by phil - August 22nd, 2016 8:16 am
This is a great chart from Morgan Stanley (click for bigger view):
We've sat out the summer rally, for the most part, waiting for a correction that never came and now we enter the last full week of August and we have to consider whether to move some of our cash off the sidelines or to wait into next earnings before making commitments. Surely there are still bargains to be had and we'll be picking up stocks that are still in the bargain basement but I'm still not willing to chase the ones that are pressing the tops of their ranges – simply too rich for my blood.
We don't need to be "bullish" to make money. Our Options Opportunity Portfolio (OOP) has gained $5,000 since our last review on 8/5, which is 5% in two weeks (now up 86% for the year) – it has a very healthy mix of bullish and bearish positions and, of course, the bullish positions are our big winners AND we have a very healthy amount (50%) in CASH!!!
Our strategy has been to pick up bargain stocks over the course of the year like Micron (MU) last Sept, Natural Gas (UNG) in Oct, IBM in Oct, Gold (GLD) in Nov, Marvell (MRVL) in Dec, Disney (DIS) in Dec, Biotech Ultra-Long (LABU) in Feb, Oil (USO) in March, Apple (AAPL) in April, Twitter (TWTR) in April, GoGo (GOGO) in May, SunPower (SPWR) in June and Kate Spade (KATE) in Aug – so it's not like we haven't bought anything over the summer – just not much.
It's a very similar strategy to the one we use in our Long-Term Portfolio, over at PSW but with protective elements from our Short-Term Portfolio added in to make a single, well-hedged portfolio that began with just $100,000 last August. Our most conservative portfolio is our Butterfly Portfolio and that went into expirations up 180% in it's 3rd year – that one is also self-hedging and market-neutral.
by ilene - August 21st, 2016 11:32 am
Courtesy of John Mauldin, Outside the Box
There has been a monster debate going on in economic circles as we try to assess the reasons for Brexit/Trump/Sanders and the developed world’s rejection of the directions in which the establishment wants to take us. There are many explanations, which try to spin answers to fit the authors’ own economic or political views; but it all goes back to my thesis that the benefits of globalization, like the future, are unevenly distributed. Those who have been on the short end of the distribution curve are pushing back.
In today’s Outside the Box, Stephen Roach, former chairman and chief economist of Morgan Stanley Asia and now a senior fellow at Yale University's Jackson Institute of Global Affairs, tackles the issue of widespread and growing public dissatisfaction – and not just in the US – with globalization.
Roach distinguishes between Globalization 1.0 – the surge in global trade and international capital flows that occurred in the late 19th and early 20th centuries – and version 2.0. Roach notes that “In contrast to Globalization 1.0, which was largely confined to the cross-border exchange of tangible (manufactured) goods, the scope of Globalization 2.0 is far broader, including growing trade in many so-called intangibles – once nontradable services.”
Not only the scope but also the means and the speed of globalization are now far different than they were for most of the 20th century. But sadly, the economics profession and policy makers have failed to keep up with the sweeping global changes that have displaced so many workers here and abroad. I’ll be addressing this key issue in some depth in my upcoming book, but today let’s focus on Roach’s suggestions for improvement.
I don’t have much to say on the personal front today, and not even much time to say it. My computer crashed in Montana on Monday morning, and it is only this afternoon that I have more than an iPad to work on. New downloads and drivers are taking many hours to install, and there seems to be a constant stream of new ones needed. But we are getting there.
by ilene - August 20th, 2016 2:38 pm
Courtesy of Dana Lyons
Near-term volatility expectations are currently on a stretch of unprecedentedly low levels.
About a month ago, we began to take note of investor complacency creeping into the stock market. At the time, the major averages had recently broken out to all-time highs amidst strong breadth readings and favorable seasonality. Thus, such complacency, or optimism, was arguably warranted. As such, our take was that the positive price action and participation was certainly enough to override the budding excessive bullishness. We have seen that, in such circumstances, sentiment extremes can persist for an extended period of time before any negative consequences unfold. Indeed, the markets have continued to creep higher ever since, along with investors’ optimism. At this point, however, sentiment is getting to the point where it is a legitimate red flag, in our view. In fact, by one measure, the market has never witnessed a stretch of such investor complacency.
The measure to which we are referring is the same as that noted in the late July post above, and pertains to investors’ volatility expectations. As we wrote:
One way of using volatility to measure the extent of investor nervousness is by comparing near-term volatility expectations versus those farther out. For example, the VIX is actually the 1-month S&P 500 volatility index. Meanwhile, the VXV is the 3-month volatility index. Typically, the VIX will be lower than the VXV as there is less time in the near-term for volatility rises to occur. When investors get especially nervous (usually during a selloff), near-term volatility expectations can actually rise above those farther out, i.e., the VIX/VXV ratio rises above 1.00. Conversely, during times of complacency, the VIX will drop to relatively low levels versus the VXV; historically, under 0.80 may be considered complacent.
