keep buying the same brand.  What if you just tell Whole Foods to send you XYZ orange juice once a week and it magically shows up on your doorstep Saturday morning.  Better, what if a bar code on your orange juice reads when it is nearly empty and automatically replenishes the order for you.  Or your refrigerator tells Amazon that you are low on OJ as well as milk.  This is not some sort of sic-fi scenario.  The technology to do all of this exists today, albeit in its infancy.  Add five years on to the mix and couple that with the rapid advancement of drones and you can see where this is potentially going.  

Don't just equate all of this to food.  Why won't you be able to go into a store, try on a dress or shirt and have it sent to you at prices competing with somebody like Amazon.  If Macy's doesn't need to keep all sorts of inventory on hand what are the savings in terms of inventory and personnel?  They have to be huge.   Also if Macy's knows you like a certain kind of dress or a perfume, why wouldn't they be able to let you know when something just like it is available or on sale?  

See I don't think shopping is dead.  I was at the Oak Brook mall outside of Chicago this weekend and it was mobbed.  People still like to get out and they still like the shopping experience if that experience is worth it to them.  But retailers are going to have to find a way to compete, especially on price.  I see no reason why they can't mimic some of Amazon's tactics to help them compete.  But to compete retail needs to change dramatically and one of the things that's going to happen is that there are going to be a lot less folks working in retail in the coming years.

We'll get to that next week.  I'm leaving for a wedding tomorrow so we'll post again either Monday or Tuesday next week.

*Amazon, Macy's and Whole Foods are components of various ETFs we own in client and personal accounts.

Amazon Buys Whole Foods

Amazon bought Whole Foods Market on Friday for $13.7 billion.  I want to digest this news over the weekend and think through the implications of what is being presented to us so I'm going to change my posting schedule a bit for next week.  I'll be back either Tuesday or Wednesday with something more expansive on this.  Here's my early read.

This is a game changer pure and simple in how customers react with retail.

This is as much about technology as it is about retail.

If you work for any retailer today you should be afraid for your job.  Many of you in that area of the economy are going to be replaced.  If you want to stay in retail then you need to get into the parts of it that will still need people.

Anyway back Tuesday or Wednesday next week with some more thoughts on this.

*Amazon and Whole Foods are components of various ETFs we own in client and personal accounts.

Thoughts {06.15.17}

The Federal Reserve raised interest rates a quarter of a point yesterday.  Markets digested that pretty well until Federal Reserve Chair Janet Yellan  began providing guidance on how they would unwind the bonds off of their balance sheet that they've been purchasing since the beginning of the Great Recession.  Markets sold off after than and that swoon looks like it's carrying over into today as all futures are in the red.

Of course yesterday's shooting of a Congressman and a few others at a baseball practice for an upcoming charity game didn't help yesterday's trading.  Neither will having all of  East Coast press running with the story that President Trump is being investigated for possible obstruction of justice in the Russia probe likely help the markets today.

Stocks are expensive and have been on a great run.  Nobody can deny that.  It's been months since we've seen any serious profit taking in the markets so it wouldn't come as much of a shock if we stalled out here.  Summer's just kicked off and once we get to the 4th of July trading will take somewhat of a backseat for the Wall Street crowd.

In case you were wondering about pullbacks in stocks, I generally measure these slumps from highest trades to lows in markets before they pivoted higher.  Most of the time when you see these numbers, writers use either market opens or market closes.  I like highs and lows because these are numbers that somebody actually bought or sold and so they seem to me to reflect more on the actual trading nature of the markets.  You have to go back to last fall to find a period where we saw even a 5% correction in case you wanted to know when the last pullback was.  Prior to that you had to go back to last summer and the "Brexit" scare.  You have to go back to late fall 2015/early winter 2016  to find a pullback worse than 10%.  Beyond that you have to go back to 2011 to find a pullback beyond the 15% range.  That's a long time ago and also lot of points ago in terms of performance.

That's also a long time for investors to have forgotten what real volatility and real market draw downs feel like.

Back Monday.

Thoughts {06.13.17}

High flying stocks have been taken out to the woodshed since last Friday.  Some names lost 10% over a two day trading period.  These same stocks and markets look to be up big at least at the open today. Many are calling for a change of trend in these names, citing valuation, relative value, and the usual etc when analysts try to make a call.  They may be right but to me  thing to watch for over the next couple of days is how these stocks react to the sell-off.  If we say any attempt at a rally fail or these stocks are unable to get back on track then there might be something to that argument.  For us right now it's wait and watch and let our systems be our guide.

