Financial Review

About Face

Sinclair Noe — August 15, 2017

Podcast: Play in new window | Download (Duration: 13:15 — 7.6MB)

Subscribe: iTunes | Android | RSS

DOW + 5 = 21,998
SPX – 1 = 2464
NAS – 7 = 6333
RUT – 11 = 1383
10 Y + .05 = 2.27%
OIL + .13 = 47.72
GOLD – 10.50 = 1272.10
BITCOIN + 0.72% = 4174.04 USD
ETHEREUM – 1.28% = 286.10

Several members of President Trump’s manufacturing jobs council resigned following what was widely considered an inadequate response from the president to violence in Charlottesville, Va. over the weekend that led to three deaths.

The executives that have resigned include: Ken Frazier – CEO of Merck, Brian Krzanich of Intel, Kevin Plank of Under Armour, and Scott Paul – President of the Alliance for American Manufacturing. That makes 7 CEOs who have resigned from Trump’s councils this year.

The AFL-CIO, a federation of labor unions that represent 12.5 million workers, said it was considering pulling its representative on the committee. AFL-CIO President Richard Trumka said the council “has yet to hold any real meeting,” and “there are real questions” about its effectiveness.

Several other members of the council issued statements denouncing racism and bigotry. Walmart CEO Doug McMillon issued a statement saying the president “missed a critical opportunity to help bring out country together.” McMillon remains on the council for now.

Trump tweeted a response, “For every CEO that drops out of the Manufacturing Council, I have many to take their place.” Although so far there have been no new additions to the council. That was followed by a tone-deaf tweet storm and a press conference in New York, where Trump said, “I think there’s blame on both sides.” Prompting a thank you tweet from David Duke.

CEOs are loath to alienate customers through politics and never want to be the target of a tweet storm from Trump. But corporate leaders who were once eager for a seat at the Trump table are increasingly deciding the costs outweigh the benefits. There is a herd effect. With each CEO’s announcement, it becomes easier for the next CEO to take a stand — and the pressure goes up to do so.

The Congressional Budget Office says ending government payments that help low-income people afford to use their Obamacare plans would raise total federal spending by billions of dollars over the next decade.

Halting the payments to insurers, known as cost-sharing reductions, would boost Obamacare premiums for mid-level Obamacare plans by 20 percent next year, and by about 25 percent in 2020, as insurers raise their charges to make up for the lack of payment.

Since Obamacare provides separate subsidies to individuals to help them cover the cost of premiums, the overall effect would be to boost government spending, to the tune of $194 billion over the next decade. President Donald Trump has threatened to cut off the payments to force Democrats to negotiate changes to the program.

Without the payments, insurers have said they may drop out of the Affordable Care Act’s exchanges or substantially raise premiums. Already, insurers have said uncertainty over how the Trump administration plans to run the law is contributing to large requested premium increases for next year.

Retail sales recorded their biggest increase in seven months in July as consumers boosted purchases of motor vehicles and raised discretionary spending. Retail sales jumped 0.6 percent last month, the largest gain since December 2016. Retail sales for June and May also were revised higher. Retail sales increased 4.2 percent in July on a year-on-year basis.

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, increased at a 2.8 percent annualized rate in the second quarter after a tepid 1.9 percent pace in the January-March period. That boosted GDP growth to a 2.6 percent rate in the second quarter.

Sales were likely boosted by hefty discounts as auto dealerships try to reduce inventory. Prices for new motor vehicles recorded their biggest drop in nearly eight years in July and have decreased for six straight months.

The retail sales report prompted the Atlanta Fed to raise its third-quarter GDP estimate by two-tenths of a percentage point to a 3.7 percent rate.

Americans are spending more and saving less. The saving rate has dropped to 3.8 percent in the second quarter of this year from a rate of 6.2 percent in the second quarter of 2015. Persistently sluggish wage growth has pushed Americans to dip into their savings to fund spending.

Americans’ debt level notched another record high in the second quarter. According to a Federal Reserve Bank of New York report total U.S. household debt was $12.84 trillion in the three months to June, up $552 billion from a year ago.