At the time, the VIX/VXV ratio had actually dropped below 0.78, a level it had only reached on 14 prior days since the inception of the VXV in late 2007. As we noted, such complacency can persist for a short while, especially amidst positive developments elsewhere in the equity markets. However, at this point complacency has extended beyond any historical precedent. Specifically, while just 14 days in the past 9 years (prior to July) had ever seen VIX/VXV
by ilene - August 19th, 2016 3:16 pm
Courtesy of John Mauldin
The last 20 years have brought great wealth to a few while most of the population was lucky to break even.
Whether you’re a member of the elite/protected class or one of the unprotected, it’s hard to deny this reality.
Household income is going nowhere.
Here’s an update of Doug Short’s household income chart:
Inflation-adjusted household income (blue line) in the US has gone nowhere in the last 16 years. Notice also that it kept dropping even after we came out of the last recession (gray shaded area).
Keep in mind, this is the median, not the average. Half of households earn even less than this amount. Worse, the inflation adjustment is based on the Consumer Price Index, which we know has understated the real cost of living for most people.
Is income flat because the economy hasn’t grown? Let’s take a look.
In the next chart, we have nominal and real (inflation-adjusted) GDP for the same period. Notice that in simple dollar terms the economy has roughly doubled in the past 18 years.
Not bad given two recessions, except for this fact. After you take out inflation, the economy has grown just a little more than 30%. This is roughly in line with 2%-a-year real GDP growth.
But wait, you say, the previous chart showed median income slightly down since 2000. As Master Po on the TV series Kung Fu would say, “Ah, Grasshopper, you must look deeper.”
If you do, you’ll see that GDP growth on a per capita basis (which accounts for population growth) is less than 17% since 2000. And it’s less than 2% since the beginning of the Great Recession.
In chained 2009 dollars, per capita GDP was $43,935 in Q1 2000 vs. $51,090 in Q1 2016. So the economy grew over 16% in total, but most households saw little or no income growth.
Average household income has taken off for the top 10%
Here’s another chart, from Sydney-based Minack Advisors.
by phil - August 19th, 2016 8:32 am
The chart on the right says it all – this is what $10Tn of stimulus in the past 7 years has bought our Central Banksters – a stock market that says things have never been better to a population who's impression of their own financial health has rarely been worse.
Hopefully the drop in productivity is merely a correction off the fantastic run we've had for the past 5 years, with a 50% increase since 2011 now paired back to a 33% increase but still very good. Unfortunately, wages have not kept up at all and that's been hurting Consumer Sentiment and making it very hard for the economy to gain any real traction – no matter how much money the Central Banksters thow at their friends.
Of course, if you are a business owner, you are loving this and there is, of course, no better way to make sure your workers keep their grubby little hands off your proifts than to vote Republican as the GOP has been more than 5 TIMES better at keeping a lid on wages than the Democrats and, if you take out the well-deserved 900% increase in CEO and management wages over the same period – you'll find that the Republican party has TAKEN money from the workers and distributed to those of us who created those jobs, on our own, without any help from anyone, ever…
This has, unfortunately, left us with a lot of whiny poor people but plans are being drawn up at GOP headquarters to deal with that as we speak. Those of us in the Top 10% only collect 48.2% of the income each year and that means there is room for us to get 51.8% more of the money in this country so don't be complacent – get out there and SQUEEZE the bottom 90% until more money comes out!
by ilene - August 18th, 2016 9:20 pm
The simple chart below from the American Enterprise Institute beautifully illustrates the absurd inflation of college tuition and textbooks over the past 20 years. In real terms, the cost of college has effectively doubled over that time period. Now what would cause such massive inflation? Could it be our government tripping over itself to provide cheap student loans for children to spend on vacations, iPads and kegs (i.e. "college"; see "What Student Loans Are Used For: Vacations, iPads, Kegs, Entertainment"). Or, per the Daily Caller, perhaps the issue is administrative bloat at our institutions of higher education:
The exact reason prices have increased so much has been hotly debated, but one critical factor at most schools is administrative bloat. While student to faculty ratios have remained relatively steady over time, the number of administrators and other non-teaching staff has exploded at schools across the country.
But we don't want to stress out our young Millennials too much. We're quite sure the debt burden associated with your $200,000 anthro degree will be socialized very soon.
by phil - August 18th, 2016 8:27 am
Thank you Mr. Wilson!
That's right, we can blame Woody for this mess that has devalued our fine currency by 5% (so far) this year. Yesterday, we got a peek behind the curtain at the Fed through the minutes of their July meeting which, frankly, were barely distinguishable from their Jan, March, April or June Meetings and will not likely vary much in Sept, Nov or December either but that doesn't stop the Financial Media from treating these monthly meetings and the minutes of the monthly meetings (16 times a year!) like they are some kind of Earth-shaking revelations – EVERY SINGLE TIME!
Of course, the Fed would never say "we're going to raise rates 0.25% in September" even though it is August 18th and you would think they would know by now but where's the fun in telling people your plans? It's so much more fun to watch them run around in circles trying to interpret all the hints you drop along the way. That's why, in addtion to 16 meetings and minutes, we have had over 200 Fed speeches this year – AND STILL WE KNOW NOTHING!
