A Way To Look At Things Right Now.

Part of this post will be stealing some of the thunder from my summer letter originally sent to clients that will be published here on this blog in the coming days, but here's a way to look at the S&P 500 as it's currently trading.  I'm publishing this now because the investment world for a month has been abuzz discussing what it means as this index trades around the 3,000 level.  First off let's confess the truth that nobody right now  knows what's going to happen next. Stocks could power higher as many bulls predict or sell off again as the bears warn.  Instead of trying to prognosticate, let's go with what we actually know has happened.

We've experienced three failed breakout attempts at new highs in the last two years.  You can see them on the chart above in the red circles.  All three led to market declines.  Stocks have been consolidating their 2016-2017 gains for nearly two years now and in that kind of environment it's typical for stocks to backtrack when they're repulsed at important barriers.  What we do know is that the S&P 500  broke to new highs in June and has been flirting with that important 3,000 for about a month.  

Anybody's guess what comes next but if we're going to see a repeat of our last three failed breakouts then there are some pretty clear support markers that will give us a clue things have changed.  These are the blue horizontal lines you can see on the chart above.  Besides these, I think the red trend line I've shown near the right edge of the chart will be something most watched and commented on since this trend line is working off last December's lows.   It's also trading around some of these shorter-term support levels right now which should make it an even more important psychological level if we start to break down.   A break of that line will surely  be noticed by investors who pay attention to money flows.  

Further down on the chart, about 20% lower from where we currently trade, is the long term trendline that dates back to the 2009 lows.  It's that purple trend line on the chart. A 20% correction is probably what we could expect to see in a really bad trading environment so that could be an important level to watch as well.  Also notice how that long term trend line is straddling the 200 week moving average.  

Watch and see how stocks react to those levels to get clues as to how we might trade.

Chart is from Tradingview.com although the annotations are mine.  Also you can double-click on the chart above to make it larger.

*Long ETFs related to the S&P 500,  in client account and personal 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.

A Response To A Friend's Question

I've been dealing with a bunch of work issues that have kept me away from my blog this week.  I did have time though to respond to a question a friend sent me asking about the possibility of a 20-30% correction in the markets in the next five years.  The question was in response to some article he'd read that noted many of the gauges reportedly used by Warren Buffet show the market historically overvalued.  Please note that I don't know what article he's referencing.  

Here's my response:

"I will tell you that at some point over the next 5 years there is a very high probability we'll have a market correction that has the potential to be between 20-30%.  The historic volatility of the market is around 15%, meaning that in any given year there is a very high probability of a stock correction around 15%.  We saw on average about an 8% correction in May for most US indices which therefore means many stocks went down more than that.  At 3,000, the S&P 500 experiencing a 25% correction would  take the index back to 2,250.  That would take the market back to about where it was in early December 2016.  Note though that we were around 2,350 in December of 2018.  If you had that kind of drawdown you'd basically have the market back to the lower end of the range we've been in for about the last two years.  The trick in any decline is trying to figure out if we're in what would be described as a typical correction in prices or a set of circumstances that would morph into something much worse.  To get much worse in my opinion you typically need a few things to happen.  You need an unexpected event or usually the unraveling of a financial bubble in assets.  Some would argue that there's a financial bubble brewing in bonds but if that's the case it is unlikely in my opinion to threaten the financial stability of the world system the way the financial crisis did back in 2007-2009.  Bitcoin is not a bubble.  Cannabis is not a bubble even though these things are in the news all the time.  

As for quoting Buffett, Warren has said a lot of things over the years but I like his comments on volatility and I trot these out for clients in periods of market weakness.  Traders tend to love volatility but investors hate it when it leads to a decline in their accounts.  Presumably nobody minds volatility when stocks move higher.  Here you go.

'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 volatilethan cash-equivalent holdings. Over the long term, however, currency-denominated instruments are riskierinvestments — 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.”

*Long ETFs related to the S&P 500,  in client account and personal 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.

A Graphic Overview On Investing By Generations

They say that every picture tells a story and I am a person that would rather look at a chart or a graph for data than to mine through a certain amount of pages in a magazine or book to find the same information.  I love the website  Visual Capitalist because of its ability to bring forth somewhat complicated concepts in pictures.  Today I'm sending you over there to take a look at their graphic "How Different Generations of Investors Think".  A lot of their findings in that graphic mirrors what my clients tell me.  For example, investors of my era have virtually no interest in crypto-currencies while Millennials and Gen. X-ers  show double the interest in that sort of thing.  