The proportion of overall debt that was delinquent, at 4.8 percent, was on par with the previous quarter. However, credit card balances in delinquency “ticked up notably.” Total U.S. indebtedness is about 14 percent above the trough of household deleveraging brought on by the 2007 financial crisis.

Mortgage debt was $8.69 trillion in the second quarter, up $329 billion from last year. Student loan debt was $1.34 trillion, up $85 billion, while auto loan debt came in at $1.19 trillion, up $55 billion.

Analysts have been warning for years that subprime car loans pose a threat to lenders as delinquency rates have edged higher since reaching a post-recession low in 2012. But it wasn’t until last quarter that the least creditworthy borrowers started to show the kinds of late payment profiles that accompanied the start of the financial crisis.

Equifax data show that lenders are extending repayment periods and offering longer terms, with many starting to exceed seven years. There may also be loosening by all lenders on other factors, such as down-payment requirements, lack of third party validation of income and employment.

A second report from the New York Fed showed its Empire State general business conditions index climbed 15.4 points to 25.2 in August, the highest level in nearly three years. Manufacturers in the region reported a jump in new orders and said they were taking longer to deliver goods.

US import prices increased in July after two straight monthly declines, driven by rising costs for petroleum products and food, but underlying imported inflation remained muted. The Labor Department reports import prices edged up 0.1 percent last month after an unrevised 0.2 percent drop in June.

Last month’s increase was in line with economists’ expectations and left the 12-month increase at 1.5 percent. The year-on-year increase in import prices has slowed sharply since hitting 4.7 percent in February, which was the biggest advance in five years.

The report also showed export prices rebounded 0.4 percent in July, the biggest gain since December 2016, after falling 0.2 percent in June.

The Commerce Department that business inventories rose 0.5 percent in June after an unrevised 0.3 percent increase in May. Inventories are a key component of gross domestic product. Retail inventories gained 0.6 percent in June. Motor vehicle inventories increased 0.7 percent. Business sales rose 0.3 percent in June.

At June’s sales pace, it would take 1.38 months for businesses to clear shelves, up from 1.37 months in May.

Home Depot reported a better than expected profit, record quarterly sales and an improved outlook for the full year. This proves two things: The company is still Amazon-proof — and the housing market is still one of the brightest spots of the US economy.

Home Depot said that sales were up 6.6% at U.S. stores open at least a year. Net income jumped 9.5 percent to $2.6 billion, or $2.25 per share. Net sales rose 6.2 percent to $28.1 billion, the highest quarterly sales in company history. Home Depot raised its full-year forecasts but concerns over a looming slowdown in the U.S. housing market due to supply constraints pushed shares down 2.6%.

TJX reported better-than-expected quarterly profit and sales and raised its earnings forecast. As traditional retailers struggle in the face of changing consumer tastes and competition from Amazon, TJX has been posting strong sales for several quarters by offering sharp discounts. TJX said its comparable-store sales rose 3 percent in the second quarter.

Shares of General Electric were down 0.9 percent, at their lowest point since October 2015. While the S&P 500 returned more than 35% to investors over the past three years, GE returned less than 9%. A late Monday quarterly report from Berkshire Hathaway showed Warren Buffet sold his stake in GE.

Without the eye-popping returns of a few high-flying technology stocks, the performance of the market would look very different — and not in a good way; 45 days after the end of a quarter, hedge funds must file 13Fs to disclose their holdings. They are selling the FAANG stocks (Facebook, Amazon, Apple, Netflix, Google).

Between the end of 2016 and July 24, the FAANGs gained some 36 percent as a group, compared with 9.39 percent for the S&P 500 Index. Since then, the FAANGs have under-performed, losing 2.63 percent to the S&P 500’s 0.18 percent decline.

Bill Gates has donated $4.6 billion or 64 million Microsoft shares according to a US Securities & Exchange Commission filing. The recipient of the gift was not specified but it is expected that the money will be directed to the Bill and Melinda Gates Foundation he and his wife set up in 2000 with $5bn funding to improve global healthcare and reduce extreme poverty.

