Trade War Hysterics

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Dep. Chief Economist

Strider Elass – Senior Economist

Since hitting new all-time highs two weeks ago, the S&P 500 has fallen about 2.2% as trade negotiations with China hit a snag.  Last week, the US announced new tariffs on Chinese imports.  This morning, China announced new tariffs on some US goods. Many fear a widening trade war.

Don’t get us wrong.  We want free trade, and we understand the dangers of trade wars and tariffs (which are just taxes on consumers).  At the same time, we think trade deficits themselves are not a reason for trade wars.  We all run personal trade deficits with the local grocery store and benefit from that.  Even if the entire world went to zero tariffs, the US would almost certainly still run trade deficits, even with China.

But today, the trade deficit with China is partly due to the fact that China has higher tariffs on imports than the US does – working to eliminate these lopsided tariffs is worthwhile.

In 1980, China was an impoverished nation.  Then it began adopting tools of capitalism – property rights, markets, free prices and wages.  Chinese businesses started to import the West’s technology, and growth accelerated.

Initially, China didn’t have to worry about intellectual property.  When you replace oxen with a tractor, all you have to do is buy the tractor, not reinvent the internal combustion engine.  But China has now picked, and benefited from, the lowest hanging fruit.  So, China decided to steal the R&D of firms located abroad.  Some estimates of this collective theft run into the hundreds of billions of dollars.

That’s why normal free market and free trade principles don’t neatly apply to China.  

Remember President Reagan’s old story supporting free trade?  “We’re in the same boat with our trading partners,” Reagan said.  “If one partner shoots a hole in the boat, does it make sense for the other one to shoot another hole in the boat?”  The obvious answer is that it doesn’t, and so our own protectionism would hurt us.

But China hasn’t just shot a hole in the boat, they’ve become pirates.  If Tony Soprano and his cronies robbed your house, would free market principles require you to trade with them to buy those items back?  Of course not!  

It’s true tariff increases will not help the US economy.  But $100 billion of tariffs spread over $14 trillion of consumer spending is not a recession inducing drag.  It’s true some business, like soybean farmers, are hurt.  But the status quo means accepting hundreds of billions in theft from companies that are at the leading edge of future growth.

Either way, if tariffs nick our economy, China’s gets hammered.  Last year we exported $180 billion in goods and services to China, which is 0.9% of our GDP.  Meanwhile, China exported $559 billion to the US, which is 4.6% of their economy.  We have enormous economic leverage that they simply can’t match.

An extended US-China trade battle means US companies will shift supply chains out of China and toward places like Singapore, Vietnam, Mexico, or “Made in the USA.”  If that happens, the Chinese economy is hurt for decades.                        

Anyone can invent a scenario where some sort of SmootHawley-like global trade war happens.  Realistically, though, that appears very unlikely.  We’re not the only advanced country China’s piracy has victimized, and China may realize it’s more isolated than it thought.  In the end, China wants to trade with the West, not North Korea, Russia, and Venezuela.  China needs the West.  And all these trade war hysterics just aren’t warranted. 

Click HERE     
 
 

Opinion: What to tell a new graduate about investing in stocks

Published: May 9, 2019 2:58 p.m. ET

Success with money and investments requires humility, self-awareness, and a few good friends

By Vitaliy Katsenelson, Columnist

College graduation ceremonies this time of year remind me of my own graduation from the University of Colorado in 1997.

I felt completely lost, with no idea what to do next. Now, more than 20 years later, I can offer some experience-based advice about investing and how to go about it realistically. Here’s what I would tell my younger self and his generation:

1. Find yourself. Investing is like a piece of tight clothing: Just because it fits and looks good on someone else doesn’t mean it’s a good fit for you. Your investment strategy has to fit your personality; it has to wrap around your biases and life experiences. You’ll only discover your strategy, the one that fits your personality, when you start putting real money to work.

2. Just do it. The best way to learn about investing is by doing. Don’t create paper portfolios. Take as much money as you can afford to lose (because you may lose it), and invest it. The most difficult part of investing is staying rational when you get punched in the face by the markets. Understanding the emotions that losses and gains evoke in you and dealing with them is incredibly valuable.

Don’t focus on building a properly diversified portfolio. Your initial focus should be stock analysis, not portfolio construction. You simply won’t have enough time to do the deep research necessary to build a diversified portfolio of 15 to 25 stocks. At this point in your career, depth is more important than breadth.

3. Invest, don’t gamble. Do the analysis with the diligence and care that you would bring to investing your parents’ retirement savings. Document your research. Imagine you are working as an analyst at a mutual fund and writing a pitch for a stock to a portfolio manager. You’ll learn a lot from documenting and writing up your research. This will keep you rational.

Browse investment writeups on ValueInvestorsClub.com. This website was started by Joel Greenblatt — a terrific investor who wrote “The Little Book That Beats the Market” and “You Can Be a Stock Market Genius” (both highly recommended). This is where you can learn what the depth and rigor of your research needs to be. Writeups here are posted by diehard value investors, not academics, who put their money where their mouths are.

