Stock Markets Ignore The Calendar To Turn in Positive Returns. What November Holds For Investors.

As Carol Ann once so innocently said, They’re Baaack!  Our government shut down but somehow the Capitol remained open and our directionless leadership remained gainfully employed.  So we’re left to ponder whether our fearless leaders would have been so willingly and stubbornly ideological had the threat of holding back their own paychecks been on the table as was for most other government employees.    

George Santayana said those that don’t learn from history are doomed to repeat it.   Our current bunch of representatives must be totally dismissive of old George.  How else to explain them risking yet another default on our debt and yet another rating downgrade on our debt and ability to borrow?  History clearly shows the results of the last standoff in 2011.   As we moved ever closer to deadlock and default the market tremored then cratered moving the S&P 500 index from 1356 down to 1074 a 20% move in less than 3 months.  It then took investors and the markets 5 months to claw back to break even.    Maybe DC needs a little history lesson. 

Where we are:

Consumer Confidence Index.  “Consumer confidence eroded sharply in October down to 71.5 from Septembers 80.2 reading as the government shutdown and debt ceiling crisis took a considerable toll on consumer expectations according to Lyn Franco Director of Economic Indicators.   She pointed to similar declines with consumers after the payroll tax hike earlier this year as well as the timing of the fiscal cliff at the end of 2012.   The expectations are for continued volatility as the budget discussions are apt to take front and center over the coming months.   Confidence is key as we head into the holiday sales season which for most retailers accounts for almost 20% of full year sales and revenues. 

Purchasing managers Index.  There were two released very close together that are worth mentioning.  The Chicago Purchasing Managers report was released two days ago and surged strongly and unexpectedly to 65.9 the strongest showing since March 2011.  This report suggested manufacturing was finally breaking out.  Many economists thought there was a misprint in the reading.  The number showed strength across the board.  New orders rose to 74.3 the highest since February 2011.   Order backlog jumped to 61 from 46.7.   Even the employment component moved higher.  All would suggest strength in manufacturing should continue through the coming months.   A few days later the National Purchasing Managers report was released confirming the Chicago report as no fluke coming in at 56.4.   Of the 18 reporting industries 14 reported growth with some commentary from the following:

Textiles:        “New business is booming”

Chemicals:   ”The government shutdown has not had an impact on our business or suppliers”.

Telecom:     “ Wireless and VOIP seem to be spiking”.

Furniture:   “ Business continues to improve every month”. 

Most commentary continued along the same lines which again seems surprising.  Many market watchers had expected a fallout from the day to day DC headline watching.  It appears to have impacted consumer confidence but not spending, thus far. 

Employment:  Non-farm payrolls for September came out at 148,000 a bit weaker than we all were looking for.  Commentary for hesitancy to add new employees ranged from nervousness due to the DC budget drama along with the rollout of the affordable care health exchanges.   We’ll be getting October’s numbers at the end of the upcoming week.   In the interim we’ll continue to look at the real time employment gauges, weekly unemployment claims which fell 10,000 to 340,000.   We’ll want to see continued progress down closer to 300,00 before we start doing the wave here, but we’re continuing to make progress. 

Home Sales:   Total existing homes sales slipped in September declining 1.9% to an annualized 5.29 million rate down from a 5.39 million rate the prior month but up 10.7% from a year ago.   Higher interest rates along with the tight supplies of inventory may both be restraining growth but the recovery chugs on.   Some of the strongest areas of pricing recovery are coming from the hardest hit from the real estate bust, with Detroit  +44.6%, Las Vegas +30.7%, and Sacramento + 28.9%.   Progress is being made but continued hikes in borrowing rates along with strengthening home prices may begin to squeeze out buyers as incomes just are not keeping pace. 

