Jason No Comments

Next Fear Please?

Good Morning,

Ok, so now we “know” what the Fed will do – uh – and that was, well, um, nothing!!!

After 2.8 seconds, the slicing and dicing began as machine traders were programmed for trades for both the words “raise” and “no change” – the average John Doe had no chance.

So what does it all mean for you and me – focused on long-term structures in place driving our economic growth ahead?

Little to nothing.

The next time the world tells you to fret over a 25-basis point rise in rates – please think about it for a moment.  By the way – the media headlines are already conjuring up “Well, so now we need to prep for a December rate hike.”

Leave the nonsense on the side of the road.

Your portfolio and your blood pressure with both thank you.

Step Back for Review

It is imperative that we consider this whole interest rate thing.  This monster that seems to be ever-present on our doorstep.  I will say again – it is a pitch in the dirt.

Rates will rise – for good reasons.  When they do it will be because the economic might of the US is slowly but surely healing from the deep emotional scars of the Great Recession.

As we stated then, “The emotional scars to our economy will last decades longer than the financial damage.”

Here is the Larger Point

When the Fed raises rates by 25 basis points, does it really matter to a well-run company?  Really?

For example, does it matter if they raise rates when companies, left and right, continue to refinance bond debts at lower and lower costs for very lengthy periods of time?  Will a rate hike – no matter when it comes – actually change anything for most companies?  The answer – very, very little.

For example, many shudder in fear that their dividend stocks will be crushed.  Nonsense.

Yes, dips and corrections will come.  But make sure you focus on this instead of fear:  If the Fed raises rates by 25 basis point in a year and your dividend producing stock does the same – are you worse off?

Keep this simple folks.  And by simple – I am not implying easy.

It can be hard if you choose – but why would you choose that?

Let me give you a real-life example which took place just this week.  One company – one set of bonds – one small debt refi in a sea of corporate debt refi’s:

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Now, I underlined a few items which are helpful as you review the bullet points.

I will highlight:  ATVI took action in a bond market filled mountains of fear-driven capital.  It refinanced $1,500,000,000 in bonds.  They were previously paying 5.625% on that tranche of money.  They will now be paying a blended rate of 2.85% on the same level of debt – further extending 55% of that debt for another 5 years!

So what does all that mean?

ATVI saves $42,000,000 EVERY year in interest going forward.

Make sure you don’t read over that too quickly:  $42,000,000 each and every year which previously went to bondholders will now stay with shareholders.  Savings that fall to the bottom line in the next five years alone?

A staggering $210,000,000 – nearly a quarter billion dollars

Again – 1 company, 1 debt tranche, 1 refi episode

This is being repeated by CFO’s across the land

I ask you simply:  Do you really think ATVI cares whether or not the Fed raises rates by a quarter point?

Your Best Actions?

Instead of fearing rate hikes, do as corporate America does.  If you want debt – go get it. Bigger house?  You have never been able to buy more house with less money on a monthly costs basis.

The fear-mongering needs to be left to others – and leave it out of your future thinking / planning process.

“But Mike – Aren’t You Missing It?”

“But Mike, companies are not investing as much.”

That’s right – you know why?  They don’t have to invest as much!!!

The blessings of a slow and steady economy are many.  One is that all needs are being satisfied by the investments already being made.  Why?  Technology falls in price every quarter.  Every new 2.0, 3.0 or 4.0 model does more with less.  The change is geometric.

The cloud – apps and software tools are doing things today which require far less expense, less investment and their output is rising.

“But Mike, manufacturing has been gutted.”

Baloney.  We just got better at it.  We have record output – we lost nothing.  Those that used to work at plants and facilities got better jobs with more pay and our output for us all went up!

So then, how could all that be correct?  What about all those things I am told I should be afraid of?

Let’s blame the proper thing – and it is a good thing by the way:  In a 2014 article from the MIT Technology Review, Erik Brynjolfsson, coauthor of a prominent 2014 book on the subject, is quoted as stating that “technology is the main driver of the recent increases.”

Supporting evidence for that theory, highlighted by Cato, was found in a 2015 Ball State University study in which economists attributed nearly 90% of the US manufacturing job losses in recent years to productivity gains.

Very important point here:  They observed: “Had we kept 2000-levels of productivity and applied them to 2010-levels of production, we would have required 20.9 million manufacturing workers. Instead, we employed only 12.1 million.”

There is no ghost in the machine.  It’s fabricated – like a movie set on a stage.  Do you really want to live in the world that would have required the 20.9 million factory workers of 2000 levels?

