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Good Things in Slow Packages?

Good Morning,

Churn and Burn.

Markets have been sloppier this week than most of the averages would indicate.  The odds are that many investors are beginning to smell the scent of growth.  Yes, that sounds odd but the sector influences are pretty clear.

Dividend focal points are feeling the brunt as fears about rate increases are front and center – just as expected.  Long-term dividend growth income seekers see this often over history.  Bouts of profit-taking are normal as the cloud of interest risk is being overdone as usual.

As soon as the media ties of scaring their viewers to death about the election fallout, we can be assured that void will be quickly filled by “the Countdown the the December Fed Meeting Rate Hike” syndrome – complete with lots of video and experts helping you clearly see the end of the world as we know it.

Good Things Come in “Slow Packages”?

Today, as the economic power baton is being passed from one record-size generation to the next, it is easy to feel like we are walking in quicksand.  It is even easier to fear the “long way down” the market can travel if the world comes to a stop again.  The higher prices rise, the worse that feeling in your gut may get – if one focuses on the wrong data.

The reality is that it’s neither a boom nor a bust in the US.

What’s interesting about this is the constant complaint of “slow growth” blinds one entirely to the idea that this may be a good thing!  You can be absolutely assured that if we were instead having a robust boom, you would not be hearing about the boom.  No – surely not.

Instead you would be hearing about inflation concerns, over-heating concerns, global imbalance concerns, social fairness concerns and rate increase concerns.

You see – there is no good news.  Get used to it.  But don’t overlook this:  a slower, steadier growth process can last much longer than most are prepared for – and surely longer than the boom and bust cycle we have experienced in the past.

In an economy that is being reshaped at the speed we are witnessing in our lives, it could be a grave mistake to assume old economy readings and reports are providing a true and fair picture of what is really unfolding.

Stagnation?

Not really….even though it understandably feels that way.

While the descriptive term “secular stagnation” fits the global economy, I don’t think it’s valid for the US, where the unemployment rate is now down to 4.9%  Lets take a quick review of other data series suggesting the world may indeed be turning in many places.

~ Metals prices are stabilizing and in some cases rising

~ Crude inventories are falling as production is halted until prices balance out better (see previous notes)

~ Yes, car sales are stalled but are still near record highs and on a 17.5 million pace for the year

~ Job openings are at a record high

~ Private-sector employment gains have exceeded 150,000 per month for 40 of the last 41 months

~ ATA’s Truck Tonnage Index rebounded smartly during August almost back to February’s record high

~ Medium-weight and heavy truck sales rebounded in September following several months of decline.  This likely another signal related to the energy sector’s recession slowly nearing an end as referenced in many previous notes.

~ Even though the Eurozone is suffering through its own pain related to Brexit fears, retail sales are strong – up 1.7% YOY during August, based on the three-month average, to a new record high

~ The rebound is widespread in the region.  August passenger auto registrations, on a 12-month basis, rose to the highest pace since fall 2010

~ Another small surprises – even China has some good data – with railway freight traffic rising 1.0% YOY during August in China.  That is the first positive comparison in 32 months!

~ Sure, China’s PPI was down again in August – 0.8% YOY.  However, that was the best reading since April 2012.

~ Global PMI’s are also trying to turn up and close to making new two-year highs. Note in the chart below that this downturn wave and bottoming process also mirrors the energy sector bust and restructure.

And just this morning, unemployment claims fell even further coming within a sliver of the all-time lows.  Dr. Ed has provided some great charts which show a somewhat consistent effort of growth turning for the better.

Cap this all off with the largest month-over-month increase on record for the ISM Non-Manufacturing Data released and you begin to get a feel for the stabilization effort being pretty widespread.  Take a quick view below:

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 Chop and Angst

Look, one can surely understand why the market is chopping a bit.  Take note that we are not moving very much since the breakout bounce after “Branic.”

See the SPY chart here:

I will do another video for posting when we have completed the Q3 review but let’s just highlight a couple of items to give you a sense of the churning process.

Item noted at 1:  The SPY has risen just 2.41% since April 20 of this year

Item noted at 2:  The SPY has risen just 1.58% since June 8 of this year

The purple box at the top-end of the chart covering all activity since we broke out, shows we have traveled a very small distance indeed from that breakout – and are effectively flat for the period. Yes – walking in quicksand.

This entire rate of change since the dates noted above are a normal trade range in a single day in current times!

The element we must focus upon is the long-term.  Churn is the name of the game for large periods in a perceived slow-growth cycle.

The more important takeaway?  You are not missing anything – the market is on pause until we get the election out of the way and past the Q3 earninigs parade.  And by the way – that is ok.  Don’t swing at the pitches in the dirt.

The Power Continues to Brew

The data above provide continuing support of the theme we are helping you to focus upon:  a time of great waves of change is upon.

The generational baton shift is unfolding as noted.

Instead of the daily news reel of fear, angst and trepidation, focus upon this:

In the late 70’s / early 80’s it was the Baby Boom…now it is Generation Y – with Generation Z right behind.

Think first inning, first pitch – long game.

Yes, there will be many ugly twists and turns ahead – but there always have been in the past as well.

Decades of demand are already built into our nation’s demographic fabric.

The economy we are seeing unfold is set to change everything we “know” today.  The dynamic world of tomorrow is set to be as surprising to us all as it would have been to your buddy in 1982 when trying to explain an iPhone….to anyone who would listen.

Simple is the Toughest You Will Ever Do

Patience, discipline and focus make up the primary pathways upon which long-term investors are rewarded for taking risk.

Until we see you again, may your journey be grand and your legacy significant.

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Jason No Comments

The Crooked Pathway…

Highlights:

~ Net worth records.

~ Debt/asset % back to late 80’s levels.

~ Oil draws – supplies still bloated – with more to come.

~ Housing dwindling

~ “The Robots Are Coming”

~ Comedy Break  (Don’t miss the cartoon)

Read more

Jason No Comments

Next Fear Please?

Good Morning,

Ok, so now we “know” what the Fed will do – uh – and that was, well, um, nothing!!!

After 2.8 seconds, the slicing and dicing began as machine traders were programmed for trades for both the words “raise” and “no change” – the average John Doe had no chance.

So what does it all mean for you and me – focused on long-term structures in place driving our economic growth ahead?

Little to nothing.

The next time the world tells you to fret over a 25-basis point rise in rates – please think about it for a moment.  By the way – the media headlines are already conjuring up “Well, so now we need to prep for a December rate hike.”

Leave the nonsense on the side of the road.

Your portfolio and your blood pressure with both thank you.

Step Back for Review

It is imperative that we consider this whole interest rate thing.  This monster that seems to be ever-present on our doorstep.  I will say again – it is a pitch in the dirt.

Rates will rise – for good reasons.  When they do it will be because the economic might of the US is slowly but surely healing from the deep emotional scars of the Great Recession.

As we stated then, “The emotional scars to our economy will last decades longer than the financial damage.”

Here is the Larger Point

When the Fed raises rates by 25 basis points, does it really matter to a well-run company?  Really?

For example, does it matter if they raise rates when companies, left and right, continue to refinance bond debts at lower and lower costs for very lengthy periods of time?  Will a rate hike – no matter when it comes – actually change anything for most companies?  The answer – very, very little.