One area where my findings don't agree has to do with the future.  In general I find Baby Boomers to be more optimistic about the future than younger generations.  That's not what the graph shows.  Also each group holds about the same amount of cash at 30% which seems high to me on average given the economic environment we've been in.  

Anyway go take a look.

Back Friday.

A Few Numbers For Your Consideration.

A few statistics and numbers that stuck out as I was reviewing things over the weekend.  I'll throw these out there without commentary on what I think these mean.  You'll need to draw your own conclusions or give me a shout out and we can discuss.  Here for your consideration are the raw facts.

The S&P 500's ETF, SPY,  pulled back from all-time highs last week.  It is up nearly 19% not including dividends and up 8.27% since the May lows during our most recent pullback.  SPY is up 1.23% since last September right before last fall's meltdown began.  It is up 3.7% since January 26, 2017 when I believe this current consolidating phase began.

Only four of the S&P 500's sectors are considered in uptrends by our work.  These are utilities, technology and both the consumer discretionary and staples.  

Energy continues to be in a secular downtrend that it began back in the summer of 2014.  The energy ETF, XLE,  is down 4.3% in the past three months and down nearly 40% from highs set back in that summer of 2014.

It is now nearly a decade since international markets, regions and indices have outperformed the US for any significant period of time.

Anyway and again  draw whatever conclusions you want from this data.  I'm just the bearer of news.

*Long ETFs related to the S&P 500, technology energy and international indices 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.

Valuation {07.19.19}

With the markets near all time highs and headed higher at the open today we'll review our valuation analysis.

The S&P 500 closed yesterday at 2,995.11  which is an advance of 19.90% for the year, not including dividends.  This represents an advance of approximately 5.33% from when we last reviewed these numbers on June 7, 2019.   Below is our current valuation analysis.  We are still using a 168.00  earnings estimate for year end 2019.     We are currently using a mid-point $173.00  for a rolling estimate out  to the end of Q2, 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 $168 {Year End 2019}

Current PE:                       17.82% {PE has increased from previous review of 16.93%}
Earnings Yield:                   5.61% {Down from previous review of 5.91%}
Dividend Yield:                  1.846% {Yield basically unchanged}

Current Expected Price Cone of Probability {COP}:   2,500-3,000 for 2019.  2,700-3,250 for 2020. 

Rolling Four Quarter Estimate for the S&P 500, Our Midpoint Estimate $173.00:

Current PE:                     17.31%
Earnings Yield:                 5.77%
Dividend Yield:                1.91.% {Estimated}

The current yield on the 10-year US Treasury is 2.055%.  That is a decrease from our last update when the 10-year US Treasury was yielding 2.121%.  

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.  We will likely next update our valuation review after Labor Day. 

In The Things Are Getting Better Department

From time to time I like to highlight data that shows how things are getting better for the economy.  This chart shows Total Job Openings Minus Total Unemployed {JOLTS}.  JOLTS notes the difference between employers looking to hire for a specific skill set vs. unemployed in the work force.  JOLTS data has recently slowed a bit but it is still at what I believe to be  an all time high.  

Dr. Ed Yardeni has an excellent blog for economic statistics and it is from a piece he wrote "Running Out of Workers" that I found this chart.  Here are some of his highlights from this last batch of statistics on jobs:

(1) Openings. There certainly are plenty of job openings. They totaled 7.45 million during April, exceeding the number of unemployed workers by a record 1.6 million.

(3) The biggest. The biggest increases in job openings compared to a year ago have been in some of the most cyclical industries: construction (404,000, up from 258,000), durable goods manufacturing (322,000 up from 288,000), state & local government excluding education (359,000, up from 339,000), transportation, warehousing & utilities (373,000, up from 348,000), and financial services (365,000, up from 328,000)

(5) Labor force. Last year, the labor force increased 217,000 per month on average (Fig. 6). During the first five months of this year, it is down 119,000 per month on average. This must be exacerbating labor shortages. 

(7) Small business owners. The report reviewing May’s NFIB small business survey showed that the demand for labor by small business owners remains strong. Last month, 38.0% said that they have job openings, which continues the readings in record-high territory (Fig. 8). The net percentage increasing hiring over the next three months was 21.0%, near previous cyclical highs. However, the percentage complaining of few or no qualified applicants for their job openings was 54.0%. 

Twenty-five percent of all owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem, equaling the record high. Fourteen percent of all firms reported using temporary workers. In construction, 59% had openings, and 93% of those openings were for skilled workers. No wonder that construction payrolls rose only 4,000 during May. 

