After another run up, last week saw large U.S. indexes pulling back to the bottom of their trading ranges. A move we've witnessed several times this year. That's what occurs when stocks trade in a narrow range. Rise up to the top, touch and fail. Fall back to the bottom, touch and fail. Rinse and repeat. As predictable as the nightly cat fights on Bravo at 10 pm.
The only events that have caused stocks to fall beneath the lower ends of their range since last fall have been the Ebola and Greek debt crises. And these drops beneath their technical shelves were short lived.
However, the S&P 500 has entered a consolidating triangle pattern that portends a larger breakout - up or down. The index has bounced between resistance at 2,105 and support at 2,075. And as its approaching the triangle's apex, it will likely break out within the next few days. Considering that the height of the triangle, top to bottom, is 75 basis points, that becomes the projected move once the index breaks out. This places the index at roughly 2,180, should the move be higher. And at roughly 2,000, should the move be lower. Either way, the move would typify what we've seen in August over the past few years.
Investors appear nervous over disappointing Q2 earnings and the growing specter of higher interest rates. Also, remember that the market tends to peak in late July before regrouping and rising again later in the year. Of course, investor anxiety these days appears to be as omnipresent as Julia Robert's smile... disconcertingly present at all times. Like a hole resembling a smile had been placed just above the chin...
Another factor capturing attention on multiple fronts? Friday's July U.S. nonfarms payroll report. Critical because schizophrenic labor data seems to be the missing piece of the economic puzzle. As well as one of the critical factors the Fed will use in its determination as to when to raise rates.
Wall Street consensus was for an increase of 225k jobs. The number ended up at 214k. Nor was their any wage gains of which to speak. Because so many of the jobs being added are in bars, restaurants and low-level health care. Simply not the career-oriented positions young people need to gain the confidence required to begin families, buy homes and become self-respecting consumers. You know, real Americans.
Fact is, the labor participation rate -- including all those healthy, working age Americans either working or looking for work -- stands at near 40-year lows of 62 percent. Where are these people? What are they doing? We estimate that many of them simply gave up seeking coveted career positions as the economy increasingly proved incapable of providing them. Consider the millennial generation. Hordes of these recent grads have been forced to take service jobs in restaurants and watering holes. Making such jobs the foremost provider of all those created these last six years. And yet, the weekly economic reports celebrate such data as victories. Which is not something that sophisticated citizens of the world's foremost economy should do. Any more than attending the ballet in Tijuana.
Depressing, eh?
The good news? European stocks were up. Assisting our overweight to that region.
Earnings Update
With 436 of the S&P 500's companies having reported, earnings are set to decline by -1 percent, the first drop in profitability since Q3 2012. Companies appear to be tracking a -3.3 percent revenue decline, marking the first consecutive quarters of top-line declines since 2009.
Corporate chieftains blame the results on a combination of factors including the stronger dollar, lower energy prices, and weakness in Europe and China.
Still, 69 percent of companies have beat their earnings estimates. And 50 percent have posted better-than-expected top-line revenues. Representing the kind of positive surprises that markets love. And if you strip out the energy sector, earnings have been quite positive.
Another positive? Consumer-related earnings have been strong. We're Americans. Even in the face of great adversity, consume we must! The auto industry in on pace for its best year in a decade. Hell, just count the number of F150s you see on the road these days. It warms the heart.
Rate Hike?
Finally, the futures markets place the odds of a September rate hike at 54 percent. Though recent Fed commentary has considerably bolstered speculation around the decision. The question remains: will the end of zero interest rates pull the rug out from under equities, showing that the last six years has been a liquidity driven run up in asset prices or, will traders take the news as testimony to the economy's improving fortunes and further bid up stocks accordingly?
Either way, it appears we'll know soon enough. And we're certain the volatility will create opportunities for those willing to act. With only 24 percent of the American Association of Individual Investors' membership in the bullish category, it's hard to believe that stocks won't disappoint the 76 percent of non-believers by running higher. The last two times we saw back-to-back weekly results this low?  July of 2010. At which point stocks took off and never looked back. And March 2009. Which represented the beginning of the six-year bull market.
