Tag: finance

Submitted by Lance Roberts of STA Wealth Management,

There have been a litany of articles written recently discussing how the stock market is set for a continued bull rally.  The are some primary points that are common threads among each of these articles which are:  1) interest rates are low, 2) corporate profitability is high, and; 3) the Fed's monetary programs continue to put a floor under stocks.  The problem is that while I do not disagree with any of those points – they are all artificially influenced by outside factors.  Interest rates are low because of the Federal Reserve's actions, corporate profitability is high due to accounting rule changes following the financial crisis and the Fed's liquidity program artificially inflates stock prices.

However, while the promise of a continued bull market is very enticing it is important to remember, as investors, that we have only one job:  "Buy Low/Sell High."  It is a simple rule that is more often than not forgotten as "greed" replaces "logic."  However, it is also that simple emotion of greed that tends to lead to devastating losses.  Therefore, if your portfolio, and ultimately your retirement, is dependent upon the thesis of a continued bull market you should at least consider the following charts.

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It is often stated that valuations are still cheap.   The chart below shows Dr. Robert Shiller's cyclically adjusted P/E ratio.  The problem is that current valuations only appear cheap when compared to the peak in 2000.  In order to put valuations into perspective I have capped P/E's at 25x trailing earnings as this has been the level where secular bull markets have previously ended.  I have noted the peak valuations in periods that have exceeded that level.

The next chart is Tobin's Q Ratio.  James Tobin of Yale University, Nobel laureate in economics, hypothesized that the combined market value of all the companies on the stock market should be about equal to their replacement costs. The Q ratio is calculated as the market value of a company divided by the replacement value of the firm's assets.  With the exception of the "tech bubble" we are near the peak of every major bull market in history.

One argument that I hear made consistently is that retail investors are just now beginning to jump into the market.  The chart below shows the percentage of stocks, bonds and cash owned by individual investors according to the American Association of Individual Investor's survey.  As you can see, equity ownership and near record low levels of cash suggest that the individual investor is "all in."

Of course, with investors fully committed to stocks it is not surprising to see margin debt as a percentage of the S&P 500 at record levels also.  It is important to notice that sharp spikes in this ratio have always coincided with market corrections of which some have been much worse than others.

Bob Farrell's rule #9 basically states that when everyone agrees; something else is bound to happen.  The next two charts show the level of "bullishness" of both individual investors (AAII Survey) and professional money managers (INVI Survey).  Surprisingly, professional money managers are more exuberant than individuals.  It is interesting to note that the 8-week moving average of bullish sentiment for individuals has declined prior to the eventual peak in the market.

As I stated above – professional investors are just plain "giddy" about the market. 

Lastly, an important chart I have shown previously, the deviation of the S&P 500 and the Wilshire 5000 from their respective 36-month moving average is at levels that have only been seen at four other periods previously. 

As a money manager, I am currently long the stock market.  I must be or I potentially suffer career risk.  However, my job as an advisor is not only to make money for my clients, but also to preserve their gains, and investment capital, as much as possible.  Understanding the bullish arguments is surely important but the risk to investors is not a continued rise but the eventual reversion that will occur.  Unfortunately, since most individuals only consider the "bull case," as it creates confirmation bias for their "greed" emotion, they never see the "train coming."

Hopefully, these charts will give you some food for thought.  Remember, every professional poker player knows how to spot a "pigeon at the table."  Make sure it isn't you.

Why do I keep humming "Come'on Take The Money And Run."

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Whether one sees this as a worrisome indicator of social unrest to come; or confirming evidence that the safety net in America provided by an increasingly fearsome government is only going to get bigger… there can be little doubt that this index is a dismal reminder of the ‘real’ recovery in America today…

 

(h/t @Not_Jim_Cramer)

So what does happen when the benefits fail?

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Whether one sees this as a worrisome indicator of social unrest to come; or confirming evidence that the safety net in America provided by an increasingly fearsome government is only going to get bigger… there can be little doubt that this index is a dismal reminder of the ‘real’ recovery in America today…

 

(h/t @Not_Jim_Cramer)

So what does happen when the benefits fail?