Economic growth may be slowing in the US and globally but statistical numbers like those cited above do not make the case for an economy that's on the brink of a recession. 

Back Thursday or Friday.

PS:  Retail sales just came in better than expected and import prices fell.  In fact import prices fell the most in the past 6 months.  To quote CNBC's Steve Liesman, "Somebody forgot to tell the consumer that the economy is slowing. 

S&P 3,000

Well, the S&P 500 finally broke to new highs yesterday and at the same time momentarily breached the psychologically important 3,000 level.  While passing milestones like this gets a lot of news play and commentary on TV or in print, I’ll note this is only a 2% advance from last year’s high water marks set in September.  All the punditry out there proclaiming what a wonderful first half of 2019 we’ve had never seems to mention last year’s rapid decline in the fall or how many were predicting a recession for this year back then.  Last winter in a piece I wrote called "What Went Wrong in 2018"  I said among other things that I didn’t see a recession on the horizon, and I thought that corporate earnings growth would be in the 5-7% range for the year.  As well I said our GDP would be 2.4% in 2019 and that stocks had the potential to advance 10-15%.  I also thought that given the psychology back then there was a potential to retest or perhaps undercut last year’s lows.

Here's how that's panned out so far.   There’s been no recession and 1^st quarter GDP came in at 3.1%. GDP has been slowing and the indicates seem to be showing growth somewhere around 2% in the 2^nd quarter.  We’ll get a better feel on corporate earnings in the coming weeks but I still think that 5-7% number is doable, most likely coming in the back half of the year.   Most broad US market indices are up between 15 and 18% as of this writing.   Finally markets never retested the December lows which I thought was a possibility back then but we did see on average about an 8% decline in broad market indices back in May.  While the economy has likely slowed this quarter from the pace we saw earlier in the year we are still seeing growth.  Add into that the increasing likelihood that we'll see an interest rate cut later this month and you can see why stocks have acted so well lately.  

I think it's possible that could soon enter a period where stocks mark time or even give up a bit of the gains we've seen in the past six weeks.  While anything can happen when we talk about the markets,  stocks rarely travel straight higher forever.  But as I've discussed time and time again there's just too many positive developments under the hood for me to worry at this point about the underlying longer-term fundamentals of the US economy.  More on this in a later post.

I'm publishing this a day earlier due to scheduling issues.  Next post here will be Tuesday.

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

Post & Comment 07.10.19

This is  where I respond with a brief comment to something I've either seen in the news or on line.  
The headline or question I'm addressing is highlighted.

S&P 500 has just passed 3,000. 

Yes it briefly went over that benchmark this morning.  As of now though it's pulled back a bit from that high.  We've broken above a key psychological barrier but only time and price action will give us clues as to whether this is the type of action that sends stocks into the next stages of this advancing bull market.

What about all of the current concerns in the world?  Iran?  N. Korea? China?

There are always concerns.  This rally from 2009 on till today has always had its naysayers.  Focus on long-term economic growth.  I ask myself everyday are things getting better for the economy on a secular trend basis?   As long as that answer is yes then longer term probability still favors stocks.

What are you watching that maybe is under the radar for most investors that you believe deserves some attention?

There's a whole list of things.  The arrest of financier Jeffry Epstein for his connection to the international high rollers of finance, politics and entertainment is one.  All these earthquakes in California are also at the top of my list.  Also, apparently the Russians barely prevented a major nuclear incident on one of their subs last week when it caught fire.   Iran is up to mischief that could accidentally backfire into a shooting match.  Finally the market seems to ebb and flow on trade related data so I'll keep my eyes on that.  Remember that just because I say I'm watching something doesn't mean it's going to turn into a problem for the markets down the road.  A great example of this are the ongoing earthquakes in California.  These could mean the big one is immanently coming for LA or San Francisco or they could mean the big one is coming for these places 30 years from now.  We need to pay attention to things like that and accept the possibility they might occur but you cannot manage assets based on an unknown event that may or may not happen within a certain period of time.

Finally a big shout out to the US Women's soccer team for winning the world cup.  As a former soccer coach to both young boys and young ladies it's been so much fun watching them on the world stage.  Definitely should be paid as much as the men.  Probably should be paid more as they win!

Back Friday.