The shares donated represent about 5% of his current $90 billion fortune. The gift reduces Gates’s stake in Microsoft to just 1.3% from 24% in 1996. Bill and Melinda Gates have donated $35 billion since 1994. The Gates Foundation has grown to become the world’s largest private charity with $40.3 billion of funds, before the latest gift.

This latest donation is the biggest charitable gift made anywhere in the world so far, this year, overtaking a $3.2 billion contribution by investor Warren Buffett to the Gates foundation last month.

Financial Review

See What Sticks

Sinclair Noe — May 1, 2017

Podcast: Play in new window | Download (Duration: 13:15 — 7.6MB)

Subscribe: iTunes | Android | RSS

DOW – 27 = 20,913
SPX + 4 = 2388
NAS + 44 = 6091
RUT + 6 = 1407
10 Y + .04 = 2.32%
OIL – .56 = 48.77
GOLD – 11.60 = 1257.10

Once again, the Nasdaq hit a record high close. And the VIX, the volatility index dipped down under 10. Nothing to worry about here. Meanwhile, investors braced for another heavy week of quarterly corporate results in an earnings season that has exceeded expectations.

Overall, profits at S&P 500 companies are estimated to have risen between 12 percent and 13.6 percent in the first quarter, the most since 2011. First quarter GDP came in at 0.7 percent. The difference between earnings per share growth and gross domestic product expansion in the first quarter is the widest since the third quarter of 2011.

S&P 500 companies that generate more than half their revenue overseas are posting quarterly earnings growth of 19.9 percent on average, double that of companies that conduct most of their business domestically. About 46 percent of S&P 500 sales overall come from foreign markets. Other factors helping earnings and overseas economic growth are softness in the U.S. dollar and stabilizing oil prices.

The greenback has traded mostly lower this year after sharp gains in 2014 and 2015 that cut into overseas profits. Meanwhile, oil recovered from a sub-$30 a barrel low last February to trade in a range near $50 a barrel. U.S. crude is up about 7 percent over the last 12 months.

To be sure, there’s another reason why earnings look so good: A year ago, they were bad. Last year’s poor results for S&P 500 companies overall, including four straight quarters of earnings decline, set a low bar for companies to overcome.

You’ve heard the old axiom, Sell in May and Go Away; that is the simplified version. If you follow the directions, you could sell in May, or slightly before or after depending on when the market gives a sell signal. The critical reference point for the adage is the MACD. A traditional sell signal occurs when the MACD line crosses below the signal line. The Sell in May refers to the best and worst six month, so the idea is to stay away until the end of October.

The saying may be better at avoiding volatility in September and October than any big downturn in May. If you don’t want to sell in May, you might consider more defensive positions, or even a few short trades.  The next week could provide direction for the markets. We have a Federal Reserve policy meeting on Wednesday, a jobs report on Friday, and Sunday brings the French election between Macron and Le Pen. Buckle up.

Over the weekend, congressional negotiators have hammered out a bipartisan agreement on a spending package to keep the federal government funded through the end of the current fiscal year on Sept. 30. You are probably shocked by the news that congress worked over the weekend. Congress is expected to vote on the roughly $1.1 trillion package early this week.

The White House sought funding to begin building the wall, as well as $18 billion in cuts to domestic agencies, and both demands were rebuffed. The spending deal includes money for Planned Parenthood. The package includes $12.5 billion in new military spending and $1.5 billion more for border security, but not for a wall or additional Immigration and Customs Enforcement agents.

The Environmental Protection Agency, which Trump has sought to shrink dramatically, would receive a 1 percent reduction of $81 million in funding and no staff cuts. The deal also includes steady or slight increases in funding for agencies within the Department of Energy, such the Office of Energy Efficiency and Renewable Energy, which would get a $17 million increase, and the Office of Science, which would get a boost of $42 million compared to fiscal 2016 funding levels.

One provision allows the secretary of Homeland Security to temporarily increase the cap in H-2B visas for temporary labor through the end of September. Agencies Trump has sought to eliminate, like the National Endowment for the Arts and the National Endowment for the Humanities and the Appalachian Regional Commission, would get modest increases in funding instead.