Sun Tzu on Investing
Centuries before the birth of Christ, China entered a period known as the "Age of Warring States." Eight states fought for control.
As the battles raged, one general rose to fame, power and immortality. His name? Sun Tzu. A general from the Wu Kingdom. He'd developed a holistic approach to combat. one noted for its power and simplicity.
Sun Tzu, a contemporary of Confucius, was essentially a contrarian. Well aware of the value found in doing the unexpected. In going against the grain. In Chapter four of his timeless tome, The Art of War, Sun Tzu wrote that "he who is destined to defeat first fights and afterwards looks for victory." That is, those destined to lose always enter the fray with no plan. No clearly delineated path to victory. Armed with only hope and optimism.
Those destined for victory have already fought their battles before combat begins. Having already planned for all contingencies. Outmaneuvered all obstacles and opponents. So providing full recognition of what the battle shall hold before the fighting begins.
Today, investors operate within the most confusing, chaotic financial environment ever incurred. In so doing, most throw money into the markets with little more than the hope that assets continue to move higher.
To such tactics, Sun Tzu said, "The skillful fighter puts himself into a position which makes defeat impossible, and does not miss the moment for defeating the enemy." That is, victory emanates from having taken a defensible position. And quickly seizing the advantage when opportunities present themselves.
From an investment perspective, defensible positions take the form of effective, diversified long-term positions purchased at favorable valuations. Moreover, a defensible position entails an exit strategy - should the tides turn against you.
Sun Tzu said, "You can be sure of succeeding in your attacks if you only attack places which are undefended." Which is to say, do not play into the hands of your enemy. Do not commit to those widely anticipated tactics. But, to those that are unexpected, and unfollowed by a wider audience.
Where has the herd panicked to the extent that opportunities now exist? In which areas has fear become so pervasive that few investors can conscientiously commit capital at prices representing multi-year nadirs? "In the midst of chaos, there is also opportunity," taught the general. Investors are well served to always keep that in mind. Running with the herd get you nowhere.
"It is only one who is thoroughly acquainted with the evils of war that can thoroughly understand the profitable way of carrying it on," Sun Tzu taught.
Accordingly, we've often said that good investing is equal parts history, math and psychology. Most investors wish to jump right in without committing to proper study of market history and psychology. So when cyclical manias occur, sending assets higher or lower, they've little idea as to how such events have historically played out. Leaving them in an indefensible position. With no advantage over other investors.
The inherent risks of investing in uncertain markets like today's require a tremendous amount of diligence, experience and calculation. But the herd never commits to the efforts required to tilt the balance of fate in its favor. Preferring to trample over one another when opportunities appear. And stampede towards the exits when the environment turns dark.
Finally, Sun Tzu said this: "Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before the defeat.'
In the midst of today's white noise - the Fed, Greece, ISIS, Iran, interest rates, et al. - we respond emotionally to every headline, broadcast and article. Effective investors do the opposite. Using those fearful moments to allocate capital to profitable opportunities. In other words, when the herd is panicking, they following a strategy, and execute pre-planned tactics.
Any unplanned path to success has simply stumbled upon luck. Which is not repeatable. And presents little opportunity to achieve long-term financial autonomy.
. . .
The Good
The U.S. added 215k jobs in July... The unemployment rate remains at 5.4%... European demand rose, spurring German factory orders...
The Bad
Oil prices continue to decline... The U.S. trade gap widened... U.S. manufacturing growth slowed... As did Chinese manufacturing...
The Ugly
The refugee situation in Europe continues to worsen. Syrian, Libyan and African refugees continue to flood into Southern European nations. In Greece, the city of Kos (population, 30k) has been overrun by 7k refugees fleeing lands overcome by Islamic fundamentalists.