For example, many shudder in fear that their dividend stocks will be crushed.  Nonsense.

Yes, dips and corrections will come.  But make sure you focus on this instead of fear:  If the Fed raises rates by 25 basis point in a year and your dividend producing stock does the same – are you worse off?

Keep this simple folks.  And by simple – I am not implying easy.

It can be hard if you choose – but why would you choose that?

Let me give you a real-life example which took place just this week.  One company – one set of bonds – one small debt refi in a sea of corporate debt refi’s:

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Now, I underlined a few items which are helpful as you review the bullet points.

I will highlight:  ATVI took action in a bond market filled mountains of fear-driven capital.  It refinanced $1,500,000,000 in bonds.  They were previously paying 5.625% on that tranche of money.  They will now be paying a blended rate of 2.85% on the same level of debt – further extending 55% of that debt for another 5 years!

So what does all that mean?

ATVI saves $42,000,000 EVERY year in interest going forward.

Make sure you don’t read over that too quickly:  $42,000,000 each and every year which previously went to bondholders will now stay with shareholders.  Savings that fall to the bottom line in the next five years alone?

A staggering $210,000,000 – nearly a quarter billion dollars

Again – 1 company, 1 debt tranche, 1 refi episode

This is being repeated by CFO’s across the land

I ask you simply:  Do you really think ATVI cares whether or not the Fed raises rates by a quarter point?

Your Best Actions?

Instead of fearing rate hikes, do as corporate America does.  If you want debt – go get it. Bigger house?  You have never been able to buy more house with less money on a monthly costs basis.

The fear-mongering needs to be left to others – and leave it out of your future thinking / planning process.

“But Mike – Aren’t You Missing It?”

“But Mike, companies are not investing as much.”

That’s right – you know why?  They don’t have to invest as much!!!

The blessings of a slow and steady economy are many.  One is that all needs are being satisfied by the investments already being made.  Why?  Technology falls in price every quarter.  Every new 2.0, 3.0 or 4.0 model does more with less.  The change is geometric.

The cloud – apps and software tools are doing things today which require far less expense, less investment and their output is rising.

“But Mike, manufacturing has been gutted.”

Baloney.  We just got better at it.  We have record output – we lost nothing.  Those that used to work at plants and facilities got better jobs with more pay and our output for us all went up!

So then, how could all that be correct?  What about all those things I am told I should be afraid of?

Let’s blame the proper thing – and it is a good thing by the way:  In a 2014 article from the MIT Technology Review, Erik Brynjolfsson, coauthor of a prominent 2014 book on the subject, is quoted as stating that “technology is the main driver of the recent increases.”

Supporting evidence for that theory, highlighted by Cato, was found in a 2015 Ball State University study in which economists attributed nearly 90% of the US manufacturing job losses in recent years to productivity gains.

Very important point here:  They observed: “Had we kept 2000-levels of productivity and applied them to 2010-levels of production, we would have required 20.9 million manufacturing workers. Instead, we employed only 12.1 million.”

There is no ghost in the machine.  It’s fabricated – like a movie set on a stage.  Do you really want to live in the world that would have required the 20.9 million factory workers of 2000 levels?

Think about that the next time you even ponder buying into the garbage being spewed out there about the end of life as we know it coming soon.

 So What’s Next?

More fears of course.  As we layer on the analysis of the latest Fed statement, every syllable will be sliced and diced.  Every report will be measured against it for weeks. Political analysis will tell you how the world will change ahead based on every sound-bite coming from either candidate.

Expect chop to be the norm as we go through the testing process unfdoling in markets which we have covered for weeks – and included in this simple video review for you here last week.

Closing Thought for The Day

Take a deep breath.  Yet another monster has been vanquished.  There are many more to come.  Do not fret – if there is ever an open space in the pipeline of fears to come – we will find a monster to replace it with – even if it needs to be completely manufactured out of thin air.

Until then – we need to remain focused on the long-term data at hand.  Short of an extinction event – in which case your account balance will matter to no one – tens of millions of new households will form in the US over the next 3,5, 7 and 10 year periods. Assuming birth rates remain stable, we will have Generation Z backing up Generation Y with back-to-back record breaking generations of demand.

Everything becomes new again.

Be confident of this – as we focus steadily on the long-term horizon:

This “weak recovery” economy of ours is far stronger than most understand it to be. Even though it is messy at times, we do continue to overcome many hurdles.

Our momentum is driven by a very significant and rare generation “baton shift” in a very long race.

But here is the deal:  People make markets.

As stated before, we can make it more difficult if we choose – but why would we?

The Barbell Economy is an effort to simplify the noise and even work to eliminate some of it.   Chop is fine, corrective action is also a plus at times.

Long-term reward tend to be delivered to the patient investor willing to live through the process of markets.

Stay on your plan, stay focused and patient.  We are in great shape for the long-term growth waves at hand.

Until we see you again, may your journey be grand and your legacy significant.

Required Disclaimers on all videos and content

Jason No Comments

Nothing But Needles…

Good Morning,

The Fed is on tap – and the various nail-biting contests are officially underway.  Office pools seem to be split down the middle as to whether a 25-basis point hike will bring on Armageddon…or a yawn and then a nap.  Fighting through the various elements in the media cycle to find anything under the category of “positive” is like trying to find a specific needle in a stack of needles.

There are a couple of things we may want to keep in mind – they are relatively simple butrequire a degree of faith in both history and the future:

Markets generally do not plummet when the entire planet is expecting them to do so.  No matter where you look, sentiment stinks.  Investors, managers, cash balances, conferences, hedge fund guys, experts getting airtime – it is across the board.  I have yet to hear anyone on air or in print celebrate that we continue to make it over the mountains ahead.  Life has not ended, the apocalypse has not arrived, black swans are not falling from the sky – and markets a a tiny bit off their most recent all-time highs.

By the way – “all-time” is Italian and it means, “it has never ever, ever better before this moment in time.”

Since about six weeks ago – markets have been doing the tightening for the Fed.  Once again, if they finally pull the trigger today – they will be following markets – not leading or controlling them.  Yet another example of why this years long effort to blame the Fed for low rates has been such a bunch of sh… – uh, hogwash.  I would have used another word but I have promised to no longer speak in that manner.

I will state this as clearly as I can.  There is a reason the markets are on highs:  it’s simple. Keeping it that way in all this crazy mess we call markets is the very difficult task at hand. Here it is:   B.a.r.b.e.l.l. E.c.o.n.o.m.y.

Review Stats

Since most are overlooking that simplicity, markets continue to struggle far too much with concerns over interest rates.  The Fed may have itself in a pickle but not for the reasons so many assume.

As noted often, fear is the driver of rates in our society for the better part of the last decade.  An avalanche of money “seeking safety” has decided that this safety they long for comes to us in the form of bonds at near record low rates – or negative rates in some places.  How a vast crowd could get so twisted in their thinking is still beyond me but be that as it may, it has become so.

The issue the Fed is faced with is how does one unwind that fear in a manner where the short-end (typically the quickest to react to Fed rate hikes for example) can rise without triggering a negative yield curve while the long-end is pressured to the downside via the fear-driven rampage of buying.

