Week In Brief: October 23

October 26, 2015

Helen Keller once said, the only thing worse than being blind is having sight but no vision.
Three weeks ago, investors were ready to sell the farm and hold cash in the face of what seemed a potentially vicious bear market. Yet, indications posit the end of what appears to have been a healthy, valuation-driven correction. Nothing out of the ordinary. Indexes were not, in fact, devolving into a prolonged bear market. Despite what the pundits opined. While the technical damage was severe, most indexes remain in uptrends, above key support levels.
Remember, big waves constantly pummel the coastline. Tsunamis rarely do.
We suspect that the correction lows are in place, and have already been tested. Meaning that markets could be setting up to move higher. Especially as the S&P 500 has risen back above its 200-day moving average. And need only hold it till the end of this week. Allowing the index to achieve that valuable end-of-the-month hold above a psychologically significant line in the sand.
Fight Club author Chuck Palahniuk wrote, "If you watch closely, history does nothing but repeat itself."
So, one learns the need for perspective. Historical context. Without which, every market gyration looks like a scary new neighborhood in which to get lost. Learn historical patterns and market behavior, however, and suddenly you're equipped to handle the highs and lows that accompany spikes in volatility.
Investors forever enter such periods with the best of intentions. Determination. Fortitude. Yet, as both John Steinbeck and Robert Burns quipped, the best-laid plans of mice and men often go awry. Because once bears grab the wheel, all bets are off. For as Jesse Livermore taught, it's what people do in the stock market that counts, not what they say they are going to do.
Experience reveals that the standard obstacle to maintaining an objective investment stance through such scenarios occurs when we inflexibly adopt a preconceived idea of where the market is headed. Which brings investors to hesitate in changing established opinions. Validating incorrect opinions via confirmation biases. Overweighting evidence that confirms prior convictions. Underweighting that which contradicts it.
Then, volatility ratchets higher. Sending indexes precipitously lower. Suddenly, biology begins trumping methodology.
First, the thalamus receives sensory input which it immediately transmits to the amygdala. An evolutionary survival mechanism providing a direct single-neuron link from the brain's antenna to the part that registers fear. Triggering an automatic reaction. Fight or flight. Which once helped Australopithecus escape hungry sabertooths on Africa's Sub-Saharan plains. And today brings investors to tremble in the face of market adversity.
Then, the market bottoms. Stabilizes. Heads higher.
Last week's elevated indexes brought the S&P 500 back to its pre-correction levels seen late August. So ending the scary but short-lived September selloff. Another example of volatility transferring wealth from weak hands to strong.
Last week's gains began in Europe. Where stocks posted their third consecutive weekly gain. ECB President Mario Draghi signaled that he will provide further support to the ongoing Eurozone recovery. Don't be surprised to see European equities surge higher. As did U.S. equities when the Fed began such support back in 2009.
European stocks were already outperforming heading into the August correction. A positive macroeconomic outlook and better GDP growth should propel those trends forward.
Domestically, the meat of Q3 earnings season continues this week. And the Fed prepares for its October policy announcement. Won't be a rate hike. But -- contrary to some opinions -- nor do we need additional stimulus. What the nation needs is economic leadership. A dynamic growth orientation. The critical variable missing these last few years.
Q3 earnings began with a stumble. But results have improved to the point that 60 percent of companies have beaten estimates. Not great. But respectable. And in line with recent quarters. Revenues remain troubling, however, with only 43 percent outperforming. In stark contrast to the typical 55-60 percent seen the last two years.
Bottom line? The landscape always changes after a big correction and recovery. Currently, money appears to be rotating out of transports and health care. Into energy, industrials and materials. Small- and mid-caps? Not as energetic as they were earlier in the year. Technology, which lagged in Q1, appears ready to lead in Q4.
