Week In Brief: September 21st

October 2, 2018

Last week saw stocks finish higher. Though small caps lost ground. The Dow Jones Industrial Average finished its strongest two-week stretch since February. A sign that the inflation and trade-related anxieties that caused the index to stumble have abated.
Nor do we believe things will change in the near term. Empirical evidence reveals too many economic tailwinds occurring to douse the lights on this party.
Two weeks ago, I joined three friends in completing the Rim-to-Rim Grand Canyon hike. A 25-mile affair exposing us to some of the most beautiful scenery in the country. We camped and hiked. And ended the trip by spending one celebratory evening in Las Vegas.
I've been to Vegas when the nation's economy was in the doldrums. Shortly after the Credit Crisis, I spent a few days there. And you would have thought I'd stumbled upon the set of The Walking Dead. Half-finished real estate developments. Sparse crowds roaming lonely streets. Stores and restaurants offering discounts to anyone who could even imitate a consumer.
That was then.
Last week's Vegas was more reminiscent of Capra's classic "It's a Wonderful Life." Amid the gleaming hotels, casinos, residential condos and commercial developments, the streets teamed with smiling tourists. Retail venues were overloaded with shoppers. Restaurants filled with hungry consumers. Golf courses calibrated start times like German civil engineers. Morning, noon and night. The antithetical experience to that dreary 2010 visit. Offering an optimistic nexus between commerce and consumer. Where everyone participates. And walks away smiling.
Even the following morning. Standing in line for my flight. The older couple behind me chatted about future plans. While the young woman beside me booked tickets on her phone, chatting excitedly with whom I perceived to be a future travel companion.
The data underscores what the eyes so easily discern. September's Consumer Confidence index hit an all-time high of 144.7. A readout last reached in 2000.
The American economy is humming. Travel. Trinkets. Tickets. Shows. Shopping. Logistics. An entire nation working in concert to move creature comforts from A to B. In an endless effort to satiate the country's growing appetite to consume, and its recently acquired ability to pay for, such luxuries.
So long as everyone feels so good about their stead? They'll continue making plans. And so long as such plans are made, this nine-year bull market remains intact.
But wait. There's more.
After the conclusion of our adventure, one of my cadre -- who heads a large Midwest-based plumbing concern -- joined the leaders of 28 other plumbing and HVAC mechanical companies representing 15 states around the country. Both coasts. And many points in between.
His summary? All of these businesses, which are literally laying the plumbing for businesses and developments nationwide, are having great years. Their new business pipelines are full. And they all expect much of the same next year.
Anecdotal evidence as to the strength and momentum of this amazing economy from the consumer and commercial ends of spectrum. Which will likely combine to push the stock market to new milestones before its all over. In fact, U.S. stocks have recently achieved a couple of new historic milestones.
Last month, we reported that it had unofficially become the longest bull market in U.S. history. Followed up in recent weeks by having pushed not just one, but two companies -- Apple and Amazon -- to more than $1 trillion in market valuations. A huge precedent underscoring the power of this trendline. Not to mention the momentum of big U.S. technology concerns and the consumers that love them.
Now, we can now add another milestone to the list: As of last week, the rally became the strongest during any Federal Reserve tightening cycle in history. As Bloomberg reported...
"Since the first post-crisis Federal Reserve rate hike in December 2015, the S&P 500 Index has gained 41 percent. That puts this cycle's rally in the top spot when compared with historical equity advances as the Fed hiked borrowing costs...
Of the 13 cycles since 1954 - when the Federal Reserve first began publishing this data - only three went on longer."
Given that virtually every one of these cycles has ended in a recession or serious stock-market decline, you might assume this news is a bearish signal. But that isn't the case.
You see, the three longer cycles -- ending in 1966, 1980, and 2007, respectively -- were significantly longer. Each went on for more than 40 months, with the longest (ending in 1966) continuing for more than 60 months... or roughly twice the current one.
In short, while there remain reasons to be cautious about today's market, these milestones aren't among them. Yet, market participants and the blathering punditocracy remain obsessed with the next shoe, and its eventual propensity to drop.
Every morning I'm greeted by a myriad predictions of an looming, imminent recession. But what's driving such fears? The surging economy? Semi-inflated market valuations? A yield curve that's approaching inversion, but has yet to invert?
We get it. The debt situation is a material problem which D.C. appears to have little conviction in solving. And since 2001 the budget deficit continues to worsen by the year. Moreover, the Fed -- which ushers in most economic downturns -- is to bull markets what Lucy is to Charlie Brown's field goal kicking average.