Go Read! {07.08.19}

The car that I use mostly for business was purchased in 2003.  I don't really have to drive all that much everyday living where I do and given that the offices of Lumen Capital Management are located where I don't have to drive to work.  I haven't made a payment on my car since 2009 so I've saved myself likely over $50,000 by not having to spend money on a monthly check to a bank or auto loan company.  My car still runs well even if time, weather and notoriously crappy Chicago roadways have taken their toll on its appearance.  That car only has 87,000 miles on it during that time.  Now, however, it's under a death sentence.  It barely passed its last state mandated auto inspection and I'm told that by the time it's up for review in two years it will need a new catalytic converter.  I'll need to get something else before that inspection since the cost of getting that installed will likely be more than the car's going to be worth by then.

I'm researching what I want to do and in that vein I found this article "Why your Luxury Car is Unlikely to Materially Boost your Happiness". Interesting and informative.    I think you should all read it.  The synopsis of the article is that a car is a depreciating asset so don't spend a lot of money on one.   I largely agree with that, particularly if you are more likely to want to turn over a car every few years.  I'm not a car guy but I know plenty of people who are.  In my situation I think I have three things to consider:

-Do I want to pay up for a new car with the expectation that I'll own it for at least 8-10 years.
-Do I want to go with a used luxury car.
-Do I want to lease.

Each has advantages and disadvantages and I'll keep you abreast of what I do as the months go by.  One thing I know is that I've missed 3-4 generations of upgrades in cars during the period I've been out of the market so I'm expecting a large learning curve regardless of what I buy.  The other consideration is going to have to be what Chicago winters do to cars.

Back Wednesday.

Housing Prices

I saw this data from the Twitter Feed of Charlie Bilello last week.  It shows April's housing price indices for April which I'm assuming is the last month we have data.  Notice in this report that Chicago housing prices rank dead last in nearly every category but 1-year time frames.  Heck, even Detroit and Cleveland have seen better price appreciation over the long run.  This just shows you what happens when you combine an economy not necessarily geared for the modern STEM world, bad fiscal policy at the state and local level, high taxes and no real vision for long term growth.  If you bought a house even 20 years ago in Chicago, by the time you add everything back in, you probably haven't made a dime on your asset.

Mr. Bilello does great work and I think you ought to check him out if you like economic and market related statistics on Twitter.  {Just so you know nobody has suggested I recommend him.  That's on me!}

Back Monday

Happy 4th of July America!

Happy 4th of July America!  Here's a large Huzzah for all the men and women who've served over the years in our armed services who have continued to make this day possible.  God Bless to you all!

Post & Comment {07.01.19}

This is  where I respond with a brief comment to something I've either seen in the news or on line.  
The headline or question I'm addressing is highlighted.

There will be a trade deal coming out of this G-20 meeting between Presidents Xi and Trump.  Unlikely that this will happen.  Best case scenario is both sides say something like process has been made and they agree to keep on talking.  

Many of the Democratic party candidates are proposing all sorts of policies that would cost trillions of dollars.  How likely are these to get passed?  Getting many of these policies through Congress, in their present iterations, is unlikely to occur.  Assuming for the Democrats a best case scenario that says in 2020 they control both branches of Congress and the Presidency, then they  would still need to be able to round up 60 votes in the Senate.  Even if the Republicans take a shellacking next year there is a low probability of them losing that many seats.  Most of this is for consumption of the party's liberal base.  Expect most of it to be toned down by the time we get to next year's general election.

President Trump will be reelected.  Alternatively President Trump will be defeated.  We don't do politics on this blog.  There's plenty of other places you can find that.  When we discuss politics it is in the context of how they play out in financial markets.  Having said that the numbers right now indicate the President is in serious trouble and will likely face a very tough bid to get reelected.  He is behind in polls in many of the swing states he will need to carry next year.  That doesn't mean he's sure to lose.  It does mean that his reelection is no sure thing, especially if the Democrats nominate a more centrist candidate.  Markets won't really start to care about this though until sometime next year, probably in late spring early summer when the Democratic challenger is likely to emerge.

Democrats will nominate a socialist or a very progressive liberal.  In that case it is a very high probability you will have four more years of President Trump.  The base of the Democratic is skewing more liberal these days just as the base of the Republican party has tilted more right.  However, the vast majority of folks in this country reside in the center and there's no evidence yet that they are skewing into the progressive camp.  Of course all of that could change in a year but present trends don't support the notion of the vast majority in this country yearning for a more socialist economic system.  Expect whoever the Democrats nominate next year to recognize that and rapidly move towards the middle once his or her nomination is secure.

Back Thursday.