Originally published in the Daily Journal of Commerce, Portland OR
March 10, 2014

After an uncertain start to the new year, the S&P gained 4.3 percent in February to reach 1,859.45 and close the month at a record high. The February performance was the S&P’s best since 1998 and second best since 1991. The Dow Jones average gained 4 percent to 16,321.71, still down 1.5 percent on the year and short of its all-time high.

After a dramatic year for the markets in 2013, in which the indices ranked within the top 15 percent of all time returns, the markets took a breather in January 2014. This was not unexpected after the 2013 run-up. But what was not clear was what direction would follow.

With powerful snow and ice storms walloping the East Coast, a rerating of profit expectations, and turmoil in Europe, the Middle East and Asia, the factor of risk came to the forefront. As fourth quarter earnings reports were announced, profits were better than expected, but not strong enough to raise valuations. Revenue growth disappointed and forward guidance was muted. With price earnings ratios at 15.1 times next years’ earnings, the P/E level is above the 13.9 percent average rate of the 10 years.

International events in China, Ukraine and the Middle East did nothing to calm fears. Even the euphoria of the Olympics was transitory. Not surprisingly, investors paused.

But, with fourth quarter earnings up 9.6 percent from a year ago, the market resumed its upward trend – a nice recovery from 2007, when fear abounded. The market tends to (but not always) look to the future. It tends to look six to nine months […]

Originally published in the Daily Journal of Commerce, Portland OR
Published February 10, 2014

After 2013, when the markets packed three years’ of returns into one, they stumbled out of the gate in 2014. In January, the Dow Jones industrial average was down 5.3 percent, the S&P was down 3.6 percent and the NASDAQ was down 1.7 percent.
The four biggest stock markets – U.S., U.K., Europe and Japan – all were down. It was the first time they have had simultaneous declines for January since 2010, when the eurozone debt crisis was at its highest. Some investors warned that the shaky start to 2014 meant that the markets were in for a down year. According to the stock trader’s almanac, when the S&P drops in January, it finishes the year up about half the time; that means January is no better than a coin flip as an indicator.
Emerging markets were the hardest hit, with huge withdrawals from the markets of developing countries. This withdrawal was the result of the confluence of several factors. With the U.S. Federal Reserve tapering its bond purchases, allowing interest rates to rise, U.S. debt markets became more appealing to investors seeking yield even as bonds’ values declined. As a result, money was repatriated back to the U.S., which put pressure on emerging market debt.
With capital outflows, emerging market currencies suffered, which in turn put pressure on emerging market equity markets. It was simply too much for these smaller economies. As investors withdrew money from emerging markets, repatriation fed on itself.
Investors sought a safer, and better yielding, investment in the U.S. While Treasurys rose, yields in the U.S. declined. U.S. equity markets declined because of fear. Short-term investors headed for the exits. There was no sign of […]

Originally published in the Daily Journal of Commerce, Portland OR
Published January 13, 2014
In 2013, the broad market gained 32.39 percent. A 20 percent market gain in a single year is considered the best of all market possibilities. All 10 S&P sectors scored double-digit gains on a total return basis for the year. It was a remarkable gain considering all the difficulties in the economy.

In addition, political maneuvering brought the government to a standstill; we came very close to exceeding our borrowing limits. The Federal Reserve hinted at tapering of its bond purchases,
precipitating a sell-off, and later did reduce its buying.

We are in the midst of a Fed chairman transition, after President Obama unceremoniously showed Ben Bernanke the door. Bernanke’s sacking occurred despite his masterful handling of a very difficult economic situation with limited tools and an uncooperative Congress and executive.

In the words of Pope Francis we need to “argue less and accomplish more.”

Slow growth economic policies, hostile to business, have taken a toll. Even as the president complains about income disparity, his policies stoke that disparity. The Obama recovery is the weakest since the Great Depression. GDP growth has been far below the average recovery since World War II.

If the Obama recovery had been merely average, the economy would be 8 percent, or $1.3 trillion larger than it is today. Every American alive, working or not, child or adult, would be $4,100 better off if the recovery had been only normal. The anti-growth policies from Congress and the executive have stalled the U.S. growth machine.

While the reported numbers from the Bureau of Labor Statistics show declining unemployment, the total employment numbers show 1.3 million fewer […]

Originally posted in the Daily Journal of Commerce, Portland OR

Published December 9, 2013

The broad market ended the month of November just below record highs, having logged its longest streak of weekly gains in nearly a decade. The Dow’s weekly gain was its eighth straight. It finished up 3.5 percent in November for its third consecutive monthly rise. The S&P 500 finished the month up 2.8 percent for its longest stretch of weekly gains since a nine-week run ending Jan 23, 2004. The Nasdaq added 3.6 percent in November to reach 4,049.89.

For the year to date the Dow is up 22.6 percent, the S&P 500 is up 26.8 percent and the Nasdaq is up 34.3 percent. Growth portfolios outperformed value portfolios; the largest gains came in small cap growth stocks, which are up 38.65 percent year to date.

J.J. Kinahan, chief strategist for TD Ameritrade says there is still room for the market to move higher. “Everyone wants to be the one to call a top, but many individual investors and funds remain underinvested,” he said. “The only bubble is in the number of people calling a bubble.”

The fact that so many people are worried about a bubble is a good sign because it puts a brake on overexuberance. There are numerous matters to be worried about. Perhaps the biggest is the U.S. government, which appears totally dysfunctional. Confidence in our government is plumbing new lows.

However, consumer sentiment improved in November, according to the Thomson-Reuters/University of Michigan sentiment index, as jobless claims fell for the sixth week in the past seven. But unemployment remained at a stubbornly high 7.3 percent.

