Correction Week 2

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  The monthly “Long Term” update will be on the second Wednesday of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.

If you lose your bookmark to the blog, google “Rich Investing” and it should show up on the first page or so.

Economy:

For the month of August, the CPI came in at +.3%, well below the increases in June and July, which is very welcome news.  Initial jobless claims for the prior week were 332K, near the recover low of last week.  Retail sales for August were up .7%, a good number, and retail sales ex-autos were up 1.8%, showing what a drag the chip shortage in the auto sector is placing on the economy. 

There is a mid-month U of Michigan consumer sentiment report on Friday the 17th that I am not reporting.  I will only report the final number at the end of the month, unless there is a major deviation at mid-month, like there was last month.  I evaluate the data I report and occasionally make an adjustment if I can lighten the burden on me to find the data, and lighten the burden on my readers to deal with the data, if it is not that important to us.  There is a ton of date on housing, such as homebuilding permits issued.  I don’t report it, I only report new home sales and existing home sales.  A professional would be interested in the permits as an advance look at the market, but I’m not a professional, nor or my readers.  So I opt for the lower impact to both of us.  If that sounds reasonable, you might be in the right place!

Geo-Political:

The Covid delta variant wave shows signs of having peaked nationally, but it is still tearing up areas where the vaccination rate is low.  That will be a drag on the economy.

The $1 trillion hard infrastructure bill is held up pending finalizing the details, but I expect we will get a bill eventually.  The second bill, to be passed under reconciliation is less certain, but the objective is coming down due to opposition from Joe Manchin and may be half of the 3.5 trillion originally sought.

Technical Analysis:

For the week the S&P 500 was down about 1%, the third week of small loses.

Technically (see chart below) the market looks poor.  RSI at the top of the chart is neutral at 42.  Momentum shown by MACD at the bottom of the chart is clearly negative, and the last histogram is the lowest so it does not look like we have turned the corner.  The price action is is negative, a slow grinding decline.

The market is in a really interesting position.  If it behaves like all the other shallow declines in 2021, we are due for a bounce.  BUT, the valuation is stretched, we have not had a 10% decline in a year, and we are due for a 5-10% decline.  Will we get it here?  I don’t know.  The talking head community on CNBC is all over the place, with Kolonovic at JPM talking S&P 4700 by 12/31, and Mike Wilson at Morgan Stanley calling for a 10 % correction prior to year end.

Click THIS LINK to open the chart in a separate window.

What am I doing?  I have held a lot of cash for months, which I have used to sell cash secured Put options.  I have been assigned a few times and picked up stocks at good prices.  I’m looking for dividends so I bought a little of CNP, my local utility company.  I had shares before that got called away at 25 and now I am buying back cheaper.  I just sold a few CNP Nov. Puts at the 23 strike.  I sold my LRCX, hoping to buy it back cheaper.  For a pattern, I am selling higher PE stocks that have run up, and buying lower PE dividend paying stocks that will hold up better in a correction, I think.

———————–   If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

I would like to call your attention to a page of my blog called “CLASSICS”.  It is located at the top of the blog, on the banner just under the title.  The banner has links to “Home”, “About”, and now “Classics”.  These are articles that I wrote one time for the blog, but they are valuable insights at all times for investors.  I will announce in the weekly blog when I add a new classic.

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update.

I am a retired person and preserving capital and seeking income are important objectives for me.  I also want a growth component to my portfolio, while minimizing major risk.  My style of investing will not suit everyone.  I like to sleep well at night.

Rich Comeau, Rich Investing

A Correction Begins

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  The monthly “Long Term” update will be on the second Wednesday of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.

If you lose your bookmark to the blog, google “Rich Investing” and it should show up on the first page or so.

The monthly Long Term update was posted Wed. so you can scroll down to read it.

Economy:

In the only major statistic reported this week, initial jobless claims fell to 310K for the prior week, a new pandemic low.  Hiring disappointed in August as hotels and restaurants stopped hiring due to a falloff in business due to the Covid delta variant, but at least more people who have a job are keeping it.