In recent weeks that adjusted only slightly with the long-end rising ahead of a feared rate hike.  That noted, vast amounts of money continue to roll into bond funds at the expense of equity funds as we noted in notes for you late last week.

Volatility?

Are we really at the stage of underlying fear where a 3-5% fallback in major averages is defined as “volatility?”  I grabbed a snapshot below to give you a feel for what these pullbacks from highs have appeared as – in percentage terms – since the Great Recession lows of March 2009.  Let’s take a look:

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Seen from this perspective, recent “volatility” seems – well – not very volatile at all.  Let’s see if we can continue to keep our wits about us as all others lose theirs.

More Data – Solid Foundation

While way too much energy will be expensed this week on the issues of will they hike or not, be assured that no matter the decision – it will leave at least half of the audience disappointed.

If they hike, a rash of headlines will usher in terrible events coming our way due to 25 basis points more in interest costs.

If they do not hike, a rash of headlines will flood our screens about how the Fed is stuck, it has run out of tools, debt is out of control, QE is still haunting us and all that is left is to finish our underground shelters and buy more guns.

While more fret over that, what do you say we focus in on the barbell economy issues which are set to continue to drive us forward:

Builders Feeling Pretty Good

I still find it rather comical that the Great Recession we still fear a repeat of on any inkling of red ink, was wrapped around the real estate world and fraud in the debt markets.  While obvious to everyone now, the expert view back then was we would never use up the supply of homes available to live in.

The good news is we now know what forever is:  About 7 years.

Home supplies are wilting to levels not seen since the early 80’s – with population demand rising rapidly.  The NAHB just noted this morning that builders are feeling good and its index jumped 6 points to a new one-year high – leaping over expectations of just a marginal increase.

Here is the deal:  We are at a 50-year low on home ownership rates – and we have the largest generation in the history of the US just beginning to buy homes – in a vast landscape of depleted inventory.  Here in Chicago, buildings for condos and rentals are going up everywhere one looks downtown.

With cap rates on most deals still ranging from 6 to 8, one can assume more and more capital will move into real estate as bonds begin to sting more and rate-starved investors look for the next pool of investment capital to exploit.

Bottom Line:  There are tens of millions of kids who will move out over the next decade – and our shrink-wrapped, Fedex style economy with little supply ini the pipeline is not ready for the demand wave coming.

Speaking of Money

More good news – we have more of it than ever before.  Even as asset managers and investors alike see their sentiment swoon as though a multi-year bear market has already unfolded, wealth has reached levels never before seen in the US – on an overall and per-capita basis.

Keep in mind that well before all the ink dries on the various charts showing these new data points worldwide, be assured we will be told it’s all really bad news anyway, based on some “outside reason” which will surely not last – so enjoy it while you can.

Check it out:

Calafia shows us that as of June 30, 2016, the net worth of U.S. households (including that of Non-Profit Organizations, which exist for the benefit of all) reached a staggering $89.1 trillion.

Get this:  that’s about 40% more than the value of all global equity markets, which were worth $63 trillion at the end of June, according to the latest stats on Bloomberg.

Importantly, household liabilities have not increased at all since their 2008 peak

The value of real estate holdings now slightly exceeds that of the “bubble” high of 2006

And, obviously, financial asset holdings have risen since pre-crash levels, thanks to the $9 Trillion in savings deposits and gains in bonds and equities alike

One last thing:  you may recall back in housing bubble days, we were told our real problem was we were not saving enough.  Well guess what – we fixed that item.  And now?  Yes, that is correct – we are now told our problem is the consumer is not spending.

If this twisted process of media expertise was not so sad it would be funny.

Hard to Ignore

Life in the U.S. has been getting better and better for generations.

While the naysayers and those who prefer you remain afraid of the future will tell you it is all about debt and bubbles, the facts provide a far more productive view.  The typical household has cut its leverage by over 30% (from 22% to 15%) since early 2009.

Debt as a percentage of assets is back to levels seen in the late 80’s!

Households en masse have been the beneficiary of strengthening balance sheets over the past seven years with a cushion of the previously noted $9 Trillion now sitting idle in the bank.  Unfortunately, as social programs have expanded under very poor fiscal polices, our Federal government has more than doubled its debt burden over that same period.  Well, there is a legacy for you I suppose.

The Bottom Line

I could make these morning notes go for pages.  The data that one should be focused upon remains solid – but that does not mean we escape all pullbacks and chop.

Finding and focusing upon that data in a sea of negative, gut-churning, fear-mongering headlines is today’s more difficult emotional challenge.

Think I am kidding.  Check this graphic from CNBC over the weekend.  I just had to include it:

Yes – that is a train included in the picture to make sure you get the point.

Closing Thought for The Day

This remains the reason driving our morning notes:  stay focused on the proper horizon – and the growing portions of our economy.

This “weak recovery” economy is far stronger than most understand it to be.  Even though it is messy at times, we do continue to overcome many hurdles.  Recall the momentum is being driven by a very significant and rare “baton shift” in a very long race.

The fact that portions of our economy are changing so rapidly could even be driving some of the deep-seeded angst and recurring fears.  Masses don’t like change – but adapt we must.

But here is the deal:  People make markets.

We can make it more difficult if we choose – but why?

The Barbell Economy is an effort to simplify the noise and even work to eliminate some of it.  If we can focus upon the areas of the economy which are growing – and which have vast channels of demand in their pipelines, then we can begin to step back far enough from the markets to escape the emotional hand-wringing.

Chop is fine, corrective action is also a plus at times.  Long-term is the reward to the investor.  Stay on your plan, stay focused and patient.  We are in great shape for the long-term growth waves at hand.

Until we see you again, may your journey be grand and your legacy significant.

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Jason No Comments

The Fallen

Good Morning,

As you may have expected from previous notes about the topic, sentiment continues to falter on every little hiccup in markets.  I know 400-points down sounds like a lot – but from an 18,500 starting point?  Really?  Not.

Indeed, for the mass audience and the media, 400 points down now immediately triggers the 2008-2009 video reel library and Black Swan chatter abounds.

When will it end?  Likely at much higher prices, with far, far less than $9 Trillion sitting in the bank.  It will be when “bond” has become a new 4-letter word marking foolishness and almost no one remembering anything bad about markets or equities.  In other words – a long time from now.

Sentiment Wilts – Again

You did not expect otherwise did you?  The snapshot below is clear:

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 Fallen and They Can’t Get Up

Here is what we have for the bulls now for well over a year++:  When the market goes down, bullish sentiment retreats while bearish sentiment spikes – ala this past week.  The kicker is this: when the market does manage to fool the masses – and rise, bullish sentiment barely budges – more or less staying steady.

In the latest week, which obviously includes the ugly couple days starting on Friday, bullish sentiment declined from 29.75% down to 27.94% – or nearing again the levels seen at the bottom of the pit in 2009!  More amazing?

This also sets another record:  the 46th straight week and the 80th time in the last 81 weeks that bullish sentiment has been below 40%.

Said another way – 72% of investors surveyed nationally don’t like the stock market.

At what level do you think they will like it?

Surely not at lower prices.

While bullish data is still a brain-bender, bearish sentiment spiked quickly this week.  As selling cascaded into the market, bearishness went from 28.48% last week to 35.92% this week.  A quick check will show that 7-point increase was the largest since mid-June (yep – Brexit days).

