A Short Q. & A. {Intro & Premier Post}

I'm introducing a new feature that I'll call "A Short Q.& A."  It's basically where I'm going to take something I've seen posted on line or heard on the news and throw out a quick thought or comment.  I'll post first what I've seen or heard and then will give my comment or thought.  

Here goes.  Let me know what you think.

Markets are off to one of their best start in years by some measures it's the best start since 1987.  That my be true but all we've managed to do is get get back to about even with last year's highs.  Also for those of you that are too young to know or have possibly forgotten, 1987 didn't end so well for the bulls.

Real GDP +3.2% for 1 Q 2019.  All those calling for a recession are so far wrong.  My guess is that the majority of them are busy deleting their twitter feeds that predicted this back at the end of last year.

Markets are still pricing in rate cuts later this year and in 2020.  I think for that to happen economic data is going to need to slow significantly.  I wouldn't be surprised if at some point this year markets begin to worry again about rate increases.

Joe Biden is the early front runner for the Democratic Party's nomination in next year's presidential election.  It's very early.  The press needs something to talk about.  Probability suggests there's a higher likelihood of a relative unknown capturing the nomination.  See Bill Clinton in 1992 for that playbook.

What is the outside event that most aren't looking for that you keep on your radar.  Right now there are two.  First is a confrontation in the South China Sea that leads to some sort of military incident.  The 2nd would be a natural disaster someplace unexpected and completely unlooked for.  My top candidate for that is an earthquake hitting the center of the country along the New Madrid fault.  Hasn't been a major one of these since the early 1800's and the mid-west isn't prepared like they are on the west coast.

Back Wednesday.  

For All Those "Pundits" That Said Last Winter We'd Be In A Recession About Now!

US GDP Grows by 3.2% in the First Quarter, Topping Expectations.  Traditionally the first quarter is often the weakest quarter of the year.  Guess all the experts that thought we'd be showing signs of a recession by now were wrong.  If they talked you out of the market around Christmas then they cost you a lot of money and opportunity.

Chart Talk {04.25.19}

Today's chart shows last fall's decline and this year's "V" shaped recovery.  Note the compounding math.  It takes a 25% gain to erase a better than 20% decline.   Also note that we've used a great deal of market buying power to just get us back to where we were seven months ago.  If I stepped this chart back even further then I could also point out that we're only marginally higher than we were back at the end of January of 2018.  In terms of market movement we have gone roughly 15 months now with little to show in the way of gains.  

This fits into my thesis which is that we've been in a consolidating pattern these past 15 months.   Are we on the verge of ending that pattern and rocketing higher or are we seeing another topping pattern that could lead to some kind of decline?  Unfortunately nobody knows, however, this is what we do know at this point.  First some reasons to be a bit more cautious at this time:

Stocks are not cheap at something like 17 times this year's earnings estimates on the S&P 500. 

Stocks are overbought by our work in all the time frames we follow.

The most recent IPOs that have come forward indicate a certain amount of speculative froth may be trickling into stocks.  Investors also seem complacent.

We are about to enter a seasonal period of time where stocks have historically struggled to make gains.

We have not seen a pullback during this recent move higher in excess of 4%.  All pullbacks have been short in duration and have been met with buyers.

Balancing out these more negative points are a few on the positive side:

Earnings have been better than analysts estimated a few months ago.  Earnings estimates on a going forward basis have been moving higher.

The economy is strong, as is job growth.

The end of the Mueller Report likely removes the risk of a constitutional crisis with the President as political crises are not good for stocks.

When I look at all these tea leaves I think the higher probability for markets between now in the fall is more of the same churning action we've seen since early 2018.  I think there's also a higher probability that stocks could at some point between now and when the leaves fall off the trees see something larger than a 4% decline. Remember that historical volatility resides somewhere in the 10-14% range.   I also think stocks have the potential to be higher than where they are now by the end of the year and also carry the potential to be higher by the end of 2020.  In that scenario and based on what we know today, I think pullbacks in stocks would be met by buyers.

