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07262017 July 26, 2017

Posted by easterntiger in economic history, economy, financial, markets, oil, stocks.
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Current Positions  (No Changes)

I(Intl) – exit; S(Small Cap) – exit; C(S&P) –exit

F(bonds) – up to 100%; G (money market) – remainder

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Weekly Momentum Indicator (WMI) last 4 weeks, thru 07/26/17

(S&P100 compared to exactly 3 weeks before***)

-13.07, +2.39, +18.35, +26.39

With the very slow market action of the past few months, I like to begin each report with a memory refresher to the environment that was in place at the previous report.  Let’s look at the TRUE reflection of change since late April, and further.

The S&P500 was UP on it’s open on the 24th, but, only a half-point below Friday’s high.  So, why is there so much talk about UP for the year, yet, so little movement in general, and, often for many days at a time?

Here is a chart of the average change, in points for the S&P on top…. .  Notice that through all of March, April & May, there was a net negative from March 1st.  Total change from March 1st to July 6th was 1%!!

 

 

and, for the Russell 2000/S Fund since March 1st.

 

Even with an S&P500 all-new ‘all-time high’ early Tuesday, the change since March 1represents an average of 1/2 point/day.

 

 

 

 

The small caps are averaging less than 1/4 point per day…since early DECEMBER!!

And, likewise on the Dow Jones Industrials with SEVEN new all -time highs since June 19th.  Yet, averaging the difference between the June 19th all-time high and the July 25th, the latest all-time high, is only 3.25 points per day.  So, be very careful of reading too much into the repetitive ‘all-time high’ hype in the financial news. These half-point per day increases won’t compensate you in an average correction, or, after years of just normal inflation adjustments, and, particularly in view of the RISKS that are presented to your portfolios as you WAIT on the next few points.

Screen Shot 2017-07-25 at 11.42.18 PM

With this reflection on how ‘easy’ it is, supposedly, to make money in the first half of 2017, it appears that the Wall Street Journal recently noticed something is different this time. Three major stock-market benchmarks in Asia, Europe and the US have avoided pullbacks this year, commonly defined as -5% declines from recent highs.

The last time the S&P500 <SPX> slumped at least 5% was in the aftermath of the June 2016 BREXIT vote — marking a 273-day streak that’s the longest since 1996, according to data compiled by Bloomberg. The last time equity markets went this deep into the year without all three of the global benchmark indexes suffering at least -5% pullbacks was nearly a quarter-century ago, in 1993.

Never in at least the past 30 years have all three indexes – the S&P500, MSCI Europe and MSCI Asia-Pacific ex-Japan–gone a calendar year without falling at some point by at least -5%.  In good years and bad, markets tend to fluctuate wildly, with stock indexes often falling by double-digit percentages before bouncing back. That hasn’t been the case this year, another reflection of the historically low volatility that has gripped the world.

 

The CBOE Volatility Index, or VIX, finished Friday at it’s lowest since 1993. The chart above shows that this years average is the LOWEST IN HISTORY.

It has hit ALL-TIME LOWS every day this week, including a level of 8.84 on Wednesday, 7/26. Extremely low volatility conditions tend to produce very high levels of complacency, and unknown risk, into market participants, who aren’t prepared for the ‘what happened’ moments that approach. Fluctuations in trading volumes are nothing new on Wall Street, but the levels of volatility are the lowest in history.  You can view low volatility directly in terms of the 1/4 and 1/2 point average gains on major indexes.  You must view extremely low volatility as the ‘calm before the storm’, rather than to greet it with a feeling of comfort or complacency, particularly when they accompany all-time price highs.

How are the market gurus dealing with this challenging environment?

Legendary investor Carl Icahn is 150% net short of the market. The net short position means Icahn’s firm is betting against 1.3 shares for every one share it’s betting on. In other words, Icahn’s investment portfolio will generally gain value when prices decline, and vice versa.

86-year-old former Quantum Fund manager George Soros, who retired from fund management in 2011, has come out of retirement, sensing a critical opportunity approaching for major stock declines.

Seth Klaman is CEO & Portfolio Manager of one of the largest hedge funds, the $30b Baupost Group in Boston. He believes that “investors are underestimating risk and the insufficient margin of safety.” His book ‘Margin of Safety’ is a favorite of Wall Street investors. http://www.safalniveshak.com/wp-content/uploads/2013/05/30-Ideas-from-Margin-of-Safety.pdf

Quite clearly, there is substantial risk during these long periods of time, regardless of the overall measure from the election, or, from year-to-date.  It is this measure of more risk to reward that keeps me away from equity markets under these conditions.  I’ve seen an image of your being given just enough UP, over long periods of time, with the appearance of little downside risk, to guarantee ‘complacency’ in these risky market conditions.  DO NOT FALL ASLEEP!

How are institutional investors preparing for their futures during these deceptively calm waters?

First, institutional cash levels are at multi-year lows.  There just isn’t much cash left to put back into the markets to drive them higher.

 

Secondly, institutional buying is largely offset by proportional selling to lock in profits from share appreciation over the past 6-7 years.