The fact is – fear runs deep.  There is still a constant emotional reaction, widespread among individual investors, to the risk of being left with no chair to sit in “when the music stops.”

Hauntings of 2000-2003 and 2008-2009 remain as fresh as yesterday.  At the first hint of trouble, sentiment shifts rapidly.

Long-term investors need to be very grateful this is still the case.

Technical Review Backdrop

I prepped a short little video review of the SPY charts from a technical perspective.  I figured you may find some time over the weekend to review.  The upshot?

Markets are doing what they normally do – testing breakout regions and building price supports.  This chop is actually health for the long-term structure one wants to see.

You can view the short video here.  It just takes a few minutes.  I hope you find it helpful.

Improvement Anyone?  

While red ink hits the market for a bit, it may be too early to brag about improvements but we must.

Seems the manufacturing data are improving – again.  I suspect this matches up with data in recent weeks from other regions as well – all showing that the pain felt in this sector (driven primarily by huge setbacks in energy-related orders output) is slowly abating.

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 I know – red ink makes it tough to look forward – but that’s where the money is made.

The Empire State Manufacturing Survey chart above is a series of diffusion indices distilled from a monthly survey of New York regional manufacturing executives and seeks to identify trends across 22 different current and future manufacturing related activities.

Yesterday’s release showed a general improvement for both current and future assessments of manufacturing activity, with the current activity index rising to a still contraction level of -1.99, while future activity also increased, rising to a level of 35.43.

By the way – the latter is nearing highs seen in all of 2015 and 2016 – another hint that we are burning off the energy negatives.  Slowly but surely.  This is also part of the reason it has felt like that US economy has been walking through quicksand.

One more note:  while everyone complains about AI – let’s be thankful some robots exist. If they didn’t, who would man the factories which are producing near all-time record output?

Heck, homebuilders are short guys who will build houses – they can’t find enough of them.

Imagine trying to staff a new factory with just people.

Be thankful that robots are coming to the rescue instead of fearing the advances the technology shift provides for the rest of us.  Thank Gen Y for the push.

Results and Bearishness

An interesting piece from Morningstar, the creator of those God-awful “style boxes.”  They out out an item on fund managers results with data up to the end of August and covering the last 5 years.  It’s pretty ugly.  Take a look:

Here is the simplicity of the back-drop to this data which is most often overlooked when reading the bullet points.  Having been one in my career and with some of my very best friends being great fund managers, most do not recognize the culprit lurking in the background of this data.

It’s emotion.  The very knee-jerk reactions that so often quantify terrible judgment in hindsight.  In a nutshell?

The fund manager tends to see significant withdrawals as prices wilt.  This causes two things: a) a demand he / she sell when prices are low to meet redemptions and, b) a lack of capital to buy stocks while they are cheap.

On the flip-side, the fund manager tends to see inflows only after markets have risen. They are then faced with having to buy the very same stocks at higher prices.

Sounds simplistic – but the public tends to see a mirror image of their emotional reaction waves ripple through the “results” published by the fund manager world.

Last on this front – be careful what you wish for:  ETF’s are not what most people understand them to be.  They are becoming one of the primary causes of the chop we see when sell alarms do ring.

Long-term investors cannot possibly believe that the massively increasing wave of double-digit moves in specific stocks, seconds after an earnings note headline is released, is driven by John Doe and his broker, right?

Closing Thoughts

We hope you have a wonderful weekend.  Check the video above.  The fears of yesterday still haunt markets.  That’s good.

I have stated this repeatedly so let’s keep it in mind:  anytime you think people are too bullish – just give me a few days red ink and I will show you a terrified crowd again. This week is no different in the larger view.

Setbacks are your friend if you remain focused on the long-term horizon, and what is shaping up here in the US.  As much as the media coverage only covers the dark views, many parts of our economy have never been better.

Seeing through all the pitches in the dirt is critical – and it is what investors get paid for – taking risk.  Very significant waves of demand are building in our economy.  As is almost always the case, those understandings will not be clear in the mainstream until they are obvious.

And count on this:  when demand is rolling ahead rapidly.  When we start hearing of shortfalls, when Gen Y footprints are everywhere to be seen and months of waiting for some product pipelines becomes clear to all – we can be absolutely certain that terrible news will cloak all of those events as well.

Stay focused, stay patient, stay on your long-term pathway.

The Barbell Economy is unfolding as expected.

The chop in the market is healthy and a benefit for long-term investors.

Until we see you again, may your journey be grand and your legacy significant.

Required Disclaimers on all videos and content

Jason No Comments

Gnashing of Teeth

Good Morning,

Over the weekend, one would have been certain Armageddon had arrived – again. The relentless reviews of all the assured risks ushered in by a loss of 400 points in the DOW were indeed dizzying.  No matter if you read, watched or listened the message was thre same:  risk.

Yesterday, the markets bounced back.  The masses were sent back up the other side of the media storm – as storylines changed with prices.  This morning – gasp – futures are down a percent or so.  September is living up to its name so far – a bit more volatile than the August slumber.  This is of course, pursuant to us now classifying 2 percwent moves as “volatile”.

I loved the headlines over the weekend.  “Markets suffer worst losses since June 24…”  I assure you we are not too far from this chaotic and ridiculous theme:  “Last 10 minutes see worst losses since 9:42 yesterday morning….”  I kid you not.

Enough Already…

If one truly believes that a quarter point rate hike is somehow going to unravel the world, then I would heavily recommend all removal of equity investments from one’s portfolio – purely from a risk management perspective.  It remains my humble poinion that this view of horrible events to come with a rate hike suggests one is entirely too close to the flame (I mean noise).  Step way, way back and recognize the path taken to here.

Yes – Friday was an interruption along a very lengthy pathway.  A review of long periods of history will show the audience that “interruption” is a far better characterization of market action versus the term “correction.”  The latter has a sens of finality and separation to it – as a cost so to speak.  The former is a portion of the process – inclusive in all market events.

Indeed, the 2% drop in the major averages on Friday left no sectors spared – hinting at something different than a bunch of people just hitting the sell button arbitrarily.  That said, if one breaks down the S&P 500 into deciles based on how stocks performed from mini-panic to mini-panic (the 6/27 post-Brexit low through last Thursday’s close) you would find that declines were evenly distributed regardless of performance during the post-Brexit rally.

Trust me on this:  ETF’s will eventually work their way to biting the crowd in ways they currently do not understand but that is a story for another day.

I do not think we should assume the chop is complete.  Volumes did rise quite a bit as noted for you in the chart included (posted again below for review) – but I would not be surprised to see this go on for a bit longer.  It is pretty safe to say that almost no one will be happy with the Fed meeting outcome this week.

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Forward Earnings

Forward earnings rose for all three indexes again last week as the energy cloud continues to be purged from comps.

Large Cap’s rose for an 18th straight week.  MidCap’s rose for an eighth week and SmallCap’s tagged their 15th rise in the last 16 weeks.

Importantly – while too many stayed focused ono the wrong bullet-point (earnings recession), all three weightings have risen since mid-March.  This signals the best multi-week streak since August 2014.

