Thursday, November 27, 2014

Thanksgiving (excerpt)

This is the time of the year when we count our blessings. We certainly are thankful for your interest in our research service. We will be taking the rest of the week off to celebrate Thanksgiving with our families and friends, and enjoy a great meal on Thursday. It’s a bad day for turkeys. On the other hand, it’s been another great year for bulls, as it has been in the stock market since March 6, 2009. Thankfully, we’ve been bullish since the start of the bull market. Here are a few highlights of some of our best calls:

2008. On November 12, I met with my congressional representative, Gary Ackerman, in his district office in Queens, about 15 minutes from my home. He and his legislative assistant agreed to hear me out on why more needed to be done in Washington to bring mortgage rates down and why mark-to-market (MTM) accounting rules should be suspended. He was a senior member of the House Committee on Financial Services, which was chaired by Barney Frank.

In the 11/20 Morning Briefing, I predicted that the Fed would soon purchase 10-year Treasury bonds to lower their yield, thus bringing down mortgage rates and reviving housing activity and prices. On November 25, the Fed announced QE1, aiming to purchase $600 billion in mortgage-backed securities (MBS) and Agencies.

2009. On March 16, I wrote: “We’ve been to Hades and back. The S&P 500 bottomed last week on March 6 at an intraday low of 666. This is a number commonly associated with the Devil. … The latest relief rally was sparked by lots of good news for a refreshing change, which I believe may have some staying power … I’m rooting for more good news, and hoping that 666 was THE low.” The same day, QE1 was expanded to $1.25 trillion in mortgage-related securities and $300 billion in Treasury bonds. (See QE Chronology.)

On March 12, Frank’s committee held a hearing on MTM. Congressman Ackerman reminded the chairman of the Financial Accounting Standards Board (FASB) that Congress was considering a bill to broaden oversight of his organization. He told him to suspend MTM in three weeks. On April 2, FASB did just that. I predicted this “would certainly be another positive for Financials, in general, and Banks, in particular.” (See “Congress Helped Banks Defang Key Rule,” WSJ 6/3/2009.)

On July 27, I wrote, “I prefer melt-ups to meltdowns. The S&P 500 has been on a tear ever since it bottomed at the intraday low of 666 on Friday, March 6. We should have known immediately that this devilish number was the bear market low. It took me a few days to conclude that it probably was the low. … I felt like Tom Hanks in the ‘Da Vinci Code.’”

I also noted that the bears were attributing the rebound in earnings to cost cutting rather than improving revenues. I countered that “the stock market discounts the future, and it is predicting that better-than-expected earnings now will be followed by a recovery in revenues, and more positive earnings surprises.”

2010. On February 10, I wrote, “Is the EMU doomed? Euro skeptics have long predicted that monetary unification without fiscal unification won’t work. They’ve been wrong since the euro was first introduced on January 1, 1999. However, the current crisis is the first real stress test of the viability of the euro. Although the European charter includes a no-bailout clause, there is bound to be an attempt by the EMU to prop up Greece. … My prediction is that this latest challenge will pass.”

2011. On August 31, I observed, “Basically, all those fully invested bears I’ve been writing about over the past two years are thinking of bailing out because they believe that the ‘endgame’ is near. They may be right. However, I’m inclined to believe that this game may have no end. In other words, what we see is what we will get for some time to come, i.e., subpar growth in the US, Europe, and Japan with better growth everywhere else. Muddling along like this really is not a bad scenario given the two obvious alternatives. It’s certainly better than a global recession. It also beats a global boom.”

2012. At the start of the year, I predicted, “If we survive the dangers confronting us this year as well as we did those of last year, then 2013 may be much safer for investors. If so, then financial markets, especially global stock markets, may start to discount this bullish scenario in 2012.”

On October 12, I first discussed the impact of stock buybacks: “The Fed’s exceptionally easy monetary policy is boosting stock prices by enabling debt-financed stock buybacks. Individual investors have been hot on bonds and cold on stocks. But by snapping up investment-grade and high-yield corporate bonds at record rates, they’ve fueled the stock market rally through corporate buybacks. The Fed’s QE and NZIRP have compelled individual investors to buy bonds at record low rates, while compelling CFOs to issue lots of bonds and use lots of the proceeds to repurchase their shares.”