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/vy0DpUsbcxU/story01.htm Tyler Durden

President Obama has just nominated Lael Brainard as a Fed Governor, Jerome Powell to his second term and most notably, Stanley Fischer (ex Head of the Bank of Israel) as Vice-Chairman of the Fed. "These three distinguished individuals have the proven experience, judgment and deep knowledge of the financial system to serve at the Federal Reserve during this important time for our economy,” Obama said in statement. Bear in mind that Fischer is skeptical of forward-guidance (as we note below) which is soon to become the Fed's main weapon to jawbone markets.

• Stanley Fischer's term as governor runs through 2020 (vice chair through 2018), Brainard's term through 2026 and Powell's through 2028!

Tenure anyone? We are sure they will still do a great job…

 

As we noted previously, Fischer brings some interesting views:

Q. How does Fischer broadly think about the economy?

Fischer is a highly respected academic macroeconomist. He is credited with helping to lay the foundations of New Keynesian macroeconomics, which sought to place traditional Keynesian theory on a stronger microeconomic foundation. Subscribing to this school of thought, we believe that Fischer's general view of the world is similar to that of Bernanke and Yellen, with a significant role for active fiscal and (more importantly) monetary policy. In fact, Fischer was Bernanke's dissertation adviser in graduate school, and Bernanke recently referred to him as a "role model and frequent adviser." As a result, we see little daylight between Fischer and the current core FOMC leadership with respect to their basic paradigm for thinking about the economy.

Q. How would his appointment affect the dynamics on the Committee?

Fisher is widely seen as a policy heavyweight, having not only run the Bank of Israel, but also served as the chief economist at the World Bank and First Deputy Managing Director (the number two position) at the IMF. Both his academic standing and policy experience suggest that Fischer's views will be very influential on the Committee.

Q. What are the key points from his tenure as head of the Bank of Israel?

Under his tenure, the Bank of Israel aggressively cut its policy rate from 4.25% to 0.5% in the wake of the financial crisis. Starting in February of 2009, the Bank of Israel joined the Fed in undertaking purchases of longer-dated securities, indicating a willingness to adopt unorthodox monetary policy measures. The stated intention was to "extend the effectiveness of monetary policy onto longer interest rate maturities." However, later in 2009 the Bank of Israel began hiking its policy rate, in advance of all major global central banks. We do not see this as necessarily indicating a "hawkish" policy bias on the part of Fischer, but rather a reaction to the fact that economic developments in Israel were substantially different from those prevailing in the G4 economies. The Bank of Israel did not adopt explicit calendar- or outcome-based forward guidance under his leadership.

Q. What are his views on balance sheet policy?

Fischer generally holds a favorable view on the effectiveness of balance sheet policy. As noted, the Bank of Israel began a program of longer-dated securities purchases under his watch. He also stated in a November speech at the IMF that one of the key lessons from the financial crisis, in his view, was that monetary policy is not impotent once the zero lower bound on short-term interest rates has been hit. He specifically highlighted the efficacy of the Fed's QE?which he said was supported by a substantial amount of academic work?and did not explicitly mention forward guidance on the path of short-term interest rates.

Q. What does he think about forward guidance?

In contrast to his statements on QE, he has recently expressed a more skeptical view of forward guidance. Specifically, he noted in September that "if you give too much forward guidance you do take away flexibility," that "we don’t know what we’ll be doing a year from now. It’s a mistake to try and get too precise," and that "you can’t expect the Fed to spell out what it’s going to do…because it doesn’t know." These statements contrast with Yellen's strong endorsement of forward guidance. In that sense, Fischer's statements do pose at least some risk to our expectation that the FOMC will ultimately enhance its forward guidance by reducing the unemployment threshold to 6.0%. That said, such a limited number of statements are unlikely to capture all of the nuances of Fischer's thinking on the topic. One can also argue that his criticisms apply mostly to calendar-based guidance and less to outcome-based guidance, which only requires the Fed to "spell out what it's going to do" in a more conditional sense. In any case, we have little doubt that Yellen and Fischer would see eye to eye on the need to prevent a large tightening of financial conditions anytime soon, so the slightly greater uncertainty that might result from his nomination is mainly about tactics, not strategy.