How does this stand up to records?  Well, the only one mot sitting at all-time highs after the latest quarterly briefings is LargeCap’s.  Their forward earnings stand just 0.2% below the record highs set in October 2014 (just as the energy cloud was shaping up in earnest).

MidCap’s are well into new highs as has been the case for 13 of the past 15 weeks. Meanwhile, the SmallCap’s also stand at a record highs – for the 11th time in the past 13 weeks.

Remember:  “Record highs” in Latin means “it’s never been better than this….”

Sometimes that simple fact is lost in the world of nail-biting headline hysteria and “increased volatility.”

A Brief on FedSpeak

Many have overlooked the idea mentioned here often – the strngthening dollar has already done some of the tightening for the Fed.  While most experts assured us that “printiing money under QE would trash the dollar for good”, it is somewhat comical that dollar strength and lack of inflation is now confounding those same experts.

A few tidbits from the latest Fed chatter – and reasons for same we can all track:

“Inflation has been undershooting, and the Phillips Curve has flattened.”

One can admit the jobs market has tightened – if you are trained in the areas of the economy which are seeing massive demand (the Barbell).  Further, keep in mind that Generation Y brings with it a suprisingly deflationary tilt.

Old-world econometric models will tell us this is terrible.  It’s likely more like a dog chasing his tail – an ineffective activity. Be assured, as their talents and abilities further infiltrate the corporate world, efficiences will be found in places no one thought possible.  Places we cannot even define yet.

Multi-tasking – high-tech savvy and keeping things simple without a lot of fluff is comiing at us in a giant wave shift.  This helps explain why price inflation remains subdued since labor costs aren’t rising significantly.  Note also that inflationary expectations remain low, with core PCED inflation rate at 1.6% YOY and expected inflation in the 10-year TIPS market at just 1.5%.

“Foreign markets matter, especially because financial transmission is strong.”

In her latest, Ms. Brainard noted, “Headwinds from abroad should matter to U.S. policymakers because recent experience suggests global financial markets are tightly integrated, such that disturbances emanating from Chinese or euro-area financial markets quickly spill over to U.S. financial markets. The fallout from adverse foreign shocks appears to be more powerfully transmitted to the U.S. than previously.”

She went on to state: “In particular, estimates from the FRB/US model suggest that the nearly 20 percent appreciation of the dollar from June 2014 to January of this year could be having an effect on U.S. economic activity roughly equivalent to a 200 basis point increase in the federal funds rate.”

Let’s Keep This Simple

The Fed is struggling because they are underestimating the cost of fear in their forecasts. They are also not making a big enough point that the baffoons in DC have done an absolutely horrible job of fiscal policy implementation for years.  Let’s face it – if it was not something having to do with a new tax to provide for more giveaways – Obama has simply not been interested.

The expansion investment strike from corporations is also a compelling stand against terrible administration policies.

That noted, we should be, on the contrary, extremely please our economy has been able to expand at all with all these chains around our neck and ankles to boot.  It’s all in the barbell.

When fear subsides, rates will rise.  When fear subsides, FedSpeak can shift.  Think fear is fading?  Not even close:  Check the last 4 weeks of specific fund flows data – every week a big flow into bond funds even at near record low rates (60+ times earnings):

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 Yes folks – fear remains.  If one needs any further indication let’s wait for the latest sentiment data out in the next 48 or so hours to encompass the selling from Griday and today.

Retail Death Reports

I always think it is kind of comical when we see lots of “certainty” in a specific opinion – like how retail is dead unless you are Amazon.  Not so quickly.  My hunch is that a couple years from now, we will find some of the hard hit retailers will have adjusted and their stock returns will have set the stage for improvements.

Survey data shows that the kids are not done with trips to the mall just yet – hinting that mall owners are doing a pretty good job of creating “experiences” and concepts along with the shopping and retail services:

A Note on the Bear

We hear so much about the constant bear market risk that we really never left the topic from over 11,000 DOW points ago.  After all, the entire theme of investing since March 2009 lows has been “yea – but just wait until you see the next shoe to drop….”

My point here is that it is easy to overlook how little time we actually spend in bear markets.  Recall from last week’s notes, I referenced a percentage:  85% of the time in history has been spent in a bull market.  Here is a graphic which may provide a better feel.  Why?  Let’s begin to spend our time thinking strategically about where risk should be taken during the 85% of the time that things tend to so – well, just fiine:

This is just one of many graphics one can find and review – but it does sort of drive home the point that we seem to focus on the bad when it is a minor amount of history.  And by the way – that history covers every single thing we are terrified of – and have been – all along the way up the mountain.

Like I said above:  think of red ink – long or short periods of same – in terms of an interruption along the way.

In Summary

The news cycle is all about strife, stress and negatives.  Meanwhile, markets are sloppy in September.  The masses are back, trade desks are full again and the sell in May crowd missed the rally.  Elections are on tap – and each one gets a bit crazier.

As soon as we get through another week or two, we will quickly be warned of the cold winds of October. They will replay all the crashes the month holds in history and investors will be sent back through the merry-go-round of fear.

The better part of valor here is to let this stuff unfold, finding pockets of elements to take advantage of as fear rises again.  In the larger forces underway – this is all short-term nuance.

The confusion is our midst continues to be the massive shift underway.  Seen one way, it appears messy.  Seen from a 50,000 foot view – relatively ordinary.  Demand is coming our way.  Experts’s fear-mongering has been a costly siren song for many years.

Allow it to be less so in the future.

We remain focused on the Barbell Economy.  It is real – expanding and demand is growing like a weed.  Does that mean every day, week or month is rosy?  Of course not.

That’s why they say patience and focus are so difficult to manage – and so few accept it as a required set of traits for the long-term successes ahead.

Stay focused on the larger view at hand – not the pitch in the dirt.

Until we see you again, may your journey be grand and your legacy significant.

Did I mention patience and focus?

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Jason No Comments

End of the World…

Good Morning,

Fifteen years ago today – the entire world was numb.  Most had not moved from their television screens for many hours as the fires from Ground Zero still burned and reality was just setting in.

What a pathway we have been on since.

Yesterday, as I recovered from jet lag coming off the Hong Kong trip hours before, I watched “Sully” as we were at the same time marking the 15-year anniversary of the 9/11 attack.  It was a blessing to recall the Miracle on the Hudson with the New York skyline in the background.

All at once, we were able to remember how we call came together at one time – twice.  It was a flood of emotions seeing how well Americans can do things together when all the chips are on the table.  Oddly, as I relived the real-life events the world watched on the Hudson that day, it struck me that without the lessons of 9/11 years before, the miracle may have had a different ending.

Numbers

Everyone is likely focused on the 400-point drop in the DOW on Friday.  Here are some interesting numbers as well:

Flight 1549

Souls on Board:  155

Length of Flight:  208 seconds

Deaths in Accident:  0

Incredible.  If you have not yet seen the movie – do so.  Take a box of tissues.  Enjoy.

Fear Returns

Last week we covered the consistency of fear seen in many indicators for months on end. We have covered the record-breaking lack of bullishness in the crowd even as record highs were reached.  I stated three things throughout the summer lull:  a) more red ink would make them even less bullish, b) fear would be quick to return and c) pray for a correction.