Going Forward:

Financial data issued by various government agencies continues to drip out which is why we’re still awaiting October’s Jobs figures among others.  Early indications suggests the budget drama had limited effects on US economic output.  As many have come to believe the budget/debt script is already written.  Act I.  Argue.  Act.II. Retreat to your corners and dig in your heels.  Act. III. Repeat act II.  Act IV. Take us to the brink.  Act V.  Ride in on white horse and save the day.    Boring and won’t play long as the midterm elections are coming up after all.   We are roughly half way through earnings season and the greater majority of companies having reported beat on revenues and earnings street analysts had estimated.   Company guidance remains somewhat cautious as the US economic expansion is uneven and job creation seeing stronger part timers entering the workforce than full timers. Rays of sunshine and hope come in from the European Union and China.  Just the other day China’s Purchasing Managers figures were released showing the strongest growth in 18 months rising to 51.4.  Also strong figures just released this Sunday morning for China’s Non-Manufacturing PMI (services) were reported at 56. 3 the highest in 12 months.    Fears of a dramatic economic contraction in China are proving overblown thus far as the slowdown in their export engine are being offset with the pickup in domestic consumption.   All very good news for the global economy and US exports.   The EU economy expanded at a .3% growth rate in the second quarter and the third quarter is anticipated to show a similar rate of expansion or a small tick higher as the economies of Spain, Ireland and even Greece seemed to show signs of stabilization.   The EU has proved a significant source of negative drag for the global economy along with Corporate America’s revenues/earnings for the prior three years as structural reforms coupled with austerity measures proved difficult to stomach for many.     With that drag from a slowing China and contracting EU removed we would anticipate a reacceleration of US exports and revisions by analysts to upcoming earnings expectations for US multinationals. 

Black Condors:

1.Syria.  While Syria’s current Assad regime now talks nice they still carry a big stick they seem very willing to bash over the heads of their very own citizenry.   They appear willing to kill as many as it takes to silence the masses and return to business as usual.  Israel does not appear as willing as the US to stand by on a wait and see plan of action.  On Thursday Israeli warplanes struck a suspected Syrian weapons cache inside Syrian borders fearful there was a missile transfer taking place to Hezbollah.   With Iran still a rising powerbroker in the area there remains a very real risk of the Middle East irrupting into a firestorm between Israel and Syria, Iran, Lebanon etc.,  forcing the US to reenter yet another front.   

2.Iraq and Afghanistan governments are routed.  The US and its allies ousted Saddam and the Taliban to defend US interests abroad as well as liberate their people.   We then installed new leadership friendly to ourselves.   The problem?  The new government figures jetting back “home” from the safety of London and abroad proved to be corrupt, thieves, killers and generally disliked by the very people we “liberated”.   This appears to one of our primary blunders of both operations.    Not the missions themselves, more so the leaders we backed. 

3. Illinois defaults.  Illinois is a financial mess looking to DC for a bailout.  After decades of overly generous benefits, pay increases and pension promises the time has come to tell the emperor (Governor and Union Presidents) he has no clothes or in this case no more money.              Illinois can’t make good on their promises.   Elected officials after years of buying votes in the form of pay raises for government union employees must now face difficult decisions.  Union members and officials must all look no further than the UAW in  the weeks before GM and Chrysler went bankrupt.   Union officials dug in their heels and said firmly NO MORE!  Then the auto giants filed bankruptcy and found plenty more.    Rational minds need to prevail and cuts need to be made.  As it stands Illinois is losing  new business opportunities and companies that currently call Illinois home are exploring other geographical options due to the possibility of yet another round of tax hikes.   There are two roads to be taken here.  One would hamstring the local economy’s ability to retain and attract existing and new businesses with higher taxes while the other leads to reasonable negotiation and givebacks and the potential rebirth of a great city.  Do nothing and one of the largest defaults ever will most assuredly take place.  It would  be a spectacular catastrophe rattling markets to the core. 