At the end of 2012, I wrote, “Global equity markets seem to agree with my assessment that having survived the third year of living dangerously [since 2010], we can do it again for a fourth year. Europe and China seem to pose less danger for investors in the coming year. The US economy is actually in remarkably good shape, as long as the fiscal cliff is averted, as I continue to expect.”

2013. At the beginning of the year on January 24, I first suggested that if we all just keep calm and carry on, "then maybe the cyclical bull market will morph into a secular bull market.” On May 16, I observed, “In other words, we have nothing to fear other than an absence of fear. … Perhaps now that investors are no longer fearful that the end is near, all the liquidity pumped into the financial markets by the major central banks over the past four years to avert the Endgame scenario is about to cause the Mother of All Melt-Ups (MAMU).”

I opined on March 6 that “Fed Vice Chair Janet Yellen has become the fairy godmother of the bull market. When she speaks, stock prices tend to rise, especially since late 2011. ... Odds are she will be the next Fed Chair …”

On September 9, the S&P 500 rose back above my yearend 2013 target of 1665, which had been my forecast since the start of that year. The next day, rather than tweak it, I moved ahead to predict that the S&P 500 would rise to 2014 by the end of 2014.

2014. On February 6, I wrote, “Early last year, in my conversations with several of our accounts, I detected that many of them had what I described as ‘anxiety fatigue.’ They were tired of being anxious about the bull market. … Well, many of them are anxious again. They are jittery that something bad is coming. More specifically, they are concerned that the tapering of QE by the Fed has triggered an emerging markets crisis. It could happen again, I suppose, though I doubt it.”

On August 20, I noted, “It can get boring staying home for a long stretch. It can also be profitable. Joe and I have favored a ‘Stay Home’ investment strategy over a ‘Go Global’ one during the current bull market. That’s worked out quite well. On one occasion, we did get bored with it. We recommended overweighting Eurozone stocks during the second half of last year.”

On October 13, I once again concluded that the latest selloff was yet another panic attack that would be followed by a relief rally: “The current dip could turn into a correction. If so, it could also be a great seasonal buying opportunity. The question is whether it is actually the beginning of a bear market. I don’t think so because I don’t expect a recession in the US anytime soon.”

The S&P 500 exceeded my yearend forecast on October 31. Actually, on August 27, it was close enough that I wrote, “Once again, the bull is running ahead of schedule. Once again, I’m moving on with a forecast for next year. How about 2015 by 2015? Just kidding. … Joe and I remain secular bulls and pick 2300, a 15% increase from yesterday’s close.”

Tuesday, November 25, 2014

The World Is Awash In Oil (excerpt)

Consumers should be thankful for the plunge in oil prices since the summer. The price of a barrel of Brent crude oil peaked this year at $115.15 on June 19. It is down 31% to $79.43 since then. The futures price of a gallon of gasoline is down 34% over this same period. This decline saves consumers about $150 billion at an annual rate at the pump--just in time for the holiday shopping season. There could be even more windfalls at the pump ahead for consumers.

Most of the oil price decline occurred after Saudi Aramco started a price war on October 1 for all its exports, reducing those bound for Asia to the lowest level since 2008. Bloomberg reported: “The move suggests that the biggest member of the Organization of Petroleum Exporting Countries is prepared to let prices fall rather than cede market share by paring output to clear a supply surplus ...

“Saudi Arabia has acted in the past to stop a plunge in prices. It made the biggest contribution to OPEC’s production cuts of almost 5 million barrels a day in 2008 and 2009 as demand contracted amid the financial crisis. The kingdom would need to reduce output about 500,000 barrels a day to eliminate the supply glut now stemming from the highest U.S. output in three decades ...”

