Friday, January 06, 2017

Sometimes math isn't hard but it scares people anyway

As you can probably tell, I've grown tired of tilting at windmills trying to get people to ignore the monthly jobs reports that come out from the Bureau of Labor Statistics because it is my opinion that when you start attempting to measure an economy as large as the US economy with statistical models, the models amplify measurement errors and the resulting headlines are usually just noise.

I'll go with my standard response when it comes to the unemployment rate - if the unemployment rate was really 4.7% do you think Bernie Sanders wins 20+ states in the primaries and Donald Trump wins the vote in the Electoral College?  Of course not, if unemployment was really 4.7% everyone would want the status quo (ie, Sec. Clinton) to continue on the path to prosperity.

However, since the Dow Jones has finally decided that today might be the fateful day to break through 20,000 I thought I should talk about the jobs report if only to highlight why it's so difficult to take the headlines seriously.

First a note on the Dow crossing 20,000 - it's just a round number and the Dow is a meaningless index that no one really cares about (except the guy talking to you on the evening news).  The Dow (and all stocks) have spiked since the election for a variety of reasons, none of which convince me that this is a good time to be buying into one of the most expensive markets in history.  Depending upon your choice of tools this is either the first, second or third most expensive stocks have ever been - only 1999/2000 and 1929 were worse.  Hey, but put on your 2017 hat and pop some champagne tonight because in 6-12 months you'll be longing for some good memories.

Okay, what's the big news today in the jobs report?  Whoa 2.9% wage growth!!! On the surface that sounds great, however, there's a little was a little fuzzy math that got to that number.  To get wage growth the BLS takes the average weekly paycheck and divides it by the average number of hours worked (again these are all basically numbers pulled from various surveys that are extrapolated).  When looking at the numerator in that equation - the weekly paycheck - I saw that it was roughly the same as in October so why is everyone getting so excited?

I'll use round numbers to demonstrate....

Let's say the average paycheck was $1,000 and the average number of hours worked was 40, you'd have an average hourly wage of $25.  However, let's say the average paycheck remained $1,000 but the avg hours worked fell to 39.5, then the average hourly wage JUMPS to $25.31/hour.  Wow, that's awesome!!!

Do you see how we magically increased the common man's pay? He's making an extra 31 cents an hour!!

However, the fictional common man, might say "Umm, thanks, but the if you'll notice my weekly pay is still $1,000 so while your model shows I got a pay increase, what I really got was the same pay for working 6 minutes less every day."

This is a simplification, but this is what drove about 25% of the "wage growth" reported in the December jobs report. The average number of hours worked fell while the weekly earnings grew slightly (about $20 for the yr).

So, in summary, this jobs report was much like all of those of the past 8 years - based on low-end jobs (retail, restaurants), freelancers and healthcare.  Not a lot to celebrate but go ahead and party like it's 1999 tonight.

I have a backlog of about 20 stories to cover - there are some really interesting things coming up.


Tuesday, December 13, 2016

Every Uber Driver is a Wall Street Expert

While I never had the exact Joe Kennedy shoe shine worker experience, I did have a similar experience in Feb 2000 when my landscaper told me his wife was day-trading dotcom stocks.  The NASDAQ market began it's steady decline 4 weeks later.

Let's play a little game -  What do all of these dates have in common?

12/13/16 (today)

Well, they are the points at which by various measures the stock market entered EXTREME overvaluation. 

1929 - the crash that began the Great Depression
1972 - Stocks fall by 50% in 1973
1987 - Black Monday
1999-2000 - The Dotcom bubble bursts
2007 - the Housing bubble bursts
2013 - nothing happened *
2016 - Trumpian Nirvana

I've discussed 2013 before so I won't spend much time there but suffice to say the global economy began cooling in 2013 and really slid in 2014-2016 however US stocks have so substantially distanced themselves from the companies they supposedly represent that weak underlying fundamentals can be ignored in the face of what the charts show.

