Coming Up For Air

I've alluded to a family matter that has kept me away from this blog for much of the fall.  That is by no means over but for the moment things have stabilized and I can come up for a bit of fresh air.  Markets continue to press toward new highs largely for the reasons I discussed earlier in the month.  Probability suggests that markets should be facing favorable patterns between now and year end.  The main question may end up being how much of next year's gains are we stealing from 2020. There is a lot of money on the sidelines that could likely be forced into the markets in the next 90 days and that could also prove positive for stocks.

I'll switch gears for a moment as I've often been asked about how the impeachment process will play out in the markets.  Unless more compelling testimony is produced that can further cement culpability on the President  then there is virtually no possibility that there are 67 votes in the Senate to vote for impeachment if the process even goes that far.  The reason it may not even be voted on in the House is that there's some evidence of the Democrats  developing cold feet as the public seems to have taken an unfavorable view of the whole matter.  It seems that Washington is discovering that most folks believe that we vote President's we don't like out of office and not have them forcibly removed by Representatives who never got over 2016.  As long as this view prevails it is unlikely that markets will be impacted by the affair. 

There is unlikely to be much the rest of this week regarding stocks that should be newsworthy enough for me to write about.  The week has historically been good for investors and the day after Thanksgiving is up something like 95% of the time.  People tend to focus on more important things this week like family, football and shopping.  Given the season and my past few months I am going to take some time off from blogging this week and recharge the batteries.  I want to thank many of you who have offered my family and myself kind words these past few months and those who have gone out of their way to help us.  In particular I need to thank the people of my home town Union City, Indiana who have stepped up in a way that probably would be unimaginable in a larger place.  One can say whatever they want about small towns and God knows the past 30 years has been unkind to them.  However, there is a resiliency, decency and a willingness to help from folks in rural areas that has survived even to this day.  In that regard I want to thank all the people back home that have really helped all of us out of a jam, particularly in the past two weeks.

Finally I would like to wish each and every one of you a happy Thanksgiving.  Along with the 4th of July it is our most American of holiday traditions and I hope you are able to spend it with loved ones. God bless to you all and we'll catch up with you sometime next week.  Hard to believe we'll be in December by then!

Again Happy Thanksgiving.

The Silent Epidemic {An Introduction}

Today begins a series of posts on the tax and budgetary problems that plaque Illinois.  I'm calling this series "The Silent Epidemic" because Illinois problems seem to me to mimic the issues of high blood pressure and heart disease that right now is strangling the people of Chicago, Cook County and Illinois. High blood pressure has been called the silent killer as it sneaks up unknowingly on people and the first sign many have of it is a cardiac event.  Like cardiac issues the problems faced by people in the above named places has been sneaking up on all of us for years.  We are at the stage in my opinion where the cumulative effect of all these budgetary issues cannot be ignored by individuals living in these parts and whatever cure comes from trying to make whole those with the disease will likely be painful and lead to life changing events.

Before I go any further with this introduction and with this series I want to make one thing clear.  I will not be writing a political column.  I write about money.  Pure and simple.   People can debate all they want on the issues of taxes, pensions and equity.  I'm not entering into that arena.  I am not interested going into the history of how we got to where we are or in picking sides in the debate on who's to blame.  My guess if I had one is that there's plenty of blame to go around on both the living and some of the dead.  Instead I intend to be like a doctor and weigh in on the symptoms of the problem, not want to dwell on how my patient came to this event.  If I'm the doctor in the case of using a cardiac event as the reason my patient is in for a visit  I'm going to tell the causes for your chest pain but not weigh in on lifestyle choices that perhaps got you to where you are today.  Rather I'm going to delve into the financial consequences as it effects people that get a paycheck and pay taxes.

Also I'm not going to weigh in on what ought to be done going forward, although at the end I'll tell you what I think is going to happen. Instead I want to look from the ground up view of how these issues are taking a toll on citizens of these various entity's pocketbooks, their savings and ultimately on their decisions on where to live.  To do so I will draw on my over 25 years of experience of living in the twin suburbs of River Forest and Oak Park.  I intend to use real life illustrations of my communities and other people and places to try and paint a picture of how all these financials issues impact folks pocketbooks.