Q. What is the likelihood of confirmation?

If nominated, we think Fischer would very likely be confirmed. In the unlikely event that his confirmation faced substantial opposition from Republicans, the recent change to Senate rules requiring only a simple majority to break a filibuster on confirmation votes ensures that he could be confirmed with only Democratic votes.

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The firm that advises its former employee Bill Dudley on how to run the New York Fed, speaks. Goldman’s bottom line: bad jobs report, the weather was at fault (and apparently all those economists who had expectations of a 200K print were unaware it was cold out there until today) but the Fed will still taper by another $10 billion in January.

BOTTOM LINE: The December employment report was broadly weaker than expected, although some of the disappointment was likely due to bad weather. The unemployment rate unexpectedly declined due to a drop in participation.

 

MAIN POINTS:

 

1. Nonfarm payroll employment grew only 74k in December (vs. consensus 197k), the weakest increase since 2011. Colder-than-normal weather likely played some part in the disappointment, as construction employment declined 16k (vs +19k in November) while leisure and hospitality employment grew 9k (vs. +20k in November). However, job growth was weaker across sectors in December, including a particularly sharp slowdown in health and education services (flat vs. +41k in November). Couriers and messengers, a category that has sometimes shown outsized December moves in recent years, fell only 6k. Government employment also subtracted from job gains, as state and local employment declined 11k after stronger growth in recent months.

 

2. The unemployment rate declined by three-tenths to 6.7%, however the drop was largely due to a two-tenths decline in the participation rate to 62.8%. Employment rose 143k according to the household survey, although “payroll-consistent” employment?adjusting for definitional differences between the two surveys?fell by 8k. Also from the household survey, the number of individuals who reported not being at work due to bad weather was 273k, above the December average of 138k, and consistent with a negative weather impact in the report. This estimate, however, is very likely larger than the true weather impact on payroll employment.

 

3. Average hourly earnings rose a smaller-than-expected 0.1% (vs. consensus +0.2%). The average workweek also fell by one-tenth of an hour to 34.4 (vs. consensus 34.5), although the worsening could reflect a temporary weather effect.

 

4. The information in today’s employment situation report does not change our expectation that the Fed will continue to taper its asset purchases by $10bn at the January

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/dBxcPSOxBw4/story01.htm Tyler Durden

The firm that advises its former employee Bill Dudley on how to run the New York Fed, speaks. Goldman’s bottom line: bad jobs report, the weather was at fault (and apparently all those economists who had expectations of a 200K print were unaware it was cold out there until today) but the Fed will still taper by another $10 billion in January.

BOTTOM LINE: The December employment report was broadly weaker than expected, although some of the disappointment was likely due to bad weather. The unemployment rate unexpectedly declined due to a drop in participation.

 

MAIN POINTS:

 

1. Nonfarm payroll employment grew only 74k in December (vs. consensus 197k), the weakest increase since 2011. Colder-than-normal weather likely played some part in the disappointment, as construction employment declined 16k (vs +19k in November) while leisure and hospitality employment grew 9k (vs. +20k in November). However, job growth was weaker across sectors in December, including a particularly sharp slowdown in health and education services (flat vs. +41k in November). Couriers and messengers, a category that has sometimes shown outsized December moves in recent years, fell only 6k. Government employment also subtracted from job gains, as state and local employment declined 11k after stronger growth in recent months.