Well, Friday’s abrupt about face sure woke everyone from their summer slumber.  The Friday evening media flood and weekend articles in anyway related to markets or the economy were filled with the expected dire projections.  I love this one – it was the ominous theme of the weekend:

“A Correction is Coming and There is Nothing You Can Do About It”

Let’s hope so anyway.   Readers of these morning notes are not surprised by the events of Friday.  It is perfectly normal to see a market move back into previous breakout ranges for support.  The summer bounce was shaved by a chunk in one day as volume spiked and the crowd quickly showed their real feelings about risk: they want none of it.   Oddly enough, this is just what you want to see.

The problem?  The structure of corrections is changing.  Machines, stops, too many “hedging” tools and public fear all work to make these seem more volatile than they really are in the larger picture – but they end quickly.

The reality?  Most investors are in cash and bonds – extremely underweight stocks.  As a percent of the large crowd – few likely did anything on Friday though the media process will lead you to believe it was massive.

Don’t fall for it.  It’s a game that has been played since time began.  While all that we fear unfolds – parallel to that same track – history proves markets rise over time.

I have stated the same for years here.  Show me some red ink – days or weeks – and I will show you a crowd quickly become as afraid as they were in the final weeks of the Great Recession bear market.

Put Away Your Sharp Objects

Ok – yes, Friday was a bad day for bonds and an ugly day for stocks. The S&P 500 plunged 2.5%, managing to find support at 2015’s highs (see chart below).  The VIX rose from 12.5 on Thursday to a 10-week high of 17.5 on Friday.

Any Good News?

Long-term investors need to remain focused on the cushion provided by the Barbell Economy.  It shows consistency as well:  Yes, it sells off along with markets – but the cushion remains steady.

Don’t overlook this unrelenting fact:  The Barbell is where most economic energy is being exerted as the two largest generations in the history for the US churn forward – slowly and steadily.

Better News?    

The forward P/Es of the S&P 500/400/600 dropped sharply on Friday to 16.5, 17.5, and 18.3.

Meanwhile, the forward revenues of these three stock indexes rose to new highs during the first week of September.  Forward profit margins also continue to firm as we edge closer to the energy debacle round-trip.

The bottom line?  Well, while most fret over short-term price action and run again from stocks, the top and bottom lines of the S&P 500 are looking very good according to the consensus of reports – even as struggles will continue.

The overall business environment remains extremely competitive and that process increases at each turn.  Companies main focal point remains simple:  stay laser-focused on cutting costs and maintain/improve profit margins.

Oddly, these are not events history suggests investors should be running from.

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 Two Charts Above

The first chart shows you the trade ranges we covered for close to two years as the markets worked through their “earnings recession” and fears became deeply embedded.

I had recently noted being surprised we had not yet seen markets go back and test the breakout region from mid-summer.  In the long run, it is very positive to see this unfolding now.   I am confident we will find this to be a productive step in markets even though I do not expect it to cause anyone to rush in and buy stocks (also a good thing).

On the contrary, if it can last for more than a couple days (the Brexit panic), I suspect we see continued outflows from equities, inflows to bonds and a more bearish tilt in sentiment.

Note the red line at the bottom of chart 1 above.  It highlights volume levels.  After being paltry all during August (expected) they quickly rose on Friday as selling ensued.  Why point this out?  We reached into the region of volume pace which typically goes along with the end of things – not the beginning.  How quickly we panic these days.

The second chart is a great one from Dr. Ed.  As noted above, forward multiples fell sharply on Friday as markets shaved points and the forward earnings increased.  As such, take an extra moment and let your mind-eye gaze backward across the paths of green, blue and red lines on the second chart.

You will note that forward P/E ratios have now fallen back in all three weighted indices:

For the large caps – we are back to levels first seen in late 2014.

For the mid caps – we are back to levels first seen very early in 2014.

For the small caps – we are back to levels first seen in late 2013.

Pretty soon – all we will be discussing is 2017 and 2018 projections.  Let’s face it:

Time flies when you are witnessing a secular bull market grind its way higher as almost no one believes in it.

Generation Y is Deflationary

Years from now this will become more clear for many.  The technologies, from apps to the cloud, which are being unleashed on our economy by Generation Y – are very deflationary.  That’s not something to fear – as it creates a nice balance in the structure of things.  It also helps margins expand and – in time – they will flourish as Gen Y moves higher up the corporate ladder.

We can see it real-time today.  After being warned for years that QE would destroy the value of the US dollar and that inflation would burn us all – the exact opposite has unfolded.

Today we are told the strong dollar is hurting overseas profits and experts are nearly begging for inflation.

Far from the beckoning fears and expert calls for the ghosts of inflation, rates remain subdued near zero. There continues to be significant undershooting of actual inflation rates and the 2% inflation target of the BOJ, ECB, and Fed for their favored measures.

In the US, the core personal consumption expenditures deflator, excluding food and energy, was up 1.6% y/y for July.

Meanwhile:  average hourly earnings rose just 2.4% y/y during August, the competitive pressures of which were covered in your notes last week (see links above).

Silent Period?

As the window of time closes for any FedHead to chatter about US rate hikes, all eyes now nervously await the idea of whether or not 25 basis points will crater life as we know it.

Please guys –  take a breath – count to 1000.

Check your Barbell Economy Portfolio data and relax.

Let them chatter, let them meet, let them raise.  How many times have we collectively (and unproductively) been convinced to fear things since 9/11?  It struck me over the weekend that the correct answer is:  far too often.

A rate hike or two will mean almost zero to the average company – even less to many others.  Our fears have become monsters that wreak havoc only on emotions – and because of that, very poor long-term investment decisions are being made.

As much as I know many do not feel this way:  these fits of mini-panic tend to be good for the market.  Study history – your best results come right after the worst pricing nightmares.

They feel bad for a little while – and then pass.

In Closing (Broken Record Warning)

Step back and focus on demographics – not economics.

We are in far better shape than understood by most.

Effectively navigating this massive “baton shift” underway between powerful generations requires patience, planning, discipline….and on days like Friday, a steady 8-week supply of the new fruit-flavored TUMS.

Did I mention patience and focus?

Until we see you again – may your journey be grand and your legacy significant.

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Jason No Comments

Capital-ism…

Capitalism:

“An economic system in which investment in and ownership of the means of production, distribution, and exchange of wealth is made and maintained chiefly by private individuals or corporations, especially as contrasted to cooperatively or state-owned means of wealth.”

Good Morning,

Baby Stats Update:  In case you felt demographics moved too slowly to be important:check this article here.

We have said if for years:  Italy is struggling.  Demogronomics tell us the US, far and away, is the best situated developed economy in the world as it relates to growth in the future – driven by strong replacement level birthrates.

This keeps it pretty simple:  As we have noted before, the productivity of the most efficient widgets plant in the world is zero if there is no demand for widgets.  There’s lots of demand for most of our widgets.  US manufactured goods real output is back at the previous cyclical high – hampered mainly by the setbacks in energy.  This – and Gen Y is just getting started.

Just keep in mind, the baton is passing.

The churn we are feeling is the unfolding of a far larger event than most understand – or are paying attention too.  This is good news for those planning with a longer-range picture in mind.  Indeed, it does demand patience. After all, the last time we saw this type of massive demographic and economic shift come together, it took nearly 20 years for the entire secular move to unfold.  Patience was demanded every day then as well.