The federal enhanced unemployment benefits ended on 9/6 and the renter’s eviction moratorium ended, so we will see some disturbing stories on the 6 o’clock news in a few weeks, I suspect.

Geo-Political:

Europe is reporting progress in their recovery from Covid:

Sept. 9, 2021 – LONDON — The European Central Bank kept its monetary policy unchanged on Thursday but opted to slow down the pace of net asset purchases under its pandemic emergency purchase program.

The Governing Council voted to maintain the interest rate on the ECB’s main refinancing operations at 0%, on the marginal lending facility at 0.25% and on the deposit facility at -0.5%.

“Based on a joint assessment of financing conditions and the inflation outlook, the Governing Council judges that favourable financing conditions can be maintained with a moderately lower pace of net asset purchases under the (PEPP) than in the previous two quarters,” the ECB said in a statement.

Markets had been eagerly awaiting the Frankfurt institution’s latest policy decision for signs of an imminent unwinding of pandemic-era stimulus, amid surging inflation and strong economic growth.

<snip>

Euro zone inflation notched a decade high of 3% in August and GDP across the 19-member common currency bloc climbed 2% in the second quarter, exceeding economist expectations.

https://www.cnbc.com/2021/09/09/european-central-bank-announces-a-slowing-of-its-pandemic-bond-buying.html

What happens around the world is of interest to us, since our trading partners need healthy economies or there is less demand for our goods.  Notice that Europe is very happy with 2% GDP growth, while the US is hitting 6% growth.

I also like to go back and audit the result of big changes and see what happened, in this case to Brexit.  From the article below, it looks like British GDP is down 5% in 2021 due to Brexit.  It has not been as cataclysmic as some thought, in the short run.  The question remains what will happen over the next five years.  I think it is still too early to tell.

https://www.cer.eu/insights/cost-brexit-may-2021

Technical Analysis:

For the week the S&P 500 was down about 2%, it was down every day this week, and the selling accelerated Friday afternoon.

Technically (see chart below) the market looks poor in the short term as a correction has started.  RSI at the top of the chart is neutral at 50 and falling.  Momentum shown by MACD at the bottom of the chart is negative and has just turned down.  The price action is negative in the short run, but positive longer term.

I’ve been cautious anticipating a correction and now we have a correction in progress.  Is this bigger than a standard 3 – 5% correction?  I don’t know.

Click THIS LINK to open the chart in a separate window.

What am I doing?  I’m not doing much, and friends I speak to tell me they are not doing much either.  It is hard to find good stocks that are not trading at sky-high PE valuations.  My biggest position now is probably Citigroup that I bought at 67.50 and it is still near that level.

———————–   If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

I would like to call your attention to a page of my blog called “CLASSICS”.  It is located at the top of the blog, on the banner just under the title.  The banner has links to “Home”, “About”, and now “Classics”.  These are articles that I wrote one time for the blog, but they are valuable insights at all times for investors.  I will announce in the weekly blog when I add a new classic.

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update.

I am a retired person and preserving capital and seeking income are important objectives for me.  I also want a growth component to my portfolio, while minimizing major risk.  My style of investing will not suit everyone.  I like to sleep well at night.

Rich Comeau, Rich Investing

Long Term – September 2021

Once a month, on the second Wednesday of the month, I will put up a long term view of the market.  This is provided for investors who don’t want to trade secondary swings in the market, but would like to exit the stock market relatively soon after a bear market begins, or enter the market after a new bull market begins (change in the primary trend).  In the blog, they will always have a title called “Long Term (month) (year)”, so you can use your browser “Find” function and easily find them.

Economics:

GDP – The second estimate of Q2 GDP is +6.6%, a strong number.

The Covid19 vaccine rollout was a success, but infections from the delta variant are increasing, with the highest infection rate in the states with the lower vaccination rate.  Vaccinations are picking up, but I expect to see a small negative impact on the economy. 

