Monday, February 13, 2017

Back to basics

I joked a couple of weeks ago that the new Monday morning trading strategy seems to be -

1. Did we start World War III over the weekend?

2. If no, then buy every stock......

The bar is set incredibly low right now for the market's expectations for leadership in Washington so every day that the world doesn't explode seems to be a positive.  I'll spend a little time today reviewing just how silly the markets have become.  As a reminder, the argument that "well, it was worse in 2000" is crazy because those markets were so overstretched that comparison to them is laughable.  However, while this recent run to new highs has been accompanied by none of the normal hysteria, it is becoming nearly as extreme.

1. Apple:  This will be a consistent theme - notice how the stock has soared almost 50% (the green line), while earnings (you know the reason why you allegedly buy a stock) have tumbled by more than 15%.
Photo published for Apple Stock Soars Above Record Closing High  

2. This is sort of wonky but as the stock indexes are rising, fewer and fewer individual stocks are actually trading above their 50 day moving averages.  This means the advances are concentrated in a few names and the "new highs" are fragile. 

Another warning sign is the lack of trading.  Many traders are complaining that they could be sleeping in until 3:30pm because that's when the trading day actually seems to start. The number of shares traded on the NASDAQ is at its second lowest level in the past two years and is a sign of complacency that often proceeds a market top.

3. IRS receipts are signaling something.  While companies increasingly report "proforma" adjusted earnings, one area where they do not make up the data is on their tax returns.  Over the past 12 months corporate tax receipts are down almost 12%.  When tax receipts fall broadly it is an indication of weakness in the economy and when they fall on a 12 month rolling basis (as they did in January) it has signaled a recession every time going back to 1970.  But this time is definitely different, right?

While we are on the subject of recessions consider the following indicators -
a) Gross private domestic investment indicates we are in a recession right now.
b) Lending standards for small and medium sized businesses have tightened for 6 straight quarters.  that typically only occurs in recessions.
c) there has also been a tightening of lending standards for consumers
d) consumer bankruptcies rose year-over-year for consecutive months for the first time since 2010.
e) Oh, and gasoline demand is implying a 6% decline in consumer spending.  That's recessionary levels.

But it's definitely different this time.

4. Last February when the stock market was saved from collapse by a miraculous Central Bank meeting there were about 27% of investing gurus who were bullish.  Now, that stocks have jumped 28% in the past year, 63% of gurus are bullish.  Hmm, I'll let you draw your own conclusions.

One final observation on the speed of the markets today.  In 2000, Goldman Sachs employed roughly 600 equity traders who were buying and selling stocks for the firm's clients.  This human intervention slowed the decline of stocks while the dotcom bubble burst.  Today Goldman employs 2, yes 2, traders and a team of 200 computer engineers.  With 50% of trades today coming from computers, the speed of the next move, up or down, will be unlike anything we've experienced in the past.


* One final note - this isn't a political commentary.  I predicted back in the fall that no matter who won the Presidential election the US had a 40% chance of slipping into a recession in 2017.  I think those numbers still hold true today but I might increase the odds of recession slightly.

Friday, February 03, 2017

Jobs day

I'll offer up a bit of analysis that I've yet to hear anywhere re: the 227k jobs created in January.  A large portion of the "jobs" created in the report are "modeled jobs" based on samples.  Basically, they are a creation of someone working on an excel spreadsheet. 

Included in those models are seasonal adjustments which do things like add more jobs in the winter months even though the jobs don't exist because you want to smooth out the overall growth.

So while the real numbers might look like this:
Jan:     50
March: 75
June:     100
Sept:      80

When you multiply the data by your seasonal adjustments

Jan =     50 x 2      =    100
March =75 x 1.35 =    101.5
June =   100 x 1.03 =   103
Sept =    80 x 1.3 =      104

Ah, isn't that beautiful? Again, these aren't real numbers but they show the effect of seasonal smoothing. So, the seasonal factors have been built over many years where we have observed the impact on job growth change with the seasons.  However, we just had one of the warmest January's in 50 years and very little disruption to travel due to weather.  This probably made our January jobs data look a lot more like a March or April jobs number.  However, when you apply the January seasonal factor you get - boom!!! 227,000 jobs.  If and when we have numerous storms in a month, the jobs data is impacted and the first line out of everyone's mouth is "Well, the weather impacted the report...".  The truth is the weather can have a positive impact as well, but no one ever seems to complain about that.

I expect you'll see that number revised in the coming months but no one will notice if and when the revised numbers are released.


Wednesday, January 25, 2017

Woohoo!! Dow 20,000!! Do I hear 30,000? 40,000?

As you all know by now the Dow finally (after an agonizing 5 weeks of CNBC coverage) FINALLY closed above 20,000 today.  There will be a great deal of hoopla around that milestone, but remember

A) It's just a round number and it has no real significance
B) The Dow is a horrible measure of stock performance
C) Most of the Dow gain has come from the rocket-like performance of Goldman Sachs since the election.

Wait, that seems weird - didn't President Trump say "Goldman has TOTAL control of Hillary" 3 weeks before the election?  Why would Goldman be soaring after President Trump's victory?  Oh, that's right, he's stacked his cabinet with more Goldman insiders than Sec. Clinton could have ever imagined nominating.  Right or wrong, the belief is that what's good for Goldman will become gospel in DC over the next few years (well, even more so than it already is) and the belief is that will propel their earnings higher.

I struggle with all of the assumptions being made on Wall Street today.  It's no longer important that a company actually, you know, make money. 

However, if they can allude to the fact that in 2054 they might have a product that could sell 100,000,000 units at $10/unit the stock will soar $50 in 0.004 microseconds.  Obviously, that's an exaggeration but take the latest jump in stocks over the past two days.  It's been driven by the hope that maybe Congress in its eternal wisdom can identify the best way to spend $1 Trillion of your tax receipts (remember budget deficits which dominated the conversation 3 months ago??  Yeah, Congress seems to have forgotten as well). 

Again, with no clear understanding of who, what, where or when any of these projects would take hold, the stock market bid up every company even remotely associated with domestic construction. 

Caterpillar is a perfect example of this new paradigm.  Their earning expectations have fallen for 24 straight months.  Year over year sales have fallen for 49 straight months and yet.....their stock is basically at 6 year highs.  Why?  Hope that maybe, just maybe, they'll get some of that sweet government cheese disguised as "infrastructure spending".


So, here we sit - the Dow, S&P and NASDAQ all at record levels, while earnings flat-line.  This is the great untold story of the past 3 years.  Since 2014 earnings have effectively gone nowhere (companies have used a combination of aggressive tax strategies and debt to buyback shares to boost reported earnings, but income has fallen flat) but people are paying more for the pleasure of investing in stocks.  At times like this, driven by what's called "multiple expansion" you have to be very careful because if the trend reverses (and it always does) you'll get multiple contraction and earnings declines.  However, why be a Donnie Downer, tonight it's all about the party and our stock market is driven by Alternative Facts.  So pop some Dom, light a cigar and party like it's March 10, 2000 because that's what it feels like to me.


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.