Think about that the next time you even ponder buying into the garbage being spewed out there about the end of life as we know it coming soon.

 So What’s Next?

More fears of course.  As we layer on the analysis of the latest Fed statement, every syllable will be sliced and diced.  Every report will be measured against it for weeks. Political analysis will tell you how the world will change ahead based on every sound-bite coming from either candidate.

Expect chop to be the norm as we go through the testing process unfdoling in markets which we have covered for weeks – and included in this simple video review for you here last week.

Closing Thought for The Day

Take a deep breath.  Yet another monster has been vanquished.  There are many more to come.  Do not fret – if there is ever an open space in the pipeline of fears to come – we will find a monster to replace it with – even if it needs to be completely manufactured out of thin air.

Until then – we need to remain focused on the long-term data at hand.  Short of an extinction event – in which case your account balance will matter to no one – tens of millions of new households will form in the US over the next 3,5, 7 and 10 year periods. Assuming birth rates remain stable, we will have Generation Z backing up Generation Y with back-to-back record breaking generations of demand.

Everything becomes new again.

Be confident of this – as we focus steadily on the long-term horizon:

This “weak recovery” economy of ours is far stronger than most understand it to be. Even though it is messy at times, we do continue to overcome many hurdles.

Our momentum is driven by a very significant and rare generation “baton shift” in a very long race.

But here is the deal:  People make markets.

As stated before, we can make it more difficult if we choose – but why would we?

The Barbell Economy is an effort to simplify the noise and even work to eliminate some of it.   Chop is fine, corrective action is also a plus at times.

Long-term reward tend to be delivered to the patient investor willing to live through the process of markets.

Stay on your plan, stay focused and patient.  We are in great shape for the long-term growth waves at hand.

Until we see you again, may your journey be grand and your legacy significant.

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Jason No Comments

Nothing But Needles…

Good Morning,

The Fed is on tap – and the various nail-biting contests are officially underway.  Office pools seem to be split down the middle as to whether a 25-basis point hike will bring on Armageddon…or a yawn and then a nap.  Fighting through the various elements in the media cycle to find anything under the category of “positive” is like trying to find a specific needle in a stack of needles.

There are a couple of things we may want to keep in mind – they are relatively simple butrequire a degree of faith in both history and the future:

Markets generally do not plummet when the entire planet is expecting them to do so.  No matter where you look, sentiment stinks.  Investors, managers, cash balances, conferences, hedge fund guys, experts getting airtime – it is across the board.  I have yet to hear anyone on air or in print celebrate that we continue to make it over the mountains ahead.  Life has not ended, the apocalypse has not arrived, black swans are not falling from the sky – and markets a a tiny bit off their most recent all-time highs.

By the way – “all-time” is Italian and it means, “it has never ever, ever better before this moment in time.”

Since about six weeks ago – markets have been doing the tightening for the Fed.  Once again, if they finally pull the trigger today – they will be following markets – not leading or controlling them.  Yet another example of why this years long effort to blame the Fed for low rates has been such a bunch of sh… – uh, hogwash.  I would have used another word but I have promised to no longer speak in that manner.

I will state this as clearly as I can.  There is a reason the markets are on highs:  it’s simple. Keeping it that way in all this crazy mess we call markets is the very difficult task at hand. Here it is:   B.a.r.b.e.l.l. E.c.o.n.o.m.y.

Review Stats

Since most are overlooking that simplicity, markets continue to struggle far too much with concerns over interest rates.  The Fed may have itself in a pickle but not for the reasons so many assume.

As noted often, fear is the driver of rates in our society for the better part of the last decade.  An avalanche of money “seeking safety” has decided that this safety they long for comes to us in the form of bonds at near record low rates – or negative rates in some places.  How a vast crowd could get so twisted in their thinking is still beyond me but be that as it may, it has become so.

The issue the Fed is faced with is how does one unwind that fear in a manner where the short-end (typically the quickest to react to Fed rate hikes for example) can rise without triggering a negative yield curve while the long-end is pressured to the downside via the fear-driven rampage of buying.

In recent weeks that adjusted only slightly with the long-end rising ahead of a feared rate hike.  That noted, vast amounts of money continue to roll into bond funds at the expense of equity funds as we noted in notes for you late last week.


Are we really at the stage of underlying fear where a 3-5% fallback in major averages is defined as “volatility?”  I grabbed a snapshot below to give you a feel for what these pullbacks from highs have appeared as – in percentage terms – since the Great Recession lows of March 2009.  Let’s take a look:

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Seen from this perspective, recent “volatility” seems – well – not very volatile at all.  Let’s see if we can continue to keep our wits about us as all others lose theirs.