We remain more optimistic than most the US and our economy’s best days are ahead of us.  The resourcefulness and entrepreneurial spirit of Americans overall are vastly underrated. From Silicon Valley to the Shale Energy Revolution, from I-pads I didn’t even know I needed, to breakthroughs in cancer research that are by the day getting us closer to fully understanding and one day curing are why I stand by our global leadership position.  Lead from behind is a good tag line not a strategy.  What continues to hinder the US economy is no longer the deleveraging of both citizenry and corporations that had to happen, it now is DC’s inability to DO THEIR JOBS.   Tax reform is talked about on both sides in a fair manner.   Close loopholes allowing for lower taxes for everyone.  Entitlement reform again is talked about similarly on both side, means testing for Social Security and Medicare.   Eliminating unnecessary subsidies to special interests such as oil companies, ethanol producers and ending handouts to farmers when land prices and profitability are at record levels  just all makes sense.  Tackle immigration reform.  Just a short few weeks back Sen. Rubio made Immigration reform his signature issue to run on.  Then partisan politics and the tea party forced him to meekly withdraw his support.   All these issues are a “third rail” for someone, but our officials were elected to lead not by checking  tweets to learn how they should think on a given day.  In other word DC needs to get out of the way and we’ll all do much much better. 

We maintain our aggressive posture to the market and will continue to monitor economic, geopolitical and market releases for any signs to adjust our positions. 

We thank you for your patience and confidence in this very challenging environment. 

Yours in Pursuit of the Kwan. 

James

ALERT!! Bernanke TKO's Market Bears By TQE!!

Forget about Floyd Mayweather, the new heavyweight Champion of the Markets is Ben Bernanke!  Winner but not by TKO, by TQE (Technical Quantitative Easing).Coming into today I was trying to look objectively at various tapering scenarios and their probabilities.  The consensus was $10-15 billion with a 45-50% likelihood from Wall Street.  $20 billion a long shot outlier and perhaps $5 billion on the taper-light side.  I only heard 'no move' from one analyst and considered that to have a probability of 20%.  The Feds decision to stand pat with their asset purchases is obviously not a "non-event" as some TV commentators initially stated.  The Fed seems to be pointing the finger at DC referencing fiscal policy drag of up to 1% on the current economy.   Washington debt ceiling negotiations will take center stage immediately beginning tomorrow.   Chairman Bernanke noted the suboptimal growth of the economy and sup-par job creation as a few reasons for their lack of action today.  

Way back when, in the throes of the near complete financial collapse of our great country I was initially championing the Fed Chairman's ingenuity and boldness with their various programs of TARP, TALF ultimately winding up at QE.  I state for the record for new comers, I am no fan of the Feds current QE Infinity program and believe they may look back at today as a lost opportunity for a first move to begin winding down this program.  That being said, we remain in a slow growth easy money environment which should reinforce the housing and auto growth story spurring employment, reinvigorating consumer sentiment and in turn boosting sales, revenues, earnings and share prices going forward. 

I'll be hawking the wires for any signs of progress from our fearless leadership surrounding the debt limit and meaningful entitlement reform for any signs we should alter our exposure to the equity markets but for now we maintain our aggressive posture. 

All in all a surprisingly good day.

James.

Investors Should Remember, When In A Rip Tide, Just Go With It

Investors seem to be waiting for signs of a lifeguard.   When I was six years old, so many many years ago, I was playing along the shoreline and got caught in a powerful riptide.  It was forceful and what happened next seemed to do so in a blink of an eye.  Before I knew it I was 50 yards out in very choppy waters lapping up against the rock jetty.  I fought as long and hard as I could and took in a lot of seawater before finally succumbing to exhaustion and water intake.  As I went under for what I thought was the final time I still remember seeing the body of the life guard 8-10 yards away cutting thru the water doing the butterfly stroke coming at me.   I’ve never forgot that sight even though I passed out immediately afterward.   The next thing I remember was being resuscitated on the beach with a slew of strangers standing around staring down at me in horror.   I responded rather appropriate from my vantage point, I coughed up a bit of salt water and balled my eyes out, until my aunt gave me a yo-yo to calm me down.  Unfortunately not enough yo-yo’s to pass out to investors today.