I don’t like to post the GDPNow estimate for the next quarter this early because I have found that it varies quite a bit in the span of one month, before the first true estimate of Q3 GDP will be released in late October.  I will make an exception this time because we have a major event happening, the current wave of Covid19 Delta variant, and I expected a visible impact to GDP.  Just realize this is a forecast a month into the future and with a major event in progress, a lot can change in a month.  But sometimes you need to use the best data you have access to, and this is the best data I can access.

From the Atlanta Fed, the GDPNow estimate of GDP for Q3 was downgraded from +5.3% to +3.7% on September 2nd.  That is making its way into the market now, and while it is not a killer, it is going to be a drag on the stock market.

The Senate passed the $1 trillion infrastructure bill, and that could boost certain stocks like CAT, and the whole economy for a few years of build-out.  It awaits a vote in the House.

This is bullish for the stock market, but the Q3 forecast is less bullish than the July data.

YearQuarterGDP %
2021Q26.6%
2021Q16.4%
2020Year0.1
2020Q44.0
2020Q333.4
2020Q2-32
2020Q1-5.0
2019Year2.3
2018Year2.9
2017Year2.6
2016Year2.0

Fed interest rates –  (no change in Sept. update)  The Fed has held the Fed Funds rate near zero since March 2020, and Jerome Powell said in the winter that he did not see the Fed raising interest rates this year (2021).  They continue to buy bonds and are very accommodative.

There are signs that inflation is picking up, which is not unusual as we come out of last year’s recession.  The Fed has said it is willing to let inflation run a bit above the long term target of 2% annually.  If it rises too fast, inflation could force the Fed to act sooner than they currently plan.  Higher rates could put a drag on the economy.

The Fed met on July 27-28 and announced no change in their interest rate or asset purchase program.  One Fed governor said if employment gains remain strong and unemployment continues downward, he would support beginning to taper this fall.  One Fed governor does not mean the policy will change, but at least it will be discussed.

Fed policy is strongly accommodative and hence it is bullish. 

DateFed Funds Rate5 Year Treasury10 Year Treasury30 Year Treasury
Sep 20210.2.81.32.0
Aug 20210.2.81.32.0
Jul 20210.2.81.42.0
Jun 20210.2.81.52.2
May 20210.2.81.62.4
Apr 20210.2.81.62.3
Mar 20210.2.81.52.3
Feb 20210.2.51.21.9
Jan 20210.2.51.11.9
2020 Q40.20.40.91.6
2020 Q30.20.30.71.4
2020 Q20.20.30.71.4
2020 Q11.21.31.42.0
     
2019 Year2.21.92.22.6
2018 Year1.82.82.93.1
2017 Year1.01.92.32.9

Valuation:

S&P 500 earnings – Factset shows that for Q2 2021, the blended earnings growth rate for the S&P 500 is 91%, which is abnormally high.  Of course, Q2 2020 was when the economy was shut down for Covid19, so the comparison is to an artificial number.  The Factset forward PE on the S&P is 21, compared to their ten year average of 16, so things are richly valued.

Looking forward, Factset projects the following for earnings growth.  Remember, these are high class guesses, and subject to large revisions if major events occur, such as a worsening of the Covid19 pandemic due to a new mutation.  The farther out in time, the less reliable the estimate (guess).

For Q3 2021, analysts are projecting earnings growth of 28%.
For Q4 2021, analysts are projecting earnings growth of 21%.
For CY 2021, analysts are projecting earnings growth of 42%%.
For CY 2022, analysts are projecting earnings growth of 9%.

The outlook for earnings is bullish.

PE on S&P 500 – The current 12-month trailing GAAP PE on the S&P 500 is 28:1, the same as last month, but down from 31 in July.  I used 4 quarters of earnings with the most recent being Q2 2021 (97% reported). 