Iran's semi-official news agency Mehr reported on Sunday that ministers from Iran will seek an output cut from Saudi Arabia at Thursday’s meeting of OPEC. Yesterday, Reuters reported, “Oil prices could plunge to $60 a barrel if OPEC does not agree on a significant output cut when it meets in Vienna this week, market players say.” OPEC probably needs to slash production by at least 1.0mbd to stabilize prices. That’s not likely to happen. Let’s review October’s Oil Market Intelligence (OMI) data on global crude oil supply and demand:

(1) Supply. World crude oil production soared to a record 93.0mbd during October. That’s up 3.3mbd in just the past five months! Over this period, non-OPEC output is up 2.0mbd, while OPEC output is up 1.3mbd. Furthermore, over this five-month period, the combined oil production of the US and Canada rose 0.9mbd to a record 12.7mbd, well exceeding that of both Saudi Arabia (9.6mbd) and Russia (10.6mbd).

(2) Demand. World crude oil demand rose to a record 92.8mbd during October. However, the growth rate slowed to 0.8% y/y, the slowest since May 2012. That slowdown is attributable to the advanced economies of the 34 members of the OECD. Their oil demand growth rate has been slightly negative for the past six months.

Today's Morning Briefing: Thanksgiving. (1) Counting our blessings. (2) The Ackerman bull market. (3) From 666 to 2063. (4) Da Vinci Code. (5) EMU hasn’t disintegrated so far. (6) Fully invested bears and the Endgame. (7) Muddling along beats the alternatives. (8) The importance of stock buybacks. (9) No double-dips or fiscal cliffs for the US. (10) Secular bull vs. melt-up. (11) OPEC’s holiday gift to consumers. (12) Global oil supply soars as demand growth weakens. (13) Focus on market-weight-rated S&P 500 Energy. (More for subscribers.)

Monday, November 24, 2014

Is a Strong Dollar Bullish or Bearish for US Stocks? (excerpt)

Of course, a major concern among investors is that slower global economic growth outside the US and a stronger dollar will weigh on S&P 500 earnings per share. That’s why I lowered my forecasts last week to $125 in 2015 and $135 in 2016, down from $130 and $140 previously. On the other hand, it is interesting to note that US stocks tend to outperform stocks in the rest of the world when the dollar is strong. That’s because this generally happens when the US economy is outperforming the overseas economy. On a ytd basis, the US continues to outpace the other major MSCI stock prices indexes (in dollars): US (11.4%), All Country (4.1), Emerging Markets (0.2), Japan (-3.9), UK (-5.6), and EMU (-7.3).

Today's Morning Briefing: London Days. (1) Tour of London. (2) Taxi vs. limo drivers. (3) “The Knowledge.” (4) Attack of the socialized students. (5) Worrying about both high P/Es and a melt-up in the US. (6) The new consensus on bonds. (7) Secular stagnation overseas, and no global recession in sight. (8) PMIs flashing global slowdown. (9) Waiting for wage inflation and Fed normalization. (10) Putin needs higher oil prices. (11) Is a strong dollar bearish or bullish for US stocks? (More for subscribers.)

Wednesday, November 19, 2014

Wage Inflation Remains Abnormally Low (excerpt)

Wage inflation remains abnormally low although the labor market has clearly tightened. The short-term unemployment rate fell to 3.9% during October, the lowest reading since November 2007. Back then, wage inflation was 3.3%. Today, it is only 2.0%. Fed Chair Janet Yellen has said that she believes that wage inflation is too low. She would prefer to see it rise to 3%-4% before starting to normalize the federal funds rate.

I monitor wages in various key industries and am hard-pressed to see any signs of mounting inflationary pressures. During October, here were the y/y increases for the ones we monitor from highest to lowest: leisure & hospitality (3.6%), information services (3.3), mining & logging (2.9), construction (2.6), professional & business services (2.4), retail trade (2.3), financial activities (2.0), manufacturing (1.9), utilities (1.7), transportation & warehousing (1.2), education & health services (1.1), and wholesale trade (1.1).

Today's Morning Briefing: The New Abnormal. (1) Tower of London. (2) From London to Zurich. (3) Is the normal business cycle dead? (4) Volcker was never in the put business. (5) Greenspan and Bernanke Puts. (6) The consequences of minimizing pain. (7) Abnormalities in this cycle. (8) Waiting for Godot and wage inflation. (9) New forces keeping a lid on price inflation. (10) Secular stagnation over there depressing bond yields over here. (11) Producers misjudged Chinese demand. (12) Profit margins still aren’t reverting. (13) Tour of London. (More for subscribers.)

