Tower Private Advisors
- A look at past bull markets
- Goldman Sachs nastiness
- Q1 Earnings season begins
- Differing inflation views
Capital Markets Recap
Missing in action
We have, concurrently, views of the markets in three time frames: short, cyclical, and secular. We’re currently positive on the first and concerned about the latter two, for a number of reasons. One thing that can help frame one’s view is to consider how it fits into an historical context. Accordingly, here is a chart showing major bull markets since 1929.
Along the horizontal axis is shown the cumulative return of each bull market, while the vertical axis displays the duration of each bull market. The green icon shows the average for all the bull markets; the yellow, the median; red, the current. Having just celebrated the two-year birthday of this bull market, one can see that it should go on for about two more years. And, judging by the average return of each, we’ve got more room for prices to move higher. Unfortunately, the post-1987 crash experience–the diamond way up in the northeast corner of the graph–skews the results badly. When that’s corrected for by looking at the median experience, it’s evident that the current bull market has about run its course in terms of appreciation. There is nothing to say it can’t go further–indeed, we think it might–but this is helpful context, and it causes one to wonder what might push this rally beyond the historic median. Let’s take a quick look some potential drivers.
- Economy – strengthening
- Monetary policy – favorable for stocks
- Valuations – stocks reasonably valued, but with profit margins at all-time highs
- Investor sentiment - pretty darn frothy
These are all favorable factors, but they can’t get priced into stocks more than once. In other words, stock prices already reflect all of these, and there would have to be improvements in each to push stocks, as a group, higher. Stocks would be in a much better position were the economy not yet strengthening, monetary policy with some room to improve, cheaper stocks, lower profit margins, and investors depressed.
Here’s the glass half-full version:
- Economy – an employment boost could goose the economy
- Monetary policy - the Fed could announce another round of quantitative easing (read: print money and buy assets)
- Valuations – profit margins could stay high (they are, however, a mean reverting series, as they attract competition)
- Investor sentiment - this has to come down, but it could get worked off without doing significant damage to markets
- Google missed its earnings mark as a result of increased hiring. Revenues were strong, however, and most companies would kill for what a Stifel Nicolas analyst called its “decent” earnings growth rate of 19%
- Goldman Sachs said to take profits in commodities, that while the long-term picture is strong, the group is over-extended in the short term. Before you rush to hit the sell button, this is the same firm that forecasted a $200/bbl oi price forecast shortly before the black gold peaked.
- That sort of short term outlook won’t help the upcoming Initial Public Offering of Glencore, a producer and marketer of commodities. (Copper, for example, fell by 4% this week.) Funny…Goldman Sachs was not asked to be part of the IPO syndicate. They wouldn’t issue such a report out of spite, would they? If you don’t believe it, you’d better get your believer examined.
- The first quarter earnings reporting season arrived this week, and just 11 of 499 S &P 500 companies have reported, so it’s too early to make much analysis of it. But just to give you an idea of what we’re dealing with with the what-have-you-done-for-me-lately crowd, Alcoa–the first biggie to report–announced earnings growth of 180% and an earnings per share figure that beat analyst estimates. The stock fell by 6.02%, as revenues failed to meet expectations.
The Federal Reserve released its latest Beige Book, so named because the cover is, well, beige. You can see the word cloud by clicking here, but you won’t want to click here, which will take you to the 18,000 word dispatch. The report is totally anecdotal, with descriptions of business activity gathered by the 12 regional Federal Reserve offices. It’s released eight times per year, and this one generally described a modestly growing economy.
That wasn’t, however, reflected in the weekly report on Initial Jobless Insurance Claims. That report showed an unexpected–as if economists ever expect what happens–jump in claims of 27,000. Dennis Gartman appropriately referred to the weekly figures as “noise,” as he expected the trend in jobless claims to continue downward.
The Consumer and Producer Price Indexes were released this week. Headline wholesale prices are up by 5.8% on a year-over-year basis, while core prices were up by 1.9%. At the consumer price level, where most of us spend our hard-earned funds, headline prices were up by 2.7%; core prices were up by 1.2%. Naturally, it’s these sorts of disparities–and the Fed insistences that inflation is not a problem–that lead folks to wonder if the people at the Fed are smoking weed. They may be but their insistence is based on studies that show that commodity inflation (e.g. food and energy, which are not included in the core indexes) does not lead to general and widespread price inflation. Rather, that is driven by increases in wages. So far–and sadly–there is no wage rate inflation. Shown below is a look at headline CPIs around the world.
Then, here is a chart from the Shadow Government Statistics that shows inflation were it still calculated as it was in 1980 alongside the current version of the Consumer Price Index. John Williams, of that site, seems to suggest his gauge–the 1980 model–is a better measure of the cost of living.
Key indicators to watch
- Initial Jobless Claims (Thursday) – weekly
- Leading Economic Indicators (Thursday) – March
- Philadelphia Federal Reserve report (Thursday) – April
- NAHB Housing Market Index (Monday) – April
- Building Permits (Tuesday) – March
- Housing Starts (Tuesday) – March
- Existing Home Sales (Wednesday) – March
- House Price Index (Thursday) – February