Week In brief: February 10

February 13, 2017

Millions of Americans sulked to their couches last Monday night. Despairing as they confronted a football-free seven months. A period during which they might rebuild marriages. Rekindle with estranged children. Work on that elusive promotion. Read a book. And take the dog for a belated walk.
Such despair misses the mark. As all good things must end. And that was how to end a football season.
One hell of a Super Bowl, eh?
In what initially appeared to be a blowout, both teams covered both ends of the spectrum. Playing terribly. And extraordinarily. And doing so at counter-posing times.

The Falcons dominated the first half. Averaging 9.6 yards per rush. Staking out a 21-3 halftime. Then stretching their advantage to 28-3 in the third quarter. At which point, according to FiveThirtyEight's statisticians, the Patriots probability of losing was 99.5 percent. Which is to say, 0.5 percent shy of victory being a statistical impossibility.
As the third quarter wore on, the Patriots flipped the script. Scoring 25 unanswered. Including separate two-point conversions on consecutive touchdown drives. So sending the game into overtime. Where the Patriots won the coin toss. And sealed the most improbable comeback in NFL history. Scoring on their initial possession. Cementing Tom Brady status as the sport's greatest quarterback. And Bill Belichik's as the league's most successful coach.
Some observations from Super Bowl LI:
-With eight minutes left, Patriots were down 28-3. With a 0.5 percent chance of winning.
-It was a global broadcast. Fox Sports used 70 cameras. Radio broadcasts were done in eight languages. Including Flemish.
-A 30-second ad sold for $5.5M. $183k per second.
-Winning team players collected $97k. Losers made $47k apiece.
-MLB players make much more for the World Series. With Cubs players receiving $369k.
-Lady Gaga was not paid. Such performances are done for exposure.
-70 percent of Vegas wagers were on the Patriots. Making for a lot of nervous half-time speculators.
-Opening coin toss? Historically, heads has won 24 times. Tails 26 times.
-New England being in the Super Bowl could be a bearish sign. As the market has dropped six percent on average in years where the Patriots have played.
-Two years when the Pats made the game, 2002 and 2008, have coincided with major bear markets.
-Markets have been volatile in years where Belichick has coached in the game (New England and New York). Following his appearances, the market has finished up 30 percent once, down 30 percent once, up 20 percent once and down 20 percent once.
We considered turning off the game when it was a lopsided, third-quarter affair. So I appreciate that we stuck it out. Saw one of the greatest, most improbable comebacks in NFL history. While emphatically underscoring how champions respond and succeed upon their profession's biggest stage.
More stats, improbable facts and analysis here.
Last week's post-Super Bowl run-up saw the S&P 500 rise 0.81 percent. The Dow remains perched above the 20K level. Though we expect to see more crosses above and below Dow 20K before the index heads permanently higher. For now, all three major U.S. indices remain at all-time highs.
The catalyst for last week's move? The Trump administration's discussion of pending tax cuts. Which could be the most singularly critical spark for providing stocks an impetus to go higher. The administration became embroiled in the imbroglio that was the temporary travel ban. And its attendant communications disaster. Last week saw the new president return attention to his original dance card.
Of course, listening to the news would have you believe that nothing good awaits investors. As most of the market blathering focuses on three topics:
1. The inevitable stock-market pullback.
2. The bottoming of interest rates, and inevitable rise to normal levels.
3. The inevitable return of volatility in the months and years ahead.
Of course, when the blathering punditocracy gets to synchronously caterwauling on any given topic? Please understand that such "inevitabilities" become highly unlikely. So, when many of our market crooners believe that stocks will soon correct, interest rates will rise and volatility will jump? We assert tactics predicated on the inverse of those frothy conclusions.
Upside drivers were continuing improvements in manufacturing and employment figures. Though we believe the market was really applauding the administration's focus on taxes.
How about some rarefied good news from the Old Continent?
European companies have been posting their first earnings rise in four years. Giving a boost to stocks.
Analysts believe the rise has solid foundations. And valuations are cheap compared to U.S. markets. And a mean reversion could be in order. As European stocks have returned 17 percent in dollars terms these last four years. While U.S. equities have delivered 65-percent returns.
Another area of the global equity market that's been moved to the stove's front burner?
Consider Brazilian equities. Which were savaged for eight consecutive years. But bottomed a year ago. And have since posted stellar returns. Some of the large Brazilian energy and mining plays look particularly attractive. With shares returning top dollar to investors last year. And still resting multiple standard deviations beneath their 10-year highs.
Turning to the Fed, Chairwoman Yellen has indicated rate hikes are coming. Perhaps faster than expected. She's also discussed the unwinding of QE bonds. Which would represent a tightening of financial conditions just as equity markets hit an all-time high. That could throw markets into a bit of a tizzy. And merits attention moving forward. By us. And President Trump.
Hell hath no fury like a woman scorned. Especially when she runs the Fed.
Geopolitically, it appears that the U.S. and Iran are on a collision course. One regarding the Joint Comprehensive Plan of Action (JCPOA). The agreement between Russia, China, Europe and the U.S. detailing the obsoletion of sanctions against Iran in return for dismantling its nuclear weapons program.
Iran has now completed two ballistic missile launches since the agreement took hold. Nor does it help that the missiles launched have the lines "Death to America" and "Death to Israel" scrawled in Farsi on either side. I believe that's called, sending a message.
The JCPOA does not permit such test launches. Though Iran argues a technical point in the agreement that does give them some clearance. The consequence of poor negotiation tactics conducted by then SecState John Kerry. Who looks more like Neville Chamberlain every week.
