Saturday, October 1, 2016

MAD Weekly Review

"Experience is the name everyone gives to their mistakes" - Oscar Wilde

Well I'm back full time after a wonderful last 7 days.  I did get married this weekend, and no the quote above has nothing to do with it! I just thought it would be fitting given everything that's going on right now. 

The news the last 7-10 days has all centered around banking issues with either Wells Fargo(WFC), or Deutsche Bank(DB). Along with lasts weeks no rate hike decision from the Fed, and of course the first debate between Clinton/Trump. Experience is key in all of these issues. Why?

Banking Experience
For the banking sector it's key in remembering who you serve. Your Customers. Neither bank is doing a great job of that right now, especially Wells since they were, ya know, defrauding theirs. Have you read my bank article? Clearly we never learned from our mistakes, ahem experience, during the financial crisis. The big banks all need to be broken up. NOW! Of course in the USA we can thank Bill Clinton for repealing the Glass-Steagall Act which helped contribute to the mess we are in now.  

Fed Experience
As for the Fed Janet Yellen admitted in her Q&A session afterward that her projections on the economy are pretty much worthless. 

“I can assure you that any specific projections I write down will turn out to be wrong, perhaps markedly so.” – Janet Yellen

Yep exactly what we are looking for in our financial system leaders. I'll note again that plenty of central bank leaders around the world have admitted the same thing, just in different words. I guess Yellen needs more "experience".

Leadership Experience
As for the debates neither candidate looked like the one you'd want to vote for. I really think Hilary outgunned Trump with her comebacks. Trump missed a few pitches lofted up by Hilary he could have hit for a home run on her. He just needs more debate "experience".

Trump said a lot of things that are really true though, and Hilary tried to paint the issues as morally wrong. The one that stood out to me was when she scolded him for apparently not paying taxes, and he said that's because he was smart. I'd have to agree with him there. There is absolutely nothing wrong with using the tax code legally to your advantage to pay almost nothing in taxes. I worked in the tax industry and believe me it's not a huge deal if you've figured it out. In fact around the water cooler your company was applauded for being that good at it, but you weren't given public accolades.

Economic News
We received a slew of economic data this week. Initial claims for unemployment continue to come in at record lows. 'Nuff said.

New and Pending home sales were released. We are continuing to see strength with new home building, which is providing support to the economy right now.

However don't be fooled by the recently released 5% rise in the Case-Schiller Home Index. That price rise is Nominal and not adjusted for inflation. As prices rise in certain areas sellers will emerge as they escape negative equity and initiate long planned moves. That should keep a lid on prices as supply comes on when people start to see their neighbors selling their homes for prices they deem agreeable. Note the home price index in Red, and the percentage change in Blue. The index is still off it's April 2006 high of 206.64 by 10%. Still rising home prices provide a tailwind to the economy.

What About GDP?

We received the third estimate for Q2 GDP this week. Growth actually came in at 1.4% instead of 1.1% from April-June. We've had 7 quarters in a row with GDP coming in below 2.6%. The solid growth during 2014 looks very enviable right now. Current growth is weaker than it should be, but I'll continue to take anything above 1%. Oh how our expectations have changed.

The Durable Goods number coming flat doesn't help paint a bright picture, but the Atlanta Fed is predicting 2.8% growth for Q3. That would be a welcome relief. While memories of heady growth in the 90's fades away I can't help but notice the long term declining trend in GDP change since the 50's. Check out the chart below. The trend for GDP growth has been in a serious long term decline. That doesn't imply absolute peril is around the corner, but it is concerning.

It reminds me of the chart I posted regarding Britains declining change in GDP once it joined the EU. Britain's GDP was under attack from increased regulations from the EU.  I'll be looking into why GDP in the USA is in decline since it affects us all. My hunch is taxes and regulations are big culprit. I probably won't surprise myself.

The markets ended the week with a nice upbeat gain.  Friday the S&P closed up 0.78% to 2,168.  People keep calling this a top in the market, but I'm not convinced. There is a nice support base underneath us that was carved out from August 2015 to May 2016, and a ton of support at the 2,100 level.

What's impressive is the Russell 2000's 10% YTD gain. Recall at the beginning of the year small caps were struggling mightily versus their larger peers. That lagging has dissipated, and turned into a full blow whooping on large caps. Let's see if it continues.

Index Started Week Ended Week Change % Change YTD %
DJIA 18261.45 18308.15 46.70 0.3 5.1
Nasdaq 5305.75 5312.00 6.25 0.1 6.1
S&P 500 2164.69 2168.27 3.58 0.2 6.1
Russell 2000 1254.62 1251.65 -2.97 -0.2 10.2

That's all for now. Enjoy the first weekend of October!

The MAD Consultant

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