Valuation has made significant progress in the last two quarters of recovery earnings.  We’re not out of the woods, but we are definitely headed in the right direction.  One of the reason that valuations have improved is that all businesses cut cost during the lockdown period and as business comes back, they have much more revenue growth while costs remain at low levels.  Inflation of the cost of input materials and labor will change that in the future, but right now, the story is good in most companies.

This metric is significantly overvalued relative to my trimmed 30 year average of 19.  I trimmed out the quarters during recessions for my 30 year average, since the P/E behaves very abnormally during those times.  I go in 5 point increments for my terminology, so 20 – 25 would be moderately overvalued, while 25 – 30 would be significantly overvalued.  Above 30 would be dangerously overvalued.

This indicator is bearish.

Age of primary move, bull or bear market The bull market is 12.5 years old.  This is neither bullish nor bearish, but it is worthwhile to keep it in mind.

Geo-Political:

COVID-19:  After looking better in the spring for the US and selected countries like the UK, where the vaccine has been rolling out, the new more transmissible variants are taking a heavy toll in countries without the means to roll the vaccine out.  There is an uptick in the US infection rate due to the delta variant, which is a concern for our economy.

Liquidity:  Congress had made money available to businesses and individuals to help through the Covid pandemic.  The national savings rate is very high for 2020 since people did not drive to work, they did not eat out, bypassed vacations, did not shop at malls, etc.  That money earns nothing in money market accounts per Fed policy so it is making its way into the stock market.  The risk is that we blow up a bubble in the stock market.

All over the world, banks have dropped interest rates to the floor and they are providing liquidity including bond purchases, helping to hold stock markets up.  How long can that continue, and what will be the after effects of such high levels of central bank money printing?  We are seeing inflation tick up.

As of Sept. 6, the federal unemployment enhanced benefit has ended and most recipients will lose the extra $300 per week they were getting.  Small businesses hope this will force workers back into the workforce, and it may.  The other side of the coin, there are some workers whose employer is out of business, there may not be another employer in their city that is hiring, and those folks will be under extreme pressure.  The ban on evictions has ended, so we will probably see more people living out of their car or in tents.  I think there will be some real negative consequences.

Geo-politics is currently neutral.

Technical:

Technically the chart is positive.

RSI at the top of the chart remains overbought at 77.  MACD at the bottom is positive and moving up, but perhaps too quickly.  Notice that the histogram on MACD all the way on the right has shrunk a little from the previous bar, so the upward momentum in stock prices slowed just a tad in August.  The price action is clearly positive.  The price action is moving well above the top of the range and that is a bit of a concern so it bears watching.  When you look at the black vertical line I added in the price action in April, I am pointing out how extended to the upside the market has become, relative to the 50 month moving average, and that has gotten worse since April.  Sooner or later we will need to get some “reversion to the mean”, in other words, a correction.

The rally really took off in January after the FDA approved the Covid vaccines.  People believed that economic activity would pick up to normal levels, but that means a rapid growth rate from the pandemic depressed level.  We are seeing rapid above trend recovery growth, fueled by congressional spending programs and Fed accommodative policies.  You can see the rise in the chart at an above normal rate.  The infrastructure bill will provide a boost to economic activity for years to come, but the taxes to pay for it will put some drag on it.  But there is no doubt we need infrastructure improvements, and we have needed them for 20 years.

S&P 500 – Ten Year Chart

Click on this LINK to open the chart in a larger separate window.

This is bullish for stocks in the long run, but cautionary for a correction in the intermediate term. 

Conclusion:

GDP returned to growth so that is bullish.  The Fed has short term rates near zero and plans to hold them there through this year, plus they are buying bonds to keep longer term rates low, and that is bullish (old saying, “don’t fight the Fed”).  S&P earnings for Q2 are 91% above Q2 2020 (which was the “shut down” quarter), with S&P projecting further improvement in 2021, keeping this factor bullish.   The PE valuation of the S&P based on the 12 month trailing GAAP number is 28, which is overvalued and bearish.   The geo-political factors are neutral.   Technically the chart looks bullish.