We wrote last week about Chicago's financial problems but the state of Illinois is also in trouble.  In regards to Illinois' debt, S&P recently lowered our state bond debt and put it on "CreditWatch negative," warning  that we here are at risk of entering a "negative credit spiral, where downgraded credit ratings would trigger contingent demands on state liquidity, further exacerbating its fiscal distress."  I'll remind you again that Illinois is entering its third year without a budget and has over 14 billion dollars of unpaid debt.  That next debt downgrade will likely place Illinois' debt in junk status.  My guess is that in a few years Illinois has a very high probability of joining Puerto Rico in bankruptcy.

CNBC noted yesterday that growth strategies are lapping value strategies.  Year-to-date growth is up over 13% and value around 4%.  

We are now definitely in summer as we're going to see 90 degree temps here for a 3rd day today and likely have two more just like it coming up.

Back Thursday.

Pensions: The Numbers Add Up

My children are grown and have long flown the coop.  Global HQ is devoid of inhabitants now except for Mrs. English and myself.  People have asked me if we'd ever sell the house and move back down into the city.   On the surface that could be tempting.  For all of its well worn problems, Chicago is still an international class metropolis.  Its museums and art scene match most places in the world, we have champion caliber sports teams, wonderful restaurants and a vibrant theatre district.  Also, the city has worked hard to make the civic experience more enjoyable by adding the Chicago Riverwalk and the 606 bike trail.  

You can break up the Chicago experience into two seasons:  Cold and Warm.  Cold means winter has arrived.  Winter is a hard season here.  It usually shows up mid-December but its initial effects are muted by the holiday season.  But January, February and much of March are cold and usually snowy.  Winter then morphs into a two-three month period where it spits rain, we never see the sun and temperatures make a mockery of the calendar which states it's supposed to be spring. By Easter and Passover, everybody here is vitamin D deficient.  But June finally arrives, the days turn long and warm weather finally arrives.  Sometimes it's too warm as moist tropical air invades from the Gulf of Mexico, bringing heat up this way that rivals anything they have in the deep south.  That's why we have the lake.  There are miles of shoreline in Chicago and our beaches are packed with young people and families in the summer.  You can walk or ride a bike along the lakefront and it will bedazzle and rival Rio or the South of France in July and August.  Summer is our highlight season when you can sit outdoors and eat great food while people watching, take in a Cubs or White Sox game or visit one of our fabulous parks.   September brings a cooler but more temperate climate.  Fall lingers here usually well into November and the outdoors beckons at least that long.  So given all of that why wouldn't we likely ever consider moving back downtown?  Simply put Chicago is broke.  

Nearly every aspect of local government is billions of dollars in the red.  The Chicago Public Schools struggle each year to find enough money to limp into summer.  The city and Cook County have expenses that they are unwilling to pass along the true cost to their taxpayers.  Chicago looks toward the state government for help.  In times past that might have occurred, but the State of Illinois is also billions in arrears and the citizens "downstate" show no interest in bailing Chicago out.  A pro-business governor is deadlocked with the state legislature.  Our Governor, Bruce Rauner wants a property tax freeze and an overhaul on how the state works.  Democrats, who control the legislature object to that and want to raise taxes.  The state is about to enter it's 3rd year without a budget and the Democratic strategy now is to try and wait the Governor out with the hopes they can get a Democrat in the office. So far their stalking horse is JB Pritzker, an heir to the Pritzker {Read-Hyatt hotel chain} family fortune.  JB is a businessman with no political experience but has promised to self-fund his campaign.  The Democratic establishment is lining up now behind Pritzker so nothing will get done until the election is over in 2018.  That's about 18 months from now.  Chicago can expect no resolution until then, the bills will keep piling up and if JB becomes Governor then all the citizens of Illinois, but especially Chicago and Cook County can likely expect higher taxes to bail everything out.

Then there are the pensions.  This is a problem all over the country but is especially serious here.  I'll let Danielle Dimartino Booth, a much better writer and explainer of things financial then I'll ever hope to be,  give you a little nugget of wisdom about this problem.  In one of her latest columns  over at her blog "Money Strong" she discusses the issue on pensions, their funding and the baby boomers who are retiring.  This is a problem throughout the Republic but she uses Chicago in her post an illustration to make her point. The highlights are mine:

"Microcosm this demographic {pension} dynamic to the extreme example of Chicago. In 2015, the latest year for which we have full data, some $999 million was paid out to 29,296 recipients. That compares to the $90 million in investment income generated by the two employee pension funds that year. Back out the timeline a decade – in 2006, these two pensions held a combined $8.5 billion in assets. Since then the two funds have generated $3.1 billion in investment returns but paid out $8.511 billion to retirees.