It had been quite a different scenario the markets were facing this past summer compared to the last few years.  Remembering back, we’ve had to battle the fear of a double dip recession, then the US losing its precious AAA credit rating followed by the fear a potential default and ensuing financial contagion caused by the postage stamp sized Cyprus.    Skeptics of this years rally were left suggesting sluggish growth and expensive Price Earnings multiples primed the markets for a return of the bear market and that any rally was one built on a deck of cards waiting to crumble.    Well, 15% later what else are they left to say, except admit their miscalculations. 

Where we are:

Leading Economic Indicators (LEI) - LEI witnessed a .6% jump after having been flat the prior month.  We saw strength notably in the new orders and new building permits indices which points favorably to future growth and continued expansion. 

Housing.  We have a few data points here worth noting.  As mentioned above, building permits as a whole increased 2.7% in July and are up 12 ½% over the trailing 12 months.   Keys to a continued recovery are consistent or an easing of underwriting criteria, pricing, interest rates and of course the availability of credit.   Next we saw housing starts move up 5.9% in July to an 896,000 annual run rate.  

Gross Domestic Product (GDP) – Domestic GDP was recently revised up from an uninspiring 1.7% growth rate up to 2.5%.  The main culprits for the upgrade were firms restocking inventories (which only do so in anticipation of future sales) and a resurgence in our exports.   Both very positive going forward.

Purchasing Managers Index (PMI)- The August Manufacturers PMI came in +.3 to 55.7% the high water mark for 2013.   We saw strength from furniture and related products, fabricated metals and paper products.  They also note some drag from government and military spending and on the cost side seeing some relief from lower commodities prices. 

Purchasing Managers Non-Manufacturers Index (Services Sector PMI).  The SSPMI LEAPT to 58.6% the highest since January 2008.   Again we see reflected here new orders gaining steam to 60.5% and the employment index increased 3.8% to 57% both very good numbers supporting the case for continued growth and economic expansion. 

Retail Sales- Retail sales edged up .2%.  We also saw a nice .2% revision up to +.6% from the prior month.  The consumer continues to defy the experts and adheres to the “Buy Mortimer! Buy! (Trading Places with Dan Aykroyd and Eddie Murphy reference here).  Ex-Autos which tend to be a bit volatile month to month, sales came in at a respectable +.5%.

Weekly Unemployment Claims-Claims came in at 323,000 the lowest level sine July 2008.   Continuing claims following not surprisingly down 3,000 to 328,500.   Less people on unemployment suggest more people re-entering the work force and adding to the throngs of our great consumer nation.

Black Vultures:

1.      Syria-not really a BV since a strike on Syria is all but a given.  The BV is really the aftermath.  I believe the markets will absorb the initial Syrian strikes.  The great unknown is what happens if Syria/Iran responds by striking Israel or Turkey?  The US simply cannot light that fuse and go home.  We have the potential to be dragged into a much longer and wider area conflict. 

2.    Debt Ceiling/Budget negotiations.  The resolution to this problem seems fairly simple.  Congress has already approved the spending now they need to raise the debt ceiling in order to pay for outlays.  Instead Congress wishes to use these negotiations to extract the spending cuts and tax overhaul that both sides agree need to be addressed.  Both thus far seem incapable of agreeing to anything aside from who to aim Patriot missiles at. 

