The Economy: The news this week has been all about Q2 corporate earnings … with a nod to the Fed’s 2-day meeting and announcement … and of course the Circus on the Potomac. Earnings have been strong with most beating expectations. The FANGS have led the way. Whether earnings justify stock valuations is up to you. Goldman Sachs thinks the market is overvalued with the market PE at 22.1 versus a 10-year average of 16.7. The other side of the coin are those saying, “This time it’s different.” The Fed’s 2-day meeting was a non-event. On Wednesday they announced no change in interest rates with a hazy comment about normalizing the balance sheet. In short the Dovish Fed is firmly committed to doing nothing. The Circus on the Potomac has continued its dazzling performance in the Theater of The Absurd. The Republicans were given a mandate to do something but seem to be incapable. Amazing. The Donald is moving closer to firing Apprentice Jeff Sessions. Sean Spicer is toast and The Mooch is sharpening his knives for future victims. There are no Summer Doldrums.
Food for Thought: As the poker player says, “Read ‘em and Weep.”
The Overvalued Market
This Time Is Different
Einhorn down 4% Q2
David Stockman on Peak Bull
A Bearish Citi Warns
Passive Investing poses risk
Music of the Week: Don Henley’s “Building The Perfect Beast”
The Economy: Happy Holidays! It’s all good. Home prices up 5% year over year. The U.S. economy expanding at the fastest pace in 3-years. Consumer confidence far above expectations. On the near horizon: Votes in Italy and Austria that may see more exits from the EU. Expectations that the Electoral College will confirm the U.S. Presidential Election. Anticipation of a ¼% Fed interest rate hike in mid-December. Prospects that we’re on the verge of another leg up in equities.
Food for Thought: Holiday joy is offset by the aftermath of the election. Partisans on both sides have sharpened their knives and created their lists. Though Republicans have The Hill and the White House, no one is calling it a mandate with the popular vote having eluded them. However, Trump is a man of a different color; arguably the first Man on Horseback since Teddy Roosevelt. Obama has established the precedent of rule by Executive Order; bypassing the Constitution, Congress and the Courts. Expect this to continue; first with the unwinding of the Obama agenda and then with its replacement. As The Circus leaves town, it looks to be replaced by The Wild West Show.
Music of the Week: Elwood Brothers “Jazz Tannenbaum”
The Economy: Economic numbers continue to show a U.S. economy that is slowly expanding. The Fed’s Beige Book was released today and confirmed the “moderate growth” that has become the standard for the past several years. Observers continue to wait to see if growth will accelerate or slow. It’s now been 7-years without some type of confirmation that things are getting better all around. Instead of a sense of wellbeing, we have pockets of folks doing well versus groups who are still waiting for their lives to pick-up. In San Diego, outside of defense and tourism, our informal polling indicates that for most business owners and executives “things are flat; about like they were last year.” Overheard in a restaurant yesterday was the comment, “I don’t think this economy is doing as well as we’re supposed to believe.” Waiting for Godot.
Food for Thought: The proposed Chargers Stadium continues to polarize San Diego voters as the election approaches. One wag was heard to comment that, “I have a problem with billionaires asking for public assistance, so that millionaires can play a game that rich people watch.” Other business owners have been heard to ask, “When do I get my handout from the city for my business?”
Music of the Week: Charlie Byrd’s “The Best of Charlie Byrd”
It flies and it drags. It’s precious and it’s wasted. It’s on my side and it’s passing me by. We have too much of it on our hands and not enough of it in the day. It’s endless and it runs out. It’s a gift and it’s a thief. It heals all wounds and we have to kill it. Time is a shape-shifter. Time Can’t keep its story straight. The Kentucky Derby is the fastest two minutes in sports, and a two-minute penalty killin the Stanley Cup playoffs lasts a century, but time claims they’re both 120 seconds. “Time” by Steve Rushin Sports Illustrated.
The Economy: It was a week of ugly numbers. The ISM Manufacturing Index came in at 48.2 indicating contraction. Likewise the ISM Non-manufacturing Index reported lower than in December. Construction spending posted its first decline in 1 ½ years. U.S. Durable Goods orders were down. Oil continued its fall, closing down $2.60/barrel from last Friday. January employment down. Foreign markets are also ugly. Chinese manufacturing contracted at the fastest pace since 2012. The Bank of England cut global growth forecasts. Super Mario scrambled to reassure markets with a review of QE in March. In many countries there are negative yields out to 5-years. We see talk of further interest rate hikes by the Fed as fanciful. The carnage in stocks continues with some of the most popular names getting hammered down from their highs: Amazon (AMZN) down 28%; Apple (AAPL) down 29%; Netflix (NFLX) down 37%; GoPro (GPRO) down 89%. But the “1929 Look Alike” award goes to LinkedIn (LNKD) down 44% overnight. Self-medicate with Super Bowl 50 on Sunday.
Food for Thought: The stock market correction was long overdue. Though painful it’s been an orderly move down without signs of panic. We follow a number of indices which show how different sectors are performing compared to the major averages. From their 2015 highs, the following indices are down as follows (rounded): S&P 500 down 12%; NASDAQ down 16%; DOW down 11%; Russell 2000 (Small Caps) down 24%; Biotech Index down 36%; Semiconductor Index down 21%. Year to Date for 2016 the same indices are down as follows: S&P 500 down 9%; NASDAQ down 15%; DOW down 8%; Russell 2000 down 15%; Biotech Index down 32%; Semiconductor Index down 13%. Using August 19, 2015 as the date this correction began, we may have another month to go. Hang onto your hat and contact us if we can help you, your family or friends.