Well, the stock market is again the talk of the town as it was in Joe Kennedy's time at the shoe stand or when my landscaper was asking for my thoughts on the Webvan IPO (look it up if you have a short memory).  However, this time it's a very Trumpian rally.  For all of his many flaws, Mr. Trump has a flair for distraction -- getting people to focus on a shiny gold faucet while the walls crumble around them.  This is today's stock market where people are focused on the Dow crossing 20,000 while ignoring that 30% of the Dow companies have been replaced in recent years (ie, they kick out the poor performers to enhance the headline number) and the fact that almost all of the gain in the Dow this year is due to 7 stocks -

1) Goldman - Because Goldman again will be running the world.

2) UnitedHealthcare - Because rolling back Obamacare will mean keeping high premiums for workers, without providing coverage. YEAH!!

3)  Caterpillar - Because ..... oh, I can't even pretend here - this is ridiculous, their business is imploding but the stock has soared on the hopes of MORE Federal spending in 2020.

4) IBM, 3M and Chevron - Rising tides lift all ships

5) JP Morgan - whatever business falls through the cracks at Goldman might go to JP Morgan.

I believe that you make the most money when there are huge mistakes made that you can see coming.  Well, 2017 is a HUUUGE mistake bearing down on us.  You see stocks don't act in a vacuum - there are a whole host of other assets that this bubble is impacting.  I expect this stock bubble to continue to chase money out of bonds.  This has the impact of raising interest rates, which will further strengthen the US Dollar.  That's great if you're going on vacation to Europe or Japan, but ask someone in sales how much fun it is to sell their products that are now 20% more expensive because of currency shifts and you'll hear the other side of that equation.

Then the Fed will have to try to reign in bond yields by raising rates QUICKLY in 2017 and that will choke off any economic activity. Boom - The next recession will be at hand.  We'll get a little preview of that today when the Fed raises rates, but don't expect any real reaction until rates start to approach 1-1.5% again.

Next up.... Why cutting the corporate tax rate is a strategy from 1980 that is doomed (ok, maybe not doomed, but what are blogs for if not for hyperbole?).


Thursday, December 08, 2016

Just trust me this is really not fake news, I swear :)

The markets were again crushed by a surge of buy programs at almost the exact same time as yesterday and that was the story of the day.  If you bought at 11:59 and sold at 12:31 you made more than they average working man or woman makes in a week in 30 minutes.  Hooray for gamblin.... I mean investing!!

The subject of "fake news" is all over the media outlets tonight after Sec. Clinton addressed the topic at one of her first public appearances since the election.  While I don't deny that "fake news" does exist (there is a guy dedicated to writing these fake stories who makes a very comfortable living spreading falsehoods), my greater concern is the more widespread "misrepresenting every day occurrences" as news.

Allow me to explain using some weather examples - this morning one of the morning shows was in North Dakota talking about the frigid conditions where it was 6 degrees F.  Two weeks ago the morning shows were in Syracuse NY covering a lake effect snow event that dumped 8-12" of snow on the area.  By discussing these routine weather events --- Newsflash: it snows East of Lake Ontario in November/December and it's really, really cold in North Dakota --- as somehow newsworthy the media is creating a story out of thin air.  This isn't news, it's buzzfeed-style presentations designed to keep you glued to the TV to find out if that snow in Syracuse is coming to NYC or Boston (short answer - no b/c NYC and Boston are not near Lake Ontario, but conveniently they neglect to mention this fact in their story that talked about a "winter blast invading the Northeast").

On a more local level let's consider the story that has dominated the headlines for the past 72 hours in the North Country -- another lake effect snow event.  About 10 days ago you could see that it was going to be cold enough to produce snow if the winds stayed consistent when they reached Lake Ontario.  I mentioned to a family member that was traveling that "there will be snow in the traditional snow belt with a strong West/Southwest wind turning West by Thursday night".  It was clear that it was going to snow very hard in a very narrow band of mostly uninhabited land on the Tug Hill Plateau.  However, the National Weather Service issued a Lake Effect snow warning for Jefferson and Lewis counties (almost 2600 square miles combined) despite the fact that just a tiny fraction of those counties would be impacted.

Here is the snow map from the National Weather Service:

Now keep in mind where that bulls eye of the storm sits - that pink area in between Lowville and Pulaski and take note of this map.

