Profits Earned, Lessons Learned, Sessions Burned
It has been an overwhelming week in terms of market action, as earnings season hits its crescendo, and analyst calls are aplenty. Outside of the individual stock results and outlooks that matter so much to investors, the political scene continues to require appropriate comprehension, and there has been no shortage of macroeconomic data to take in as well. So while we’ve had our hands full in the stuff that wakes us up each morning, I do think this week’s Dividend Café blends interesting content and understandable messaging. And take in the video here as well, which gives a little look at our New York office, and provides some more candid commentary on the current political environment. Off we go …
Earnings, Learnings, Burnings
Yes, earnings have been quite strong as we delve into the heaviest part of earnings season. What have we learned? I do feel quite vindicated in my thesis that observers were way of ahead of themselves to believe all the political hopes post-Trump would be “smooth sailing,” whereas our belief was that the bulk of his agenda would come to fruition, but not without specific wrangling, adjustment, headwinds, and delay. We have certainly been right about all the latter action thus far, though it remains to be seen if we are right about the former (color us optimistic). The point is that policy developments have a way of becoming strongly de-correlated from the stock market right at the times that investors expect the correlation to be highest. This year is the most intense illustration of this reality I can remember – that the political interest levels were at their very highest, even as the market’s sensitivity to such was extremely low. The President’s unseemly behavior this week with Attorney General Sessions this week did not impact markets for the same reason that most any other political headline event hasn’t – numbness rules the day; numbness, and earnings.
The only grade on Trump’s report card
Obviously a much higher unemployment report than the very low 4.4% one we have now could happen in the next couple of years, but it isn’t likely, and a much lower one is not very likely either, or impactful. The stock market is already up 3,000 points since President Trump was elected, but while we all are probably happy about it, I do doubt that stock market returns will be the message he will want to sing with his rather populist base. When we look at the plethora of metrics that are likely to determine the economic success of President Trump, I believe it not be unemployment, the S&P, consumer confidence, or even the deficit; rather, it will be good old-fashioned real GDP growth. That number (and its extended weakness over the last eight years) is a big reason why President Trump won the election. And that number is where by far the most controversy exists amongst market analysts. Many believe we are in “secular stagnation” or a “new normal,” where something like 3%+ real GDP growth is impossible. Others believe the engines of productivity are there, but some shackles need to come off to let the economy grow. Fundamentally, we don’t know the answer to that question, or more specifically, whether or not those growth shackles will come off. But we do firmly believe THIS is what will end up being the sole metric of economic success.
Setting the Record Straight: Should Investors Worry About Trump and Russia?
Setting the Record Straight: Should Investors Worry About Trump and Russia? Comment your thoughts and questions below to have David answer them personally.
Posted by The Bahnsen Group on Wednesday, July 26, 2017
I have never heard of a black swan
A reader chastised me recently for using the term “black swan” without explaining what I was talking about. I am quite sure I do it a great deal, and the amount of jargon and acronyms in our business that we use in nearly every sentence, but which cause normal people to think we speak in tongues, is truly overwhelming. That said, I want to never cease defining and explaining, as that form of investor IQ growth is a major aim of this Dividend Café project. Most people know that swans are white, and anyone who has ever seen a swan has surely seen a white one. But in 1697 Dutch explorers discovered black swans in Western Australia. They had never before been seen or recorded. But then they were, unexpected as it may have been. The indomitable mathematician, Dr. Nassim Taleb, used this incident to coin a phrase for events in financial markets that we believe to be impossible – off the radar – yet can come out of nowhere. All the precedent, track record, and built-up expectations of something go out the window once one isolated incident that disproves it comes into play.
Early report card on earnings season …
We’re not quite halfway done, but thus far: 74% of companies have beaten expectations on earnings; 72% have beaten on top-line revenues!