Buying/Holding/Selling on S&P500

SPXGuruTrades

 

 

 

 

 

 

 

 

Buying/Holding/Selling on NASDAQ 100QQQGuruTrades

 

 

 

 

 

Note the prevalence of more selling in the major stocks, last year, with scant buying.  They are anticipating lower prices. Most of the buying, driving positive earnings, is as a result of financial engineering accomplished through  the result of stock buybacks, since earnings are derived based upon a smaller base of remaining shares outstanding, after the buybacks.


And in what few areas where this momentum is taking place, the appearance of true buying is also deceptive.  INSIDERS include corporate officers, executives, board members, etc.

Why are they selling so many more shares than they’re buying????

Apple

Net Insider Selling;  P/E Ratio of 17.92 (P/E ratio is share price divided by earnings per share, or by market cap divided by net income; market cap is value of all of the shares totaled together)

Apple has 3 BIG concerns (1) declining gross margins, (2) declining operating margins, and, (3) asset growth is faster than revenue growth.

AAPLInsiderSellsBuys

Warren Buffett/Berkshire Hathaway appears to be supporting the market all by themselves. They’re holding 186,716,758 AAPL shares. The next 10 holders only have another 65,617,772 shares, total. Everyone else is reducing, making small buys, or, already sold out. Apple is the #1 company in market cap, over 3 times Visa, or, WalMart, or GE, or, Bank of America.

Amazon.com

Net Insider Selling; Shiller P/E Ratio of 197.65!!!

Amazon is also getting less efficient, with asset growth moving faster than revenue growth.

AMZNInsiderSellsBuys

Google

Net Insider Selling; Shiller P/E Ratio of 34.23

GOOGInsiderSellsBuys

The tech sector has been virtually tilted upward by the flooding of a handful of big-name stocks, which are also represented in the S&P500 to a lesser degree.

According to a FactSet analysis, while there have been massive inflows into ETFs in 2017, the bulk of that money has gone into a vanishingly small part of the industry. The vast majority of funds have been left to essentially fight over the scraps.

The most popular ETF this year, in terms of flows, has been the iShares Core S&P 500 ETF IVV, +0.23% which has taken in $18.51 billion. Two other iShares equity products—the iShares Core MSCI EAFE ETF IEFA, +0.13%  and the iShares Core MSCI Emerging Markets ETF IEMG, -0.25% —rounded out the top three, amassing $13.1 billion and $11.3 billion in inflows, respectively.

This trend also held on the fixed-income side, as the iShares iBoxx $ Investment Grade Corporate Bond ETF LQD, -0.59%  and the iShares Core U.S. Aggregate Bond ETF AGG, -0.36% topped the list for inflows, taking in a combined $15.1 billion.

It has been widely documented that exchange-traded funds (ETFs) set a torrid asset-gathering pace in the first six months of 2017, with U.S.-listed ETFs hauling in $245 billion in new assets. Fixed income and international equity ETFs were primary drivers of the avalanche of new assets flowing to ETFs.

Year to date, three bond ETFs are among the top 10 asset-gathering ETFs. Those funds are the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), the iShares Core U.S. Aggregate Bond ETF (AGG) (a valid proxy for the F fund) and the Vanguard Intermediate-Term Corporate Bond ETF (VCIT). As highlighted by the massive inflows to LQD and VCIT, investors have been searching for higher-yielding though still conservative options for U.S. government debt.

Another prominent theme has been investors’ thirst for ex-U.S. equity funds, which has been stoked in large part by the notion that, with the bull market in U.S. stocks aging by the day, domestic equities are richly valued. “Investors deposited over $20 billion into international ETFs in June and over $80 billion through the first six months of the year – marking the best start to a year ever for international funds,” said SSgA.  The roughly 10% surge in the I fund between February and June is reflective of this short-term event.  This parallels  the +3.29%/+5.25%/+6.6%/8.2% increases in the French CAC, British FTSE, German DAX, and Swiss market indexes, respectively, year-to-date.

How else do we reconcile so much of the bullish news on ‘strong earnings’ on the S&P500?

First, almost half of the earnings for the S&P500 come from just one sector, energy!!

While the S&P 500 earnings outlook looks impressive mainly due to a bounced-back energy sector, technology and financial services look impressive as well. But they depend on energy, too.

If oil prices fall enough to hurt the energy sector, some producers will miss loan payments. That would be bad news for the lenders in the financial-services sector.

Likewise, energy companies won’t buy as much hardware and software if they have to cut back on drilling activity. Not good for some technology companies.

Bottom line: the bull market in US stocks will be on even shakier ground if oil prices dip below $40 again. In any case, earnings growth probably won’t continue at current rates unless oil prices climb higher.

The FED

Fed Chair Janet Yellen said just this month that the Fed will be kicking the dollar ($USD) off a cliff.

 

 

 

 

 

 

 

She didn’t use those words, but the words she did use weren’t all that different.

But first a little context…

The fact is that the $USD has been falling steadily throughout 2017. At this time of this writing, it was down nearly 8.5% year to date. (The dollar should be ‘strengthening’ during rate increases, not falling. There is no confidence in the Fed’s moves to tighten monetary policy.)