Poof…

Alright, all the kids are back to school by now.  Summer break is over.  In another 48 hours, be assured we will all be checking our calendars to see when the next break is – so will the kids.

Speaking of school, a little test of our own.  It’s got just four questions – a pop quiz of sorts:

Do you believe that people will want to continue inventing things in the future?

Do you believe that people will need to purchase “stuff” or “use services” in the future?

Do you believe that people will continue desiring ownership of property or investments in the future?

Do you believe most businesses will likely continue to feel the same about the three issues noted above as well?

If you answered yes to these questions, you have passed the test.  You now understand capitalism.  What does that mean?  Simple – and hundreds of years of history are on your side:

Stocks do the best job of protecting future purchasing power over long periods of time.

If, however, you did not answer those questions with yes, do not at all be alarmed. You are (by far) not alone.  But do this:  don’t invest in the stock market.  It will be too volatile and will likely not mesh with your emotions – leading to costly errors over time which tend to harm.

Time and Money

You see, to be an investor we must work with broad bands of time.  We must work to cease being controlled by our emotions.  We must recognize investing will be – at times – a very, very ugly game.  We must stop the need to compare – comparisons won’t always work.

Stocks, markets, equities are all like life itself – there will always be someone prettier, slimmer, with better abs, more money, a nicer car or a bigger house – and with a better return in the last 85.7 hours on their stocks.  Always.

Another line from the Sunscreen Song:

“Sometimes you are ahead, sometimes you are behind.

The race is long…and in the end, it is only with yourself.”

Another dirty secret about investing for the long haul in this thing we call capitalism?  One can be absolutely assured that at some point in your process, maybe even twice or three times in your life:  50% of your account will vanish (temporarily), as long as you don’t react to that event poorly.  This is also proven in historical fact:  it will tend to find its way back if you do not let your emotions control your reactions.

Ask yourself this:

How come you don’t go to theme parks and see a bunch of dead bodies under all the biggest roller coasters?

Answer:

Because people don’t jump off during the scariest parts of the ride.

“Capitalism works better than it sounds, while socialism sounds better than it works.“
—Richard M. Nixon, Beyond Peace (1994)

Spooky

Long-time readers know I have often stated this before, so please forgive me for being repetitive – but it is important:

The next 40 years are very likely to look a lot like that last 40 years.  Now, oddly enough, I have recently found a quote which supports same.  Odd how we seem to feel better if there is a quote from somewhere else in the past about the future right?   Here goes:

“The events of future history…will be of the same nature-or nearly so-as the history of the past, so long as men are men.”  – Thucydides-Athenian Historian and General

So that means?

Lots of terrible things.  Lots of scary things.  Many events which will elicit those 5 most expensive words in investing:

“It’s Never Been This Bad….”

Plenty of turmoil awaits…but so too do more record amounts of wealth created, many more thousands of points in the markets and plenty of reasons you will be told it cannot possibly go on.

All of this, by the way, has been present since I began in 1982.  You see, risk has always been present – we simply got through it.  Your mind does not perceive risk once success is obtained.

As stated very often:  There are no guarantees in the investing world.  There will always be risk.  We must always recognize though that daily events are noise – and primarily dominated by volatile human emotion, both a toxic mix always at work in the short-term.  In the longer term, historical precedents tend to be a closer call.

What can be gleaned from a study of history?

Quite a few items – but the list below is all factual to date, can be proven by decades of those facts and by themselves are so starkly simple, they can help quickly eliminate many of the most fearful elements – if one can agree with them.  Remember, they are facts:

We have had one Great Depression.  Most recessions do not turn into a Depression over time.

Uncertainty is always present – no matter how sure you are that it isn’t.

It’s ever-present existence then is not an effective choice to use as an excuse not to invest in the future growth of solid businesses.

“When things become more clear” tends to arise at higher prices from the current point.

There is a massively large (emotional) behavior gap “cost” suffered between total mutual fund returns and what investors actually received. (review the comment about roller-coasters and dead bodies above)

If stock volatility scares you a lot, adding leverage to “get better returns” almost always ends poorly for the borrower.

Bull markets last much, much longer than bear markets.

Stocks can and will stay significantly undervalued and overvalued for very lengthy periods of time – even as the definitions of overvalued and undervalued changes over time.

Buying the latest new Wall Street product to hedge away risk is often a poor idea.

Finally for now, stocks are in a bull market 85% of the time for the history to date.

Forward Revs and Earnings Updates

The August data has been slow and all sorts of new fears are brewing in the peanut gallery.  The simple answer may have been forgotten:  that August is, well slow.  It’s slow everywhere.  Most are on vacation.

While everyone immediately leaps to the idea that major slowdowns are ahead (that’s a lazy but easy reaction to have – out of fear), it is tougher to have faith in the idea that we have a normal soft spot during a normal soft period of a year.

The odds are high it bounces back – sooner rather than later.

I say again:  our economy is changing so quickly, we must begin to grasp the idea that the data we are “seeing” is not a productive or effective view of what is actually unfolding.

In the meantime, Dr. Ed reminds us that forward earnings rose for all three indexes last week – again.  In fact, for LargeCap’s, it was up for now the 17th straight week in a row.  It was MidCap’s 7th week in a row and SmallCap’s was up for the 14th time in the last 15 weeks.

Could we pause on the improvement for a bit?  Sure – in fact that would be normal to expect in slow spots.  But, all three have risen since mid-March, making it the best multi-week run since August 2014.

LargeCap’s forward earnings is now just a tick or two (0.5%) below its record high of October 2014.  MidCap’s is at a record high, as it has been in 12 of the past 14 weeks. SmallCap’s is less than 0.1% from its mid-August record high, which was its first since October 2015.

The point?  While we will surely replace it with another worry – the net effect is we have completely erased the “earnings recession” brought on by the dismantling of the energy sector.

More on Sentiment

We already know 72% of investors do not like stocks now.  So, let’s mesh that with the latest from BAML and their sell-side sentiment model.  What does it say?  It shows the strategists remain more bearish on markets than they were just after the 2008-2009 Great Recession.

Sorry guys–you are costing your clients a fortune:

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A couple things are pretty fascinating about this data.  It shows, for example, that the experts are now as fearful as they were AFTER the 1987 Crash (16,000 DOW points ago), AFTER the early 90’s recession (14,800 DOW points ago) and AFTER the ’08/’09 collapse (11,800 DOW Points ago).

In case you were wondering, when did they feel good?  That peak in the chart was March of 2000 – the Tech bubble top.  Outcome?

Last on this – the green line signifies “extreme bearishness” in the data.  Note how long we have been below this line – in years.  All the while, US markets have risen.  Do we really want to assume it’s all still because of QE?

Next?

We said it all summer:  The next couple months have the added pressure of what are likely to be some pretty ugly antics in the race for the White House.  Of course, I suppose the use of the term “race” implies question in outcome – but race it is…for now.

A corrective wave should not be surprising and could indeed be helpful for long-term investors.  Call me a nut, I always like the idea of getting something a little cheaper.  I know – foolish right?  The point is that a small flush would cause even more fear to mount as the economy continues to move forward slowly but surely.