Today, President Trump told Bloomberg News that he’s considering breaking up giant Wall Street banks by reinstating Glass-Steagall, the 1933 law that separates investment banking from traditional banking. Trump also suggested raising the gas tax to fund infrastructure.

The Trump administration released an outline of a tax plan last week that would slash tax rates for businesses and reduce the number of tax brackets for individuals. The plan, however, was silent on gasoline taxes. So, throw it on the wall and see if it sticks.

The European Union’s summit in Brussels ended with EU leaders suggesting that British Prime Minister Theresa May’s ambitions for the looming Brexit negotiations are unrealistic. May stuck to her guns, however, arguing that Britain should be allowed to line up a “comprehensive” free-trade deal with the EU post-Brexit and denying accusations that she’s in a “different galaxy.”

Meanwhile, Marine Le Pen and Emmanuel Macron are kicking off the final week of the French presidential campaign with major rallies in Paris. Macron is still leading the polls, although his margin has slipped slightly in recent days.

Oil and gold moved lower, but in the commodity markets, it was a big jump for wheat. A winter storm dropped more than 12 inches of snow across four Midwest states. While it will take several days before the damage can be assessed accurately as the snow melts, early estimates suggest losses could exceed 50 million bushels but quite possibly more.

Heavy rains are forecast for the region later in the week. Many reports of snapped wheat stems, and for a crop in the early stage of forming grain, that suggests there could be “substantial” production losses. For hard red winter wheat, a variety of the grain used to make bread, futures for July delivery surged 6.5 percent to close at $4.6575.

July futures for soft red winter wheat, which is used to make cookies and cake, jumped 5.5 percent to $4.56, also a record, while corn prices climbed 3 percent in active trading. Wheat has been in a long-term bear market thanks to near ideal growing conditions the past couple of years, and the feeling among many traders was that the only direction for wheat was down. The dominant position for speculative traders has been short. The freak storm caught many by surprise.

America’s largest oil refinery is now fully owned by Saudi Arabia. Saudi Aramco, the kingdom’s state-owned oil behemoth, took 100% control of the sprawling Port Arthur refinery in Texas on Monday, completing a deal that was first announced last year. Port Arthur is considered the crown jewel of the US refinery system.

The Gulf Coast facility can process 600,000 barrels of oil per day, making it the largest refinery in North America. Aramco previously owned 50% of Port Arthur through a joint venture co-owned with Royal Dutch Shell.

The ISM manufacturing report shows manufacturers scaled back hiring plans in April and demand for new products slowed, but most companies said business was still quite brisk, a survey of executives found. The Institute for Supply Management said its manufacturing index slipped to 54.8% in April from 57.2%. Any reading above 50 indicates expansion.

Spending on construction dipped 0.2% in March following an unusually strong pace of spending in February. For the first three months of the year, spending was 4.9% higher than in the same period in 2016. Much of the increase came from housing. Residential construction was up 1.2% during the month, but stood 7.3% higher than a year ago.

Overall private construction was flat in March, as lower levels of spending on public works continued to drag. Overall public construction was 0.9% lower during the month, and 6.5% lower than in March 2016.

Personal income rose less than expected in March while spending was flat, according to the Bureau of Economic Analysis.  Personal income rose 0.2%, missing the forecast for 0.3% growth. The report also included data on personal consumption expenditures, a gauge of consumer purchases that the Fed prefers to measure inflation. The PCE deflator fell 0.2% month-on-month and rose 1.8% year-on-year, slipping from 2.1% in February.

American consumers are holding $1 trillion in revolving credit, mostly in credit card debt. So how well is this segment of consumer debt holding up? Synchrony Financial – GE’s spin-off that issues credit cards for Walmart and Amazon says net charge-offs would rise to at least 5% this year.

Credit-card specialist Capital One disclosed in its Q1 earnings report last week that provisions for credit losses rose to $2 billion, with net charge-offs jumping 28% year-over-year to $1.5 billion. Synchrony, Capital One, and Discover – a gauge of how well over-indebted consumers are managing to hang on – have together increased their Q1 provisions for bad loans by 36% year-over-year. Other worries about consumer debt in the US are piling up.