By that way of looking at it, the market is bullish, with four factors bullish, one neutral and one bearish.

My conclusion is that I am constructive on the market, but with the valuation stretched there is always the risk of a short term correction. 

Long Term Issues to Keep in Mind:

Federal Deficit:  (Updated March 2020) – Well this is going to get a lot worse.  Looks like the politicians are going to be printing money and dropping it from helicopters.  But all the other major economies will do the same thing, so relatively, the dollar may not drop much (which would be bad for inflation).

(Negative – Noted Jan. 2018)  The deficit will go up despite the republicans saying that if the tax cut bill is “dynamically scored” using “possible” increases in economic activity, it will hold down the deficit by increasing tax receipts.  This has not been shown to work in the past.  The US added $980 billion to the national debt in fiscal 2019 (ended 9/30/2019), a tragedy in good financial times.

The total national debt exceeds $26 Trillion (late 2020), and as interest rates rise, the component of the annual budget allocated to “interest on the debt” will increase, putting pressure on existing programs, or increasing the deficit.  If the deficit is allowed to rise too much in good economic times, the value of the dollar will fall and that is inflationary which is usually bad.  The thing saving us today is how poorly all the other nations are managing their economies, so the dollar continues to hold up.

Rich Comeau, Rich Investing

Listless Market

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  The monthly “Long Term” update will be on the second Wednesday of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.

If you lose your bookmark to the blog, google “Rich Investing” and it should show up on the first page or so.

The monthly Long Term update will be posted Wed. the 8th.

Economy:

The ISM manufacturing index for August was 59.9, up slightly at a strong level, while the ISM services index is at a strong 61.7 (anything over 50 shows growth).  New vehicle sales in August plummeted to an annualized selling rate of 13.1 million vehicles (from about 15 million) due to the computer chip shortage.  Initial jobless claims for the prior week were 345K, in line with recent data.  Factory orders for July were up .4%.  Non-farm payrolls for August grew 235K, far below the recent trend of around 700K, but enough to drop the unemployment rate to 5.2%.

The poor new vehicle sales number is due to the global chip shortage.  Computer companies are used to the supply / demand characteristics of the computer chip market, but the car companies are new to the market and clearly did not understand it.  When demand for cars fell during the shutdown of the economy, car companies cancelled orders for computer chips.  Those production slots were allocated to different customers.  Now the demand is back, and the car companies don’t have orders in the queue, so they went to the back of the line.  American manufacturers try to run very lean, using a concept of “just in time” manufacturing, where very little supply is kept in inventory and new supply is constantly arriving in small quantities.  That will maximize profit, until there is a disruption in the supply chain, and then your manufacturing line is DEAD in the water.  What lesson is learned?  Sometimes there is such a thing as TOO LEAN, and learning that lesson is painful.  The second lesson to learn is the supply demand characteristic on the computer chip market is vastly different than the steel market.  There is a lot of slack in the steel manufacturing market, not so much in the computer chip market where the plants are running full out all shifts and can’t keep up.  A new foundry takes a couple of years to get online.

The second number of note is the poor growth of non-farm payrollsHiring in the leisure and hospitality sector stalled amid a resurgence in COVID-19 infections, which weighed on demand at restaurants and hotels.  Folks, that is not on Biden, it is on the American people who have the availability of effective vaccine, yet they fail to take it in sufficient numbers to protect the whole population.  The states with the highest hospitalization and death rate per capita are the states with the lowest vaccination rate, and the states with the highest vaccination rates have the lower hospitalization and death rate.  After 170 million doses administered in the 10 months since December, there are no reports of widespread serious side effects of the vaccines.  Maybe people stopped getting vaccinated after April because they thought the infection was going away.  They were wrong, the new delta variant came on the scene and it is much more easily transmitted, so now we are in a new wave of Covid infection.  Hospitalizations are rising, deaths are rising.  There is a breakthrough infection rate among the vaccinated, but the cases tend to be less severe, unless you are older and have a co-morbidity like I have.  So, I had to stop eating out again.  There goes the hiring demand for restaurants and hotels.  This is on the American people.  Get your shot. 

https://www.cnn.com/2021/08/18/health/us-coronavirus-wednesday/index.html

Geo-Political:

There is nothing impacting the economy right now with an impact like the Covid delta variant.  Re-read the section just above this.

