Weekly Update And Inconsequential (to the long-term investor) rough patches…

For this week’s update I’m going to pull (and edit/amend for clarity) some highlights from my daily market journal.

From May 3rd:

Dow’s down 190, Nasdaq’s off 1.22%, S&P’s down 22 (1.05%).

The manufacturing ISM was published yesterday. It came in below expectations, but was the 2nd consecutive month above 50. Construction spending was overall constructive. Auto sales decent, particularly Ford F150s (positive sign for small business activity)…

The RSA (Australian central bank) surprised and cut their benchmark rate by .25 last night, Aussie up 2% today…

The Yen is still amazingly rising against USD…

Overall, my view is that there’s nothing particularly pernicious in the environment that would smack of huge economic risk that would take us spiraling into the next bear market soon. The market in the short-run, however, is clearly losing momentum; seasonality stinks and “Brexit” (Britain’s 6/3 referendum on leaving the EU) is on the horizon, not to mention my bbdxy (dollar) chart is turning bullish.

From May 4th:

Stocks are continuing to trade lower… this is consistent with what I’m seeing in the MACD, FSI and OBV (technical indicators)…

Don’t know that the political landscape is seeping in just yet, I don’t suspect so with regard to the U.S..

The dollar’s rallying which could be a headwind at this juncture…

I suspect the recent selloff in stocks is largely about seasonality after a big bounce off the 2/11 bottom…

Staples and utilities are the only sectors higher at the moment… utilities big time!

Looking out a bit: today’s productivity numbers were weak, employment costs are rising and capex (businesses investing in capital and capital improvements) isn’t happening (although weak productivity and rising labor costs should inspire it). This does not paint a pretty economic picture going forward and, added to the Manuf ISM—with its reported rise in commodity input prices, smacks of inflation—makes the Fed’s job tougher…

On the brighter side, Services ISM beat estimates (firmly above 50), other manufacturing surveys have been threatening improvement… construction spending decent… Ford F150 truck sales up.

12:43pm: Dow’s come back a bit, down 70ish, S&P 500 down 9. Given what I’m seeing in the technicals, seasonality, etc., I’m reluctant to put new money to work just yet.

Just did a check of recent U.S. ETF in and out flows: Investors/advisors appear to be leaning jittery, while looking for yield (let’s hope not in all the wrong places). Market Implications: conventional wisdom says nervousness is bullish…

From May 6th:

The jobs number disappointed, coming in at 160k vs 200k consensus. The market immediately sold off half a percent or so (-100ish Dow), however, at the time of this typing the Dow and S&P are down only .1%, Nasdaq is down .23%…

Now, you’d think that such disappointment would send bonds up (yields down), utilities up and cyclicals down. That, more or less, was the kneejerk reaction. However, as I type, utilities are down .8% and transports are only down .1%. Actually, that makes better sense given the last paragraph below (Bloomberg):

Add employment to those reports showing weakness, at least moderate weakness as nonfarm payrolls rose a lower-than-expected 160,000 in April. Revisions are minor, down a combined 19,000 in the two prior months with March now at 208,000. Government is a weak spot in April, down 11,000, with retail also showing weakness, down 3,000 after a series of outsized gains.

The unemployment rate is unchanged at 5.0 percent but the size of the labor force did fall in this reading. And the participation rate, which had been jumping, slipped 2 tenths to 62.8 percent.

Earnings are a positive, up 0.3 percent in the month with the year-on-year rate back on the climb at 2.5 percent for a 2 tenths gain. The workweek is also a positive up 1 tenth to 34.5 hours.

Turning back to industry sectors, mining extended its long trail of contraction with a 7,000 decline. But there is definitely strength especially for the closely watched professional & business services reading, up a very strong 65,000 and pointing to the need for additional permanent hiring in the months ahead. The temporary help services subcomponent of this reading is up 9,000 for a second month. Financial activities also show strength, up a very solid 20,000 with manufacturing back in the plus column but not by much with a 4,000 gain and reflecting a snap-back for the auto industry.