Besides the issues of pensions the city of Chicago has to deal with the issues of poverty race and crime.  Of course other metropolitan areas have to grapple with the same issues and this series is not intended to cover these topics except how the pension crises trickle down onto our most neediest communities.  Most tourists coming to Chicago only see the well traveled spots in the city's core and if that's all you've ever known of our area then you'd be surprised by what many other parts of the city look like.  Chicago is a city of neighborhoods and not a few of these are very poor, blighted and controlled by gangs.  The latest data that I could find indicated that nearly 20% of Chicago's population lived below the poverty level.  Cook County includes Chicago but many other communities as well.  Some of these are very impoverished.  Poverty levels for Cook County {which would include Chicago} is estimated at nearly 16% of the population.  High levels of poverty require high levels of social services which means higher levels of taxes.  The FBI estimates there are over 115,000 gang members in Chicago, not including juveniles or members living in the suburbs.  Chicago year after year is found to be one of the most racially segregated cities in the country.  Many {but not all} of the issues in the northern part of the state are defined by race, but poverty and it's impact on communities is probably as big a root cause.

Having given you this introduction  we need to do an overview of the biggest issue from a fiscal standpoint confronting all levels of government in the state which is the mounting pension burdens assaulting community finances both near and far, state and local.    It is to define these burdens that we'll turn in the  2nd part of this series, "The Weight of Water", which will be posted in the coming weeks.  Then I hope to post the rest of these columns serially after that as my schedule permits.  Unfortunately for me a family matter has intruded itself into my life these past few months.  I had hoped to run this series serially each week until completed.  Life has intervened and finishing this may be more of a catch as catch can event.

Back Friday.

Investment Themes

I've been asked recently to review what are the major investment themes I work off of.  I discussed these back in May and you can go read more about them here as I originally introduced them to readers.  Today I'll list simply them below as they are currently formatted and take the opportunity to introduce a newer addition that didn't make the original cut.   Over the course of the next few months I plan to try and discuss these in more detail.  

We Aren’t Living In The Post-World War II Economy 

Changes In The World Order  

Generational Changes

Exponential Advances In Knowledge Akin To Moore’s Law

Technological Advances Disrupting Traditional Industries

Revolutions In Healthcare

The Coming Utilization of Space

Everything's Connected-The World is more interrelated than you think.

More on each to follow at a later date.  The family issue that I've referenced here in the past few months has resurfaced again and I'm not going to commit to posting until sometime late next week.

International Markets Vs. The USA

{F}rom December 31, 1979 to December 31, 2009, the S&P 500 annualized at 11.5% per year.  And so did the MSCI Europe.  It annualized at 11.5% per year too.  Think about that. This is the three-decade breakdown, and the cumulative returns across them. 

That’s right, for three decades, equity returns in Europe and the US were almost exactly the same.  Yet in this last decade, which will be finished in less than two months, the picture has been very different. 

The above information and tables are taken from a blog post titled "America's Decade" from a firm named Albert Bridge Capital.  In that post they point out that for whatever reason the past decade has belonged to us Americans in terms of equity performance.  It's not just in Europe either.  You can look all over the globe and see that the US has outperformed I believe nearly every other region of the world by many percentage points.  I have said for a very long time that other parts of the world are much cheaper than the US on a valuation basis.  Unfortunately, you can go back on this blog and see that I've been saying that for years!  Maybe it will start to matter in the next decade or maybe not.  I still believe that given the growth rates, especially in Asia, investors need some international exposure.  In the meantime you are for the most part paid to wait if you use international related ETFs because many parts of the globe have better yields than the USA.

Back Thursday.  {The above is not an investment recommendation or investment advice but rather an observation about relative valuation.}

Long international ETFs in client and personal accounts.   I reserve the right to change these investments without verbal, written or electronic communication at any time.

Stock Chart {11.07.19}

You can double-click on the chart to make it larger.  Some of the reasons stocks might be breaking out right now could include:

-Better fundamentals.  3rd quarter earnings were better than expected.  Investment community beginning to look at earnings in 2020-early 2021 and so far they expect those earnings to accelerate.

-Federal Reserve.  The Fed has signaled they won't be raising interest rates at any time in the near future.  You simply don't fight the Federal Reserve.  Easy money has traditionally been good for stock prices.  It could help overseas markets as well.

-Easing of international tensions.  The trade deal with China isn't done and the hard bargaining in stages 2 & 3 has been kicked down the road.  Both sides right now need a period of detente.  China needs to focus on internal matters and the President needs to focus on getting reelected.  

-Favorable seasonal factors.  We are well into the best six months for stock performance, while November and December have traditionally been good months for stocks.  This is a tailwind for markets right now.  The only print that matters for Wall Street is the one that will be posted at the end of trading on December 31st.  That date is now in focus by institutional investors that are badly behind the curve in terms of their portfolios and respective benchmarks.  This means a very strong probability that any dips in the markets between now and year end will likely be bought unless something drastically changes.  Also after two years of markets basically going nowhere investors have substantial cash reserves.  That's dry powder that could potentially support a move higher in the coming months.