More Data – Solid Foundation

While way too much energy will be expensed this week on the issues of will they hike or not, be assured that no matter the decision – it will leave at least half of the audience disappointed.

If they hike, a rash of headlines will usher in terrible events coming our way due to 25 basis points more in interest costs.

If they do not hike, a rash of headlines will flood our screens about how the Fed is stuck, it has run out of tools, debt is out of control, QE is still haunting us and all that is left is to finish our underground shelters and buy more guns.

While more fret over that, what do you say we focus in on the barbell economy issues which are set to continue to drive us forward:

Builders Feeling Pretty Good

I still find it rather comical that the Great Recession we still fear a repeat of on any inkling of red ink, was wrapped around the real estate world and fraud in the debt markets.  While obvious to everyone now, the expert view back then was we would never use up the supply of homes available to live in.

The good news is we now know what forever is:  About 7 years.

Home supplies are wilting to levels not seen since the early 80’s – with population demand rising rapidly.  The NAHB just noted this morning that builders are feeling good and its index jumped 6 points to a new one-year high – leaping over expectations of just a marginal increase.

Here is the deal:  We are at a 50-year low on home ownership rates – and we have the largest generation in the history of the US just beginning to buy homes – in a vast landscape of depleted inventory.  Here in Chicago, buildings for condos and rentals are going up everywhere one looks downtown.

With cap rates on most deals still ranging from 6 to 8, one can assume more and more capital will move into real estate as bonds begin to sting more and rate-starved investors look for the next pool of investment capital to exploit.

Bottom Line:  There are tens of millions of kids who will move out over the next decade – and our shrink-wrapped, Fedex style economy with little supply ini the pipeline is not ready for the demand wave coming.

Speaking of Money

More good news – we have more of it than ever before.  Even as asset managers and investors alike see their sentiment swoon as though a multi-year bear market has already unfolded, wealth has reached levels never before seen in the US – on an overall and per-capita basis.

Keep in mind that well before all the ink dries on the various charts showing these new data points worldwide, be assured we will be told it’s all really bad news anyway, based on some “outside reason” which will surely not last – so enjoy it while you can.

Check it out:

Calafia shows us that as of June 30, 2016, the net worth of U.S. households (including that of Non-Profit Organizations, which exist for the benefit of all) reached a staggering $89.1 trillion.

Get this:  that’s about 40% more than the value of all global equity markets, which were worth $63 trillion at the end of June, according to the latest stats on Bloomberg.

Importantly, household liabilities have not increased at all since their 2008 peak

The value of real estate holdings now slightly exceeds that of the “bubble” high of 2006

And, obviously, financial asset holdings have risen since pre-crash levels, thanks to the $9 Trillion in savings deposits and gains in bonds and equities alike

One last thing:  you may recall back in housing bubble days, we were told our real problem was we were not saving enough.  Well guess what – we fixed that item.  And now?  Yes, that is correct – we are now told our problem is the consumer is not spending.

If this twisted process of media expertise was not so sad it would be funny.

Hard to Ignore

Life in the U.S. has been getting better and better for generations.

While the naysayers and those who prefer you remain afraid of the future will tell you it is all about debt and bubbles, the facts provide a far more productive view.  The typical household has cut its leverage by over 30% (from 22% to 15%) since early 2009.

Debt as a percentage of assets is back to levels seen in the late 80’s!

Households en masse have been the beneficiary of strengthening balance sheets over the past seven years with a cushion of the previously noted $9 Trillion now sitting idle in the bank.  Unfortunately, as social programs have expanded under very poor fiscal polices, our Federal government has more than doubled its debt burden over that same period.  Well, there is a legacy for you I suppose.

The Bottom Line

I could make these morning notes go for pages.  The data that one should be focused upon remains solid – but that does not mean we escape all pullbacks and chop.

Finding and focusing upon that data in a sea of negative, gut-churning, fear-mongering headlines is today’s more difficult emotional challenge.

Think I am kidding.  Check this graphic from CNBC over the weekend.  I just had to include it:

Yes – that is a train included in the picture to make sure you get the point.

Closing Thought for The Day

This remains the reason driving our morning notes:  stay focused on the proper horizon – and the growing portions of our economy.

This “weak recovery” economy is far stronger than most understand it to be.  Even though it is messy at times, we do continue to overcome many hurdles.  Recall the momentum is being driven by a very significant and rare “baton shift” in a very long race.

The fact that portions of our economy are changing so rapidly could even be driving some of the deep-seeded angst and recurring fears.  Masses don’t like change – but adapt we must.