Now, the big banks and research shops have gotten into the game. So desperate to get it right this time. To not miss out on the big call. Rolling out one warning after the next of a recession and its attendant bear market. Bank of America/Merrill Lynch recently stated that recession was imminent. Yet another, Goldman Sachs, has just gone on the record stating the opposite.
Goldman believes there to be only a 36 percent chance of recession in the next three years. Below the historical average. "There has been increasing investor interest in the chance of a recession in the U.S. over the next few years ... Our model paints a more benign picture", said Goldman's Chief Economist Jan Hatzius.
The stock market has risen despite endless political gremlins. Trade-war talk. Partisan warfare. None seem to matter. As nothing can contain the market's optimism. If most bull markets end with a melt up? Then perhaps we're entering into that final, notable stage. Where invested capital takes one final slug from the chalice of risk before receding into a shadow of its former self. Or, perhaps we're not there yet. Nobody knows. But increasingly, we navigated uncharted waters. So, strap on your life jacket. And try to avoid icebergs.
Speaking of icebergs, seasonality dictates that markets should see a resumption of volatility. After all, September and October rank as the two worst months of the year for stock-market performance. Moreover, another big driver of volatility is set to emerge. That being the so-called "blackout" period. Referring to the month before corporate earnings releases where companies are barred from buying back their shares. This is important because company buybacks have been a major tailwind for markets this year. With almost $400B of buybacks occurring through June. Up nearly 50 percent from the prior year.
Historically, volatility jumps during blackout periods. Add to that fact a spate of political (SCOTUS, election) and geopolitical (Brexit, trade wars) turbulence over the next month, and this particular blackout period could exceed the average.
Across the pond, consider the recent "summit" in Salzburg, Austria. Where UK Prime Minister Theresa May presented her latest Brexit plan. Had she been led to believe that there would be a fair hearing by other EU leaders? Then she was rudely surprised. Not only did the EU power structure reject her proposal down, but it did so with vehemence. From EU President Juncker to EC Council President Donald Tusk to French President Macron, there was no quarter for the British PM. In fact, Macron called the Brexit chiefs liars in his public statements. And led the charge to punish the UK for Brexiting. Markedly enhancing the probability of a "hard Brexit." And more trouble on the Old Continent.
In the energy patch, charts suggest that Brent Crude is approaching the final phase of a major bull market. The target being $83 to $88. Leaving another $2-$7 higher from current prices. Though that could be even higher. With the Dallas Fed reporting that American shale producers are approaching a plateau. One where they will be unable to meet new world demand. The IEA states that demand is projected to grow by 30 percent by 2040. So dispelling the notion that growth in crude demand will peak in 2-5 years.
Demand growth rates will likely slow. But supply has become the problem. The Iran sanctions are about to hit Iranian crude exports. These are not designed to slow Iranian exports. But to kill them off. The 1.8 million barrels per day which Tehran now sends to customers is meant to go away. Making this, essentially, a blockade. Not a sanction. Removing another 1.8 million barrels per day from global supply when the market is this tight is not something that has happened since 1973. And since more than 80 percent of Iran's revenues come from oil? This represents an economic death sentence. Placing Tehran in a position from which they will have to respond.
Finally, a note about cannabis stocks. Which we have owned, off and on. Given the recent price movement in names like Tilray, cannabis stocks have become the new Bitcoin.
Bitcoin saw its mania feverishly come and go in 2017. Ascending to lofty valuations of $20K per unit before collapsing to $5K. While the Blockchain technology that drives it will continue to revolutionize multiple industries, the future of crypto-currencies, which have begun to mirror the forward P/E number of the S&P 500, have taken on the technical patterns of more speculative vehicles.
Similarly, cannabis stocks have recently captured the attention of those seeking their fortune.
Tilray, like many of these high flyers, is involved in the research, cultivation, processing, and distribution of medical cannabis. And that's become big business. But a company that may end up making $20M per year should not attain a market cap of $20B. Should not be worth more than CBS and Twitter. Combined. Regardless of how dazed and confused some investors appear, this stock has no business being so high. All puns intended.
Weekly Results
Major indices finished mixed last week. The DJIA gained 2.25%. The S&P 500 rose 0.85%. The Nasdaq declined 0.29%. While small cap stocks lost 0.55%. The 10-year Treasury bond yield rose 6 basis points to 3.06%. Gold closed at $1,198.78, up $5.28 per ounce, or 0.44%.

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