Hmm, that's interesting, I wonder why that area that is going to get pummeled with snow is awfully green on the map?  Could it be because it's mostly uninhabited forests?  Uh, yes that's exactly the answer. 

So, that's my long-winded way of say that even local sources are guilty of trying to spice up a story to make you pay attention.  The reality is that this was a fairly typical lake effect event that will deliver snow to a fairly narrow section of forest land and snowmobile trails.  However, that is not a story that gets you to click on it 10 times a day.  If the story says LAKE EFFECT WARNING FOR JEFFERSON AND LEWIS COUNTY, you'll probably click all day for updates.  This isn't an example of "fake news" but it is rather disingenuous and this is a very common practice in the entire media industry.

Okay, that's enough ranting for the evening :)

Drive carefully if you live in Worth, NY.


Wednesday, December 07, 2016

Another day, another bunch of dollars

If you've been following the blog for any length of time you are well aware that I believe the markets disconnected from economic reality for good in the middle of 2013.  The past 3 years have seen consistent growth in asset prices while economic activity has sputtered from Asia to Europe to the US.

However, today may have finally been the day that broke the camel's back.  For no real reason, the market continues to levitate higher on hope and dreams that an individual who has failed repeatedly is going to somehow, magically jump-start growth for every company in America (side note - I'm admittedly biased - my first job involved restructuring some Trump debt after one of his bankruptcies and I felt like I had to take a shower after every interaction with his company.  They were shady, incompetent, demanding, and argumentative at every point of the negotiation and it was the catalyst that got me out of commercial banking). 

The grandest irony of this latest market rally is that while both Sen. Bernie Sanders and President-Elect Trump roundly criticized Sec. Clinton for her connection to Wall Street Banks it's the banks are driving this rally. 

The incredibly influential roles being filled by current and former employees of Goldman Sachs both in leadership and behind the scenes has pushed the shares of Goldman up 30% in a MONTH adding $20 billion to their market cap.  Goldman Sachs alone accounts for roughly 1/3rd of the 1300 point move in the Dow Jones Industrial Average since the election.  So, I guess it's less about draining the swamp and more about filling the swamp with guys who drive cars that are worth more than your house.  If you add in JP Morgan Chase and Caterpillar more than 1/2 of the gain of the Dow is attributable to just those 3 companies. 

So here we go again on the subject of computerized trading.  Today, the markets were up, but nothing was out of the ordinary until someone decided to pull some of the liquidity from the market.  The best way to think of this is to say that it's like going to the grocery store for bread and when you get there they take 100 loaves off the shelf and only leave 3 loaves on the shelf.  Well, those loaves will suddenly go up in price if 100 people rush to buy bread.  That is essentially, what happened today, the market dried up for some unknown reason at 1:31pm and sensing that the market could be easily moved, a computer bid for $3 billion worth of futures in 1 second.  This is by far the largest trade I've seen in recent memory.  Again, thinking about our bread analogy, there were very few stocks for sale and a MASSIVE order hit the market as that exact moment conveniently causing panic buying and rising prices.  This spurred more automated buying and it was off to the races. 

Here are some of the best things I've seen in the past week:


US Government Debt to GDP:

Think what was happening in the mid-1940's: we were emerging from the Great Depression, fighting WWII, and we were about to experience the greatest period of innovation and growth in our nation's history.  If Trump's spending plans are real it is very likely our debt to GDP will exceed the highest levels experienced since the end of WWII and the ramifications of that for everything from the dollar to interest rates is significant.

Electronic control of the markets:
The key quote in there is often ignored by the financial media that want you to think the stock market is still that big marble building in lower Manhattan.  100 companies with 5,000 servers control 90%----90%!!!!--- of the Nasdaq market.

The total value of US corporations has now exceeded the dotcom bubble.  I can't get this chart due to copyright restrictions, but it shows the value of all stock and debt of US companies and the run over the last month has now pushed us into uncharted territory.

This is very telling - the US 10 year note (that has been rising in yield) is currently yielding 0.5% LESS than it was in March of 2009 --- the absolute bottom of the financial crisis.  I can hear you all saying, "what??". Well, the yield on the 10 year note should go up as people believe the economy recovers and they stop seeking safe assets like US treasuries.  So, at the bottom of the Great Recession the Dow hit 6,500 and the yield on the 10 year note was roughly 2.9%.  Today, the yield is about 2.4%, indicating even greater fear and risk in the global economy today than in March of 2009, but the Dow is at 19,500.