Technical Analysis:

For the week the S&P 500 was up about .5% and set new closing highs along the way.

Technically (see chart below) the market looks good.  RSI at the top of the chart is in high-neutral and rising slightly.  Momentum shown by MACD at the bottom of the chart is positive and rising slowly.  The price action is positive, but it was flat for the week.  The daily changes have gotten very shallow and it feels like the market lacks energy to jump higher.

The big headwind is the Covid delta variant that blunted hiring in August, and we can expect some slip in GDP growth for Q3 when that gets reported in late October.  Supply chain disruption is a big issue weighing on GDP growth.  Companies have trouble getting the material they need to make their product, like the car companies can’t get computer chips.  Ships from China are stacked up and waiting to unload in Los Angeles because there are not enough dock workers and ships have gotten much larger and require longer to offload.  We need to expand port capacity.  The cost of shipping has risen, and it drives INFLATION, which is another headwind.

We have this comment from Mike Wilson at Morgan Stanley:

“With record GDP and earnings growth, rising inflation and the rates of infection from the Delta variant peaking, the Fed will feel more pressure to remove what is essentially emergency monetary accommodation,” wrote Morgan Stanley’s Mike Wilson, who sees a 10% correction soon in the market. “We expect a more formal signal from the Fed at the September FOMC meeting, and the markets are likely to anticipate it. That means higher interest rates and lower equity valuations.”

Click THIS LINK to open the chart in a separate window.

What am I doing?  I’m not doing very much, mostly finishing selling covered calls and selling a few put options to try and buy stocks at lower levels if the correction occurs.  When you sell a put option, if the stock does not fall to the strike price of the option, you get to keep the option premium you received when you sold the option, so it’s a source of income.  I recently bought shares of Citigroup at 67.50 because I had sold a put option at that strike price and the option was assigned so I had to buy the shares.  C then rose to the low 70’s range, and I sold a call option at a strike of 75.  I also sold a put option at 67.50 again, so now I have a profit on the stock, and option premium income on a covered call and on a put, in addition to possibly collecting the quarterly dividend if I keep the stock past the ex-dividend date.  It’s a conservative way to generate extra income.  You run the risk of having to sell your shares if the stock exceeds the $75 strike price on the call option, and it happens to me on 10 – 20% of my call options.  But usually within a short period of time, I am able to buy the shares back with a low ball buy order. 

I mentioned about six weeks ago that I sold out of BIIB at 350 per share, now I can buy it back at 333.  It is rather controversial with it’s Alzheimers treatment having been given accelerated approval by the FDA, but that is not full approval.  I’m not buying back in yet, although I could at a price below where I sold.

———————–   If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

I would like to call your attention to a page of my blog called “CLASSICS”.  It is located at the top of the blog, on the banner just under the title.  The banner has links to “Home”, “About”, and now “Classics”.  These are articles that I wrote one time for the blog, but they are valuable insights at all times for investors.  I will announce in the weekly blog when I add a new classic.

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update.

I am a retired person and preserving capital and seeking income are important objectives for me.  I also want a growth component to my portfolio, while minimizing major risk.  My style of investing will not suit everyone.  I like to sleep well at night.

Rich Comeau, Rich Investing

Another Record High

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  The monthly “Long Term” update will be on the second Wednesday of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.

If you lose your bookmark to the blog, google “Rich Investing” and it should show up on the first page or so.