But here is the deal:  People make markets.

We can make it more difficult if we choose – but why?

The Barbell Economy is an effort to simplify the noise and even work to eliminate some of it.  If we can focus upon the areas of the economy which are growing – and which have vast channels of demand in their pipelines, then we can begin to step back far enough from the markets to escape the emotional hand-wringing.

Chop is fine, corrective action is also a plus at times.  Long-term is the reward to the investor.  Stay on your plan, stay focused and patient.  We are in great shape for the long-term growth waves at hand.

Until we see you again, may your journey be grand and your legacy significant.

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Jason No Comments

Gnashing of Teeth

Good Morning,

Over the weekend, one would have been certain Armageddon had arrived – again. The relentless reviews of all the assured risks ushered in by a loss of 400 points in the DOW were indeed dizzying.  No matter if you read, watched or listened the message was thre same:  risk.

Yesterday, the markets bounced back.  The masses were sent back up the other side of the media storm – as storylines changed with prices.  This morning – gasp – futures are down a percent or so.  September is living up to its name so far – a bit more volatile than the August slumber.  This is of course, pursuant to us now classifying 2 percwent moves as “volatile”.

I loved the headlines over the weekend.  “Markets suffer worst losses since June 24…”  I assure you we are not too far from this chaotic and ridiculous theme:  “Last 10 minutes see worst losses since 9:42 yesterday morning….”  I kid you not.

Enough Already…

If one truly believes that a quarter point rate hike is somehow going to unravel the world, then I would heavily recommend all removal of equity investments from one’s portfolio – purely from a risk management perspective.  It remains my humble poinion that this view of horrible events to come with a rate hike suggests one is entirely too close to the flame (I mean noise).  Step way, way back and recognize the path taken to here.

Yes – Friday was an interruption along a very lengthy pathway.  A review of long periods of history will show the audience that “interruption” is a far better characterization of market action versus the term “correction.”  The latter has a sens of finality and separation to it – as a cost so to speak.  The former is a portion of the process – inclusive in all market events.

Indeed, the 2% drop in the major averages on Friday left no sectors spared – hinting at something different than a bunch of people just hitting the sell button arbitrarily.  That said, if one breaks down the S&P 500 into deciles based on how stocks performed from mini-panic to mini-panic (the 6/27 post-Brexit low through last Thursday’s close) you would find that declines were evenly distributed regardless of performance during the post-Brexit rally.

Trust me on this:  ETF’s will eventually work their way to biting the crowd in ways they currently do not understand but that is a story for another day.

I do not think we should assume the chop is complete.  Volumes did rise quite a bit as noted for you in the chart included (posted again below for review) – but I would not be surprised to see this go on for a bit longer.  It is pretty safe to say that almost no one will be happy with the Fed meeting outcome this week.

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Forward Earnings

Forward earnings rose for all three indexes again last week as the energy cloud continues to be purged from comps.

Large Cap’s rose for an 18th straight week.  MidCap’s rose for an eighth week and SmallCap’s tagged their 15th rise in the last 16 weeks.

Importantly – while too many stayed focused ono the wrong bullet-point (earnings recession), all three weightings have risen since mid-March.  This signals the best multi-week streak since August 2014.

How does this stand up to records?  Well, the only one mot sitting at all-time highs after the latest quarterly briefings is LargeCap’s.  Their forward earnings stand just 0.2% below the record highs set in October 2014 (just as the energy cloud was shaping up in earnest).

MidCap’s are well into new highs as has been the case for 13 of the past 15 weeks. Meanwhile, the SmallCap’s also stand at a record highs – for the 11th time in the past 13 weeks.

Remember:  “Record highs” in Latin means “it’s never been better than this….”

Sometimes that simple fact is lost in the world of nail-biting headline hysteria and “increased volatility.”

A Brief on FedSpeak

Many have overlooked the idea mentioned here often – the strngthening dollar has already done some of the tightening for the Fed.  While most experts assured us that “printiing money under QE would trash the dollar for good”, it is somewhat comical that dollar strength and lack of inflation is now confounding those same experts.

A few tidbits from the latest Fed chatter – and reasons for same we can all track:

“Inflation has been undershooting, and the Phillips Curve has flattened.”

One can admit the jobs market has tightened – if you are trained in the areas of the economy which are seeing massive demand (the Barbell).  Further, keep in mind that Generation Y brings with it a suprisingly deflationary tilt.

Old-world econometric models will tell us this is terrible.  It’s likely more like a dog chasing his tail – an ineffective activity. Be assured, as their talents and abilities further infiltrate the corporate world, efficiences will be found in places no one thought possible.  Places we cannot even define yet.