Most likely, the U.S. will drop out of the JCPOA. Leaving no other nations with both the ability to do anything about Iranian intransigence. And the will to act. Moscow and China will likely begin to focus on other geographic expanses closer to home. Forcing the U.S. to stretch already thin resources. And concern itself with the idea of fighting on two fronts. Which is when years of budget sequestration on U.S. defense spending, and the shrinkage of America's military, will adversely impact decision making.
The Navy has 275 ships. The Air Force needs new fighters. The Army and Marines are the smallest they've been in decades. Which will lead the Pentagon to conduct this war (a cold war?) on a stage in which it is confident of victory. Cyberspace. The Dollar. The Swift System (global payments). Communications. Satellites. Battlefields of a new digital age.
On a side note, Muslim Kuwait announced it will ban tourists from applying for Visas if they are from Iran, Iraq, Syria, Afghanistan and Pakistan. Why? Fears of terrorist activities. So, here is a Muslim country banning travelers from other Muslim countries. Interesting times.
Further, Austria is now demanding that immigrants sign an 'integration contract' upon entering. Nor will it surprise us to see other Eastern European nations do the same.
It is deplorable that these types of steps must be resorted to in the twenty-first century. As these types of efforts tend to occur concentrically. From one area to the next. One has to think that there are thought leaders in the Muslim world considering a stronger stance against radical Islam because of it. Ideally, thoughtful nations can figure out an acceptable means of vetting all those wishing entrance. And then permanently discard exclusionary tactics.
Recently, there been grumblings over the prospective overhaul of the Affordable Care Act. "If they don't plan to change everything, why change it at all?"
The ACA was a worthwhile attempt at healthcare reform. Unfortunately, it was undertaken at the worst time possible (the immediate wake of the Credit Crisis). And took on only 70 percent of what should have been reformed.
The American healthcare system has been the unfortunate victim of the trend towards centralization and technocracy. Too much power in the hands of administrators lacking real-world experience. As opposed to being run by real-world practitioners with experience in the trenches. Theoretical and anecdotal.
Look no further than the following chart by the Bureau of Labor Statistics, revealing how the density of administrators in the healthcare sector has exploded. While the number of actual physicians and caregivers has flatlined.
Resultantly, costs have skyrocketed. While metrics measuring traditional patient care have not. Underscoring the idea that, when you allow too many administrators to make a living from something? A degradation of quality occurs. Regardless of industry. Healthcare. Education. Commerce. Or politics.
On Wall Street, corporate sentiment reveals that businesses have not been this bullish in years. As U.S. executives used the words "optimistic" on 51 percent of Q4 earnings calls. The highest rate since 2003. Executives also used the word "better" rather than "worse" or "weaker" during earnings calls at the highest rate in two years.
Despite such bullishness, it appears that the Main Street public and the mainstream media have disconnected. As the news seems to focus on the media's ever-more-desultory expectations. The stock market continues to rise. And last week's Rasmussen Poll reported that 53 percent of the nation approved of the new administration's job thus far.
Why the disconnect?
First, I believe that the media tends to focus on the nation's top twenty percent of income earners when covering economic narratives. Conveniently forgoing the economic reality of 80 percent of the country.
Conversely, when covering social/cultural narratives, the media's pendulum swings to the spectrum's opposite end. Focusing on the nation's lowest 20 percent income households. So again conveniently forgoing coverage of the experiences of 80 percent of the nation.
The audience has noticed. With traditional media being plagued by the increasing presence of non-mainstream news outlets. Which increasingly bring to light the media's misdirection.
For instance, since the Credit Crisis ended, the media has broadcast the narrative that the nation's economy was recovering. That American households were on the mend. Reporting that wage growth has risen 40 percent since 2000. But that's not the real data.
Truth remains that nominal wage growth (wage growth minus inflation) has been less than zero for 17 years. In other words, the lion's share of households have had no increase in annual wages for nearly two decades.
Explaining why those otherwise viewed as astute political observers can't figure out how a populist won the presidency.
Measures of employment and production have drifted higher. But productivity, profits and wages for the nation's bottom 95 percent have stagnated. Technocrats trying to centrally manage a capitalist economy? Not effective in the long run. Be they Republicans or Democrats. Both parties have failed to prevent an army of administrators lacking real-world experience from invading the hen house. Eventually, such mismanaged gets noticed. And punished. So making possible the election of a populist real estate developer to the nation's highest office.
On the subject of that populist real estate developer...
A very vocal facet of the nation's population continues to rage about the temporary, seven-nation immigration halt. And the alleged deportation frenzy to which it would lead. Though we find this puzzling, having considered the facts. Which are these: last week, the U.S. deported 630 illegal immigrants. Nearly all of whom were convicted of a crime. The previous administration deported 3 million illegal immigrants. Averaging roughly 1,000 deportations per week over the last eight years. Amounting to an average of 59 percent more deportations than the new administration carried out last week.
When the appearance of chaos sets in, and the more vocal among us are losing their cool? Logical people benefit by stepping back. Taking a deep breath. And allowing empirical evidence to tell the story.
Stay tuned...
Weekly Results
Major indices finished higher last week. DJIA gained 0.99%, S&P 500 rose 0.81%. The Nasdaq climbed 1.19%. 10-year Treasury bonds fell 2.43%. Gold futures rose 1.16%.

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