The $1.4 trillion in student loans are already in crisis, though the government backs them, and they cannot be charged off in bankruptcy. Of the $1.1 trillion in auto loans, subprime loans packaged into asset backed securities are getting crushed by net charge-off rates that are worse than during the Financial Crisis.

In a new study, life insurer and financial services provider Northwestern Mutual found that 45% of Americans that have debt spend “up to half of their monthly income on debt repayment.” Those are the true debt slaves. Excluding mortgage debt, American carry an average debt of $37,000. Of them, 47% carry $25,000 or more, and more than 10% carry $100,000 or more in debt, excluding mortgage debt.

Face the Facts

Financial Review with Sinclair Noe — September 8, 2014

 

Podcast: Play in new window | Download (Duration: 13:14 — 6.1MB

DOW – 25 = 17,111
SPX – 6 = 2001
NAS + 9 = 4592
10 YR YLD + .01 = 2.47%
OIL – .63 = 92.66
GOLD – 12.90 = 1256.50
SILV – .17 = 19.12

The Federal Reserve reports consumers increased their debt by a seasonally adjusted $26.0 billion in July, up from an $18.8 billion gain in the prior month. Monthly debt rose at a 9.7% annual rate in July, compared with a 7.1% rate in the prior month. On a dollar amount, that’s a record gain, and on a percentage basis, it’s the highest since July 2011.

Crude oil for October delivery fell 63 cents, or 0.7 percent, to settle at $92.66 a barrel in New York, its lowest level since January. Oil prices have fallen for three days straight as geopolitical worries in Ukraine and Iraq have eased.

The ceasefire between Russia and the Ukraine is holding by a thread. The EU has approved a second round of sanctions against Russia, but today, they put the sanctions on hold, hoping for a favorable outcome. In an initial set of economic sanctions imposed in late July, the EU barred five state-owned Russian banks from selling shares or bonds in Europe; restricted the export of equipment to modernize the oil industry; prohibited new contracts to sell arms to Russia; and banned the export of machinery, electronics and other civilian products with military uses to military users, so-called dual-use goods. Those measures prompted Russia to ban imports of some EU farm goods, a step that has cut off about $6.5 billion of annual trade and left the bloc scrambling to aid its producers. In a statement on Sept. 6, the day after EU member-state diplomats drew up the latest sanctions plan, the Russian government signaled it would take further retaliatory action should the extra penalties be enacted.

Also weighing on crude oil prices was a report out of China that showed manufacturing in the world’s second-largest economy was slowing down.

Also, a report today showed Japan’s economy contracting 7.1% in the second quarter. The problem in Japan is that the government is trying to raise the sales tax. The economic weakness followed a surge in growth in the three months through March when consumers and companies rushed to make purchases before the tax rose to 8 percent from 5 percent. The current contraction likely means more stimulus before the government can try to raise taxes to the target of 10%.

The Federal Reserve Survey of Consumer Finance found that only 48.8 percent of Americans held stock either directly or indirectly in 2012, the latest period measured. That’s the lowest level since 1995, when 40.5 percent of Americans held some form of stock. Only 14 percent of Americans own stocks directly; down from 21 percent in 2001. The stock ownership rate for Americans peaked in 2001. Stock ownership in America is heavily skewed toward the wealthy; 93 percent of the wealthiest 10 percent of Americans own stocks. That’s nearly twice the level for the middle 50 percent and far more than the 26 percent stock-ownership rate for the bottom 40 percent. Stock ownership is even more concentrated when it comes to share of total stock holdings. In 2010, the latest period available, the top 10 percent of Americans by net worth held 81 percent of all directly held or indirectly held stocks.

Now, this raises some interesting points. First, you know that the Federal Reserve has been propping up the stock markets for the past 5 years. The tools the Fed uses are known as ZIRP and QE, or Zero Interest Rate Policy and Quantitative Easing; also, on an as needed basis, the Fed will step in to stabilize equity markets directly or indirectly. ZIRP and QE are not direct investment in stocks; rather stocks benefit from short-term interest rates hovering around zero and from the Fed pumping up the monetary base from around $800 billion back then to more than $4 trillion now.

