December 9, 2014

Stocks gapped down at the open again this morning. The Dow and SPX are currently off 170 pts & .8%, respectively. Every sector except utilities is lower on the day. Commodities are mixed. Gold and copper are up over 1.50%; WTI crude oil turned around and is trading up toward $64/barrel. Yesterday oil hit a fresh 5-year low around $62/barrel. Remember, the Saudis say they are comfortable with oil at $60/barrel. It’s beginning to look like gasoline prices will hover around $2.50/gallon by the end of the year. Bonds are higher on the day. The 5-year Treasury yield ticked down to 1.62% and the 10-year edged down to 2.20%.

This morning on CNBC, Jim Cramer explained why he thinks stocks are selling off. This probably has a lot to do with the calendar. Institutional investors are likely locking in gains toward the end of the year. So it’s a temporary, orderly kind of thing and in no way implies the stock market is overvalued. He pointed out yet again that “We’re stronger than the other guys overseas,” and noted falling oil prices are a tailwind to our economy.

Wharton professor Jeremy Siegel, often a stock market bull, says 2015 will see a 10%+ correction. He advises investors not to try and time it, because it’s impossible to predict when it will come, and impossible to know what gains will be achieved between now and then. The market still looks attractive and bond rates will come up very gradually. Rate normalization won’t “tank stocks.” He thinks the Fed-funds rate will end 2015 somewhere in the range of .75% – 1.0%. My sense is that Mr. Siegel’s view is now becoming consensus on Wall Street.

The Nat’l Federation for Independent Business (NFIB) Small Business Optimism Index rose to 98.1 in November. That’s the highest since early 2007. Over 20% of small business managers said they’ve recently increased employee compensation levels and another 15% say they plan to do so in the near future. The NFIB’s chief economist had this to say about the results: “Labor market conditions are suggestive of a tightening, which will put further upward pressure on compensation.” So that could be a very early sign of accelerating wage growth. Separately, we got the JOLTS Job Openings report this morning, and it is hovering around a 10-year high. The number of job positions waiting to be filled rose to 4.83 million. Accelerating end demand is forcing employers to look for additional workers.

September 16, 2014

Stocks opened lower but quickly recovered. The Dow is currently up 12 pts; SPX +.19%). Energy, telecom and utilities are leading the way. The VIX Index is down a bit to 13.9, and VIX October futures are trading up around 15. I mention it because, although still at fairly tame levels, investor fear is gradually increasing. Commodities are mixed, but WTI crude oil is back up to $93.80 from the recent low of $92. Bloomberg reports OPEC may cut oil production amid falling prices. Bonds are modestly higher after a month-long route. The 5- and 10-year Treasury yields edged down to 1.79% and 2.58%, respectively.

We’re seeing some selling in tech stocks, prompting CNBC and Bloomberg to posit that large institutional money managers are selling in order to make room for Alibaba (BABA) in their portfolios. In the month-to-date period LinkedIn (LNKD), Yelp (YELP), and Amazon (AMZN) are all down 6-8%.

US wholesale inflation (PPI) rose 1.8% y/y in August, in line with expectations. PPI has accelerated this year, having dipped to 1.1% last winter when the economy briefly stalled. Back at the high end of the post-recession range, PPI suggests improvement in the economic recovery but price growth isn’t high enough to make anyone worry.

We’ve had some disappointing economic news out of Europe and China. A key German investor confidence index fell to a 21-month low. And The Scottish independence referendum is causing some volatility in Eurozone markets. Over the weekend, we found out that foreign direct investment in China fell to a four-year low. Industrial output (up 6.9% y/y) fell to its lowest growth rate since 2008. Fixed asset investment and retail sales also disappointed. As time goes on, it seems like a less attractive place for global businesses to invest. As we’ve said repeatedly, the Chinese economy is going through a massive long-term transition from export/manufacturing led growth toward consumer-driven growth. At the same time, Chinese monetary authorities are trying to balance inflation against a hot real estate market. And, of course, it’s painfully clear that state-sponsored organizations are stealing as much intellectual property from foreign businesses as they can. So a lot of cross-currents that don’t paint a rosy picture.

The Federal Reserve’s policy committee (FOMC) begins a two-day meeting today. Tomorrow’s session will likely see some Fed-driven volatility; everyone is anxious to hear the Fed’s evolving view on the timing of interest rate hikes. Jeremy Siegel, famed Wharton professor, says investors are a “little behind the curve” on interest rate expectations. That is, the Fed funds futures market suggests investors expect lower rates than some FOMC members do by the end of 2015. He says this could cause a temporary pullback in stocks as the market adjusts to reality. “There is some room for volatility in the market over the next week when they realize that this period of zero rates is going to end.”

August 20, 2014

Stocks opened mixed (Dow +28 pts; SPX +.08%; Nasdaq flat). Industrials, which were hit the most in the recent pullback, are leading the charge today. Exchange trade volume remains very light. Commodities are mixed. WTI crude oil is up a bit to $95.50/barrel. Copper is up 2%, but still down 7% on the year. Bonds are lower again today in front of the release of the Fed meeting minutes. The 5- and 10-year Treasury yields are up to 1.59% and 2.42%, respectively. Bonds have performed exceedingly well this year, and are priced for perfection. Any hint of rising inflation or Fed tightening will likely end the bond rally. The Dollar is beginning to strengthen (now back to September 2013 levels), and that may be a hint that currency traders are anticipating rising rates.

With stocks back near their highs, we’re hearing a lot more debate over whether the market is fairly valued or over-valued. Robert Shiller, a Yale professor credited with helping create the Case-Shiller Home Price Index, says stocks (and bonds) look to be over-valued. To be specific, he’s referring to a new stock market valuation metric called CAPE (cyclically adjusted PE ratio) that focuses on inflation-adjusted earnings. He helped create the metric, which he hopes is a superior way to judge valuation. This morning on CNBC, a trader commented on Shiller’s CAPE, saying it’s flawed because it looks backward at stock market earnings in the past rather than depending on future expected earnings. He pointed out that the stock market is a discounting mechanism for future events. In addition, he noted the forward-looking P/E on the market is a very reasonable 16. “There is no speculation in this market; if we saw speculation we would see a P/E of around 20.” He thinks we have further to run.

Wharton professor Jeremy Siegel was interviewed on CNBC yesterday. He says “Our bull market is still intact,” and urges investors to focus on what matters: earnings (strong) and interest rates (low). As for the recent pullback, he says “We’ve learned to live with geopolitical uncertainties,” and today’s events pale in comparison to what we went through in the 1960s and 1970s. He believes fair market value for the Dow is probably “around 19,000.”