September 20, 2013
By Steve Blumenthal
I have had the same hair stylist for 15 years. Fancy word, “stylist”. I’d say barber but he would definitely take offense, so stylist it is. Don’t tell him but I think stylist means $45 and barber means $15. Anyway, I’m totally loyal, I trust him and enjoy our friendship.
Elijah runs a great business and smartly, like you, has his eye on the economy. Today he asks, “Steve, I want to buy Samsung stock but I understand there are currency risks. I have $50k to invest, what do you think?”
Do you want to invest or speculate? I ask. How much do you have and how much can you afford to lose? He says he doesn’t want to lose any money. No small thing. I told him I work closely with some of the brightest investors in the business and I can share that no one has a lock on this game. Everything is a risk and the best investment minds I know allocate to a broad set of risks.
I have read about the Berkshire Hathaway/ Buffett billionaires. It takes a lot of conviction, a lot of years and some good luck. I told him to stop by the office and I’ll help him think through a well thought-out plan. He’s young and has a lot of time. He just needs to make sure his head is properly prepared for the bumps along the way. I left the “salon” after sharing with him the following story:
What if Larry Summers passed on the Fed Chair position not because of the challenges of the confirmation process but because he simply believes that, like the cartoon above, we are way out over the cliff. The other side of QE will be painful. It is just a matter of time. This is what I believe.
“It’s shocking in the sense that Summers was so widely considered to be a front-runner,” said Jared Bernstein, a former economic adviser to Vice President Joe Biden. “I’m sure they were very carefully counting votes—including Republican votes—and just believed that they couldn’t get Larry out of committee.” Source: WSJ
I told Elijah to check in monthly and that, fortunately for him, a great buying opportunity is ahead within the next three years (my best guess). Be patient and be prepared to act and know that it will not feel like the opportunity it will be.
This week, I share the following relevant research:
- Asset Price Bubbles – “And yet, here we are again”
- The Biggest Economic Growth Obstacle is Household Income: Down 10% vs. 10 years ago
- Fed Estimating 2013 GDP Growth of 2.15% (down from a 4.2% estimate in 2011)
- The Sub-2% Tipping Point Economy – Via Bloomberg’s Rich Yamarone
- Trade Signals – Investor Sentiment Remains Favorable
Asset Price Bubbles: “The events of the past decade demonstrate the enormous human costs of asset price bubbles and crashes.” – San Francisco Fed President John Williams, September 2013
“And yet, here we are again. The Federal Reserve has now enabled the creation of a third equity bubble in hardly more than a decade. It has enabled this, in part, by intentionally targeting equity prices in a vain attempt to create a “wealth effect” that economists have known for decades does not exist – as consumers spend based on their view of lifetime “permanent income” and not based on fluctuations in volatile assets. The Fed has also enabled this, in part, by ignoring the inverse relationship between government/household deficits and corporate profit margins (which make equity valuations seem only modestly elevated on the basis of temporarily bloated earnings, even while stocks remain steeply overvalued on cyclically normalized measures).” Source: www.hussmanfunds.net “Baby Steps”
I know, I hear you and I agree with you – Hussman missed the move (and he agrees as well). With that being said, I wouldn’t dismiss his intellect. We are in uncharted waters. The biggest bubble of them all is in the bond market and, unfortunately, every risk in the world is tied to the bond market.
Household Income is down 10% vs. 10 years ago – From www.shadowstats.com
“Real Median Household Income Is at Its Lowest Level Since 1994. Real (inflation-adjusted) median household income contracted again in 2012, although the annual change was not statistically significant. Nonetheless, the level was the lowest seen since 1994, and was lower than levels indicated for the 1968 to 1974 period, using the CPI-U as a deflator.
As indicated by the Sentier Research numbers, and confirmed broadly by the Census data, consumer income contracted into the formal 2007 recession, with the decline in income accelerating into the period of the purported post-June 2009 economic recovery.
With the Sentier numbers now stagnant at a low level of activity, and consumers’ inability to expand borrowing in order to make up for shortfalls in income, the chances of there having been a full economic recovery since 2009 (as reflected in the GDP), or of a recovery pending in the immediate future, remain nil.”
“Census Plays Games with Inflation. The next graph show median household income deflated using two Bureau of Labor Statistics (BLS) inflation measures, the CPI-U and the CPI-U-RS. With the CPI-U-RS, 2012 median household income has dropped to its lowest levels since 1995 (not 1994) and is above the 1968-to-1974 reporting. The emphasis here is that the graphs use government inflation numbers, not an alternate ShadowStats inflation measure.”
If two thirds of our economic growth is dependent on consumers and the consumers are financially stressed it is logical that GDP growth will be low. The above charts reflect the loss in spending power. The next chart shows the progression of the Fed’s 2013 GDP growth estimates from what the Fed estimated in January 2011 to most recent.