By lowering the cost of credit for corporations, the Fed has helped dump trillions into stocks as CEOs have leveraged up their balance sheet by issuing debt cheaply and using that money to repurchase their own shares. The practice of using debt to repurchase shares has become so widespread and aggressive that it is limiting actual physical investment in plants and equipment. Share price goes up quicker when a CEO buys back shares, rather than making investments in cap-ex and working hard and growing the business organically. Higher share price equals bigger bonus, equals early retirement. This is why both labor productivity and the capital expenditures component of GDP growth have been weak; private nonresidential fixed investment is growing at around a 7 percent to 8 percent rate compared to peaks of near 12 percent hit during the last two economic expansions.

The reason this works is because of ZIRP and QE, but the Fed has almost finished its exit from QE and promises it will raise rates, probably next year, depending on the economic data. And so the bond market is starting to respond. Junk bonds are showing signs of fatigue. If the weakness were to continue, it would limit the ability of companies to issue debt at low cost. Right now, there is a stampede to float debt after a summertime lull. Nearly $40 billion of high-grade debt was sold this past week, the third-highest weekly total so far this year. Overall, high-grade and junk-rated bond sales have already reached the $1 trillion issuance level for the year to date, the fastest pace on record going back to the mid-1990s. This follows a strong performance last year.

We know that Mom and Pop investors are not buying stocks like they used to; so, for the past couple of years, the major buyer of stocks has been corporations. Last year corporations made purchases totaling $500 billion. But as QE and ZIRP ends and rates start moving higher, with the first cracks now appearing in the high yield or junk bonds, we are also starting to see a little less in the way of stock buybacks; now on pace to levels last seen in 2012. QE and ZIRP aren’t the only reasons for fewer buybacks; part of it is that corporate balance sheets may be stretched, part of it might be because there are limits to buybacks. But there is a big question of whether corporations can now shift gears, increase capital expenditures and re-grow business after living off their own fat; or whether all that debt they’ve taken on will come back to bite them because of the steady drag of fixed interest expenses.

This does not mean the stock market will necessarily crater; just that it could. Vincent Reinhart, a former monetary policy expert with the Fed and current chief economist for Morgan Stanley thinks the Wall Street traders will have a market tantrum. The thinking is that the markets have not yet priced in a rise in rates, and when the inevitability hits, it will hit like a sack of bricks; the markets will sell-off and the investment banks will cry like little babies, and the Fed will then have to choose whether to press ahead with the rate hike or appease the bank babies and delay rate hikes.
So, the Fed is trying to offer guidance, but Wall Street types aren’t buying it; they’re too comfortable with the prospect that the Fed will leave rates near rock bottom lows for the foreseeable future. According to a research report from the San Francisco Fed, even if the Fed raise rates, the primary dealers and brokers don’t think they will really raise rates by much. It’s almost understandable, rates have been so low for so long, we can’t imagine they will ever go back to normal levels.

And even if the Fed raises rates, we live in a global economy, and last week the European Central Banks announced a new round of monetary easing; what is now being called Draghi-nomics; that prompted several investment banks to raise their outlook for equity markets. Goldman Sachs shifted from neutral to overweight; Morgan Stanley’s chief equity strategist raise the firm’s 12 month S&P 500 forecast; Deutsche Bank increased their forecast for the S&P. Goldman Sachs sees “lower risk” from bonds following the ECB decision and the net effect of the policy action from here will be positive for equity markets.

We could still see the economy pick up and businesses could grow their way out of the mess. Workers could get jobs and start spending again. And everything would be so economically strong that even whiny Wall Street traders would be laughed at.

The United States moved up two places for the second year in a row in the World Economic Forum’s competitiveness rankings, from fifth last year to third in 2014. The WEF’s Global Competitiveness Report defines competitiveness as the “set of institutions, policies, and factors that determine the level of productivity of a country.”

According to the WEF’s report, “Factor-driven” economies are the least developed, typically relying on low-skilled labor and natural resources. More developed countries are considered “efficiency-driven” economies because they focus on improving economic output by increasing production efficiency. The most developed economies, which rely on innovation and technological changes to drive growth, are considered “innovation-driven” economies. Nations may also fall between these classifications. By the way, the two countries that ranked higher than the US are Singapore and Switzerland.