This week, we'll see if bulls have what it takes to end the year with a flourish. Despite the shackles of weakening revenues and a higher dollar. Our bet? U.S. large caps and Euro stocks are heading higher. The trend is your friend.
Politics be damned, the stock market is a universe unto itself. Still, the race for the White House becomes more interesting every week.
Hillary Clinton's last remaining rival for the nomination is a 74-year old socialist who has stated emphatically that he cares little about Clinton's role in the Benghazi tragedy. Nor does he wish to hear any more of her email scandal. Which positions him as no more a threat to Hillary than is a hairdryer to an iceberg.
Meanwhile, Trump continues to lead the GOP field. Even besting Bush and Rubio in their home state of Florida.
The idea that fifty percent of the remaining Democrats is a socialist? While the leading GOP candidates have never been in politics? Very telling. Democrats traditionally believe in a strong, active government. Capable of righting society's ills and imbalances. Republicans, on the other hand, believe in limited government. And individual liberty. Given the government's recent ineptitude, Republicans have come to believe that the best chance for real hope and change resides outside of the Beltway. Beyond the realm of professional politicians.
To the north, Canadians decided that 10 years in office was enough for
conservative Prime Minister Stephen Harper. Canada is roughly 60 percent left-wing. Now, with the nation slipping into recession, Harper (Canada's Sean Hannity) has simply worn out his welcome.
Enter Justin Trudeau. Handsome. Son of former PM Pierre Trudeau. Though he'd been languishing throughout the campaign, he enjoyed a late surge. Everyone piled on, propelling him to victory.
Trudeau may be a bit more left than people believe. Exhibiting a clear authoritarian streak. He plans to legalize marijuana. To intentionally run a deficit by raising taxes on the rich. And spend even more money on infrastructure.
Classic Keynesian tactics. Canada is, theoretically, already in recession. Albeit, a mild one. If Trudeau's plan is to build bridges between Vancouver Island and mainland B.C.? Canadians may be disappointed when the nation slides more deeply into recession.
Speaking of Keynesian tactics, the U.S. federal government collected a record amount of taxes in the first 10 months of fiscal year 2015. Amounting to more than $2.6 trillion in revenue, according to the Treasury Department. Despite record revenue, the federal government ran a deficit of $465 billion.
Can't spend enough of other people's money.
Tax revenues came from individual income taxes, corporate income taxes, social insurance and retirement taxes, unemployment insurance taxes, excise taxes, estate and gift taxes, customs duties, and other others. But, most came from individual income taxes, which totaled $1.27 trillion.
The Treasury Department has been tracking this data on its website since 1998. In that fiscal year, the federal government collected about $2 trillion in inflation-adjusted revenue in the first 10 months. Since 1998, tax revenues have increased about 30 percent. Despite those increases and record numbers of welfare recipients, those Americans living below the poverty line continues to exceed pre-Credit Crisis levels.
What's the definition of insanity? Perhaps some fresh tactics are called for.
Remember, there has never been a correlation between increased tax revenues and effective allocation of that capital. In fact, the government has consistently proven itself a terribly ineffective capital allocator. As would any organization not constrained by the need to run a balanced budget. When the well is endless, the mistakes and inefficient expenditures are never fatal. And easily forgotten.
The Good
With Paul Ryan preparing to assume the House Speaker position, it appears that a government shutdown is not likely... Jobless claims hit the lowest four-week moving average since 1973... China GDP beat forecasts... Housing data was strong... Existing home sales were strong... Builder confidence was up... Mortgage applications rose... 77% of companies having reported thus far have beat earnings expectations...
The Bad
Earnings revenues have been down... Earnings are poised for a second consecutive quarterly decline, estimated at 3.8%... Housing permits declined... Bearish sentiment is declining - a contrarian bearish indicator...
Weekly Results
Major markets finished higher last week. The DJIA gained 2.50%, the S&P 500 added 2.07%, and the Nasdaq climbed 2.97%. Small cap stocks added 0.32%. And the 10-year Treasury bond yield rose 5 basis points to 2.09%. Gold lost $12.60 per ounce, or -1.07%.

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