I added a new entry in the Classics section, it is my recent post on why healthcare costs so much in the US. A friend called it “an instant classic”!

Economy:

Existing-home sales rose 2% to an annual rate of 5.99 million in July.  Sales of new homes increased 1% to an annual rate of 708,000 in July after three consecutive months of declines.  Durable goods orders dropped .1% in July on weakness in orders for new airplanes.  Initial jobless claims for the prior week were 353K, in line with recent levels.  The U. of Michigan consumer sentiment index final for August was 70.3, down significantly from the July read, on concerns about inflation and the delta variant.

Home sales are strong because of the absurd low interest rates.  Thirty year fixed mortgages are still between three and four percent.  This has allowed the median home price to rise too rapidly with the median home price around $390K, up 15% year-over-year.  People who buy an overpriced home now will not be happy in a few years, after interest rates return to more normal levels and buyers then will not be able to afford the note on a $390K home.  I don’t think we will face a 2008 mortgage crisis because these loans are fixed, so they will not reset higher to unaffordable levels for the people that hold them now.  Also, loans have not been granted to un-creditworthy borrowers like in 2008.  If you can afford a $400K home, you have a good job, and if you have to take a $50K haircut to sell it, it will hurt but not be catastrophic to your financial picture.  It will be a problem for some, but not a big problem.

Geo-Political:

The infrastructure bills, both of them, are working along in congress, but with the summer recess not much is happening right now.

The big news this week was Fed chairman Powell’s speech at Jackson Hole, which went about like most suspected it would.  He said inflation is above target like they wanted and he still feels it is transitory, and that substantial progress has been made in employment.  If those conditions continue, some on the Open Market Committee feel the Fed could begin to reduce their asset purchase program this year.  He has to be vague, but also when the time comes to cut back on bond purchases, he must be able to say “we signaled the end of the bond purchases”, and he has given the signal.

If the formal announcement of the taper happens at the Sept. Fed meeting, I would expect some market volatility, even though it has been signaled.  Then the market will normalize if history is a guide.

If the Fed stops buying so many bonds, then somebody else will have to buy the bonds.  Luckily the enhanced unemployment checks end in September, so the level of monthly govt. debt will go down just at the time the Fed cuts the bond buying program down.  Imagine that (sarcasm alert), it almost looks like they planned it that way!!!  But, when somebody else has to start buying the govt. bonds, they will probably not be willing to buy a 10 year Treasury bond yielding 1.3%.  In order to get those sold, they market will demand a higher yield, so the market will force up the long end of the treasury yield curve.  The salvation for the US may be that there are still negative interest rates in Europe, so those investors buy US treasuries because +1% looks better than -.5%.  The only thing the European investors have to worry about is the value of the dollar because it would not have to fall much to wipe out the yield advantage they thought they had.

Technical Analysis:

For the week the S&P 500 was up .5%, closing at a new all-time high.

Technically (see chart below) the market looks good.  RSI at the top of the chart is in high-neutral at 64.  Momentum shown by MACD at the bottom of the chart is neutral and flat, but shows a minor bias to rise.  The price action is clearly positive.

Passage of an infrastructure bill should be stimulative for years building roads and bridges.  It depends on what tax measures are needed to pay for the building, but I suspect it will be a net positive overall.  The delta variant and inflation have hurt consumer sentiment, and that could pull down economic activity a bit in the Q3.

Click THIS LINK to open the chart in a separate window.

What am I doing?  I mostly replaced option contracts that expired last Friday, which is a way I generate income on stocks that don’t pay dividends.  I bought a little SMH and XLK, and placed trailing stop loss percent orders under each, immediately.  I had a high ball sell order on RBLX at 90, so that sold this week.  It is at 85 today, so I can buy it back cheaper, but I’m not sure it is finished falling.  I will probably buy some, then place a low ball buy order to add more on weakness, if that happens.  RBLX was a stock that I had a covered call sold on it that expired last Friday.  I made money on the call, but rather than sell the next call without stopping to consider if the stock was at a high point, I did stop to consider that and decided to sell it.  When covered calls expire, I recommend you consider whether you should sell the stock or sell the next covered call.  I made the same consideration on MSFT recently and sold the stock at 286, a recent high.  MSFT has just gone up to 300, so that has not worked out yet, but let’s see.