Calls for Constitutional Convention
The U.S. has not held a national constitutional convention since the days of its first president. Yet, given the lack of political conviction in finding a solution, a growing population believes that such a convention, deigned to pass a balanced-budged amendment, may be the only way to address the nation's worsening debt crisis. Article.
Environmental Destruction Agency?
An EPA crew working to dispose of toxic mining water outside of Durango, Colorado, instead opened an artery into the toxic pool and redirected the runoff into the Animus River, a popular attraction for kayakers, rafters, and other sportsmen, not to mention the myriad of species that make the river their home. The once-beautiful river now flows orange. Article.
The Beginning of Greatness
Katie Ledecky won a single swimming event at the 2012 London Olympics. But, she won it easily. At the age of 15. Today, she's proving to be the most dominate freestyle swimmer in the world. And her upside potential has mouths agape all over the athletic world. Article.
ISIS and the Graves of Prophets
Ronald Tiersky examines the roots of the Sunni-Shiite conflict, and the Islamic State's strategy to delegitimize the Saudi regime as Islam's religious and geopolitical focal point. Story.
Five Advantages You Hold Over Wall Street's Professionals
True, Wall Street has better computers, algorithms, degrees and access. But there remain some significant advantages that David maintains over Goliath when it comes to any discipline. Investing is no different. Article.
Abbott and Costello on the Jobs Data
We've long discussed the conundrum that the government-reported job numbers have represented. The idea that unemployment appears to be reaching desired levels, while so many healthy, working-age people continue to be out of work (measured by the participation rate). Some clever economist has tackled the mystery with the following Abbott and Costello parody. Enjoy.
COSTELLO: I want to talk about the unemployment rate in America.
ABBOTT: Good Subject. Terrible times. It's 5.6%.
COSTELLO: That many people are out of work?
ABBOTT: No, that's 23%.
COSTELLO: You just said 5.6%.
ABBOTT: 5.6% unemployed.
COSTELLO: Right, 5.6% out of work.
ABBOTT: No, that's 23%.
COSTELLO: Okay, so it's 23% unemployed.
ABBOTT: No, that's 5.6%.
COSTELLO: Wait a minute! Is it 5.6% or 23%?
ABBOTT: 5.6% are unemployed. 23% are out of work.
COSTELLO: If you are out of work, you are unemployed.
ABBOTT: No, Congress said you can't count the "out of work" as the unemployed. You have to look for work to be unemployed.
COSTELLO: But they are out of work!
ABBOTT: No, you miss his point.
COSTELLO: What point?
ABBOTT: Someone who doesn't look for work can't be counted with those who look for work. It wouldn't be fair.
COSTELLO: To whom?
ABBOTT: The unemployed.
COSTELLO: But ALL of them are out of work.
ABBOTT: No, the unemployed are actively looking for work. Those who are out of work gave up looking; and if you give up, you are no longer in the ranks of the unemployed.
COSTELLO: So if you're off the unemployment rolls, that would count as less unemployment?
ABBOTT: Unemployment would go down. Absolutely!
COSTELLO: The unemployment rate just goes down because you don't look for work?
ABBOTT: Absolutely it goes down. That's how it gets to 5.6%. Otherwise it would be 23%.
COSTELLO: Wait, I got a question for you. That means there are two ways to bring down the unemployment number?
ABBOTT: Two ways is correct.
COSTELLO: Unemployment can go down if someone gets a job?
ABBOTT: Correct.
COSTELLO: And unemployment can also go down if you stop looking for a job?
ABBOTT: Bingo.
COSTELLO: So there are two ways to bring unemployment down, and the easier of the two is to have people stop looking for work.
ABBOTT: Now you're thinking like an economist.
COSTELLO: I don't even know what the hell I just said!
ABBOTT: Now you're thinking like a politician.
Weekly Results
Major markets finished down last week. The DJIA fell 1.79%, the S&P 500 dropped 1.25%, and the Nasdaq lost 1.65%.  Small cap stocks lost 2.57%.  And the 10-year Treasury bond yield lost 2 basis points to 2.20%. Gold lost $2.38 per ounce, or 0.22%.