4. Start with what you know.  What stocks do you analyze first? Recently I was asked this question by a fellow who had undergraduate and graduate degrees in aerospace engineering. What do you think my answer was? I said “You probably know more than most people your age about the aerospace industry. Create a map of the industry and then learn about each company in the industry.” It is easier to start analyzing something you already understand.

5. Learn to say ‘I don’t know’. You cannot be expert in everything. Someone who has an answer for everything probably knows very little. Saying “I don’t know” requires honesty and self-confidence, and it opens doors for learning.

6. Make investment friends. My life over the last 20 years has been enriched by having great investment friends around me. Today my investment friends are really just my friends, with whom I share and debate stocks, though we also talk about family, kids, and such.

Investing doesn’t have to be a solitary, sterile journey; in fact it should not be one. Every investor, without exception, will go through a period where he or she feels like a complete idiot — the market will do this to you at times (trust me on this). Surround yourself with loyal, humble investment friends who can give you support, and who are smarter than you, so you’ll always be learning from them.

7. Read. These books have been helpful to me:

•  “Fooled by Randomness”, by Nassim Taleb, which will make you deeply appreciate the role randomness plays in investing.

• “The Essays of Warren Buffett” — Buffett’s annual reports edited into a book by Lawrence Cunningham.

• “Poor Charlie’s Almanac”, to understand the second half of Berkshire Hathaway BRK.A, -2.26% BRK.B, +0.00%  — Warren Buffett’s partner, Charlie Munger.

•  “Basic Economics”,  by Thomas Sowell, which has taught me more about economics than all my economics classes combined.

• “Margin of Safety”, by Seth Klarman — one of the most brilliant investors of our time. Though the book is out of print, you can find it online if you’re resourceful.

• “The Most Important Thing Illuminated”, by Howard Marks, which is filled with Klarman-like wisdom.

• The “Little Book” series: The process of writing one of these books made me appreciate the series even more that I did already. These books are typically written by investors who often have taken their “big” books (as I did) and simplified and condensed them into smaller, more accessible works. This process of simplification and condensation forces you to keep what matters the most. My two favorite books in is series are “The Little Book of Behavioral Investing”, by James Montier, and “The Little Book That Builds Wealth”, by Pat Dorsey.

• “Reminiscences of a Stock Operator”, written in 1923 by Edwin Lefevre, tells from a first-person perspective the fictionalized tale of the early years of the great trader Jesse Livermore. It is rumored that this book was actually written by Jesse Livermore and edited by Lefevre.

This book provides a great introspective look inside a trader’s mind and teaches many behavioral and common-sense lessons. My favorite edition is the one annotated by my friend Jon Markman. His annotations are like a book within a book; they take you behind the scenes of Lefevre’s story and give important insights into the key characters and the backdrop of that interesting time period.

I don’t want to end with empty platitudes, but I’d be remiss if I didn’t stress the importance of having an unstoppable, insatiable thirst for knowledge. Learning doesn’t cease when you graduate; it continues and never stops. As I look at my investment role models, all them, without exception, have that quality. If you don’t have that thirst, cut your losses and find another career or hobby. A value investor needs to have a growth mindset.

5 Signs That This Market Will Push Even Higher [VIDEO]

While it’s never easy to watch stocks fall, CIO Larry Adam sees any current weakness in the market as a potential buying opportunity.

May 7, 2019

Click HERE to watch video

In the video above, Chief Investment Officer Larry Adam discusses five factors pointing to continued stock market growth:

  1. The economy is accelerating.

  2. The Fed has put interest rate increases on hold.

  3. Earnings are better than expected, and estimates for future quarters are being revised higher.

  4. Dividends have remained healthy and have reached a record high.

  5. The U.S. market continues to de-equitize, meaning fewer companies are trading publicly.

 

Recorded April 25, 2019 with Larry Adam, CFA, CFP®, CIMA®.

The Big Picture and the Fed

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Dep. Chief Economist

Strider Elass – Senior Economist

you take a long hike up a mountain, there’s plenty to appreciate along the way. But, sometimes, you just have to stop and enjoy the view. With that in mind, let’s forget about the April employment report – which saw a combination of very fast payroll growth and moderate wage growth – and think about where the labor market stands in general.

Nonfarm payrolls have grown by 2.6 million in the past year, well ahead of the roughly 2.0 million jobs the consensus was forecasting a year ago.

Due to the rapid job creation, the unemployment rate has dropped to 3.6%, the lowest level since 1969. Some analysts claim the jobless rate is being artificially suppressed by lower labor force participation, but participation is higher now than it was in the late 1960s, when 3.6% was considered full employment.

Regardless, the labor force is up 1.4 million from a year ago, and the labor force participation rate has been essentially flat since late 2013. And that’s in spite of an aging population.