Tuesday, November 18, 2014

Russia’s Catastrophe (excerpt)

Last Friday, Bloomberg reported that “President Vladimir Putin said Russia's economy, battered by sanctions and a collapsing currency, faces a potential ‘catastrophic’ slump in oil prices.” Nevertheless, he claimed that Russia’s reserves, at more than $400 billion, would allow the country to weather such a turn of events. Russia is the world’s largest energy exporter. So Putin’s assurances that Russia can absorb the oil shock are hard to believe.

Russia’s non-gold international reserves have dropped from $457 billion at the start of this year to $383 during October. The ruble has plunged 30% since the start of the year. To stem the drop in reserves, Russia’s central bank on November 10 allowed the ruble to float freely in the market. I wouldn’t rule out a debt default crisis if the price of oil continues to fall. In that event, Russia might have to spend more of its reserves to stop the crisis. In other words, catastrophic outcomes are still possible for Russia.

Today's Morning Briefing: Oil Bubble Bursting. (1) Bullish or bearish for global economy and equities? (2) Drilling deeper. (3) Zero-sum game? (4) Russia’s catastrophe. (5) No props from next OPEC meeting. (6) The Saudis’ game plan. (7) Wolf on Wall Street says it was all a big bubble. (8) Drilling money into the ground. (9) Transports on speed. (10) Subsidize frackers! (11) Cutting earnings estimates for next two years. (More for subscribers.)

Monday, November 17, 2014

Bubble in the Oil Patch (excerpt)

When the price of a barrel of Brent crude oil peaked at a record $145.40 on July 3, 2008, there was lots of talk about “peak oil.” Industry experts were speculating about whether the price might continue to rise to $200 or even higher. Global oil demand was growing faster than global oil supply. It was widely believed that global oil reserves were likely to dwindle because all the cheap stuff had been found. The remaining reserves would require higher prices to develop. Now that the price has plunged from this year’s high of $115.15 on June 19 to Thursday’s $76.13, the focus is on how low can it go, what I called “trough oil” in late October.

In a matter of a few months, the world suddenly recognized that the world is awash in oil. That’s largely because of the extraordinary surge in US oil field production, which soared 3.6mbd over the past two years to a high of 9.4mbd during the week of September 12. Easy money in the US sent lots of investors searching for better returns in the oil patch. They fueled the oil boom. In many ways, it was a bubble that may be starting to burst. Over the past eight weeks through the first week of November, US output has dropped by 0.4mbd to 9.0mbd. As they say in the commodity pits: “The best cure for falling commodity prices is falling commodity prices.”

Today's Morning Briefing: The Great Deflators. (1) The New Abnormal. (2) Nostalgia about normalizing monetary policy. (3) Monetary policy affects both demand and supply. (4) Awash in liquidity and oil. (5) Easy money fueled the oil bubble. (6) Secular stagnation specter haunting Europe. (7) China remains on soft-landing course. (8) Specter of deflation in Asia. (9) Durable goods prices are falling everywhere. (10) How the Great Moderators became the Great Deflators. (11) Central bankers keeping zombies alive. (12) Governments are the biggest zombies of all. (13) Meet the Selfies. (14) “Whiplash” (+ + +). (More for subscribers.)

Thursday, November 13, 2014

Small Business Owners Confirm Improving Jobs Market (excerpt)

October’s NFIB survey of small business owners continued to show an improving trend in almost all categories. The data can be volatile on a monthly basis, so I track various monthly averages. October’s Small Business Optimism Index (on a 12-month basis) rose to 94.6, the best reading since April 2008. The percentage of respondents reporting “poor sales” (on a six-month basis) fell to 12.8% last month, down sharply from the cyclical peak of 33.2% during March 2010. (By the way, this series is highly correlated with the unemployment rate.)

The survey corroborates lots of other positive labor market indicators. On a 12-month basis, the percentage of firms with one or more job openings rose to 23.4%, the highest since February 2008. The percentage expecting to increase employment rose to 9.4%, the best reading since May 2008. Capital spending plans aren’t as strong, though more owners say it is a good time to expand.