Now there are all sorts of things that could still happen to change this analysis.  The impeachment process running through Congress right now is a wild card and there's always a chance that something comes up with a US-China trade deal.  Best advice there is to assume it's not done till there's a signature on a document.  That being said a whole lot of probabilities suggest stocks have a greater potential of moving higher in the next few months, if for no other reason then it's the end of the year.

I said a few weeks ago that I thought  the potential is there for stock advancement in the 6-8% range next year. Throw in a nearly 2% dividend yield for the S&P 500, and you see a total return potential that could be around 10% next year if certain things pan out.  I'll stick with what I said then and throw in a 2020 updated cone of probability  potential upside in 2020 of 3250-3300 on the S&P 500.  No guarantee we get there, just telling you what is possible if certain things happen next year.  I also think there's a higher probability that most of those gains will come in the first six months of 2020.  I think after that investors will focus on the elections and stocks potentially could be range bound until after those results are known next November.  

But that's a long way off and Wall Street will just want to get through 2019.  We'll review 2020 at the end of the year when we know how everything shook out in November and December.

Note that I will need to be out dealing with a family issue the 1st part of next week and likely won't be posting here until probably Thursday or Friday.

Chart is from Tradingview.com although the annotations are mine.

*Long ETF’s related to the S&P 500 in both client and personal accounts.  I reserve the right to change these investments without verbal, written or electronic communication at any time.

The Coming Change That's Happening With The Millennial Generation.

I discussed a few posts back the view by some on how millennials are going to save us from a recession.  You know from reading that post that I think they're a much bigger deal than short-term worries about a recession.  Let's look at their demographic data so you can get a sense of why I think this has the potential to be so vast.  Depending on who you talk to the millennial generation comprises something like 82-96 million residents of the US.  That generation was born between 1981-1996.  The oldest are now 38 and the youngest not quite 23.  There's been more ink spilled about that cohort then perhaps any grouping since us baby boomers.  They are now in the most likely years where if they're going to form families they're going to do it soon.  

Guess what?  They are!  I have three kids in this cohort and it seems as if they're going to one wedding after the other.  Also if you spend some time looking around you'll notice a lot of young people now pushing strollers.  Things change when you have a kid.  The money you put away a year ago for that trip to Portugal now gets used on diapers and formula.  Also that discretionary cash now gets put into the savings account, possibly to buy a house.  Of course not every millennial is going to behave like their parents but enough will that it's going to start impacting big areas of the economy I'm guessing in the next few years.  Let's say millennials produce the standard 2.1 kids, a number I see bandied about as a coming representative statistical size for this cohort.  If that's the case then the US is going to be awash in babies in the coming years, somewhere between 86-100 million of em!

Guess what else?  Not to far on their heels is "Gen Z".  These kids were born in the late 1990s and on.  That means the oldest of them is about 22-23.  There's somewhere between 60-70 million of these kids.  Give them another 6-7 years and the oldest of that cohort will enter the prime house holding years as well.  Tack on then another 63-75 million babies coming not that far behind.  So let's think about this.  Let's say we're 5 years into this next baby boom and let's calculate we're right now a nation of around 330 million people there's the potential in let's say the next 30-35 year period for something like 140-175 million babies.  That's the potential for a lot of babies and also the potential for the demographic profile of the US to skew lower in the coming years.

Anyway food {baby food that is} for thought.

PS:  When thinking about these changes {and also food, which is largely featured in the article I'm sending you to} you might have an interest in reading how the millennial lifestyle is about to get more expensive.  It's an article from a few weeks back but I think it highlights the issue with many of the internet business models that have come into existence in the past five years or so.

Back Thursday.

Happy Birthday!

Happy birthday to this little fella.  Hard to believe he's 59!  

{You too Clayton!}

Snowed In!!

Sooo......This is the scene that's greeted us the past few days around "Global HQ"!  The Chicago area right now has the look and feel of mid-winter.  Snowiest Halloween on record in these parts and temperatures are more like what you'd experience in January!  Wind chills last night in the teens.   I think we might really be in for it here in the coming months and "Chiberia" may make a return visit.   Global warming?  How about Mid-west cooling?

Back Monday.

P.S.  In a response to a question I just received.  Yes-those are still green leaves on the trees!