Finally, this is the overall chart of market psychology.  I believe we're nearing peak Euphoria (we can get sillier from here, see Feb/Mar 2000 for reference), but I think by January we could be in the Denial phase.


Tuesday, November 22, 2016

And you get an All-Time High and you get an All-Time High and you get....

Remember the famous Oprah episode "And you get a car, and you get a car and you get a car...."?  Well, that's the way the market has acted ever since the election 2 weeks ago.  Everything is perfect in a world that was apparently falling apart just two short weeks ago, so of course all four major US stock indexes hit new record highs yesterday.  If you want the same old tired explanation of why this happened you can click over to CNBC but I'll give you an alternative view because apparently alternative news is all the rage these days.

1) Everyone expected a crash with a Trump election so obviously the opposite had to happen.  If there is one consistent theme I've discussed here over the past 8 years, it's that when everyone expects the market to do one thing it does the exact opposite.  While we did get an immediate crash in response to the election results, the overnight buyers turned the tide and that let the computers run amok.

2) The stock market has become a full game simulation. This is another topic we've discussed before, but in the past you would have looked at various policies of Mr. Trump, assigned a likelihood of their implementation and then discounted that back 3-5 years to assign a value to those policies.  So for example, you might say, if every project proposed were enacted it might boost Caterpillar sales by 8% in 2020 which could increase earnings by 5%-10% so maybe the stock could go up 5-10% over the next 4 years.  Instead, the computer run 50,000 of these scenarios overnight and decided that Caterpillar should go up 8% in two days based on some hope of future business opportunities (and ignoring the fact that year over year sales at Caterpillar have now fallen for 47 straight months).

The Trump rally is based on the assumption that he will get Congress to approve more shovel-ready infrastructure projects.  While I question how many more projects like this even exist (it seems like every bridge from Canada to Washington, DC is under construction), remember that we are running a $1 Trillion deficit annually.  Debt levels are at almost $20 Trillion and Trump wants to SPEND MORE and cut taxes (ie, bringing in less revenues).  The best case scenario I've seen is that in Year 1 we'd have a $2 Trillion deficit under the Trump Administration.  Can you assure me that all of the deficit hawk Republicans that railed against President Obama's spending are now going to endorse going even more in the red for the sake of getting some pork in their district?  Maybe, but I'm not convinced.

The second part of this equation is the previously discussed Brexit. The computer based traders need to only look back 5 months to the reaction of the markets after the Brexit vote to find their path.  You can basically lay the chart of the US stock markets on top of the UK markets post-Brexit and you'll see the exact same pattern.  Massive selling followed by panic buying.

3) Is the market really rallying? This is one of the least reported stories but so far the vast majority of gains in the market have been concentrated in the Financial sector.  Wait, didn't Trump get elected as an anti-Wall Street guy?  Not according to the markets which seem to love the concept of less regulation (though I don't know how they could get less regulated), while ignoring things that are going to really cut into earnings like a rapidly rising US dollar and jumping interest rates.

4) No one is noticing interest rates. Despite all of the euphoria over the stock market it's worth noting what's happening in the bond market.  Since June the 10 year bond (upon which all mortgage rates are based) has jumped from 1.35% to 2.25% with about half of that jump hitting post-election.  Mortgage rates have moved up about 40 basis points in the past three days.  To put that into context if you wanted your mortgage payment to remain flat on Thursday of last week you could have bought a $200,000 house.  Today, you could only pay $190,000 - a 5% decline in 3 days. 

Interest rates took a much needed breather yesterday but like every other market they are run by algos trading off charts and the charts for interest rates are very scary.  If we break through a couple of key levels we could looking at mortgage rates in 5-6% or higher range in very short order (every 1% increase in interest rates knocks roughly 10% off the value of your house --- very rough math).  I know none of my readers would say this but about 98% HGTV viewers would say "Wait, what? Housing never goes down in value!!!".  Interest rates remain incredibly low, even at 4% on a 30 year mortgage but if that changes and we revert to historical norms expect many people that bought more house than they could afford to really struggle.  See 2008 for what happens next.

