Week in Brief: June 22

June 27, 2015

Monday afternoon, President Obama signed fast-track authority on the Trans-Pacific Partnership trade agreement. The exclamation point on what was a very productive last week for the president.
Congress backpedaled to hand Obama a victory on trade. The Supreme Court rejected the final challenge to the Affordable Care Act -- essentially, making permanent the president's signature piece of legislation. The court also invoked gay marriage as the law of the land. And on Friday, the president took to the pulpit and personally led a wounded Charleston, S.C., congregation in singing "Amazing Grace."
For a president whose very relevance has been questioned of late, this week was a big step back onto the nation's central stage.
Equities continue to be shaky. As there continues to be a lot of anxiety over Greece and the Fed's interest rate decision. Every day the white noise grows louder. "Is this the end of the five-year bull market?"
For instance, preparing to leave this morning, my wife -- listening to the Today Show gin up fear over a foreign economy that ranks smaller than the state of Louisiana -- asked me, "Are you worried over this Greek thing?"
The media finds itself somewhere between Caitlyn Jenner and a hard place. Following last week's tragedy in Charleston, the summer doldrums have set in. There's not much to discuss. So, the media focuses on items with which ordinary Americans would not typically concern themselves. Greece. Interest rates. Anything by which it can play up the scariest angle possible.
So, you get people who end up making poor decisions. Selling funds in their 401(k)s. Institutional investors who fear contagion and end up sitting on large cash positions.
Speaking of Greece, don't believe anyone telling you that Greece is defending its dignity by fighting austerity. Greece is sticking up for socialism by fighting reality.
After a few years of minor market-friendly reforms, and seeing a bit of economic growth, Greece elected a far left government in January. The economic and financial crisis took an immediate turn for the worse. Instead of trimming government spending and reducing regulation to boost growth and pay down debt, Greece said it won't cut retirement benefits and will raise taxes on what remains of its private sector.
Well, Greece finally ran out of other people's money. Backed into a corner, the government came to initial terms last night on a deal that may avoid Greece's being forced from the EU. The market rallied in relief, as certain observers said that the Greek tragedy would be just the catalyst required to prick the equity bubble and drop stocks like the opponents of the U.S Women's World Cup team.
We don't buy it. Stocks aren't in bubble territory. Nor do we believe that interest rate hikes will be as catastrophic as some have described. The last four decades have seen eight rising rate periods. Throughout, domestic equities have returned 8.5 percent annually. Bonds? A measly 2.5 percent. But, foreign equities have returned 14.5 percent. And the range of alternative investments we've been discussing of late have done very well throughout such periods.
Credit Suisse's Andrew Garthwaite recently broke the situation down. He believes stocks have room to run. As the equity risk premium (stock returns investors demand over and above risk-free Treasurys) sits at five percent. Market peaks tend to continue until that measure falls to roughly 2.4 percent.
Regarding price-to-earnings multiples, Garthwaite posited that the current S&P 500 12-month forward P/E stands at 16.8 times earnings versus a fair-value estimate of 18.3 times. Historically, market peaks have historically occurred when those multiples approach 23 times, on average. Meaning that stocks could have another 40 percent upside potential from here. Which would take the S&P 500 to nearly 3,000 from today's perch of 2,071.
We mentioned some time ago that market cycles characterized by strong monetary support from central banks tend to jump roughly five times from the previous low. So, in March 2009 the S&P 500 reach its nadir of 666. Just do the math.
Moreover, stocks continue to find support in excess liquidity, corporate buybacks (which have reach nearly seven percent of total market capitalization) and investor risk appetites at average levels (remember, the higher those appetites ascend, the closer we come to the peak).
In all, Garthwaite explains, only 20 percent of those factors signifying a bubble are in place. These include a recent drop in corporate profits (mostly due to energy prices) and a jump in M&A activity. He believes that the risk of a bubble's eventual formation is high (60 to 70 percent) because central banks will be tempted to keep interest rates low for an abnormally long time. Till then, however, investors should focus on the areas most likely to benefit by an increase in speculative excess. Those being new economy stocks (internet and biotech), asset managers and financials.
Domestically, the U.S. Supreme Court ruled on King v. Burwell. Upholding the legality of federal health care subsidies in a 6-3 vote. Had the ruling gone against the Obama administration, up to 8 million people in 34 states could have potentially lost health care coverage. In addition, the door would have been open for Republicans to start dismantling Obamacare, including the individual mandate. ACA has been a big support to drug makers, as well as the healthcare sector in general. So it was no surprise that the sector rallied on the news.