Fed Estimating 2013 GDP Growth of 2.15% (down from a 4.2% estimate in 2011)
From Guggenheim’s Scott Minerd:
“Since the U.S. Federal Reserve first began to release economic projections three years ago, it has consistently downgraded its outlook. In the latest Federal Open Market Committee meeting, the Fed further lowered its projections for GDP growth in 2013 to an average of 2.15 percent, compared with an average of 4.15 percent from its initial projections in January 2011.”
In other words, the Fed started at 4.2%… and ended with half that number. Oh, and that includes the recent GDP-boosting revision, without which the GDP growth for the year would have been even lower.
As Bloomberg’s Rich Yamarone notes, “There’s a little known rule of thumb in the economics world: when the annual growth rate of key U.S. indicators falls below 2 percent, the economy slides into recession in the next 12 months… and more than one of them is flashing red.”
The Sub-2% Tipping Point Economy – Via Bloomberg’s Rich Yamarone
“Real GDP growth was an annual 1.6 percent in the second quarter. It was last at 2 percent in the fourth quarter 2012, down from 3.1 percent in the third. In addition, real disposable personal incomes (0.8 percent), and real consumer spending (1.7 percent) flash warning signs. With GDP, they possess exceptional recession-predicting abilities. The reason is simple: like riding a bike, if you don’t pedal, you tip over.
Industrial production has the weakest history as an indicator, with growth falling below 2 percent on several occasions when the economy has avoided recession. The economics behind this is that the U.S., far from being a factory behemoth, is prone to manufacturing downturns.
Another rarely-cited statistic with excellent predictive qualities is the pace of real final sales of domestic product, which measures the level of goods produced in the economy that are actually sold rather than placed in inventory. The current 12-month pace is 1.6 percent. Alternatively, some economists look to the level of final sales to domestic purchases, which represents GDP less net exports and inventories.”
“Consumer weakness was seen in the retail sales report for August as total sales inched up a lowly 0.2 percent or 4.3 percent from year ago levels. Heavy discounting and promotion resulted in contracting sales at clothing, sporting goods, and general merchandise stores. Once adjusted for inflation of 2 percent (July CPI), the real rate of retail sales is 2.3 percent — another measure with a history of predicting economic downturns.
CEO James Craigie of household products producer Church & Dwight recently remarked, “I’ve been a long-term pessimist about the business environment. The latest forecast of weak GDP growth, continuing high unemployment and weak same-store sales by major retailers provide little hope for significant near-term improvement in the U.S. economy… all consumer packages companies are fighting these headwinds.”
Retail sales at general merchandise stores — the second largest category of retail sales behind motor vehicles and parts — fell 0.2 percent month-on-month in August and 0.3 percent from August 2012.”
One might wonder where the money is going. Perhaps TIME magazine captured it best on their September 23, 2013 cover.
This might have helped the firms secure the “W” as well: 16 major Wall Street firms that received early data from Thomson Reuters.
Trade Signals – Investor Sentiment Remains Favorable
Trade Signals is designed to help you navigate the risks and rewards of the stock market. I believe a less certain investment outlook is ahead due to unmanageable debt, entitlements and unprecedented central bank manipulation.
Have a plan in place that enables you to participate in the stock market’s gains while mindfully reducing your downside risk.
Included in this week’s update:
- Sentiment Charts – The short-term trend remains favorable supporting a continued rally.
- Cyclical Bull Market Charts – The cyclical bull market trend remains favorable
- I suggested removing hedges several weeks ago when sentiment was at Extreme Pessimism and the S&P 500 Index was at approximately 1630. Sentiment continues to favor a bullish market view.
Here is the link to the charts. Note – it is posted to our website every Wednesday.
Who wants to hear bad news? I know you don’t, nor do I, but it is important to be aware. For now good news remains. Equities are having a great year. The cyclical bull market is in place and tools exist that enable you to risk protect the investments you own. Our Global Equity Strategy is unhedged and doing well, our equity focused tactical strategies are having a very good year, our managed futures tactical strategies are mixed and high yields avoided most of the recent bond sell off and are again positioned in high yield bond funds.
I told Elijah that I don’t know which risk will do the best and that if he buys into the stock market because all feels good today, just be prepared for the next recession and -43% drop. It will happen. It is better not to chase and to be prepared to buy when everyone is selling.
I’m heading back to Elijah’s at 5:00 pm. My 14 year old, Kyle, is up next. Elijah has a gentle Portuguese Water Dog named Willie with an endless amount of love in his heart. This dog lights up when Kyle enters the “stylist’s” salon. He jumps into the chair and rests his paw on Kyle’s arm – the entire time. I think Elijah has both Willie and I well trained ($45 bucks and all). I really want to get a dog.
Wishing you a great weekend!
With kind regards,
Steve
Stephen B. Blumenthal
Founder & CEO
CMG Capital Management Group, Inc.
Philadelphia – King of Prussia, PA
steve@cmgwealth.com
610-989-9090 Phone
610-989-9092 Fax
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