Saturday, February 4, 2017

MAD Economic Review - 2/4/2017

It was a busy week for economic data as we had a FOMC rate decision, Unemployment/NFP, ISM, and earnings from a few big names.  That was all enough to keep the market action interesting for the week. In fact we saw record levels of VOLATILITY!!!  The last time we saw this kind of volatility was back exactly 10 years ago in February 2007.  What does that mean?

This week was the first time in 10 years, since February 16th 2007 to be exact, the VIX Index went below 10. As a matter of fact there were a string of days in February 2007 where the VIX briefly dangled below the ever hard to reach 10 level. While it didn't last long the VIX traded as low as 9.97 this week. If you look closely it was kind of a #FlashVIX.

Now many people use the VIX as a contrarian indicator.  Rightly so as it can be a useful tool forecasting overbought/oversold conditions, and determining when a pullback/rally is in order. Now readers with astute memories will remember that while the VIX hit those lows 10 years the S&P 500 closed that week at 1,451. It ended up closing 2007 at 1411 so only a drop of 2.7% was realized after those historically low VIX closings.  Contrarian investors screaming about a top did so for a whole year, but it fell on deaf ears.

Of course when 2008 came around investors took a wallop on the chin as the S&P 500 opened at 1,414 but quickly lost 52% over the ensuing 8 weeks until it hit a fitting low of 666 the first week of March.   That's an astounding loss in such a short period of time, and it's why so many people are on still on edge despite the fact one of the worst bear markets in history is 9 years in the rear-view. It doesn't matter the S&P 500 Index is sitting 1,631 points higher since that fateful low. Peoples savings got burned(almost literally), and they decided to banish equities from their portfolios for good.

As they say fool me once....

The real tragedy is people walked away from their equities for good(some came back later)only to see one of the most historic bull runs in history erase all the losses, and then pile on historic gains.  Of course they say only Wall Street and the rich make money on stocks.

Here is why.

They hold onto their equities for the most part, and when possible they put more cash to work when prices are cheap as they buy up great business' at temporarily low prices.  Furthermore they stick to a long term plan that's diversified and suited to their needs.  Do they take losses periodically? Absolutely. But so do the worlds best traders so no one is immune.  In fact most wealthy individuals claim their investing success comes from just a couple factors.

  • Sticking to a long term plan
  • Staying Diversified
That's it.  It's so easy.

Economic News

The big event this week was the FOMC rate decision.  The committee decided that the economy was "roughly" in balance.  Now the market isn't pricing in another rate hike until June.  Although it appears some within the Fed, and the market, think March is another possibility.  The Fed still believes three hikes are coming this year, while the market thinks two.  So take it all with a grain of salt. Rates are on the uptrend.  This is going to keep a tailwind behind the US Dollar rally as other Central Banks around the world still toy around with negative rates. That's going to send a lot of capital fleeing into this country.  Add in potential softer regulations, and lower taxes from Donald Trump and we could really see capital flows pick up steam.

Then we received jobs data from our two regulars. ADP reported payroll gains of 246k, and the DOL showed 227k new jobs. All good, but remember this is still weak job growth overall for an economy our size.  In the new normal it's good, but right now it might not be good enough to justify one of the aforementioned rate hikes.  I think the Fed will want to see numbers coming in above 250k for a bit. 

Average Hourly Earnings(very important) increased just 0.1%, and last month was revised down to 0.2% from 0.4%. Sigh, I thought that 0.4% was great but obviously it was wrong.  At this point YoY AHE growth rate is now 2.5% instead of 2.8%. that's still good, but numbers closer to 3% are what we'd like to see.  The reason being is employment and wage growth are big components of inflation. The closer inflation gets to 3% the more likely we see action from the Fed.  

Now for some big earnings reports. Amazon(AMZN), Apple(AAPL), Facebook(FB), and Visa(V) all reported earnings for the week. A lot of people are familiar with these names, and they represent 20% of the 20 largest companies by market cap.  Ironically Amazon and Facebook reported large increases in revenue, yet their stocks either went down, or nowhere. Meanwhile Apple and Visa showed comparatively lower revenue growth, but saw their stocks both shoot up.  Ah always the paradox the market is.  

                            Revenue % Change MRQ          Stock Price % Change 1 Week
AAPL -                              3.2%                                                 5.8%
V -                                     12.5%*                                              2.7%
AMZN -                            22%                                                  -3.06%
FB -                                   51%                                                  -0.91%

What's more important is these titans showed that the economy is alive and well. Of course it depends on what sector your in.  These are all "tech" companies in a loose sense.  Apple and Amazon are really quasi tech plus being a manufacturer and a retailer. Meanwhile Facebook & Visa are more closely aligned with traditional "tech". No matter how you cut it though all these organizations use technology at every level, and develop new ones to serve customers.  This revenue growth helps us understand why the Nasdaq is leading the major indexes YTD as it's up 5.2% versus a 1.6% gain in the Dow. The S&P 500 and Russell 2000 are up 2.6% and 1.5% respectively.

*Visa sales changes represent calculations related to Visa Europe acquisition as if the company results were included as of 2014. Reported results including the acquisition in the MRQ show a 25.1% increase in revenues reflecting the first full quarter of results in Visa's operations. 

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