The unemployment rate for those with less than a high school degree has averaged 5.6% in the past twelve months, the lowest on record, and well below the previous cycle low of 6.3% reached during the internet boom two decades ago

The Hispanic unemployment rate has averaged 4.6% in the past year, while the Black unemployment rate has averaged 6.4%, both also record lows.

Meanwhile, wage growth has accelerated. Average hourly earnings are up 3.2% from a year ago, versus the gain of 2.8% in the year ending in April 2018, and 2.5% in the year ending in April 2017. And the gains in wages are not just tilted toward the rich. Among full-time workers age 25+, usual weekly earnings are up 3.5% for those in the middle of the income spectrum. But wages are up 4.9% for workers at the bottom 10% of earners, while up 1.7% for those at the top 10% of income earners. A rising tide is lifting all boats.

Some observers are claiming we should discount strong job creation because workers are taking multiple jobs. But, in the past year, multiple job holders have been just 5.0% of the total number of employed workers; that’s lower than at any point during the 2001-07 expansion, or during the previous longest recovery on record during the 1990s. Meanwhile, part-time jobs are down since the expansion started, meaning, on net, full-time jobs account for all the job creation during the expansion.

What’s interesting is that President Trump, Vice President Pence and NEC Chief Larry Kudlow all think things could be even better if the Fed hadn’t raised interest rates. President Trump, in fact, is calling for a 1% interest rate cut. This puts the Administration at odds with Fed Chair Jerome Powell, who thinks interest rates are at appropriate levels.

We don’t disagree with the theory behind the thinking of Trump, Pence and Kudlow who say faster economic growth, by itself, doesn’t have to cause higher inflation. A "permanent" supply-side boost to "real" growth from deregulation and marginal tax rate cuts is not inflationary. In fact, as we’ve previously written, the growth potential of the US economy has accelerated. Productivity (output per hour) is up 2.4% in the past year, deep into this recovery, when normally productivity growth should slow.

But "nominal" GDP (real growth plus inflation) is still up 4.8% at an annual rate in the past two years, and is set to equal, or exceed, that in the year ahead. If we think of nominal GDP as the average growth rate of all businesses in the economy, then a federal funds rate of 2.375% is not holding anyone back. Even projects with a below-average return could justify borrowing, which is a recipe for disaster – what Ludwig von Mises called "mal-investment" – when people push investment into areas that are unsustainable at normal interest rates. Remember the housing bubble?

That’s why we want Powell and the Fed to resist calls to cut rates. The Fed is not tight. Interest rates are not discouraging investment. If anything, the Trump administration should work to cut government spending, which has grown so large it’s crowding out private sector growth.

https://www.ftportfolios.com/Commentary/EconomicResearch/2019/5/6/the-big-picture-and-the-fed

Consensus forecasts come from Bloomberg. This report was prepared by First Trust Advisors L. P., and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.

Morning Tack - “Melt Up?”

Jeffrey D. Saut, Chief Investment Strategist  (727) 567-2644

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I received a lot of questions about Larry Fink’s (CEO of Blackrock) statement on CNBC yesterday when he said, “I think the risk right now is that we have a melt up in the equity market while everyone is under-invested, not a meltdown.” I also got a lot of questions about my statement that, “In bull markets, most of the surprises come on the upside!” That said, my short-term energy indicator still suggests the equity markets are out of gas on a trading basis and need time to rebuild their energy. As often stated, my long-term energy indicator remains highly bullish. And yesterday was another “stall session” (just like Monday’s session) with the S&P 500 (SPX/2907.06) up a mere 1.48 points. Regrettably, my short-term timing work continues to show the stall should extend for a few more sessions. Accordingly, I would not chase stocks right here, yet longer term, I remain highly bullish despite the chants from a number of pundits I saw on CNBC yesterday stating that the stock market is priced for perfection. In my view, nothing could be further from the truth.

Looking at the longer term, I recently received an excellent report from our friends at Federated titled, “2019 Principals for Successful Long-Term Investing."

To wit:

  1. Plan on living for a long time and save more for it.

  2. Cash is not always king, even when, like now, a lot of people are relying on it.

  3. Harness the power of dividends and compounding. Investing in risk assets – and reinvesting dividends – can be powerful moves.

  4. Avoid emotional biases by sticking to a plan. Don’t let biases – home-country or otherwise – sway your better judgment.

  5. Volatility is normal; don’t let it derail you. See through the noise.

  6. Diversification works. Time and again, diversification serves its purpose.

  7. Staying invested matters. It’s always darkest before the dawn.

Well said!

As for yesterday, Financials (+1.37%) and Energy (+0.64) were the best performing sectors, which is why we have highlighted them for quite some time. Again, as our pal Leon Tuey writes:

Last week, all the A-D Lines closed at record highs along with the QQEW, XLY, & IYR. What bear market? Today, both the DOW A-D Line and the NYSE A-D Line closed at record highs again. Others will be updated later today. As mentioned, the various market indices, too, will post record highs. Also encouraging is that, globally, the financials are breaking out. Clearly, the bull market has resumed. This sector is not only interest-sensitive, but economy-sensitive. Moreover, next to technology, it's the second biggest weight on the S&P. The breakout augurs well for the equity market.

