Week in Brief: October 9

October 12, 2015

Fall. Best time of the year in the Midwest. 68 degrees. Cool evenings. Football. Playoff baseball. Halloween. The NBA. And, preparing for Oscar contention, Hollywood's studios soon release what they consider their best movies of the year. Something for everyone amid this surplus of riches. A uniquely first-world problem.
In fact, our riches have become so extravagant that even Cubs fans are smiling. Having made the playoffs for the first time since 2008. And winning their first playoff series since 2003. The Cubs last appearance in a World Series? 1938. The Germans had just invaded Czechoslovakia. Which was 31 years after the last time the Cubs won it all. 1907. Only 16 years after Jack the Ripper ended his reign of terror in London's Whitechapel district.
Just a bit of perspective in this season of Hallow's Eve.

Last Saturday, my son and I watched Notre Dame sink Navy in South Bend. Every time the scoreboard showed the Cubs score, many of the 80,000 strong went nuts. Gotta love fall.
Mark Twain said October is the most dangerous month for stocks. Perhaps he'd never invested in September. Nor August. As thus far, October has been a purring kitten compared to the claw-bearing pole cat that were the previous two.
Friday saw equities push higher. The eighth gain in nine days. Leaving the S&P 500 with a 3.26 percent weekly gain. Investors believe that the Fed thinks well of the domestic economy. Having delayed rate hikes only because of weakness overseas. A narrative that has helped the VIX "fear index" settle down to a placid measure of 16. Well below the 53 to which it shot in the midst of the August panic.
This week features a full array of Q3 earnings. 37 S&P 500 companies report.
Analysts have decimated earnings estimates. Continuing Wall Street's trailing-year trend of downward revisions. Which gathered steam in late August following the correction. Nearly a quarter of companies have had their EPS forecasts cut last month. Marking the fifth straight quarter -- and thirteenth of 14 -- that revision spreads have been negative entering earnings season. Of course, analyst negativity has focused primarily on those companies with more international exposure. A byproduct of the stronger dollar.
Of course, that's music to our ears.
When expectations are low heading into earnings season, the S&P 500 traditionally outperforms. Conversely, when expectations are high? The market tends to disappoint.
Consider those 19 quarters going back to 2009 in which analysts have been negative. The S&P 500's average gain through the proceeding earnings period has been 2.32 percent. Posting positive returns 84 percent of the time. During the seven quarters over that same span in which expectations were positive? The S&P 500 declined an average of 1.18 percent. With positive returns less than half of the time.
Accordingly, bullish investors should take comfort when Wall Street's analysts go glum. Moreover, the current negative 24-percent earnings revisions spread ranks as one of the most negative of this seven-year bull market. So take solace, dear friend, in knowing that probability rests with the bulls. In fact, when earnings spreads were below negative 20 percent heading into earnings season, the S&P 500 has rallied 4.35 percent on average, posting gains 100 percent of the time.
Thank you, Wall Street. You make one helluva contrarian indicator.
Following years of negotiation, the 12-nation Trans Pacific Partnership (TPP) deal reached an agreement. The sweeping trade deal covers 40 percent of the world's economy, and forces participating nations to abide by common business standards and reduce or eliminate tariffs on nearly 18,000 categories of goods.
While the deal may face a bit of Congressional opposition, we believe it's a good one. Providing the U.S. with much needed influence in the Asian economy. One in which China has been flexing its muscles. Extending its reach. Not to mention giving U.S. companies a wide-open, global marketplace for goods and services.
The deal must be approved by all 12 member nations. No small task in the global bureaucracy. But, like an attractive gal strolling by a construction site, this one looks too good to ignore.
Finally, opportunity knocks.
You can now make a three-month loan to the U.S. government and be paid zero percent interest on your capital. Marking the first time on record that the U.S. Treasury sold new three-month government securities with zero yield. Given its sloppy balance sheet and anti-growth policies, the mattress will suffice for now.
Before you rush out to buy some of these Zero Interest Bonds, consider this quick overview on government financial management and the debt ceiling:
1) The Data:
U.S. Tax Revenue: $2,170,000,000,000
Federal Budget: $3,820,000,000,000
New Debt: $1,650,000,000,000
National Debt: $14,271,000,000,000
Recent Budget cuts: 38,500,000,000
Let's now remove eight zeros and pretend it's a household budget:
Annual family income: $21,700
Money the family spent: $38,200
New debt on the credit card: $16,500
Outstanding balance on the credit card: $142,710
Total budget cuts thus far: $385
Got it? OK. Now, consider an analogy...
2) The Analogy (another way of looking at the debt ceiling):
Let's say you come home from work and find there has been a sewer backup in the neighborhood. Your home has sewage piled up to your ceilings. What do you think you should do?
a) Raise the ceiling?
or,
b) Remove the shit?
The government is clearly not in the excrement removal business.
The Good
FOMC minutes were viewed as slightly more dovish than the press conference and the dozen odd speeches since the meeting... Initial jobless claims declined to 263k... Technical setups and indicators have improved since the recent correction... Government shutdown has been averted for now...
The Bad
The Chinese are dumping U.S. bonds, says the WSJ... Rail traffic declined 2%... U.S. traded deficit widened to $48.3B... ISM services were a bit lower than expected at 56.9...
Weekly Results
Major markets finished higher last week. The DJIA gained 3.72%, the S&P 500 added 3.26%, and the Nasdaq climbed 2.61%. Small cap stocks lost 4.6%. And the 10-year Treasury bond yield rose 9 basis points to 2.09%. Gold rose $18.46 per ounce, or 1.62%.

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