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.