Chicago Mayor Rahm Emanuel recently proposed raising new city employees’ contribution to help fill the gulf of underfunding but Illinois’ Governor quickly vetoed the measure declaring Emanuel was, “trying to fix a drought with a drop of rain.”

Projections suggest that one of the two funds will be cash flow negative by 2023; the other will run short by 2025. If all else remains the same, a big IF with risky asset prices trading at frothy high valuations, property taxes would need to be doubled to cover the coming shortfalls.

Many Cook County taxpayers are forsaking a wait-and-see approach. Chicago was the only large city in America to lose population last year, its resident count dropped at nearly double the rate of 2015."

These are simply unfathomable numbers in terms of our local economy if Deborah is correct.  Since her numbers jibe with what you can find on line, its pretty safe to assume that she's at least in the ballpark in terms of her math.

Now please understand I make no political calls on the statements in this post.  Here we are talking about money.  I am a numbers person and simply stating what the accounting has been telling us about the looming pension crisis for years.  Basic math knows no ideology and when the pensions run dry all the commentary emanating from the political class will do nothing about making sure pensioners are payed what has been promised to them.  To try and address some of the shortfall Chicago has passed a series of tax increases over the past few years with the most of the funds raised going to shore up the pensions.  The majority of that money raised doesn't go to fix roads, fund schools or put sorely needed police officers on the streets.  Even then it will likely not be enough and city residents will be asked to cough up more tax dollars to in many cases fund somebody else retirement instead of their own.  Add to that the funding needs of Cook County and the State of Illinois and all the various other governmental entities means that as a resident of this area you have to protect yourself by making sure that as few of these taxing authorities have a claim on your wallet as possible.  

When I look at it from an economic analysis, irregardless of how wonderful it could be to live downtown, then there's just no way at this point I could justify making the move.  Too many mouths to feed.  Politicians in the city have no real interest in finding a way to resolve problems besides raising taxes.  It's too bad that we're in this mess because it didn't have to be this way and I truly feel for the people that have no alternatives or have a pension they're worried about.  But I cannot expose my own net worth to an unknowable bill that is likely to emanate from the city if things get as bad as it looks right now.  So it's likely I'll stay put in the suburbs.   And, if it gets really bad I have the ability and luxury to move away from the area.  That's a concept politicians here don't understand.  That is, in today's modern economy money has the opportunity to move where it's treated best.  It is hard for me to say that.  I've lived here for over 30 years.  But from an economic prospect I have to call it like I see it.  At a minimum I can stay where I am or move twelve miles west into DuPage County and be free of Cook County's problems.  The taxes are less and instead of a 20 minute drive to the city it will be a 45 minute trip.  Very doable to enjoy all the benefits of our world class city.

Or if things get really bad I can move to Florida or South Carolina.  Summer's are brutal but the tax climate's better.  And, they have no winter.

Back Tuesday or Wednesday of next week.

Link:  Danielle DeMartino Booth:  "The Demographic Divide:  A Police State of Mind."

Chart Talk {06.07.17}

Insider are those who are considered to have intimate enough knowledge about their businesses so that their sales are tracked and regulated.  It is considered important by some because presumably savvy business people don't sell shares unless they think they're pretty fully valued.  I think this indicator may have lost it's luster somewhat as we live in an era where options are granted and vested on a regular basis so certain insiders sell as part of estate planning.  

However if this is the sort of thing that keeps you up at night then please note that insider selling is the highest it's been in seven years according to this chart.  Even a cursory viewing of the chart shows that insider buying tends to be a better indicator than selling.  

Back tomorrow.

Link:  Abnormal Returns via Archaea Capital and Wall Street Journal Blog.

Retail: A Review

Unless you never go shopping {a category I would prefer to be in} you understand that the large retail chains have been imploding in the past two years as the deflationary cost pressures hitting them from both on line marketers like Amazon and big box stores like Costco have wrecked havoc with the entire industry's business model.  There have been more retail bankruptcies in the first four months of this year than in all of 2016. Retail's collapse is also the cover story in this weekend's Barron's.  {Note this article is behind a paywall.}  Barron's seems to lay most of the blame on tapped out consumers.  Their chief argument seems to be that consumer's debt burden has grown during this recovery and it is squeezing out discretionary spending.  They also point out the drag that is the over $1 trillion dollars outstanding in student loans.  I think there is something to that argument but consumer spending at stores and malls has been in trouble for the last few years.  I discussed some other reasons that I think we're seeing some of these changes last year.  These to me seem to be secular trends that began impacting shoppers earlier in this recovery, long before their wallets became a bit tighter.  I thought it might be timely to run that column again as all of it's premises remain intact.   The original post from May 23, 2016 appears below:

"It seems to have dawned on investors that based on recent retail sales folks don't much like going to the mall anymore as clothing retailers and large chain stores have been taking it on the chin.  I've listened to Wall Street talk about this for the past two weeks.  They've mostly focused on Amazon as the primary culprit.  I do think there's something to being able to sit at your desk and order a shirt as long as you know your size, but I also think there's more going on.  These are my admittedly non-scientific observations about shopping which come from listening and watching what my wife and children all seem to be doing these days.  I'm the last person who anybody could think is an expert in this field because I hate to shop and I'll wear clothing till it falls apart especially if it's comfortable.  With that being said here goes:

1.  What the web has done is educate the public on how not to pay full boat.  People are still willing to shop it seems but they're not willing to pay "retail" anymore.  Go sometime to the relatively new Fashion Outlets of Chicago Mall and you'll see what I mean.  That place is constantly mobbed.  I bought a designer sweater there last winter that would have retailed for $75 for $15.  {05.23.16: 3:45 PM. As an update to this post, I stopped yesterday at a retail outlet mall between Milwaukee and Chicago  just over the state border in Wisconsin.  We arrived there at 4:30 PM and the place was mobbed.    It was a beautiful summer day, the end of the nicest weekend we've seen since last fall and people chose to spend time at the mall.  Don't tell me they won't shop!  I think it's better to generalize that folks likely won't shop unless they get a good deal.}

2.  There is a huge market in high end second hand clothes.  Check out places like Vestiarecollective.com sometime or the many other similar places.  You can find plenty of people making extra cash out of selling clothing they've maybe worn once or twice on the web.  

3.  Etsy.com and other websites offer custom and hand made items for significantly less than what you'd find similar priced pieces at a department or local clothing shop.

4.  For whatever the reason, people's shopping habits have changed.  Somebody who once went to the mall and bought three pairs of jeans now buys one and either that's it or they go home and find the second pair on line.

5.  Millennial's value experiences over shopping.  It seems that for the most part you need a hook in order to get them to the mall.  The Apple stores in malls are always crowded.  So are the fast casual lunch spots out there.  Macy's, not so much. 

Finally go read Danielle DiMartino Booth's latest column over at her blog "Money Strong".  The article titled, "Retailing in America:  Valley Girl {Interrupted}," is not only a fun read but a deeper dive into the problems affecting consumers and shopping right now."

Back Wednesday.

*Macy's, Etsy and Apple, Amazon and Costco are equites that are components of ETF indices we own in client and personal accounts.  We also have clients who own Apple as part of either discretionary purchases on their request or as legacy positions.  Please note positions can change at anytime without notice either on this blog or via other forms of electronic communication.  

Thoughts {06.01.17}

The Nasdaq Powershares QQQ Trust {QQQ} representing the top 100 stocks on the Nasdaq exchange is year to date up nearly 19% not including dividends.  For comparisons sake over the same period the overall Nasdaq is up about 15% and the S&P 500 has advanced about 7.70%.  The outperformance in the Nasdaq is attributed to a small group of stocks.  I'm not going to comment on this right now.  Maybe we'll cover this discrepancy on a later post.  You can take away from these numbers what you want.

If you want a better understanding of what's going on in the world from a geopolitical perspective then go read Tim Marshall's book "Prisoners of Geography:  Ten Maps That Explain Everything About The World".  I especially recommend folks read the chapter on China.   My favorite quote about China from the book is actually in the introduction to the Chinese chapter by political scientist Lucian Pye,  "China is a civilization pretending to be a nation".  Read the chapter and see if you agree!

We are now squarely in the period roughly six month seasonal period of weakness where stock performance has been known to hit a rough patch.  While there is no guarantee that we will experience that kind of period in 2017 it behooves all of us to understand the patterns and what could occur.  To that end Jeff Hirsh over at the "Almanac Trader" notes that "June is not such a hot month in post election years".  

Go read over at the Washington Post why hedge funds are in trouble.

Back early next week.

*Long ETFs related to the S&P 500 and the Nasdaq 100 in both clients and personal accounts.    Long the Nasdaq composite in certain client accounts.  Currently short SPY and ETFs related to the S&P 500 in a personal account related to an options strategy not employed in client accounts.  We reserve the right to change these investments without notice on this blog or via any other form of verbal, written or electronic communication.