When you think about it, though, what difference will it make in your life if the rate is 0.25% or 0.5% next month? What difference would it make to IBM or AAPL or WMT? What difference would it make to the UK or China or Japan or Canada or Switzerland? While 0.5% may bed twice as much as 0.25%, it's only 1/10th of the "normal" rate of 5.18% that has been the average for our nation's history.
There's certainly nothing "normal" about 0.25% interest rates, let alone negative interest rates. A negative 1% interest rate means that, if you work hard and save $100,000 by the time you are 25, by the time you are 75 you'll get $50,000 back. Clearly this is not a good plan yet that's what the Fed would have you believe is "appropriate" for the health of the economy – certainly they don't mean your personal economy.
by ilene - August 17th, 2016 10:40 pm
While the pending subprime auto loan bubble pop is nothing new for our readers, it may be a shocking revelation for the average American who would fall victim of these scams. British comedian John Oliver has prepared a video that places in evidence the rampant fraud that currently takes place in the auto lending sector. The similarities between this industry and the mortgage industry pre-2007 are striking.
The video compiles some of the current TV ads for the segment, including one from Viers Auto Sales, that should strike fear down your spine. Even a clown can get approved.
While the Obama administration has created the Consumer Financial Protection Bureau, we have yet to see any action from them or other social justice warriors like Elizabeth Warren on cracking down on these predatory practices.
Some of the video highlights include:
- A woman asking for a maximum $3,000 car loan ends up on the hook for a $13,000 loan (paying ~30% interest).
- A [woman] who leaves her baby in the car, and then gets her car repossessed with said baby inside.
- A 2003 Kia Optima car that gets loaned and repossessed at least 8 times, each times valued at 2-3x its previous estimate.
- Approximately 31% of subprime auto loans are currently non-performing
Evidently, we have learned nothing from the 2008 crisis.
by phil - August 17th, 2016 8:32 am
Insider selling is on the rise.
The rate of net insider selling reached the highest level since June 2015. That surge preceded a previous market high when the Dow was pushing over 18,000 for the first time ever, according to Richard Cuneo, senior vice president of operations at Argus Research. InsiderTrade reports that, in the week ending Aug 12th, $1.9Bn worth of insider shares were sold compared to just $100M of buys – a 19:1 ratio!
That kind of stuff should at least bother you a little if you are on the side of the 1 that is buying while 19 are selling, right? This is just one of dozens of things that don't smell right as the market keeps testing those new highs on record-low volumes.
This morning we noted that Hotel Room Rates fell 2.7% in July (the worst in 8 years) and Air Fares fell 6.6% while the Atlanta Fed's GDP Now Forecasts 3.6% growth in Q3. Wherever that growth is coming from – it's certainly not from businesss travel…
Actually it's housing that's driving the forecast with Residential Investment growth projected to be up 2.4% from 0.4% in the previous reading. So we'll be keeping an eye on reports from home builders to see if there's more signs of a turn-around there but Retail Continues to be weak with TGT's guidance well below expectations and costing that stock 4% today. WMT reports tomorrow.
They keep throwing red flags and we keep racing around the track at 200 miles an hour – something's gotta give at some point and we can only hope it's just a fender-bender and not a nasty multi-car crash.
Staples (SPLS) was disappointing, LOW and HD were disppointing, CSCO is laying off 14,000 workers – what could there possibly be to be concerned about? Surely I do not know because I listen to the MSM and they don't even mention these things – it's all about "record highs" and "can we set a new record" and "when will the…
by ilene - August 17th, 2016 3:39 am
Summary: Since February, US equities have risen more than 20%. Equities outside the US have risen 16%. A tailwind for this rally has been the bearish positioning of investors, with fund managers' cash in February at the highest level since 2001. Similarly, their equity allocations in February had only been lower in mid-2011 and mid-2012, periods which were notable lows for equity prices during this bull market.
Remarkably, allocations to cash in July were even higher than in February, and fund managers became underweight equities for the first time in 4 years. Investors dove into the safety of bonds, with allocations rising to a 3 1/2 year high in June and July.
Now in August, cash allocations are only slightly lower than in February and allocations to equities only slightly higher. Both are about one standard deviation away from their long term mean. Overall, fund managers' defensive positioning supports higher equity prices in the month(s) ahead.
Allocations to US equities had been near 8-year lows over the past year and half, during which the US has outperformed most of the world. That has now changed: exposure to the US is at a 20-month high. There is room for exposure to move higher, but the tailwind for the US due to excessive bearish sentiment has mostly passed. That's also the case for emerging markets which have been the best performing equity region so far in 2016. European equity markets, which have been the consensus overweight and also the world's worst performing region, are now the contrarian long trade within equities.
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Among the various ways of measuring investor sentiment, the BAML survey of global fund managers is one of the better as the results reflect how managers are allocated in various asset classes. These managers oversee a combined $600b in assets.
The data should be viewed mostly from a contrarian perspective; that is, when equities fall in price, allocations to cash go higher and allocations to equities go lower as investors become bearish, setting up a buy signal. When prices rise, the opposite occurs, setting up a sell signal. We did a recap of this pattern in December 2014 (post).…