Of course that is just a guess.  It may be based on probabilities but we all know the future is hard to predict.  Pretty much anything can happen and will.  In terms of what to do I will say that investors should monitor their risk/reward requirements and see if anything has changed.  Only based on that should investors contemplate any changes in their investment profiles.  Investors that see the need for certain amounts of cash in the next 4-6 months may want to become more defensive in their portfolio orientation.  In terms of an upfront need for cash I would note that advice is prudent at any time whether in good or bad markets.

I will be back early next week.  The chart above of the S&P 500 ETF SPY is from Tradingview.com although the annotations are mine.  You can double-click on the chart at the top of the page to make it larger.

*Long ETFs related to the S&P 500 in client accounts, although positions can change at any time    We reserve the right to change these investments without notice on this blog or via any other form of verbal, written or electronic communication.

Global Growth

From the excellent twitter feed of Charlie Bilello comes this graph of global growth rates.  Remember last fall much of the investment class was convinced that world growth was going to slow down to the point that a global recession was possible.  Looks like much of the world didn't get the memo.  Even if these numbers turn out to be optimistic on a going forward basis there's almost nothing here indicative of an immenent recession.

Happy Easter

Hill of Slane, Co. Meath, Ireland 2008

Christus Resurrectus Est! Vere Resurrectus Est!

Happy Easter!

An Observation

Markets are closed today for Good Friday so it's been a morning of catching up on some paperwork and looking at a few charts.  As I look, I notice a lot of ETFs that are statistically overbought right now.  Also the markets have been exhibiting some signs of distribution in the past week or so even as we flirt with new highs.  Couple that with higher valuations and it would suggest that there's a higher probability of a return to a market with a bit more volatility in the coming weeks.  

Of course there's no law that says that has to occur but all the signs are coming together for an environment where that sort of scenario could possibly take place.

Back Tuesday.

Valuation {04.17.19}

The S&P 500 closed yesterday at 2,907.06  which is an advance of about 16.00% for the year, not including dividends.  This also represents a gain of about 8.5% from when we last reviewed these numbers back on January 31, 2019.  Below is our current valuation analysis.    Current Street estimates for the S&P 500 for year end 2019 We are are using a 169.00 for year end 2019.     We are currently using a mid-point $174.00  for a rolling estimate out  to the end of Q1, 2020.    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.  Black means unchanged.

Our Midpoint S&P 500 Earnings Estimate of $169 {Year End 2019}

Current PE:                       17.20% {PE has increased from previous review of 15.90}
Earnings Yield:                   5.819% {down from previous review of 6.29%}
Dividend Yield:                  1.84% {Yield has declined from previous  2.06.%}

Current Expected Price Cone of Probability {COP}:   2,500-2,950 for 2018.  2,700-3,100 for 2019. 

Rolling Four Quarter Estimate for the S&P 500, Our Midpoint Estimate $174.00:

Current PE:                     16.70% 

Earnings Yield:                 5.98% 
Dividend Yield:                1.92.% {Estimated}

The current yield on the 10-year US Treasury is 2.59%.  That is a decrease from our last update when the 10-year US Treasury was yielding 2.73%.  

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    We reserve the right to change these investments without notice on this blog or via any other form of verbal, written or electronic communication.

Back early next week.  

I know I said back in January that I would be updating this analysis monthly.  I am going to change that to once a quarter. 

Back Friday.

Best And Worst States For US Taxpayers

On Tax Day I thought it would be interesting to post this analysis.  You can go to the article linked below to read how they came up with the rankings.  Notice Illinois came in dead last!

Back either Wednesday or Thursday.

Link:  "The Best and Worst States for US Taxpayers".

Go Read!

