Reading, Consumer Sentiment & Holiday Weekends

By Jeff Kelly on August 30, 2019

I’ve always been a reader. I’ve always had several books going at one time. Some are being read for the first time and will be finished, some are being read for the first time and will never be finished and some are favorites being read again for the umpteenth time. When I was young books came from the library. We didn’t have the money to buy them and before discounting came along books were very expensive. I’d ride my bike to the library and get as many as they would allow at one time. I’d head home and dig in. When my Mom came home, I was typically still in my reading coma. She would tell me to “get my head out of the clouds and get my chores done.”  She was right. I’d likely have forgotten the work to be done as soon as I started reading. Reading took me to places I didn’t know existed. It taught me about history and gave me heroes. It also forced me to learn the negatives as well as the positives about different time periods.

I wanted to be able to ask people of different periods why they did the things they did. What were they thinking? Why didn’t they make different choices? As we see events unfold in our world today, I wonder what books a young person will be reading about us 50 years from now. Did Crypto currencies go mainstream? Did the huge debt run up by our society lead to major issues? Did the movements to nationalism result in the same poor outcomes as it did in the past? Did climate change have the expected impact? (impact for you can be a disaster, nothing or somewhere in between). Did we ever at least try to address gun violence? Did the Broncos ever find another quarterback who can play? Maybe not as big an issue as some of the others but…

As we move to the last 3rd of 2019 we have many unanswered questions about the state of the markets. We also have a stock market that, while up nicely in 2019, has gone nowhere in the past 20 months. The closing prices on January 26, 2018 for the S&P 500 was 2,872.87. Today (Thursday) after a couple of nice days of rallies we are at 2,924.55. We reached 2,923.43 last October 3rd. The Russell 2000 ETF, IWM, a proxy for small capitalization stocks reached 156.74 January 26, 2018 and 170.93 on August 31, 2018. Today it’s at 149.13.  Markets can correct via time or price or both. If we can get an economic lift in 2020, this time of sideways action can be the precursor to a nice move higher.

We don’t see that move higher without some further volatility, an easing of the trade war tensions and large Federal Reserve rate cuts. Buckle up we’re about to enter September.

Charts From The Week Past

Small Cap stocks, represented by the IWM (Russell 2000 ETF), held at support this week and have rallied nicely.

If the market is to trade higher this is an important step. Small caps have underperformed over the past year. They never made a new high with the broad market.

Source: Charles Schwab

We also saw the financial stocks, represented here by XLF, hold at support.

We will likely see layoffs at many financial companies in the coming weeks. Many financial companies make their money on the spread between short rates and long rates. When this spread compresses or disappears (an inversion causes the spread to go negative) it’s bad for the profits of financial companies. Many will react with layoffs.

Sources: AllStar Charts, Optuma

There has been lots of talk in the press about the inversion of the yield curve.

This means short rates are higher than long rates. What many fail to mention is it takes an average of 21 months after the inversion for a recession to start.

Sources: Deutsche Bank Research, Haver Analytics, Federal Reserve Board, WSJ, TheDailyShot

The bad news, economists see a high probability of a recession coming.

The good news, they are wrong a lot.

Source: WSJ Survey of Economists

2017 was such an aberration.

Volatility, as measured by the VIX index, virtually disappeared.

Source: FactSet

Since the beginning of 2018 we’ve seen quite a different picture.

The market seems more volatile, because it is.

Source: FactSet

Polls are starting to show some concern on the economy.

Given the relentless tweeting and press coverage this shouldn’t be a surprise. Our economy runs on confidence.

Sources: Quinnipiac Poll, Bloomberg

The University of Michigan Survey of Consumers posted its largest monthly decline since December 2012.

The index fell 8.6 points in August. One in three consumers surveyed mentioned tariffs as a cause for concern.

Source: University of Michigan Consumer Survey

The downturn in the Consumer Sentiment index is troubling.

Source: University of Michigan Consumer Survey

In the past, the deficit has tracked the unemployment rate up and down.

Now they are diverging. Something happened in 2016 to cause this change.

Sources: CBO, J.P. Morgan

The average “A” rated corporate bond in Europe now has a yield very close to zero.

Let’s think this through, you buy a corporate bond, it pays you nothing and the only way to profit is if rates go more negative than they are today. Low rates are hard on folks looking to retire here in the U.S. Imagine no rates!

Source: Bloomberg

Non-defense capital goods orders and shipments of capital goods both down and falling.

Trade wars, tariffs are hurting these numbers.

Sources: Federal Reserve, DailyShot, WSJ

The yield on the 30-year treasury is less than the dividend yield on the S&P 500.

If rates stay low or go lower do investors buy stocks for income?

Source: Bloomberg

Japanese consumer confidence is not so great.

Source: Bloomberg

Yield curve inversions coupled with downturns in consumer sentiment haven’t been good in the past.

Source: Bloomberg

Weekend Homework

A couple of fun and useful recommendations for this holiday weekend. Both by Andy Kessler. Andy writes the occasional op-ed in the Wall Street Journal. His career took him from being an analyst on Wall Street to running a very successful hedge fund through the dot com bubble.

The first book, Wall Street Meat, details his life as an analyst. It has some great stories and will keep you laughing along the way.

The second book, Running Money, covers his period as a hedge fund manager during the dot com bubble. Spoiler alert, he got out very close to the top and closed his fund. Both books are great reads for sunny days. I hope you enjoy them.

A brilliant investor, a born raconteur and an overall smart-ass, Andy Kessler pulls back the curtain on the world of hedge funds and shows how the guys who run big money think, talk and act. Following on the success of Wall Street Meat, his self-published book on the lives of Wall Street stock analysts, Andy Kessler recounts his years as an extraordinarily successful hedge fund manager. To run a successful hedge fund, you must have an investing edge — that special insight that allows you to reap greater returns for your clients and yourself. A quick study, Kessler gets an education in investing from some fascinating and quirky personalities. Eventually he works out his own insight into the world economy, a powerful lens that reveals to him hidden value in seemingly negative trends. Focusing on margin surplus, Kessler comes to see that current American economy, at the apex of the information revolution, is not so different from the British economy at the height of the industrial revolution. Drawing out the parallels he develops a powerful investing tool which he shares with readers. Contrarian and confident, Kessler made a fortune applying his ideas to his hedge fund.

What happens in Hong Kong will have out sized effects on the world. A peaceful resolution and a resolution of trade issues with China becomes easier. If there is an intervention by China with force it will not be helpful to world stability or trade policy. The podcast from Hidden Forces deals with the potential outcomes.

In this week’s episode of Hidden Forces, Demetri Kofinas speaks with famed Hong Kong investor David Webb, an outspoken critic of China’s authoritarian grip over the coastal territory. There are two parts to this story that we explore during this conversation. The first deals with Hong Kong – specifically, its political and economic future as an independent territory of mainland China. The second deals with China itself – specifically, its political and financial stability as the most leveraged economy at scale, in the world. 

Hong Kong Revolution: Geopolitical & Financial Implications for China and the World | David Webb

The long weekend is here. I hope you have some terrific time lined up with family and friends. Enjoy the last few days of summer. Remember tomorrow isn’t promised to any of us. Let’s make today count! Call an old friend, send someone a message of hope and gratitude. Have a simply wonderful weekend.