And then there was this from the astute Lowry’s Research Organization:

The DJIA and S&P 500 staged mediocre rebounds today after yesterday's nominal sell-off. Up Volume was 57% of total Up/Down Volume, Advancers were 54% of total Advance/Decline Issues and NY Comp. Volume remained light at 3.3 billion shares. Buying Power and Selling Pressure were both unchanged, while the Short Term Index rose one point. With the market seemingly stuck in neutral, a short-term overbought condition and ongoing signs of selective strength continue to suggest elevated near-term risk.

The Turnaround Tuesday attempt was disappointing, especially when an expiration week tends to have upward bias. When the equity markets fell during the final hour yesterday, a “V” shaped rally developed after the S&P 500 traded with a 2900 handle (low of 2900.71). That makes the 2900 an important support level today. Participants want to make Wednesday an upward squeeze on expiry call options. The time for the expiry squeeze is down to two days. The market is closed on Friday. This morning, the preopening S&P 500 futures are better by six points at 5:00.

 

April 17, 2019

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Morning Tack - “Melt Up?”

Morning Tack - “One More Time”

Investment Strategy US RESEARCH | PUBLISHED BY
RAYMOND JAMES & ASSOCIATES

 

Morning Tack - “One More Time”

Jeffrey D. Saut, Chief Investment Strategist  (727) 567-2644

VIEW FULL REPORT

 

Yesterday, piqued by my never-ending rant that everybody is looking at the wrong yield curve instead of the real curve of the 3 month T’bill to the 30 year T’bond, I got this email from one of the best portfolio managers I know. Craig Drill (Drill Capital) wrote:

"Doesn’t the investment meaning of a flattening or inverting yield curve depend on WHY it is flattening or inverting? If it is because the Federal Reserve is raising short-term interest rates and reducing credit availability, that is a negative at some point. If, however, it is because long rates are falling because of muted inflation and -0- rates in Germany and Japan, isn’t that ultimately bullish?"

As a sidebar, I would note that despite all the cries that a recession is coming, I would ask if that is the case, why is Dr. Copper (the ultimate recession predictor) acting rather well?

Speaking to ultimately bullish, I cannot get much more bullish than I already am. That said, on a very short-term trading basis, the positive energy flow I was looking for later this week seemed to arrive yesterday as Monday’s “stall,” which my work suggested would last at least another session or two, got blown out of the water early yesterday. Indeed, the D-J Industrial Average leaped over 100 points on the opening bell and then extended that rally to over 250 points by 11:00 a.m. From there, however, stocks peaked and began to fade, yet still managed to leave the senior index higher by some ~141 points on the close. Ladies and gentlemen, we are in a credit boom and a secular bull market that has years left to run. Readers should recall that secular bull markets last 15+ years and DO NOT end because of a mere 20% decline.

Despite yesterday’s fade, the stock market’s internals were pretty good. As Lowry’s writes:

"Although the DJIA and S&P 500 closed well off their highs for the day today, market internals were positive. Up Volume was 79% of total Up/Down Volume while Advances were 74% of total Advancing/Declining Issues."

My monthly indicators still have plenty of internal energy, but in the short run, the stock market’s internal energy, by my pencil, still needs to be rebuilt, despite yesterday’s rally. Regrettably, this still leaves me somewhat non-committal on a near-term trading basis but has NOTHING to do with my long-term secular bull market thesis. And then, as another sidebar, I received this from someone that read my “Trading Sardines” report last Monday:

"Dear Sir, I noticed the sardine parable in your commentary and attribution as anonymous. In fact, I was present when Murray Pezim made the joke with all biblical names of Abraham to Aaron sold to Joseph to explain a whirlwind of activity in junior mining in the early eighties. It was his signature joke, but of course he was friends with Milton Berle and Red Buttons. Just thought you might want to know. Sincerely,Victor"

This morning the preopening futures are flat on no news. 

March 27, 2019 

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Morning Tack - “One More Time”

Investment Strategy From Jeff Saut

Investment Strategy US RESEARCH | PUBLISHED BY
RAYMOND JAMES & ASSOCIATES

 

Morning Tack - “Road Trip”

Jeffrey D. Saut, Chief Investment Strategist  (727) 567-2644

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While traveling up and down the west coast of Florida this week, I could not help but recall the famous line from the movie Animal House, “Road Trip!” as well as the old stock market axiom, “When the going gets tough, the tough go on the road!” Clearly, that's what I did this week, and while I was traveling, the stock market was doing some pretty weird things. In fact, I cannot recall the last time I saw the D-J Industrials down over 200 points and the S&P 500 up some 13 points. That's why, when someone asks me about the stock market, I hardly ever refer to the Industrials but, rather, the S&P 500. Leon Tuey does me one better by saying the stock market is not an index, which is why the Advance–Decline Line is a much better indicator of the overall stock market than any index.