Here's an excellent article that I first saw yesterday over at the blog "Abnormal Returns".  All investors, especially individuals with money in the markets, should go read "Why an Obsession With the S&P 500 is Unhealthy for Individual Investors".  Here is the key takeaway.

"The tendency {for individuals} to compare their portfolio performance to the S&P 500 is more often than not both inappropriate and counterproductive for individual investors. Unlike a large cap stock mutual fund where the comparison may be valid, individual investors have specific goals, objectives, and risk tolerance considerations. So, if this is inappropriate, what should they focus on instead?

If not the S&P, what’s the right question?

Constructing a portfolio requires considering a client’s goals, objectives, and risk tolerance. Instead of asking, how is my portfolio performing relative to the S&P, the right question might be, is my portfolio allocation still appropriate for meeting my goals, objectives, and risk tolerance? More recently, comparison to the S&P 500 is a function of performance chasing as equity markets have risen substantially over the last decade. An investor in the S&P 500 between April 1999 and August 2010 would have lost nearly 4%. If this same investor had “beaten” the S&P 500 by losing “only” 2%, would they feel better? Comparing your portfolio to S&P 500 in rising markets, and your own risk tolerance in down markets is an unrealistic expectation. Point being, relative performance to the S&P says nothing about whether an investor is meeting their goals and objectives."

The rest of the article makes some more relevant points and I urge you to go read the whole thing.  

Back Monday.

*Long ETFs related to the S&P 500 in client and personal portfolios.  Positions can change without notice.

Chart Talk {04.09.19}

Here is an unannotated weekly chart of the S&P 500's ETF SPY.  You can see on this that while this index is trading at a six month high, we still haven't surpassed our most recent record high set last fall.  Actually when looking at this chart you can see we haven't gone anywhere in over a year.  We're more or less flat with prices we hit back in January of 2018.  Part of this longer term consolidation pattern we've harped on much of the last year, most recently here.  

Do we break out here or continue to consolidate?  Hard to say.  On one hand there seems to be bullish interest and buying power behind stocks right now.  Lower interest rates have helped with that.  On the other is that we are over bought by our work and we are entering a seasonal period where stocks have historically struggled a bit.  Time will tell.

Back Thursday.

*The chart above is from Tradingview.com although the annotations are mine. You can double click on the chart to make it larger if you would like.  Long ETFs related to the S&P 500 in client and personal accounts.  These positions can change at any time without notice.

They're Playing Baseball Today!

They're playing baseball today!  I know I missed opening day but today is the Cubs home opener, the weather in Chicago is going to be close to 70 and you can finally see the faint stirrings of spring around here.  No matter that we return to the 40s and 50s over the next few days and could even see a spit of snow later in the week.  Today we see the bright promise of better weather in the coming weeks.   Life is good!

"The one constant through all the years Ray has been baseball. America has rolled by like an army of steamrollers. It's been erased like a blackboard, rebuilt and erased again, but baseball has marked the time. This field, this game is a part of our past Ray. It reminds us of all once was good and could be again."-James Earl Jones as Terence Mann in "Field of Dreams."

 Happy Birthday RJE as you practice before the Supreme Bar.  Down here you would have been 87.  God bless and miss you. 

In The Things Are Getting Better Department

We occasionally highlight some pieces of economic data that illustrate our belief that things continue to get better in the economy.  Today's interesting number comes to us from Charlie Bilello over at his great twitter feed.  He notes that we are now at 102 months of consecutive job growth and that is now the longest streak in history.  I point these things out not because I want to be accused of being too optimistic or a cheerleader for the economy.  I just feel that too much is wasted always looking for the negative.  I take that information into account as well but feel that the positive is too often underreported.  I like to point those numbers out as well.

Back either tomorrow or Wednesday.

Go Read!

A few items that have caught my eyes these past few days that I think are worth passing along.