In a nutshell, the services sector read remains strong with temp hiring up (denotes a pickup in business) as well, and manufacturing showing a net gain. Weakness in govt does not denote economic weakness. All this, along with the spike in wages and hours worked—and a still very low 5% unemployment number—actually makes this a pretty strong report in my view. Also, gotta factor in that the labor market is tight, meaning there really isn’t the number of available (or qualified) workers that there was earlier in the expansion. 160k is in fact more than enough to handle new entrances into the workforce.

As I finish this note the Dow is now up 8 points, Nasdaq down 4, S&P flat. Transports are up .4%, utilities are getting crushed -1.3%, treasury yields are up (10 yr +.02), and the dollar (bbrg index) is higher. I.e., contrary to the headlines, the market logically says this is a good report. Now, if that’s the case, is it so good that Fed-fears take hold and send stocks lower?  Right now fed funds futures trading discounts a 4% chance of a rate hike in June — that dropped to zero on the release of today’s numbers before bouncing back up a bit. I agree (for now at least) with the traders, simply because I don’t see enough just yet to force the Fed to hike ahead of the Brexit vote.

As for my view of the market, I still see the near-term (next 6 weeks or so ) risk firmly to the downside — per the technicals, seasonality and potential global angst…

12:56pm: Stocks have rallied back, Dow up .4%, S&P up .3%, Nasdaq up .3%… Utilities still lower -.7%, transports up .9%… Looks like a risk-on rally… However, volume is unimpressive (spy 76 million vs 107 mill average)…

Oil is up .5%, but down 3% on the week (strong dollar)…

My guess is that the market accurately interpreted the jobs number as good, in economic terms, but not enough to push the Fed toward higher hawkishness. The perspective on the Fed could change going forward, as it relates to inflation (productivity is down, labor costs are up, manuf and services commodity input prices are up). If we get a raft of really good economic data between now and the June meeting, we could see some pain in stocks for that reason—although I think a fed hike in front of Brexit is extremely unlikely unless polls say there’s virtually no chance…

The VIX (volatility index) hovering below 16, while the curve (vix front months’ futures) flattens, is not supporting my view that the market’s in for pain for May and June. The technicals, however, point firmly to near-term weakness. And the dollar is showing me technical strength (up slightly today). My best guess is that today’s rally was the jobs# reaction referenced above, and that it’ll be short-lived and we’ll still see lower levels between now and the end of June. All that said, have to keep an open mind—knowing how the market loves to make mincemeat out of short-term prognostications. Plus, many pundits remain near-term bullish.

I think the above more than suffices as a weekly update.

Of course I can’t leave you with only a short-term view of the market (a pessimistic one no less), which is of virtually no import with regard to your long-term portfolio. Allow me to wax a minute on what truly makes me bullish for you faithful investors in the companies that make the stuffs and provide the services that you, me and the remaining 7 billion earthlings will buy for eons to come:

So, close your eyes, breathe in deep, then breathe out while chanting “om”. Just kidding with the “om” (unless of course it helps you find your center). Now imagine your life, say, 5 years from now if you think you’re really old, 10 years-plus if you don’t think you’re really old. Will you, over the coming years, have eaten literally tons of food, finished off hundreds of sticks of deodorant (well, let’s hope so), worn out a good number of pairs of shoes, changed up your wardrobe, replaced a few tires, a few cars maybe, traveled to a few places, paid for a few parking passes, visited a few restaurants, seen a few movies/plays/etc., upgraded your cell phone/computer/tablet/tv/boy friend/girl friend (the latter two can be very expensive), reroofed your house, remodeled your kitchen, bought a new home, a second home, a first home, paid thousands to the utility company, invested a few bucks with Marty 🙂, and on and on and on?

Yes, of course you will have! And so will have many of the folks like you who live in the world’s developed countries. Now imagine the life-changing to come for the folks living in the world’s emerging countries—who, believe it or not, comprise 85% of the earth’s population —who are the chief customer targets of the world’s greatest multi-national companies. Imagine the economic growth of the emerging world in the decades to come. Imagine investing in that growth! That’s what we do, through the ups and the downs that are part and parcel to long-term investing. Imagine how utterly inconsequential will be the potential rough patch (regardless of the extent to which it sees stock prices lower) I see developing over the next few weeks (or months)—and the many more to come—against the global potential I outlined above.

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