Multi-tasking – high-tech savvy and keeping things simple without a lot of fluff is comiing at us in a giant wave shift.  This helps explain why price inflation remains subdued since labor costs aren’t rising significantly.  Note also that inflationary expectations remain low, with core PCED inflation rate at 1.6% YOY and expected inflation in the 10-year TIPS market at just 1.5%.

“Foreign markets matter, especially because financial transmission is strong.”

In her latest, Ms. Brainard noted, “Headwinds from abroad should matter to U.S. policymakers because recent experience suggests global financial markets are tightly integrated, such that disturbances emanating from Chinese or euro-area financial markets quickly spill over to U.S. financial markets. The fallout from adverse foreign shocks appears to be more powerfully transmitted to the U.S. than previously.”

She went on to state: “In particular, estimates from the FRB/US model suggest that the nearly 20 percent appreciation of the dollar from June 2014 to January of this year could be having an effect on U.S. economic activity roughly equivalent to a 200 basis point increase in the federal funds rate.”

Let’s Keep This Simple

The Fed is struggling because they are underestimating the cost of fear in their forecasts. They are also not making a big enough point that the baffoons in DC have done an absolutely horrible job of fiscal policy implementation for years.  Let’s face it – if it was not something having to do with a new tax to provide for more giveaways – Obama has simply not been interested.

The expansion investment strike from corporations is also a compelling stand against terrible administration policies.

That noted, we should be, on the contrary, extremely please our economy has been able to expand at all with all these chains around our neck and ankles to boot.  It’s all in the barbell.

When fear subsides, rates will rise.  When fear subsides, FedSpeak can shift.  Think fear is fading?  Not even close:  Check the last 4 weeks of specific fund flows data – every week a big flow into bond funds even at near record low rates (60+ times earnings):

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 Yes folks – fear remains.  If one needs any further indication let’s wait for the latest sentiment data out in the next 48 or so hours to encompass the selling from Griday and today.

Retail Death Reports

I always think it is kind of comical when we see lots of “certainty” in a specific opinion – like how retail is dead unless you are Amazon.  Not so quickly.  My hunch is that a couple years from now, we will find some of the hard hit retailers will have adjusted and their stock returns will have set the stage for improvements.

Survey data shows that the kids are not done with trips to the mall just yet – hinting that mall owners are doing a pretty good job of creating “experiences” and concepts along with the shopping and retail services:

A Note on the Bear

We hear so much about the constant bear market risk that we really never left the topic from over 11,000 DOW points ago.  After all, the entire theme of investing since March 2009 lows has been “yea – but just wait until you see the next shoe to drop….”

My point here is that it is easy to overlook how little time we actually spend in bear markets.  Recall from last week’s notes, I referenced a percentage:  85% of the time in history has been spent in a bull market.  Here is a graphic which may provide a better feel.  Why?  Let’s begin to spend our time thinking strategically about where risk should be taken during the 85% of the time that things tend to so – well, just fiine:

This is just one of many graphics one can find and review – but it does sort of drive home the point that we seem to focus on the bad when it is a minor amount of history.  And by the way – that history covers every single thing we are terrified of – and have been – all along the way up the mountain.

Like I said above:  think of red ink – long or short periods of same – in terms of an interruption along the way.

In Summary

The news cycle is all about strife, stress and negatives.  Meanwhile, markets are sloppy in September.  The masses are back, trade desks are full again and the sell in May crowd missed the rally.  Elections are on tap – and each one gets a bit crazier.

As soon as we get through another week or two, we will quickly be warned of the cold winds of October. They will replay all the crashes the month holds in history and investors will be sent back through the merry-go-round of fear.

The better part of valor here is to let this stuff unfold, finding pockets of elements to take advantage of as fear rises again.  In the larger forces underway – this is all short-term nuance.

The confusion is our midst continues to be the massive shift underway.  Seen one way, it appears messy.  Seen from a 50,000 foot view – relatively ordinary.  Demand is coming our way.  Experts’s fear-mongering has been a costly siren song for many years.

Allow it to be less so in the future.

We remain focused on the Barbell Economy.  It is real – expanding and demand is growing like a weed.  Does that mean every day, week or month is rosy?  Of course not.

That’s why they say patience and focus are so difficult to manage – and so few accept it as a required set of traits for the long-term successes ahead.

Stay focused on the larger view at hand – not the pitch in the dirt.

Until we see you again, may your journey be grand and your legacy significant.

Did I mention patience and focus?

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