We wrote a few days ago about that college cheating scandal currently roiling the country.   Here's a great article written by a former guidance counselor at a prestigious LA private high school.  It's written from the perspective of dealing, even 25 years ago, with very wealthy parents attempting to game the system in placing their children in Ivy League colleges or places such as USC.  Her insights are compelling, even if a bit dated.  The heart of this story is about certain wealthy or powerful people and their sense of entitlement.  That is also why I don't think this story is going away any time soon.  

I've been saying for some time that we are finally on the verge of unlocking the potential of space as a profitable path for business and not something that is the sole provenance of governments.  The era of reusable rockets is substantially going to bring down the costs of getting to orbit.  Here's a piece backing my thinking on this.  Go read out of UBS report "Investing In Space".   They make the following observation that "mainstream financial markets are only just starting to awaken to the commercial and disruptive opportunities that space offers, as technology is starting to tear down the high entry barriers to access space".  Also, among other things, they note that "the combination of declining space launch costs and advances in satellite technology will raise the value of the space economy from USD 340bn currently to nearly USD 1trn over the next two decades. And while traditional satellite, government, and military applications in space will continue to grow, in our view, the space economy will start to have major spillovers across several industries. The emergence of satellite broadband internet is one such example."

Finally I am a keen observer of millennials as I have three of them in that age bracket.  Here's an interesting article noting the split between older millennials who bore the brunt of the financial crisis and younger millennials who came of age more during the recovery period.  I think the article makes some interesting points but I also think that a generation which is usually defined as somewhere between 25 and 30 years is an awfully long time.  I'm generally considered the tail-end of the baby boom era and I've always noticed that there are differences along many lines between those of us born from say 1955 on as opposed to those that came of age earlier in the turbulent 60s.  For one thing, in general, those born at nearer the end of our generation seem to be more conservative.  At any rate the article is interesting for pointing out that not all millennials are cut from the same cloth.

Back early next week.

Check Your Mortgage Rate

The chart above shows that mortgage rates have declined pretty substantially in the past five months as interest rates have declined.  If you purchased a piece of property in the past year it might be worth your while to see if refinancing makes sense.

Link:  The Wall Street Journal, "The 4% Mortgage is Back".

Back Friday.

Thoughts {April Fools Edition}

Here's a few things I'm juggling about in my noggin as we begin the 2nd quarter of 2019.

Major US indices are all up better than 10% as of Friday's close.  What we've had is a large inverted "V" on the stock charts as the gains almost perfectly matched the losses from last year's 4th quarter.  Now comes the trickier part which is whether stocks have enough left in them to assault last year's old high's and continue forward.  Many think that's a dubious proposition right now and I'm on record as thinking that at a minimum some sort of pause should be expected sooner rather than later.  But it is the markets that are the final judges on these sorts of things and right now the bulls are in control.  Stocks look to open strong this morning.  As long as the animal spirits are running stock prices could move higher.  Time will tell.

Switching gears now, the worst sort of scandals or issues are the ones the public can easily understand.   In that vein expect the college admissions scandal and the current immigration crisis along the border to carry on and be potential surprise issues into next year's elections.  Many already feel the system is rigged against them and the blatant way it seems some wealthy families bought or bribed their kids way into elite universities will reinforce those beliefs.  Likewise no matter what one thinks about immigration I detect a growing unease that people are concerned we've lost control of the process while many have the perception we've lost control of our borders as well.  I think both issues will have legs going into next year.

Speaking of politics I think it's a higher probability than most that the Democratic nominee for President next year will be somebody flying below the radar right now ala Bill Clinton in 1992.  My dark horse candidate to fill that role is Pete Buttigieg, the current mayor of South Bend, Indiana.  To make it clear I'm not endorsing Pete or any other candidate.  I just wouldn't be surprised if he runs better than most might expect right now.  

Finally go read, "Five Pieces of Traditional Retirement Advice That No Longer Work Like They Used To".  I'll have more to say on this article at a later date.

Back Wednesday.