Finally, I was interviewed last week by American Banker for an article on bank efforts to enter the wealth management business. Click here to read the article.
American Households Wealthier Than Ever
On June 11, the Fed reported that Q1 household net worth rose by $1.6 trillion from January through March. Hitting an all-time high of $84.9 trillion. The nation's GDP? $18 trillion. Roughly 22 percent of the world's GDP. In other words, U.S. household net worth exceeds the nominal GDP of the entire world. The underpinnings of this largesse? Stocks and mutual funds rose $487 billion (0.40 percent in Q1). Real estate gained $503 billion. Home equity has risen. Simultaneously, households continued to pare debt, as total household debt as a share of disposable income was 106.5 percent, down from 107.5% last quarter. Representing the lowest debt level in a decade. Finally, household net worth in relation to personal disposable income was 639 percent, up sharply from 632 percent the previous quarter. This represents the highest level since Q3 2007. In all, American households are wealthier than they've ever been.
SCOTUS Punts on King vs. Burwell
One might ask how the validity of legislation comprising 11,000 pages and standing three-feet tall when printed could come down to four words. Yet, that is exactly why the Affordable Care Act ended up before the U.S. Supreme Court last week. The wording that brought about such contention? The provision that only health-insurance exchanges "established by the state" could offer subsidies. Following the law's enactment, the administration claimed that the words were meant to include exchanges set up by the Federal government, in addition to the individual states.
We commend the SCOTUS, as well as Chief Justice Roberts, for determining that such laws and their outcomes were meant to be political footballs handled by the U.S. legislature. Not by the nation's highest court. We fault, however, the administration and those legislative members who crafted the monolithic legislation. Fault them for being sloppy, narrow minded and inattentive to detail in their creation of the law.
"Don't Trust the Private Sector"
When Lanny Davis, former White House council to Bill Clinton and now a lobbyist for California's eHealth Inc. marched up the hill to ask Democratic legislative reps "Why you would make this distinction with a state exchange," Davis said that he found the answer he was given mindboggling. "We don't trust the private sector."
That sums up the attitude of many holed up in D.C. today. Not the POV to which you aspire from the political leadership of the world's largest capitalist economy. Greece shared that sentiment. Look where it's gotten 'em.
America's Founding Principles Endangered
Former Senator and Democratic presidential candidate Gary Hart scribes this excellent piece on how systemic corruption throughout the U.S. political system is degrading the very principles upon which this nation was founded and through which it achieved excellence. Here.
Chief Justice Roberts, Intimidated by the Left?
While those justices having been appointed by democratic presidents have relentlessly sided with their political ideology, those justices appointed by republicans have, on occasion, sided with the other side of the aisle. Why? This article from RealClearPolitics may hold some answers.
World War III
Dr. Peter Singer, one of D.C.'s pre-eminent futurists has been delivering an ominous message to the Pentagon: World War III with China is coming. The senior fellow at the New America Foundation has even written a book about it (here). Dr. Singer warns that the U.S. is extremely vulnerable to a massive cyber-attack on the scale of a Pearl Harbor. As evidenced by recent Chinese and Russian hacks into the White House and other government computer systems. Article.
Mr. Wronghouse
U.S. Veteran and Army Paratrooper Andrew Myers had been robbed before. Having seen the burglar on his home-surveillance system. So, when he saw the same guy again preparing to rob him, he was ready. And unfortunately for the would-be burglar, Mr. Myers was more than formidable. In this video, he confronts, takes down and manhandles the burglar. He then set the video to music, and posted it online to raise money for Paws & Stripes. Well done, sir. Article and video here.
Handicapping the 2015 CFB Championship
While we certainly don't agree with his conclusions, it's always of interest to see where the handicappers are placing odds before the college football season begins. Of course, last year none of the handicappers thought Ohio State had a chance. So too will this year hold much tumult, surprise and intrigue. Enjoy this.
Calcio Storico: Makes the NFL Look Effete
This ancient Italian sport blends American football, soccer and mixed-martial arts. The result? A brutal, no-holds barred sporting event set in Florence and played for bragging rights and a crow. Story.
Weekly Results
Major markets finished mixed last week. The DJIA fell 0.38%, the S&P 500 lost 0.40%, and the Nasdaq fell 0.71%. Small cap stocks dropped 0.38%. And the 10-year Treasury bond fell 22 basis points to 2.47%. Gold fell $27.70 per ounce, or 2.30%.

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