"The quote, 'a picture is worth a thousand words' is attributed to Confucius. That may or may not be true. The attendant chart [page 2], however, tells investors much more about 'the market' than what the S&P-obsessed seers have been telling investors. Most on Wall Street always talk about the S&P as it was 'the market' not realizing that it only contains 500 big cap stocks and it is a weighted Index. On any given day, several thousand stocks are traded in the U.S. and that, is 'the market'

For decades, I've been advising those who really want to know what 'the market' is doing to look at the Advance-Decline Lines. Mathematically, it's simply the cumulative differential of Advances and Declines. Each day, sum up the day's Advances to previous days and sum up the declines to previous days and subtract one from the other. Because of the way it is calculated, in a bull market, over time, the Advance-Decline Line should rise and in a bear market, it should be heading in a southeasterly direction. Accordingly, this indicator tells investors more about the health and direction of 'the market' than any market index. Yet pundits keep talking merrily about the S&P. You would think these folks are trading the S&P minis or the S&P futures and not 'the market.'"

I received many emails about the lunch group's comments on inflation, but I want to highlight the following from blast-from-the-past Albert Wojnilower, Ph.D., who became known as Doctor Doom, while Henry Kaufman was Doctor Gloom, as a result of their dire economic predictions of the stagflation 1970s. From his perch at my friend Craig Drill's money management firm, Al wrote this week:

"If so, why have the Fed and many other leading central banks been chronically over-estimating inflation? Two major sources of inflation in the post-World War II period were rising wage rates and oil prices. Technological innovation has curbed them both. Globalization, spurred by advances in communication, travel, and transport (especially containerization), has exposed Western labor to world-wide competition, sapping the political and economic power of industrial labor unions. As for oil prices, the burgeoning of shale and off-shore petroleum resources outside the Middle East has been holding them in check. Moreover, sharp declines in the cost of solar and wind energy, coupled with improvements in storage batteries and the advent of affordable electric cars, are likely to displace fossil fuels. This would fundamentally alter the costs and uses of energy, with far-reaching repercussions around the globe. Textbooks and economic models that treat inflation as a mainly monetary disorder are obsolescent."

Today is option and futures expiration. When equity futures expire, it is usually more difficult to generate an upside squeeze late in the week. That said, the preopening futures are better by some 9 points as I write at 5:10 a.m.

 March 15, 2019

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Morning Tack - “Road Trip”

Monday, Ten Years Ago...

Frist Trust

Monday Morning OUTLOOK

March 11, 2019

Brian S. Wesbury – Chief Economist

Robert Stein, CFA – Dep. Chief Economist

Strider Elass – Senior Economist

It’s March 8, 2009. The market’s down 56% from its all-time high, unemployment is over 8% and hurtling toward 10%, it’s just been reported that real GDP dropped at a 6.2% annual rate in Q4 of 2008, and it feels like the world is coming to an end. You’re tired, exhausted from living through this, and you fall into a deep sleep. So deep, in fact, that you don’t wake up until today, 10 years later.

First thing you do is run to your computer and see the S&P 500 is up 305% since the bottom. You are blown away. No way this could be true! Things were so bad when you fell asleep. Little did you know the S&P 500 bottomed the next day.

So you run over to your friend’s house and knock on the door. Your friend answers, wondering where you’ve been for 10 years! You ask what possibly could have happened to drive the stock market up more than 300%.

Your friend pulls out a list. Let’s call them the "golden geese."

After-tax economy-wide corporate profits are at record highs, up 175% since the bottom, or around 11% annualized growth.

Then your friend tells you about Apple. When you fell asleep, Apple had been selling the iPhone for about a year and a half. Over that period, they sold a record-breaking 17.4 million of them. But since you’ve been asleep, Apple has sold about 1.3 billion of them. Every calendar quarter Apple sells about three times what it sold in that first year and a half.

Then there’s Uber. Your friend tells you how you can press a button on a phone and a few minutes later a car will come by and, before you get in, you know who the driver is, his rating, how much it’ll cost, and how long it will take to get to your destination. All cheaper than a taxi. It seems like science fiction!

You see unemployment is only 3.8% and think it’s a typo, because when you fell asleep it was more than double that.

Your friend shows you a video of a self-driving semi-truck that Budweiser used to carry 51,744 cans of beer from Fort Collins, CO, to Colorado Springs, CO. About 130 miles on I-25 with no driver! Now Amazon is deploying similar trucks.

But what may be most amazing is that that there have been several years over the last 10 that the US has run a trade surplus with OPEC. You wonder how this can be since the US was in an energy crisis when you fell asleep. In fact, oil production had been on a declining trend for about 50 years. Your friend tells you it’s all changed. Since you have been asleep, because of new technology, oil production has more than doubled, from about 5 million barrels per day to around 12.1 million barrels per day. In fact, the US is now the world’s biggest oil producer. Bigger than Russia and Saudi Arabia! The state of Texas, by itself, just surpassed Iran to become the world’s fifth biggest oil producer!