The International Monetary Fund (IMF) just issued a warning, reflecting the weakness of the dollar to other currencies.  The IMF also noted that “the U.S. Dollar has depreciated by around 3½ percent in real effective terms since March,” while the Euro was strengthened. Countries such as Germany, France, Italy and Spain all saw growth projections increase. China’s growth was expected to stay at 6.7%. They also placed uncertainty in U. S. political leadership as one of their criteria for their warning.

“The major factor behind the growth revision, especially for 2018, is the assumption that fiscal policy will be less expansionary than previously assumed, given the uncertainty about the timing and nature of U.S. fiscal policy changes.”

The four largest central banks now have a total of THIRTEEN TRILLION dollars on their balance sheets, nearly TRIPLE their balances from the bottoms of the last financial crisis in 2009.  Anyone who has believed during the past 8 years that our markets are on strong financial footing, worthy of full confidence and bullish appetites, is sadly out of touch with the reality of the TEMPORARY magic of electronically created money.

THERE IS NO FREE LUNCH!

THE PARTY IS NEARLY OVER!!

IT CARRIES INTEREST PENALTIES!!!

IT RESTRAINS GROWTH!!!!

THIS MONEY MUST BE WITHDRAWN!!!!!

In a Fed statement in early July, the following stunning statement  was issued.

In the assessment of a few participants, equity prices were high when judged against standard valuation measures.

That is an incredible statement.

It tells us:

1)   The Fed is openly discussing stocks prices.

2)   The Fed is openly discussing whether stocks are in a bubble (when prices are high against standard valuations).

3)   MORE THAN ONE Fed member believes that stocks ARE in a bubble.

On June 27th, ECB President Mario Draghi raised the possibility of reducing their 2-year quantitative easing support, totaling €60 billion/month, before the end of the year. An Q2 annualized 3% growth rate in the Eurozone gives Draghi the room to take his foot off the pedal.  This was the fastest pace in a decade. Of the €4.25 billion on the ECB balance sheet, €2.25 billion have been added since March ’15.  Most of this liquidity was channeled into the high-flying NASDAQ, led by Facebook, Apple(!), Amazon, Netflix, Google, and Microsoft, as well as Alibaba and Tencent pushing the Hang Seng index to a recent 2-year high, and pushing Samsung in Korea. With this combination from the ECB, the Japan Central Bank, as well as the Swiss National Bank, the NASDAQ has doubled in value from the post-Brexit lows in June ’15, in the face of 3 Fed rate hikes, and threats to reduce the access to liquidity by reducing the $4.5 trillion balance sheet.  A clearer signal on the ECB’s plans will emerge when Draghi addresses the Jackson Hole, Wyoming financial summit in late August.

Central Bankers are absolutely terrified.

In the last month, both Fed President Janet Yellen and ECB President Mario Draghi have issued somewhat hawkish statements, only to turn around within 48 hours and walk back their comments.

Where has this nearly decade-long Fed support to the market left Main Street?

image1(1)

Study shows 1/3 of Americans not recovered from Great Recession. ? Still ok. After all, equity averages up > 3 times since March 2009.

However, even Main Street is exhausted.

Notice how this chart shows market peaks, shown by the S&P 500 index on the right, at nearly the same times that household percentage of ownership reaches historical peaks, shown on the left.  We are now at 30%, slightly higher than the previous market top in 2007, and just about 6% under the tech bubble peak in 1999/2000.

Stocks look expensive by multiple measures, and they have for a while now. But that hasn’t stopped major indices from achieving new highs as market fundamentals have looked more than capable of withstanding higher prices.

That all could change as the stock market swells to a size rarely seen outside of 2000 and 2008, just before the two most recent stock market crashes, says Deutsche Bank.

Rather than assessing the stock market using more traditional methods such as price-to-earnings ratio, Deutsche is instead looking at equity market cap as a percentage of gross domestic product (GDP). And it attributes the recent rise in historical highs to a shift in monetary policy.

While global markets benefited from a “long period of post-global financial crisis accommodation,” that’s changing as central banks like the Federal Reserve move to tighten.

It’s also important to note that Deutsche’s measure of market cap as a percentage of GDP also spiked to current levels in 2015, yet the market didn’t become embroiled in a crisis. This is because the Fed didn’t tighten to the degree that was expected, waiting until December of that year to increase rates, and then waiting another full year to hike again.

The situation showed that swift central bank tightening is a key component to unwinding an equity bull market. And this time around, stock bulls may not be so fortunate, with the Fed signaling a clear path of rate increase after already hiking multiple times.

THE CURRENT US TOTAL MARKET/GBP RATIO is 135.3%.  This is closer to the historical maximum than in any other industrialized nation right now.


This projects future returns that among the lowest in the world.

And it’s not just US stocks seeing their market cap swell as a percentage of GDP — Japan and the UK are getting in on the action, showing its a worldwide phenomenon.

 

This is a very uncomfortable global picture.  It’s similar to that of a number of pressure cookers all running at once, all inter-connected.  They must all function properly, or, they’ll all ripple their problems from one to the other.

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