Consider just one industry like farming - the nation's farmers have debt to income levels last seen in the 1980's as farmers have built and expanded in an effort to gain efficiencies of a larger operation.  That's okay if interest rates remain low, but if they start to spike and farm income levels remain low, you're going to see another wave of farm bankruptcies in the coming years that echoed what happened in the 1980's.

5) King Dollar is on top again.   This one made me LOL - One media outlet shouted this headline last week "America is great again as US Dollar hits 14 year highs".  You might want to ask the CEOs of IBM, Ford, Apple or Google what they think of a stronger US dollar.  It makes our products much more expensive in the rest of the world and makes imported substitute goods even cheaper here in the US. The net result of this will be more companies moving jobs overseas and/or declining earnings for US companies unless the markets reverse.


Have a great Thanksgiving and remember to fill your plate with veggies :)

Wednesday, November 09, 2016

The World Turned Upside Down

I guess now I know why I never went into political prognostication.  I'll leave the political analysis to others because they've done such a great job at it in recent months (sarcasm).

However, regarding the markets, the moves have been very predictable.  At around 8pm last night it was clear that something was going on because the markets were turning red fast.  As the night wore on the losses for the markets continued to mount because Wall Street really was rooting for gridlock.  No movement on trade, healthcare, taxes, social security, etc was a positive in Wall Street's mind, but that all changes with a Trump presidency and a Republican controlled Congress.

However, after plunging to their aftermarket limits in the early going last night (down 5% across the board) a relatively small bid has moved markets back to green at the open.  The model here that everyone is obsessed with is Brexit where a swift sell-off was met with steady buying by the computer algorithms and that seems to be the way things are playing out right now.  However, I'd caution that there are many, many differences.  The most notable of which is that the Brexit will happen in phases over many years.  President Trump takes office in two months.  The market has no clear understanding of what his relationship with Fed Chair Janet Yellen will be like, what industries will be impacted by the potential repeal of Obamacare, how reduced military spending will impact us domestically and abroad, how he would finance the infrastructure spending he plans, etc.

The good news is that we finally have something to debate in the markets again.


Monday, November 07, 2016

The race to the bottom

The computers have anointed Secretary Clinton as the next President based on the latest FBI memo sending stocks soaring all the way back to their levels from a week ago.

I typically resist the urge to comment on political matters because there is no winning in that arena.  However, I did want to share an article written by another trader on the state of America on 11/9/16.  It's a sobering, yet accurate depiction of the challenges we face and our inability or unwillingness to face those challenges.  We've become a nation of can kickers who allow ourselves to be distracted by the latest social media announcement or random reality TV show (I know this doesn't apply to my readers - I'm talking about the general populace :) ).

I was struck when watching a documentary about the election of 1992 on how Ross Perot was obsessed with our staggering national debt which at the time was $4 Trillion.  A quarter of a century later it sits at $19 Trillion and we're adding nearly a trillion a year to that total.  Using the Federal Reserve's own projections, this debt is expected to cost the US almost $800 billion in interest by 2021.  This assumes that we are able to manage interest rates during this period which is a huge assumption.  If interest rates move more than expected we could easily see our annual interest cost exceed $1 trillion/year or probably 25% of our operating budget. 

Anyway, take 5 minutes that you might otherwise spend watching MSNBC or FoxNews breakdown early voting in some random Ohio town and read "Hitting Rock Bottom".

With regard to our local races, I don't believe anyone is really addressing the big issues.  However, I'll say that I find it very ironic that surrogates for our current Congressional Rep are attacking her opponent for "Only recently moving to the district and own 6 'expensive' properties out of state".  I say it is ironic, because our Congressional Rep has really not lived in our district since high school, but this sums up the state of politics in America today.  Confuse and attack rather than discuss long-term solutions.

Finally, a prediction:
Secretary Clinton wins the Presidency and names NY Senator Gillibrand to become Secretary of State.  Rep. Stefanik runs for the Senate to replace Senator Gillibrand in a special election in 2017.