You continue through the list and are more and more blown away. It’s been only 10 years and the world is completely different, for the better! You barely recognize it, so many things have happened that you wouldn’t have even dreamt possible.

And notice, you have no idea who is President, what’s been going on with interest rates, Quantitative Easing, China, or North Korea. You’ve never heard of "AOC" and you missed the whole Greek debt crisis. All you know about are these "golden geese." And that’s all you need to know. The entrepreneur, alive and well, has continued to revolutionize the world over the past 10 years. That’s what has been driving economic growth and the stock market.

Imagine where we will be 10 years from now. Our guess is that it will be better than you can think.

************************************

As a side note, celebrating the 10-year anniversary of the current recovery and bull market is very satisfying to us.

We believed the Panic of 2008 was made significantly worse (trillions of dollars worse) than it needed to be because of overly strict mark-to-market accounting. Forcing banks and other financial institutions to write the value of assets down to fire sale prices based on frozen markets put the whole financial system at risk.

No amount of money from the Federal Government would have ever stopped it. Private investors stopped investing in banks. Markets stopped trading. All because assets were being written down well below the amount of cash they generated.

Quantitative Easing and TARP were both unnecessary, and useless. QE was started in September of 2008 and TARP was passed in October. During the next five months, the S&P 500 fell an additional 47% and financial stocks declined 70%. There is no evidence (unless you value self-proclaimed victories) that either worked.

The market turned on March 9, 2009, when the House of Representatives decided to push the Financial Accounting Standards Board to reverse the damaging mark-to-market rules. The change wasn’t made until April 2009, but the market knew it was coming. The change allowed banks to use cash flows to value investments. And guess what, private investors came back. They invested in banks and other equities and that was the turning point.

While government will tell you that it saved the economy, it didn’t. Once mark-to-market accounting rules returned to the way they were from the late 1930s through 2007, the economy could recover. And that’s exactly what it did. This recovery and the bull market are based on entrepreneurship. It’s not – and never was - a Sugar High.

TARP would have never been enough to save the system because assets would have continued to be marked down. And QE was unnecessary because the problem wasn’t due to a lack of money in the system.

Some members of the Federal Reserve try to compare 2008/09 to the Great Depression, and argue Milton Friedman would have wanted QE. But in the Great Depression, the money supply was declining. It never declined in 2007 or through September 2008, when QE was started. The problems in the system were capital problems, not liquidity problems.

In fact, it is our belief that without those overly strict mark-to market accounting rules, Bear Stearns, Lehman Brothers, WAMU and Wachovia would never had needed to go under.

Thank goodness the rules were changed, allowing the free market and entrepreneurship to once again work the magic that has transformed this great country since its start.

The attached information was developed by First Trust, an independent third party. The opinions of Brian S. Wesbury, Robert Stein and Strider Elass are independent from and not necessarily those of RJFS or Raymond James.  All investments are subject to risk. There is no guarantee that these statements, opinions or forecasts provided in the attached article will prove to be correct. Individual investor's results will vary. Past performance does not guarantee future results. The S&P 500 is an unmanaged index of 500 widely held stocks that's generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index. The Troubled Asset Relief Program (TARP) was a group of programs created and run by the U.S. Treasury to stabilize the country's financial system, restore economic growth, and mitigate foreclosures in the wake of the 2008 financial crisis.

Morning Tack - “Boeing Crash”

Jeffrey D. Saut, Chief Investment Strategist | (727) 567-2644 | jeffrey.saut@raymondjames.com

MARCH 12, 2019 | 8:16 AM EDT

"If there is one thing to be gleaned from the futures market this morning, it is this: the Dow Jones Industrial Average is not 'the market'. When one refers to 'the market', think the S&P 500.”

. . . Briefing.com

If I have heard it once, I have heard a million times from stock market guru Leon Tuey. To wit:

"Many persist in believing that the S&P is 'the market' which it is not as it only represents 500 big cap stocks and it is a weighted index. On any given day, however, several thousand stocks are traded in the U.S. and that is 'the market'. Hence, it's much more important and more informative to watch the Advance-Decline Lines as they reveal the true health of the market.

SHORT-TERM: Last week, the short-term oscillators (daily) registered oversold readings pointing to a bounce this week, and the market is rallying right on cue. Pundits, however, point to the 200+-point drop at this morning's opening. Little do they realize that much of the loss was due to a sharp plunge in Boeing and other airline stocks while Advance outnumbered Declines by a margin of more than 2-to-1 both in New York and on the NASDAQ. In other words, most stocks rallied.