 

2. The unemployment rate declined by three-tenths to 6.7%, however the drop was largely due to a two-tenths decline in the participation rate to 62.8%. Employment rose 143k according to the household survey, although “payroll-consistent” employment?adjusting for definitional differences between the two surveys?fell by 8k. Also from the household survey, the number of individuals who reported not being at work due to bad weather was 273k, above the December average of 138k, and consistent with a negative weather impact in the report. This estimate, however, is very likely larger than the true weather impact on payroll employment.

 

3. Average hourly earnings rose a smaller-than-expected 0.1% (vs. consensus +0.2%). The average workweek also fell by one-tenth of an hour to 34.4 (vs. consensus 34.5), although the worsening could reflect a temporary weather effect.

 

4. The information in today’s employment situation report does not change our expectation that the Fed will continue to taper its asset purchases by $10bn at the January

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/dBxcPSOxBw4/story01.htm Tyler Durden

The gross manipulation of the unemployment rate due to the plunging labor force participation rate and the soaring, record number of people that are not in the labor force is by now, we hope, clear to all. Yes, millions may be dropping out of the labor force because they can’t find a job which somehow means the US economy is getting better, but sadly the US civilian, non-institutional population keeps rising, and hit a record 246.7 million in December. Which is why every month we show what the real unemployment rate would look like when normalized for the fudged participation rate by taking a 30 year average.

Today, we find that the difference between the reported (6.7%) unemployment rate, and the implied using realistic assumptions for the US labor force, which remained at 11.5% where it has been ever since the start of the Second Great Depression, just hit a record high 4.8%. As did the spin, lies and obfuscation by the administration that “all is well.“

And why 11.5% is precisely where the unemployment rate should be based on the employment to population ratio:

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/mcYA8ubOE_U/story01.htm Tyler Durden

While we have been told again and again that there are no asset bubbles – although th emost recent FOMC statement referenced concerns over small-cap mulitples and covenant-lite loan issuance – it seems the Fed’s Jeff Lacker just let slip some ugly truthfulness…Answering questions after a speech proclaiming growth ahead and rising inflation, he said:

• *LACKER RELUCTANT FOR FED TO ‘PRICK’ ASSET-PRICE BUBBLES

Well there it is. There are asset bubbles? But Lacker – who has been anti-QE to some extent – knows that if the Fed moves to actually do anything about it (other than jawbone), it’s all over. Perhaps as more realize the transition from a Bernanke Put to a Yellen Collar has occurred, there will be no need to jawbone any longer.

 

But jawbone on they will as open-mouth operations try to persuade investors that strong forward guidance is just as effective as printing 100s of billions of USDs….

• LACKER SAYS MARKET EXPECTATIONS THAT INTEREST RATES WILL REMAIN LOW MAY
  BE BIGGER DRIVER OF MARKET LIQUIDITY, EQUITY PRICES THAN BOND BUYS

 

Just believe

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/hU1mzBOJBHw/story01.htm Tyler Durden

While we have been told again and again that there are no asset bubbles – although th emost recent FOMC statement referenced concerns over small-cap mulitples and covenant-lite loan issuance – it seems the Fed’s Jeff Lacker just let slip some ugly truthfulness…Answering questions after a speech proclaiming growth ahead and rising inflation, he said:

• *LACKER RELUCTANT FOR FED TO ‘PRICK’ ASSET-PRICE BUBBLES

Well there it is. There are asset bubbles? But Lacker – who has been anti-QE to some extent – knows that if the Fed moves to actually do anything about it (other than jawbone), it’s all over. Perhaps as more realize the transition from a Bernanke Put to a Yellen Collar has occurred, there will be no need to jawbone any longer.

 

But jawbone on they will as open-mouth operations try to persuade investors that strong forward guidance is just as effective as printing 100s of billions of USDs….

• LACKER SAYS MARKET EXPECTATIONS THAT INTEREST RATES WILL REMAIN LOW MAY
  BE BIGGER DRIVER OF MARKET LIQUIDITY, EQUITY PRICES THAN BOND BUYS

 

Just believe

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/hU1mzBOJBHw/story01.htm Tyler Durden