Today's Morning Briefing: Still Decoupling. (1) Standing out. (2) The benefit of slower global growth. (3) US small business survey showing lots of cyclical highs. (4) Citigroup Economic Surprise Index positive in US. Not so much in G9. (5) JP Morgan global composite index confirming global growth. (6) OECD Leading Indicators especially weak in Japan and Germany. (7) Maersk sees shipping slowdown. (8) Lower fuel costs should benefit EMs. (More for subscribers.)

Wednesday, November 12, 2014

Strong Dollar Is Depressing Commodity Prices (excerpt)

There are strong correlations between the inverse of the trade-weighted dollar and the following: industrial commodity prices, the Brent crude oil price, and the Emerging Markets MSCI stock price index. The strength of the dollar has been especially bearish for the price of oil, though causality also runs the other way.

While the CRB raw industrials spot price index dropped during September and October, it seems to be finding support at the bottom of its trading range, which starts in mid-2012. A sharp drop below the bottom of this range would be a worrisome indication of a rapid global economic slowdown. Also mildly encouraging is that the EM MSCI seems to have stopped falling in recent days despite the latest surge in the dollar, which was mostly attributable to the drop in the yen when the BOJ expanded and extended QQE at the end of last month.

Today's Morning Briefing: Competitive Devaluation. (1) US MSCI continues to outperform. (2) Dollar soaring as ECB and BOJ boost their balance sheets after Fed terminated QE. (3) Devaluation is often a zero-sum game. (4) Desperate measure for desperate countries. (5) Currency wishes come true for Draghi and Kuroda, but not for economy and inflation. (6) Interesting correlations between US dollar, commodity prices, and EM MSCI. (7) China is first to report trade stats, and they were good last month. (More for subscribers.)

Tuesday, November 11, 2014

Why Is Gold Losing Its Luster? (excerpt)

Gold is a hedge against inflationary monetary policy. So why isn’t it soaring anymore? Maybe it isn’t doing so because the ultra-easy monetary policies of the major central banks haven’t boosted inflation. Instead, they’ve become increasingly concerned about the prospects of deflation, especially at the ECB and BOJ. At the Fed, the worry must be that the ECB and BOJ are exporting their deflation to the US by pursuing policies that are weakening their currencies. A strong dollar hasn’t historically been good for gold.

I’ve previously explained why ultra-easy monetary policy might be deflationary rather than inflationary. In brief, it might stimulate supply more than demand. In the past, easy money stimulated demand more than supply as borrowers borrowed lots of money and spent it all. Now their debt burdens are such that many may be maxed out. Meanwhile, suppliers have taken advantage of easy money to expand their capacity, assuming that “if you build, they will come.” That’s been a bad assumption for a lot of producers, especially of commodities.

Gold also tends to reflect the underlying trend in commodity prices, including the price of crude oil. Their trends have been mostly flat since 2011, and down more recently.

Today's Morning Briefing: More Relief. (1) Recalling the causes of October’s panic attack. (2) Where are we now? (3) Cocoa price as an Ebola thermometer. (4) Reversal of futures: Distant crude oil prices exceeding nearby ones. (5) QE termination anxiety in US dissipated by more of it from ECB and BOJ. (6) Eurozone economy crawling along. (7) Chinese curse: Prolonged soft landing. (8) Falling oil prices depress Energy earnings, but boost Transportation earnings. (9) US consumers have the will and means to spend. (10) Crude oil plunge yields winners and losers. (11) Evil doers in Russia and Iran among the losers. (More for subscribers.)

Monday, November 10, 2014

Political & Other Cycles Driving S&P 500, Maybe (excerpt)

Last week, I observed that the one-year periods following mid-term congressional elections and third years of presidential terms have been consistently very bullish for stocks. A few of our accounts reminded me that years ending in “5” have also been consistently very positive ones for stocks. Let’s review these cycles:

(1) Mid-term elections. Last Monday, I noted that our analysis of mid-term elections found that since 1942, the S&P 500 rose on average by 8.5% for the subsequent three-month periods, 15.0% for six months, and 15.6% for 12 months. There was only one out of the 45 periods that was down, and just for three months! One has to go back to Depression-era market losses to find two periods when this indicator did not give consistently positive results.