The WEF measured the drivers that actually lead to economic strength or weakness. Key drivers of economic success include institutions, infrastructure, and education; the most competitive countries maintain a high level of quality for road networks and transportation infrastructure and primary education. Maintaining strong nationwide institutions and infrastructure takes money. With only a few exceptions, the world’s least competitive countries have relatively low debt levels. The most competitive countries typically had high debt, with 6 of the most competitive countries creating debt equivalent to 75% or more of GDP.

Tuesday, July 08, 2014 - Everything Except Productive Purpose

Financial Review with Sinclair Noe

DOW – 117 = 16,906
SPX – 13 = 1963
NAS – 60 = 4391
10 YR YLD - .05 = 2.56%
OIL - .13 = 103.40
GOLD - .40 = 1320.60
SILV - .03 = 21.12

 

Down 2 days and already I’m seeing the financial talking heads asking if this is the start of a correction. Just a reminder that markets go up and down and sometimes sideways. The markets don’t need a big reason to move. Right now, we’re heading into earnings reporting season, and a few things happen; first, some investors might look at a position and determine that prospects for earnings are not so great, or some investors are taking the opportunity to put some cash in their pockets, just in case they see a bargain basement opportunity.

A trend in place is more likely to continue than it is to reverse, and it reverses when we can see clear evidence of a reversal. Yes, the market looks overvalued by many metrics, yes there seems to be irrational exuberance; but the markets can remain irrational longer than you can remain solvent; yes, we’ve seen a couple of down days but we’ve gone 33 months without a correction, but we’ve had a bunch of down days during that same time. Right now, we’re seeing a minor pullback into a trading range as we await earnings season.
 

 Should you stay or should you go? The markets have hit recent highs, and so you have to wonder if you get out when the getting is good. After hitting record highs, the past 2 days have seen declines; let me be very clear, 2 down days do not constitute a trend; not unless you trade the minute bars. Still, it can be sickening to see profits melt away. Conversely, cutting exposure with the aim of putting cash back to work when valuations drop can be soothing at first, but maddening if stocks continue climbing. There is a fine line between adjusting exposure based on valuations and timing the market; and either way it’s a real trick heading into earnings reporting season.

With interest rates at historic lows and stocks climbing, holding cash in a portfolio has been costly, but on the flip side, cash can serve as a buffer against market pullbacks and corrections, and it provides flexibility to buy again if prices drop; in other words, you keep your powder dry. The real return on cash has to consider the idea that you can use it to make even more money down the road. Of course, for that strategy to work, you have to reinvest the cash; you have to look for bargains or look for other opportunities. If you aren’t willing or able to do that analysis then the risk is that you build up cash and don’t know when to get more invested.

This is where the idea of rebalancing comes in; it doesn’t require sophisticated analysis; you just sell high and buy low. If your risk tolerance points you toward a 60% allocation in stocks, and the stocks go up in price and now you hold 70% in stocks, cash out, to bring the equity allocation back to 60%; turn around and put that cash into a part of the portfolio that has dropped. The idea is that you are buying low; the unfortunate side effect is that you might be dumping your winnings into a losing position. A variation on the theme is sell high and buy something you don’t already hold.

But then the question is where do you go to find value? An article in the New York Times suggests that everything is in bubble territory. The chief investment strategist at BlackRock, one of the world’s biggest asset managers, spends his days searching for potential opportunities for investors to get a better return relative to the risks they are taking on, and he says there are very few cheap assets these days. At the current level of the Standard & Poor’s 500 index, every dollar invested in stocks buys you about 5.5 cents of corporate earnings, down from 7.4 cents two years ago, and lower than just before the global financial crisis in 2007-2008.

Bonds offer next to nothing in the way of returns, and if you want to chase yield in the debt markets, you’ll find some of the riskiest issues can’t even breach 5%. Real estate has spiked in many locations, even farmland has rocketed. It’s not that any one area is outrageously overvalued. Most people would agree that stock valuations are lower than 2000, and real estate peaked in 2006, and we haven’t really recovered to those levels. It’s just that everything that could be considered a financial asset has gone up. And of course, as prices go up, the potential future returns drop.