Going Forward:  The global economy continues on the mend with China and the EU showing signs of stabilization and a resumption of growth and expansion.  The US is speeding full ahead on its way towards energy independence, this glut of cheap domestic natural gas is also a boom for a resurgent US manufacturing sector.  This is really a game changer and under discussed. The US as a manufacturer of something other than Intellectual Property and services can and should be the solution to our employment woes.  The millions of jobs lost during the housing collapse evaporated.  Many of those jobs will NEVER come back.  Energy and manufacturing will /can lead us back and be the job creator the current economy is searching for.   The US market is transitioning from one driven by Federal Reserve Stimulus to one focused on Fundamentals.  It will continue to be a rocky road as the Fed removes the monthly $85 billion monthly purchases and nervous investors will tremor with each adjustment to the program to see if we can hold up.  I believe the fundamentals are capable of filling that Fed void.  As the Fed takes its foot off the accelerator and the markets begin to bob up and down investors may begin to look for that Lifeguard when all they need to do, as when caught in any RIP is go with the flow.    

We maintain our aggressive posture to the market and will continue to monitor economic, geopolitical and market releases for any signs to adjust our positions. 

We thank you for your patience and confidence in this very challenging environment. 

Yours in Pursuit of the Kwan. 

James

Higher Rates Along With MidEast Turmoil Suggests A Time For Caution

The strength of the domestic recovery evident in housing and automobile sales are now being tested from the spike in borrowing costs.  Granted the spike occurred from historically low rates and now still offer very attractive levels when viewed from an historical perspective.  The same sense of buyers retreat happened not too long ago with gasoline sales.  I can still recall the good old days of when filling up the tank costs $16 on .89 cent per gallon of petrol.  Then I was horrified when gas spiked all the way up to $4.45/gallon which took a hefty $71 out of my wallet.   I even began to monitor my bi-weekly jaunts to Costco. Gasp!  So, now that gasoline has fallen all the way down to $3.44/gallon I no longer feel so bad, gas is virtually on sale.  I believe we're experiencing the same effects with interest rates.   Potential home buyers and investors alike were fed a healthy dose of ultra-low borrowing costs and 3% mortgages for years.  Unfortunately many would be buyers couldn't qualify either from tightened underwriting standards, damaged credit or job losses.  Now that they are ready to take the plunge rates have moved aggressively up to 4 1/2%. Ouch! Not really.  I can still remember when home mortgage rates were over 8% and that was for excellent credit scores.   So, as you can see it's all relative.  The "shock" of higher rates will abate some as we get accustomed to the new reality and the pent up demand continually growing will be released, it will just take some time and the recovery will experience an extended period to play out.  

The US President has been virtually backed into a corner.  The President took flak from the right for his "leading from behind" Libya plan, which from where I stand, worked.  He is also taken some sniper fire from conservative for pulling our troops out of Iraq and Afghanistan too early leaving the job "unfinished".   We flash forward to the Syrian civil war and President Obama's red line in the sand regarding chemical weapons.  It appears clear Government forces have used poison gas on its people.  What will be the Obama response?  Jawboning?  Lead from behind?  UN resolutions?  No, it is too late and too weak for the Obama administration.  The administration is building a coalition among its friends to act outside of the UN and appears to have the UK, France, Israel and of course local powerbroker Saudi Arabia in full support of a direct and aggressive response in order to force the Assad government into serious diplomatic negotiations with rebel fighters.  There are far too many questions to figure out how this ends.  Is the coalition prepared to put boots on the dirt and send troops into Syria?  Will they create a no-fly zone and allow the battle to rage on?  What happens if the Syrian response is to refocus their arsenal towards Israel?  What will Iran's response be?  Will Oil supplies be disrupted? What will the Russian response be?    

There are many more questions and scenarios to ponder which can/will lead to heightened market volatility and nervousness as we head ever closer to the US budget negotiations.  We at Grand Street Advisors believe we are currently stuck headline reading and not yet ready to move aggressively to alter our portfolios.  Once the US coalitions plan of attack/negotiation with Syria becomes clearer we believe we'll have plenty of time to adjust accordingly.  To move now we believe would be premature as the recent sell-off has uncovered some attractive investment opportunities at current levels.   However, as stated earlier, it's all relative.