(2) Presidential third terms. I extended last week’s analysis of the presidential cycle from 1951 back to 1928 using daily data for the S&P 500. The average gain for the third years of presidential terms was 13.4%, well ahead of the averages for the first (5.2%), second (4.5), and fourth years (5.5). Of the 21 third years, only two of them were down during the Great Depression. The 22 first years and 21 second years each included 10 downers. The 21 fourth years included six negative ones.

(3) Years ending in “5.” There have been eight years ending in “5” since the start of our daily S&P 500 data. They all have been up with an average gain of 25.3% ranging from 3.0%-41.4%. By the way, the two-year gain for years ending in “5” and “6” averaged 37.6%, with seven of the eight periods having double-digit gains and only one period down by 5.2%.

Today's Morning Briefing: Gridlock & Goldilocks. (1) Three bullish cycles: Mid-term elections, third years of presidential terms, and years ending in “5.” (2) An anti-progressive, pro-business vote. (3) Review of Republican sweep. (4) Second “shellacking.” (5) Gridlock is bullish. Shutdowns are not. (6) Madison’s biggest fan. (7) McConnell’s impressive deal-making resume. (8) Employment report pushes the Fed to tighten sooner, but doves likely to focus on subdued wages. (9) Price inflation may be keeping lid on wage inflation. (10) “Stay Home” still the way to go. (11) “Interstellar” (-). (More for subscribers.)

Thursday, November 6, 2014

Is Sentiment Too Bullish? (excerpt)

In the past, when sentiment, as measured by the Bull/Bear Ratio compiled by Investors Intelligence, was too bullish, the market often took a fall. Contrarians tended to turn bearish when the ratio rose to 3.00 or higher, and bullish when it was down to 1.00 or lower. Previously, I’ve demonstrated that the ratio works better as a contrary buy signal than as a sell signal.

In the current manic environment, I doubt that it will be a very useful sell signal. That was demonstrated by the latest correction, in my opinion. The Bull/Bear Ratio whipsawed from a recent high of 4.22 during the week of September 2 down to a low of 1.94 during the week of October 21. It rebounded to 3.62 this week. Most of the swings down and up were attributable to bulls jumping into the correction camp and then back into the bullish one. Remarkably, bearish sentiment has averaged just 15.4% since the start of September, the lowest since 1987, and below readings during the financial crisis of 2008-2009.

Today's Morning Briefing: Mood Swings. (1) Manic-depressive disorder. (2) Computers vs. humans. (3) Algorithms reading the headlines. (4) Bull/Bear Ratio’s latest bungee jump. (5) The bears have left the building. (6) The fourth phase of the bull market. (7) Don’t fight the central banks. (8) Don’t fight the political cycle. (9) Congressional mid-term elections and third years of presidential terms tend to be very bullish. (10) SMidCaps are rising and outperforming again for a couple of good reasons. (More for subscribers.)

Wednesday, November 5, 2014

Global Economy: Muddling Along (excerpt)

The ongoing decline in oil prices since the summer reflects a glut of supply rather than a sudden slowing in the global economy, in our opinion. I note that the CRB raw industrials spot price index remains range-bound since 2012, though it is near the bottom of that range. If it dives below it, I will have to reconsider my assessment of the global economy. Here’s a brief rundown on some other recent economic indicators:

(1) Europe. Manufacturing activity in the UK improved in October, while it remained subdued in the Eurozone. The UK’s M-PMI increased for the first time in four months from a 17-month low of 51.5 in September to a three-month high of 53.2 last month, boosted by domestic demand. The Eurozone’s M-PMI ticked up from a 14-month low of 50.3 to 50.6, the third reading just above 50.

(2) China. China’s official M-PMI fell from 51.1 to a five-month low of 50.8 last month. Growth slowed for production (from 53.6 to 53.1) and new orders (52.2 to 51.6), while new export orders (50.2 to 49.9) contracted for the first time in May, albeit slightly. The supplier deliveries measure was unchanged at 50.1. The employment measure ticked up from 48.2 to 48.4, its 29th consecutive reading below 50.