Bonds would rally, rates would stay lower for longer and values would improve.  It does not mean current values are bad – it simply means, they would improve.

The Bottom Line

If you need anymore data on the explosive energy building under the surface to soon benefit the US economy, look no further than tech markets:

This effort to break out may take a bit more work – but it too is likely to be overlooked. Technology will drive the forces behind the baton shift we have been covering.

Gen Y is tech savvy – they live, eat and breathe it.  Have since they were born.

Their knowledge base will slowly infiltrate the corporate world and efficiencies will be set in motion.

Most important of all – be confident.  Thanks to our wonderful US demographics – it is all just beginning.

Think in terms of decades, not months or quarters.

And retailers are not dead yet.  Let’s stop this data digest where each little link in the chain is immediately grounds to shift entire multi-year perspectives.  It’s foolish:

And one final tip of the hat to patience.

Check it here…and everyone thought he was done.

Take a deep breath.  Count to 1000 if you need to.  Slow down the heartbeat a bit and realize that our economy is going through major demographic change.  That is not a bad thing.  The people who will impact our world for the next 50 years are already alive.

Pray for a correction guys.

Years from now, from much higher prices in markets, there will be a time we are going to chuckle when recalling how afraid everyone was – way back in 2015 and 2016.

Until we see you again, may your journey be grand and your legacy significant.

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Jason No Comments

Beige, Red, and Blue

Good Morning,

Hope this note finds you well.  I am sorry for the late note – am flying back from overseas after a 4-day conference – jet lag and all.  Back to normal schedule each day to start the week.

So the last couple days were filled with new Apple colors and Beige Books.  Today – it’s all about this noon-stop enchantment with the Fed and rates.

The beige book told us things were pretty steady – not much different than a normally slow August.  A couple regions were slower, a couple faster and the consumer was steady. Bank of America’s Moynihan told everyone this morning that the consumer is healthy with retail sales up 4.7% YOY in the latest data.

Here’s an idea:  Stop paying attention to the world in 30-day soundbites.  You have much better things to do.

Meanwhile, the media is telling us what they always tell us:  dreadful things await. My hunch is they speak of nightmares packaged in 25-basis point rate hikes.  Geez.

As I have suggested for months – pray for a correction.  Could this be it?  Maybe.  If so, fantastic – in a word.  We get another great sentiment washout (watch how quickly fear spikes), finish up these ridiculous election campaigns, gag on which ever one of these morons wins – and then…boom:

We all get on with life and the very surprising growth demand ahead.

Don’t worry, the howling at the moon will continue all the way up the mountain.  The need to sell fear and the readiness for the crowd to buy it is like throwing a bag of crack into a drug house.

A Big – Rapidly Changin’ World

As I peer over the harbor of Hong Kong and watch a storm roll in, the city lights go dark behind the clouds and rain.  I am listening to a rehash of the other news of import in the last few hours:  the long awaited Apple announcements.

I’ve picked up a couple interesting tidbits and some really, really idiotic comments from experts covering the release.  I mean this is numbskull kinda stuff.  Check it out:

As they were covering the new Apple Watch, Version1 was called – and I am quoting, “Nothing to write home about yet.” That reference came from a reporter on CNBC.  He then went on to say, “Well, Apple has only sold a little over $5 Billion in watches in the first 15 months…”

Just to be clear:  My brain went numb after that.

Two thoughts:  We have “reporters” giving us news who feel a brand new product revenue launch of $5 billion is not good enough?  and – Investors actually listen to this crap still? While I am no Apple hype guy, let’s be real:  name one other company in the history of companies which has created multiple multi-billion products from scratch – this quickly.

The best news about Apple is not their product – it is more important to contemplate what their product does, how it empowers, what it unleashes and the wave of productivity it pushes – non-stop.   But that’s for another note…right?

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Another interesting piece:  Apple now does $28 Billion a year in service revenues alone. All by itself, their services unit would be a Fortune 100 company.  Put a 15 cap on that net and add in their $260B in cash (I think the reporter above overlooked that little asterisk). You get $540B of their $560B market cap.  Someone missed something somewhere.

The Pentium Chip from Intel which powered Microsoft Office back in the mid-90’s had 3.2 Million transistors on it – a mind-bending number back then.  The new iPhone 7’s chip carries 3.2 BILLION transistors.

And we are bitching that they took away the earphone plug?   I cannot decide whether to laugh my ass off or leap from the nearest first story ledge.

I find it stunning we have reporters asking from their perch just outside real work whether or not Apple “under-delivered”.  Are we forgetting the $260 Billion in cash again.

My point?  We have gotten way, way too lost in data and noise and impatience and media “expert” stupidity.

Brexit Who?

For those on vacation this summer it would have been easy to miss market selloff surrounding the UK’s vote to exit the European Union near the end of June.

Recent economic data seem to support the idea that the UK is quickly rebounding from any economic slowdown in the immediate wake of the June 24 vote. A service sector index rose to 52.9 in August, up from 47.4 in July.

The 9/5 WSJ reported, “Monday’s results follow a strong reading of the manufacturing sector PMI index, which last week posted the joint-largest month-to-month jump in 25 years, placing it above June’s pre-referendum level. Official data last month on retail sales showed Britons shrugged off the referendum result in July and kept spending, while a long-running household survey carried out by market research firm GfK Ltd. found consumer confidence recovered in August after collapsing in July.”

For those needing something to fret over, not to worry:  the EU economy’s expansion slowed slightly in August. IHS Markit’s Purchasing Managers Index for the Eurozone fell to 52.9 from 53.2 in July.

Best idea to come from this menagerie of unwarranted fear?

Next summer, let’s remember that going to the beach can be a good business decision – for you and your portfolio.

Tight Quarters

For those feeling a bit hemmed in the last few weeks, it appears we have set yet anther record in the technical followers camp.

Check the chart below:  For the last 40 trading days – a window spanning back to mid-July – the difference between the S&P 500’s highest and lowest daily closing price has been a razor thin distance of just 1.75% (today is the exception – but should run stops pretty quickly – perfect).

Shocker?  It should be – it’s a level of thin sideways trade the US stock market has never experienced before.  The chart shows the 40-trading day high/low closing price spread for the S&P 500 since the index began in 1928.  Never has a 40-trading day period seen a lower spread.

Think about it:  as the all-too-feared Brexit vote unfolded and we edged into the tail-end of this terrible Presidential run, the stock market embarked on its flattest trek ever.

The chatter is having its way.  The noise is once again clouding judgment.  How many times have we seen these fits?  This is good for the market.  Give us a week or two – or three of red ink.  Maybe even a mini-panic.  Then, study history – your best results come right after the worst nightmares.  They feel bad for a little while – and then pass.

Like it or not – every single market return number you have ever reviewed – was riddled with these same types of “setbacks” hidden in the trail up the mountain.

Take a deep breath – red ink is a friend to the long-term investor.

Think demographics – not economic.  We are in great shape folks.  Just takes patience, planning, discipline….and a steady 8-week supply of the new fruit-flavored TUMS.

Did I mention patience and focus.

Have a great weekend…the fog will lift sooner than we fear.

Until we see you again – may your journey be grand and your legacy significant.

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