Maybe that’s a reflection of a slowing global economy. Maybe it’s a result of the central bankers printing lots of money, but not directing where the money would go; and so the money was parked on the sidelines, and not put to productive use, not being invested in things like factories or infrastructure. And then the risk is that folks chasing yield take on more and more risk until something pops.

Taking a look at economic data today, the Federal Reserve report on consumer debt for May showed debt increased $19.6 billion, not including mortgage or real estate related lending; that’s down from a $26.1 billion increase in April. Revolving debt, including credit-card balances, rose $1.79 billion in May following an $8.85 billion April advance that was the biggest since November 2007. Non-revolving debt, which includes car and education loans, gained $17.8 billion in May, the biggest increase since February 2013, after climbing $17.3 billion in the previous month. Car sales continue be show strength, reaching a 16.9 million annual rate last month, the fastest pace since July 2006.

The JOLT survey, or Job Openings and Labor Turnover survey shows that as of the end of May, companies increased the number of job openings almost back to pre-recession levels. Despite greater demand for workers, pay scales have not budged much.  Wages for all private-sector employees increased 2% in the year ended in June, according to the Labor Department, exactly where wage growth has trended through all of this recovery.

News from the small-business sector, however, suggests pay growth is ready to break out of the 2% range. According to the June survey of small firm owners by the National Federation of Independent Business, a net 21% of small businesses report lifting compensation in the last few months. That is the highest reading since the end of 2007. So, it looks like we are getting closer to seeing wage growth in the near future, but we’re not quite there yet. And since we aren’t seeing actual proof of wage inflation, it could be argued that the Fed should wait a bit longer before tapping the brakes. And for that matter, even if we start to see signs of wage inflation, that might be a good thing.

Federal Reserve Bank of Richmond President Jeffrey Lacker said in a speech today that “subdued productivity gains” along with “moderate” increases in consumer spending and “more tempered” growth in housing construction, will lead to economic growth in the range of 2% to 2.5%, well below the Fed consensus of 3% growth. Lacker says “broad-based advances in technology are far less likely than in the past, and that we should prepare for relatively stagnant productivity growth trends going forward.”

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said today that inflation will likely stay quite low for about 4 or 5 years. Kocherlakota says the Fed is “undershooting its price stability goal” of 2% inflation and will likely continue to do so for some time to come; he sees the probability of inflation averaging more than 2% over the next four years as being “considerably lower” than the probability of inflation coming in less than 2% over the same time period. Kocherlakota is skeptical of improvements in the jobs market, saying “much of the decline in the unemployment rate since October 2009 has occurred because the fraction of people who are looking for work has fallen.” That means the Fed is also failing to meet its job creation goal, which is damaging for the economy.

When you look at last week’s jobs numbers something doesn’t seem to add up, at least it gives pause to consider the numbers. GDP growth equals productivity growth plus job growth, or at least growth in hours worked. We’ve been adding jobs at a good pace, but the economy contracted 2.9% in the first quarter. That leaves productivity, and it turns out that there is a long term trend in decelerating productivity growth. And the problem with productivity is not that workers aren’t working hard; the problem is that we haven’t been investing in the right tools for the job.

Earnings season kicked off with a report from Alcoa. It was better than expected. Including all charges, the company earned $138 million or 12 cents a share during the quarter. That reverses the company’s $148 million loss in the same period a year ago. Revenue also came in ahead of expectations. Alcoa reported revenue of $5.8 billion, which is 2.6% higher than expected. Revenue is flat from the year-ago period.

Earlier Samsung issued an earnings warnings, claiming profits could fall as much as 26% from a year earlier. Smartphone and tablet sales took a pretty big beating. Samsung put out a statement that says tablet sales are slow because consumers are slower to upgrade tablets compared to upgrading smart phones. They also blamed the rising Korean won, which is up 9% against the dollar in the past 3 months; they blamed excess inventory in Europe, and competition in the mid and low-end of the market, and a few other excuses as well.