Today's Morning Briefing: As The World Turns. (1) Wild ride in S&P 500 Transportation. (2) Burning cheaper fuel. (3) Intermodal loadings at record high along with ATA Trucking Index and real business inventories. (4) Slow speed reduces odds of derailment. (5) A couple of hot capital spending indicators in GDP. (6) Gasoline bill cut by at least $100 billion. (7) Wage gains remain too low for Yellen. (8) M-PMIs show global economy muddling along. (9) Focus on overweight-rated S&P 500 Transportation. (More for subscribers.)

Tuesday, November 4, 2014

Valuations Not Too High for Central Banks (excerpt)

The combination of the recent weakness of forward earnings with the record-breaking performance of stocks has boosted forward P/Es significantly since mid-October. Here are the year’s peaks, mid-October lows, and Friday’s readings of the forward P/Es for the S&P 500 (15.7, 14.4, 15.7), S&P 400 (17.7, 15.3, 16.9), and S&P 600 (19.3, 15.8, 17.6).

The S&P 500 seems especially expensive relative to forward revenues. The same can be said for Q3’s ratio of the market capitalization of the S&P 500 to its aggregate’s revenues. The ratio rose to 1.66, the highest since Q1-2002. I suppose valuation multiples can continue to go higher now that we have the Kuroda Put. The major central banks and government pension funds are not value-oriented investors.

Today's Morning Briefing: Kuroda’s Put. (1) Main drivers of the bull market. (2) Worries have evaporated. (3) BOJ upping the ante. (4) QQE-1 was scheduled to terminate by end of FY2014. (5) QQE-2 is more open-ended at least through end of FY2015. (6) Contrary indicator alert: Japanese pension fund raising global equity allocation from 24% to 50%. (7) What if monetary policy can’t cure what’s wrong, but central bankers don’t get it? (8) How do you say “melt-up” in Japanese? (9) Forward earnings weighed down by falling oil prices. (10) Valuation metrics getting pricey again. (11) Central bankers and government pension funds aren’t value buyers. (More for subscribers.)

Monday, November 3, 2014

Congressional Cycle Is Bullish (excerpt)

Of course, one of the most concentrated pools of fools is in Washington, DC. This might explain the extraordinary conclusion of a study examining the performance of the S&P 500 by our long-time statistical consultant Jim Marsten. Along with Joe, he designed many of the publications in the Quant Center on our website. I asked Jim to calculate the three-, six-, and 12-month percentage changes following mid-term elections in the S&P 500. After doing so, Jim concludes:
Suppose I told you there is a technical indicator that, once the buy signal was given, has an amazing record--with the S&P 500 up three months later 17 times out of 18 since 1942, up six months later 18 times out of 18, and up 12 months later 18 times out of 18. The only condition this technical indicator has to meet is a particular political-calendar date, i.e., mid-term election day, which happens to be tomorrow. Buying on that day is one of the best technical strategies I have ever seen. One has to go back to Depression-era market losses to find two periods when this indicator did not give consistently positive results. The historical odds are almost 100% in your favor. The average percentage changes are also good since 1942: 8.5% for the three-month periods, 15.0% for six months, and 15.6% for 12 months.
Why has this mid-term cycle been so consistently bullish since 1942? The most likely explanation is that mid-term elections tend to increase gridlock in Washington, DC. While the debt-ceiling political crises of August 2011 and late 2012 suggested that too much gridlock is bearish for stocks, it has been quite bullish historically. Jim and I believe that it might be again after tomorrow. It would be bullish to see that our Founding Fathers’ system of checks and balances, designed to limit the folly of our foolhardy politicians, is still working.

Today's Morning Briefing: In Praise of Folly. (1) Folly speaks. (2) A famous essay. (3) Central banks get top billing today. (4) Doing more of the same including inflating bubbles. (5) Counterfactual praise. (6) From brief meltdown back to melt-up. (7) Japan: From aw-shucks to shock & awe. (8) Draghi’s low-key shock & awe. (9) Fed policy is also market dependent. (10) Biggest fool may be Pouting Putin. (11) Pool of fools in Washington. (12) Mid-term election rally almost a sure thing? (13) Risk On is back on. (14) “Nightcrawler” (+ +). (More for subscribers.)