Week in Brief: August 19

August 22, 2016

This week brings the Kansas City Fed's annual Jackson Hole retreat. Drawing economists and central bankers the world over. Resembling that which might occur if a bunch of economists crashed an Illuminati meeting.
We doubt anything momentous comes of it. But we do hope this cadre of central bankers may begin to put their heads together and figure a way out of all this ZIRP, NIRP and RIRP. As one begins to feel that central banks threw a party back in 2009. Seven years later, they still lack the resolve to kill the music and close the bar.
Speaking of which, last week's Fed FOMC meeting minutes revealed a hearty discussion of potential overvaluation in commercial real estate. As well as elevated equity valuations, and investors' search for yield.
Does it strike you as odd that a smattering of elite economists and academics are suggesting that they know more about asset valuation than an entire global marketplace comprised of millions of independent investors actually making self-interested decisions?
Man am I growing tired of Ivory Towers. Alexander Hamilton would be ashamed.
At the other end of the spectrum, did you watch the Olympics? Michael Phelps's name should forever be synonymous with Olympic greatness. 22 gold medals. Including 13 individual golds. Breaking the long-standing record set by the great Greek runner Leonidas of Rhodes. at the 152 B.C. games.
Excellent work, Mr. Phelps. Not to mention the countless other athletes who thrilled spectators by their dedication, training, efforts and sportsmanship.
Markets sent a resounding message that this party could continue. So spike the punch and whack that piñata.
Each of the major U.S. equity indices simultaneously achieved new highs on Thursday, August 11. The first such occurrence since 1999. All the more impressive considering that the tech-heavy Nasdaq was more tortoise than hare in this scenario. Having taken 16 years to regain its 2000 high-water mark.
That said, the recent volatility respite could soon dissipate. As the past 20 days have featured one of history's most narrow trading ranges. And the lowest volatility level in 20 years.
[Which brings us to this week's riddle: what's the difference between the media and Donald Trump? Answer: A press pass... as the media's hyperbolic bloviations are somehow accredited by the presence of that small, lanyard-born piece of plastic.]
Last time such a low-volatility, narrow trading range occurred? September 2014. Market had hit new highs. Then Ebola hit the headlines. Sending the blathering punditocracy into frenetic froths of hyperbole as it convinced viewers/readers that the world was ending. Quickly steering markets 12 percent lower.
Such is life. High volatility follows low volatility. Yin and yang. Don't fear it. Anticipate it.
One worry among equity strategists? That Janet Yellen's August 26 address in Jackson Hole will mark the high of the 2016 rebound. As she's likely to espouse a more hawkish position given the recent economic data. Bringing investors to look away from low interest rates. And refocus on unbalanced economic data, dilapidating corporate earnings, volatile energy prices, compressed bond spreads and chaotic geopolitics. All juxtaposed against aggressive investor allocations. So providing the hair trigger that could catalyze market drops the next time the herd begins to panic.
Because the market thrills by disappointing the largest number of investors as frequently as possible. So requiring successful investors to maintain the stoic's contrarian's ethic.
The below chart highlights the disconnect between U.S. equity performance and fundamentals. While the market has continues to rise, capital goods orders have fallen. Why? Most likely the market's expectation of more easy money. Qualitative easing. Senseless government intervention. None of which has helped. As global markets have generally turned south. Leaving the U.S. to remain adrift a few other stalwarts.
And while members of the blathering punditocracy (i.e. Paul Krugman) push the government to borrow and spend ever more, those without ideological sticks up their bums know that at some point inflation will begin to rise. That is to say, the type of narrowly defined inflation that the government recognizes. Spurring the Fed to raise rates. And making all that public-sector debt service ever more expensive. So locking in the apex of this accommodation-driven trend line. And ushering in a new phase of the bull market.
Of course, that could catalyze a period in which performance once again relies upon healthy variables like profits, economic growth and factory output. Who wouldn't welcome that?
Q2 earnings season draws to a close. Roughly 2,400 companies have reported. 64 percent have beaten earnings estimates. If that holds, it shall be the best beat rate since Q4 2010.
Revenues? Not so much. As only 56 percent of companies have beaten expectations. Trailing the historical revenue beat rate these last two decades.
Bespoke reports that technology crushed it (72 percent beat rate). While industrials, financials, consumer discretionary and health care maintained (63 percent plus). With utilities and energy bring up the rear (55 percent).
Despite unceasing pessimism heading into the earnings season, companies continue to cut expenses, modernize and outperform lowered expectations. They've been doing so since early 2009. Quite the opposite of what the public sector has accomplish over the same period.
Further evidence of the advantages to meritocracy.
Which leads us to politics.
Polling reveals that Trump and Hillary are neck in neck. Signifying the electorate's inability to get too aroused by either candidate. A common political affliction otherwise known as "electile dysfunction."
Can you blame 'em? The media has portrayed Trump as the anti-Christ's more-evil twin brother. And we can no more escape the constant presence of Hillary's scandals than a porch light can bugs. Reports like this are omnipresent. And so depressing.
Bond King Jeff Gundlach remains convinced that the election is Trump's to take. Citing the Brexit outcome as an immediate corollary. Of course, this missives regular readers know that we've said the same thing. Having written about the growing undercurrent of electoral discontent with the world's political elites. With each election representing an opportunity for the tea kettle to blow off steam and release the growing pressure.
Many voters believe the biggest problem of this election to be that one of these candidates must win. That said, Trump has one unspoken advantage that Hillary does not: his election would represent the biggest torpedo the electorate can send into the bow of our maddeningly ineffectual political ship.
As Brexit revealed, the electorate pines to strongly condemn the self-enriching political establishment. A duopoly that's delivered little to no value in years. And the harshest condemnation the electorate could deliver would be to smite all of the establishment political contestants. Mission accomplished in the GOP. And among Democrats, nobody represents the establishment more than does Hillary.
Amid all the uncertainty, one thing's for sure. The debates will be must-see television.
Stay tuned...
Weekly Results
Major indices finished mixed this week, The Dow Jones Industrial Average lost 0.13 percent. The S&P 500 Stock Index fell 0.01 percent, while the Nasdaq Composite climbed 0.10 percent. The Russell 2000 small capitalization index gained 0.57 percent. Gold closed up $5.62 per ounce, or 0.42 percent.

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