INTERMEDIATE-TERM: As mentioned, in the week of February 25, a consolidation/correction was signaled as the market was grossly overbought, momentum and sentiment deteriorated. Short-term rallies notwithstanding, until a grossly oversold condition is reached, momentum and sentiment improve, further consolidation/correction lies ahead. As noted, the correction will prove to be rotational/time rather than magnitude as in December, fearful of a recession and a bear market, investors liquidated their equities ferociously. Consequently, they are grossly under-weighted in equities and are sitting on a mountain of cash. Now, they are starting to realize that given the Fed's dovish posture, there is no recession and as this begins to dawn, investors will scramble to get back in. Hence, the consolidation/correction is nothing more than a normal reaction to an overbought condition within an ongoing bull market which is healthy. After gaining more the 19% from its December low, the bull is just trying to catch its breath, a well-earned rest.

LONG-TERM: The secular bull market which commenced on October 10, 2008, remains firmly intact. Investors are witnessing the second leg of this great bull market that began in February, 2016 which is always the longest and strongest as it is driven by improving economic conditions caused by the monetary stimulation of years past. Since the first leg lasted nearly seven years, despite the black headlines and the widespread fear, the current leg remains relatively early."

And then there was this from our friends at the astute Lowry’s Research Organization:

"On Monday, the DJIA and S&P 500 rallied throughout the day, adding 0.79% and 1.47%, respectively. The lag in the DJIA was the result of extraordinary weakness in one of its largest components – Boeing (BA). Overall, Demand and the breadth behind the gains were strong, with Up Volume at 83% of total NY Up/Down Volume, while Advancing Issues made up 79% or total Advance/Decline Issues. Further support for Monday’s rally was reflected in Buying Power’s 4-point gain and Selling Pressure’s 4-point loss."

Stock Chart’s, John Murphy, went one further by writing:

"1) TECHNOLOGY SECTOR LEADS TODAY'S REBOUND AND HOLDS ITS 200-DAY LINE

2) SEMICONDUCTORS ARE HAVING AN EVEN STRONGER DAY

3) THE NASDAQ AND S&P 500 REGAIN THEIR 200-DAY LINES

4) THE DOW SHRUGS OFF BIG BOEING LOSS

5) AND IS BEING LED HIGHER BY APPLE, INTEL, AND MICROSOFT

6) MICROSOFT NEARS ANOTHER TEST OF ITS DECEMBER HIGH"

As for me, I have always averred the support level for the S&P 500 (SPX 2783.30) was in the 2700–2730 level and that the December 2018 intraday low of 2346 would NOT be retested. Last week’s pullback stopped at 2722.27; GED! Speaking to crude oil, as Cornerstone Analytics’ savvy Mike Rothman writes:

"Fears of an economic slowdown in China have recently weighed heavily on global oil prices. Demand deterioration leading to a drop in demand might sound like straightforward logic, but February’s Chinese oil usage data paints a completely different picture. Year over year crude demand increased by almost 15%, a staggering 1.78 million b/d for the month. Keep in mind that the per capita oil usage in China is at only 2.3 barrels a person – about one-tenth the usage rate of the US. With coal still accounting for 70% of China’s overall energy usage, we continue to have trouble turning bearish on China’s impact on the global oil balances. In the words of Mike, “it’s strange to see such a preponderance of bearish beliefs that keep getting defied by obvious bullish data.”

Yesterday, the SPX rallied 1.2% above its 200-day moving average, suggesting this rally may have upside “legs.” This year, the Federal Reserve has taken a softer tone, concerns regarding a trade war with China have fallen, and recessionary risks have declined. This more benign backdrop creates the potential for multiples to expand despite uninspiring profit trends. This morning, the preopening futures are marginally higher with no real overnight news.

Risk and Disclosure information, as well information on the Raymond James rating system and suitability categories, is available here.

Investment Strategy: “National Treasure, National Treasury, National Debt"

Jeffrey D. Saut, Chief Investment Strategist | (727) 567-2644 | jeffrey.saut@raymondjames.com

FEBRUARY 25, 2019 | 7:58 AM EST

Dear Clients and friends, please read the entire report!

I was traveling last week seeing portfolio managers and doing gigs for our financial advisors and their clients. I have been doing such events for much of the past six months. The recurring question from clients is, “What about the national debt?” First, I would point out that when everyone is asking the same question it is usually the wrong question. Yet, last week that question hit its zenith as the media trumpeted that the national debt had traversed $22 trillion dollars. With that, I kept getting the same recurring question at events: “Jeff, the debt to GDP is above 100%. Doesn’t that worry you?” My answer has always been:

I don’t think the debt-to-GDP ratio is the right lens to view the debt issue. In a past life I was a fundamental analyst writing stock-specific research on individual companies. When we researched a company we always looked at assets to liabilities. NOBODY looks at America in that way. I don’t know what the Grand Canyon is worth, but it is worth a lot. I don’t know what the Tetons are worth, but they a worth a lot. Now obviously we are not going to sell the Grand Canyon, but the government has many levers to “pull.” A couple of months ago I was driving from San Antonio to the Hill Country to speak at an event. Along the way I drove by an army depot, with nobody there, that had to be 15 miles long. It brought to mind the fact that the government is selling such properties for big bucks. Indeed, the government has many levers it can pull.

