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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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