A Currency Primer
The Euro has strengthened dramatically against the dollar. The Fed began raising rates some time back and yet the dollar has dropped materially since the beginning of the year. The ECB is dramatically more dovish right now than the Fed, yet their currencies are going in the opposite direction one would expect. Why? There are three things that must be understood:
(1) It is utterly false that when a central bank (namely ours) raises rates, the dollar strengthens. That may be intuitive, but it is false. As we have written countless times, the historical precedent playing out yet again is that the dollar strength one would expect from rate increases normally happens in advance of the tightening and that the dollar normally reverses when it is actually happening. It’s just historical fact.
(2) Currencies, like many asset classes, do respond to expectations more than news, so the mere expectation that Draghi and the ECB are closer to stopping quantitative easing than beginning it plays in
(3) Monetary policy and interest rates are NOT the sole drivers of currency behavior, and they have never been. Trade flows, inflation realities, inflation expectations, economic strength, tax policy, competitiveness, stability, and a number of other factors all play in.
I’m old enough to remember a few months ago
One of the driving beliefs at The Bahnsen Group is that crowds are often wrong, sometimes revealed as such sooner and sometimes later, and that those who manufacture financial products do so based on what they believe investors will buy, not what they should buy (there is no fiduciary duty on the manufacturing side of our business, I’ll tell you that!). It seems like yesterday (and it wasn’t too long ago at all) that “currency hedged index funds” were all the craze (“buy the beauty of the European stock market with the awful risk of the currency”), never mind the fact that history has shown a significant part of the return and diversification benefit in internal investing is, itself, currency-related! So after these products were sold every which way you can imagine, how have things panned out? Regular unhedged normal European equities have more than doubled their hedged counterparts in just six months! Is the moral of the story that we should have known the Euro would do this, or the dollar would do that? No, not at all. Rather, it is that once these products became the products du jour, we should have known not to buy them. And of course for The Bahnsen Group, buy them, we did not.
So what was your first clue?
Magazine covers serving as CONTRARY indicators have a long and fascinating tradition in our business. This cover’s date?? December 2016
Chart for the U.S.dollar since this magazine cover ran (FactSet, July 27, 2017)
Is Globalization dead? Better let your realtor know…
Foreign purchases of residential real estate here in the United States are at all-time highs in the number of homes bought and in total dollar volume. Over the last 12 months, foreign purchase of residential real estate exceeded $150 billion, 50% more than the year prior. This represents almost 300,000 homes, and while it is 5% of all transactions, it is over 10% of total dollar volume (pointing to the heavy concentration foreign purchase represents the higher end of the market). As for the sustainability of this trend, we have no comment, as it is wholly unprecedented.
Craziest thing I heard all week
With a special shout-out to my colleague in San Diego, David Molnar, who passed along a white paper for my review, I became privy this week to the methodology many “index funds” get to use for calculating things like their P/E ratio. One might be tempted to look at the ETF for the Nasdaq and see that it trades at “only” 22x earnings … The fact that every company with negative earnings (a lot of them), and every company with a really high P/E (some of the biggest weightings) are not factored in at all – eliminated from the calculation – doesn’t seem to bother anyone. The idea of doing a simple sum of parts for the index from the companies to calculate a real P/E ratio for the index would apparently have been a turn-off since the Nasdaq trades about 43x earnings. Thank you for the information, Horizon Kinetics, and thank you for bottom-up active management, God.
Chart of the Week
Our heavy focus on monetary policy and its role in affecting markets becomes more important when one sees charts like this. You will note that the Bank of England has no real increase in their balance sheet (bonds they have bought) throughout the crisis, whereas the Fed, Europe, and Japan have added nearly $10 trillion in aggregate. This is why we refer to “normalization” as the process ahead … And we suspect it will take place with the same speed it took to even start: Slowly …
Quote of the Week
“Nearly all men can stand adversity, but if you want to test a man’s character, give him power.”
– Abraham Lincoln
Originally published on Dividend Cafe.
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