Also speaking to this point, our friend, Riverfront Investment Group’s Doug Sandler, in an article titled “National Debt . . . No Time to Worry Yet,” writes this:

In theory, investors should have one less thing to worry about with the passage of the federal spending bill last week, which averted a second government shutdown. However, true to form, investors replaced the fear of too little government spending with new concerns about too much government spending. Given that the bill’s passage coincides with the federal debt surpassing $22 trillion and now exceeding our country’s gross domestic product (GDP), the concern seems justified. In fact, The National Debt Clock personalizes the $22 trillion figure by reminding us that it equates to about $67,000 per US citizen, or roughly $180,000 per US taxpayer.

As scary as the federal debt appears, we are less concerned for two reasons. First, in our opinion, several mitigating factors make the debt load less precarious than what is reported in the headlines. Second, the ‘warning lights’ that would typically flash before a debt crisis remain unlit. According to the Congressional Budget Office’s (CBO) January 2019 report, roughly $5.5 trillion of the $22 trillion is intergovernmental debt. Intergovernmental debt is the debt that the government owes to itself. For this reason, many economists believe that ‘Federal Debt Held by the Public’, which excludes intergovernmental debt, is the more important measure of the Federal government’s indebtedness. By this measure, the federal debt is expected to grow to $16.6 trillion by year-end. While $16.6 trillion is a big number, it’s 25% smaller than $22 trillion and well below the psychological threshold of exceeding 100% of GDP.

Although it would be highly unlikely, if the U.S. was obligated to put up collateral for its loans, there are plenty of assets it could pledge. A few of the ‘priceless’ assets it controls include prime land (national parks) and buildings, a portfolio of patents, usage rights to digital access, and spectrum and mining rights for energy and minerals.

Lastly and most importantly, the Federal government has the ability to print its own currency, like it did in the years following the Financial Crisis. Since 2008, the Federal government printed over $2 trillion in US dollars and has the ability to print even more. In theory, no country with its debts denominated in its own currency should fail to make good on its debt obligations.

Doug’s conclusion is that warning lights are not flashing. Obviously I agree with Doug, having used the same points as Doug’s 2 and 3. I must admit, however, I have never heard about the intergovernmental debt discussed in point 1, but it is a pretty important point. So, I hope this missive allays concerns about the debt-to-GDP question that I keep getting asked.

Turning to the equity markets, last week the D-J Industrial Average (INDU/26031.81) notched its eighth consecutive weekly gain for the longest weekly upside skein since May 1995. According to our friends at Bespoke:

"Despite lots of economic data weakness both in the US and around the world, earnings have been coming in at a respectably strong pace in the US, and asset markets from Asia to Latin America have been rallying steadily. Whether the explanation is still-cheap valuations, less hawkish central banks, the hopes of positive effects from credit stimulus in China, or possible winding down of trade tensions, there’s plenty of explanations for the ongoing equity rally."

Meanwhile, the Advance-Decline Line for the S&P 500 continues to trade to new all-time highs and as Leon Tuey points out, “The A/D Line is a much better indicator of the strength of the equity markets than any index.” Other breadth metrics are equally as strong. The eight-week rally has caused AAII’s bullish sentiment to rise to 39.32%, which is not all that extreme. However, bearish sentiment has fallen to 25.39%, which is somewhat extreme. The strong rally continues to leave all of the overbought indicators I follow at extreme overbought levels, as well credit spreads are somewhat elevated vis-a-vis credit, which could be a red flag for stocks in the short term (chart 1 below). Interestingly, given all the recession talk, Dr. Copper, one of the best economic indicators, has broken out to the upside in the charts (chart 2 on page 3). And don’t look now, but crude oil has broken out in the charts to the upside (chart 3); buy the midstream MLPs.

The call for this week: Over the weekend Jim Paulsen said, “Last year to be successful you had to find a way to stay appropriately cautious in the face of nothing but optimism. This year you must stay bullish in the face of nothing but pessimism on fears of slowing earnings growth, trade wars, and other threats.” Speaking to earnings, so far of companies reporting 4Q18 earnings 63.8% have beaten the estimates, while 60.1% have bettered revenue estimates. That is not as strong as the past four quarters, but it still is not bad. My indicators that were looking for an energy polarity peak have reversed with the mild stall we have seen and currently are configured again to the upside. I did not expect that, but in this business you take what they give you. As one of my mentors used to say, “It is no disgrace to guess wrong, the mistake is to stay wrong!” My indicators now reflect an upside move without much of a pullback. The pace of the rally should slow, however, following this extraordinary December upside run. This morning the preopening S&P 500 futures are better by some 13 points as I write at 5:17 a.m. because the president has delayed the implementation of further tariffs of Chinese goods.

“For charts associated with this article, please click this link”

https://raymondjames.bluematrix.com/sellside/EmailDocViewer?encrypt=f255d9a7-4262-4744-8bc5-bbfe7851ce50&mime=pdf&co=raymondjames&id=matt.goodrich@raymondjames.com&source=mail

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