In contrast, the Conference Board Consumer Confidence Index, a […]

Originally posted in the Daily Journal of Commerce, Portland OR

Published November 12, 2013
Despite worries created by Washington politicians, October saw the S&P rally 4.5 percent. A 16-day shutdown of the government and a debate over the debt ceiling, which could have meant a default on U.S. bonds, were not enough to keep a resilient market down. The S&P is now up 23.2 percent on the year through Oct. 31, with both the S&P and the Dow sitting at just 1 percent below their all-time
highs.

Worries abound over the elevated market levels. This is good, because if there were not worries, we should be worried. If there were no worries in the market, an investor could conclude that we were on the verge of exuberance, which would be a worry. It is good for the market’s balance if investors are concerned.

However, just now the S&P is trading at 18.7 times trailing earnings and 15.93 times projected earnings. Against a historical backdrop of a 15.50 mean earnings, the market is fully valued, but not worryingly so. Still, valuations support increased exposure to emerging markets and foreign developed markets, and a slight reduction in exposure to the U.S. The markets have been fueled by profit gains, but also cheap money. The Fed has kept interest rates low and bond purchases high in order to support the economy and prevent deflation like the kind that racked Japan for 20 years and is creeping into Europe.

The latest numbers out of Europe show that dangerously low inflation is threatening Europe. In the eurozone, the annual inflation rate in October pulled back to 0.7 percent.

Because Congress and the president have failed […]

Originally posted in the Daily Journal of Commerce, Portland OR

Published October 15, 2013
Just as his approval numbers reached an all-time low for his presidential term, Barack Obama was rescued again. He painted himself into a corner with his “red line” in Syria that he couldn’t or didn’t want to back up. Vladimir Putin bailed Obama out.

Now, with Obama’s approval rating at 49 percent, the Tea Party Republicans have contrived to make the president look good. With no apparent ability to count votes, or knowledge of how government works (clue to Tea Party: there are three branches of government, and you control none), the Tea Party blunders on, bringing the operation of government to a halt.

The Republicans, who had a shot at improving their numbers in the midterm elections, once again see defeat snatched from the jaws of victory. The Tea Party has stymied the Republican Party, and all Republicans will be tarred. Like Don Quixote, they see themselves on a great crusade, while in reality they are tilting at windmills.

The Tea Party wants Obama to concede to the loss of his signature legislation, the Affordable Care Act. No matter whether the legislation is good or bad, it is the law of the land; Obama is not going to give it up, and, as president, he has the power of veto. Of course, the Tea Party does not have the votes to send a bill to the president anyway. It is all a simple numbers game, and the Tea Party does not understand that it doesn’t have them.

The markets are generally down from their all-time highs since the government shutdown began, but […]

Originally posted in the Daily Journal of Commerce, Portland OR

Published September 9, 2013

“It is hard to make predictions, especially about the future.” That quote has been attributed to a various number of folks – Winston Churchill, Will Rogers, Albert Einstein, Victor Borge and Groucho Marx, among others.

“It’s always something,” said Gilda Radner as a performer on “Saturday Night Live.” She later was diagnosed with ovarian cancer.

It appears that it’s always something with the U.S. economy and government. Often, it seems that the “somethings” are self-inflicted wounds.

Unemployment remains stubbornly high. Consumers are not spending. Bank bailouts did little for households, but a lot for bank executives as they paid themselves big bonuses for their fine work during the Great Recession. To defend themselves from the government and litigious former homeowners, the banks have had to pay more than $100 billion to their lawyers – more than they have paid out in dividends to shareholders.

Not just the United States, but other major powers have been supported by their central banks. The U.S. Federal Reserve struggles with the question of how and when to trim that support, and whether they can.

In another self-inflicted wound, it was not helpful that President Obama fired Fed Chairman Ben Bernanke while this debate was going on. Markets and CEOs are now confronted with a murky Fed policy with no knowledge of who the next Fed chairman will be and what her or his policies will be.

At this writing it appears that Obama’s favored candidate is Larry Summers. He would likely favor reducing Fed support of the economy and raising interest rates. The prospect is already having a chilling […]

Originally posted in the Daily Journal of Commerce, Portland OR

Published August 9, 2013

In July the equity markets as measured by the S&P index were up 4.9 percent. This brings S&P returns for the year through Aug. 2 to 19.9 percent. Dow transports are up 22.67 percent through July 30, confirming the Dow industrial rise – a strong sign according to the Dow Theory of investing. Also through July 30, bond markets this year have had negative returns. Year to date through June 30, $80 billion flowed out of bond funds, in the great rotation.

After Fed Chairman Ben Bernanke’s testimony in June regarding quantitative easing, the markets threw a taper tantrum. The yield on 10-year bonds jumped from 1.6 percent to 2.5, the largest increase in such a short time in history. The value of 20-year-plus bonds fell 11 percent after Bernanke’s remarks.

PIMCO, the largest bond house in the world, saw outflows of $10 billion in June – the biggest outflow since tracking began in 1993. On a total return basis the fund’s returns were down 3.6 percent in the second quarter – the largest quarterly loss since inception. Investors are engaged in the “great rotation” from fixed income to equities.

The markets are beginning to trade on fundamentals, not just quantitative easing. Corporate profits are coming in slightly above forecast, but revenues are slack. The macro picture looks even better.

In Asia, China recorded unexpectedly strong factory activity. In Europe, where European Central Bank President Mario Draghi has promised easy money for the indefinite future, the Eurozone Purchasing Managers’ Indexes showed expansion. The U.K. expanded at the fastest pace in more than two […]