———————–   If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

I would like to call your attention to a page of my blog called “CLASSICS”.  It is located at the top of the blog, on the banner just under the title.  The banner has links to “Home”, “About”, and now “Classics”.  These are articles that I wrote one time for the blog, but they are valuable insights at all times for investors.  I will announce in the weekly blog when I add a new classic.

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update.

I am a retired person and preserving capital and seeking income are important objectives for me.  I also want a growth component to my portfolio, while minimizing major risk.  My style of investing will not suit everyone.  I like to sleep well at night.

Rich Comeau, Rich Investing

Minor Correction

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  The monthly “Long Term” update will be on the second Wednesday of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.

If you lose your bookmark to the blog, google “Rich Investing” and it should show up on the first page or so.

Economy:

Retail sales for July were -1.1%, not a good sign.  Initial jobless claims for the prior week were 348K and still coming down, so that’s good.  The index of leading economic indicators was +.9% indicating future growth. 

There’s not much data this week, but the weak retail sales number probably reflects the wave of the Covid delta variant that is hitting hard in the southeast.  The LEI does not know anything about Covid, so I would weight the poor retail sales as the more important data point.  The question remains, how much damage will the delta variant do to the economy in the next couple of months?  About half the nation is fully vaccinated, and about 25% of the people have had Covid and recovered, giving them some natural immunity.  That leaves about 25% of the people that are vulnerable, and the delta variant is the most transmissible we have seen.  This variant is so new we just don’t know what it will do.  There is no mention of a shutdown at the national level, but a governor or mayor may call for one in a particular hot spot.  That is a wild card.  The vaccination rate is going up, and that will help.

Geo-Political:

There is a lot of talk about the mess in Afghanistan, but it does not affect the economy.

The Fed minutes from late July show the Fed acknowledges inflation is higher than they expected, and job creation has been good the last two months.  If job creation continues strong in August, certain Fed members say they would vote to announce the beginning of the taper in Sept., to start in Oct. or Nov.  Most business leaders I have heard think even that is a bit late, but it appears that we need to get on with it.  The Fed has telegraphed the move in the minutes and in speeches, but the announcement will probably cause a hiccup in the market if it is announced in Sept., but I would not expect a big one.

Technical Analysis:

For the week the S&P 500 was down .5%.

Technically (see chart below) the market looks fair.  RSI at the top of the chart is neutral at 57.  Momentum shown by MACD at the bottom of the chart is negative and trending down.  The price action is fair, remaining in the long term uptrend.  We’ve just had a minor correction and the price has bounced off the rising wedge floor (the black line).

Oil is weak as demand has fallen due to Covid.  The energy complex has been in retreat for weeks, some of that is due to oil overshooting to the upside in the spring and now correcting on Covid concerns.  The Covid concerns may be reflected in many areas.  The enhanced unemployment benefits expire Sept. 6 or so, and that will reduce consumer spending.  There are a number of headwinds building in the general economy; inflation, delta variant, and the Fed taper.

Click THIS LINK to open the chart in a separate window.

What am I doing?  My options expired on 8/20 and I had a good month with the options, as usual.  Unfortunately my stocks went down more than my options were up.  My KMI has been in retreat and it is in a good spot to start adding, but I have a full position and no room to add if I don’t want to get too heavily invested in one stock.  I picked up a little AAPL.  I was stopped out of the QQQJ I bought recently.  In general it was a quiet week.  Next week I will be selling covered calls for Sept. 17 expiration.

Added Note:  What is a “full position” on a stock?  I have not seen a precise definition, but basically it means that you have a risk management rule that you should not hold too much of any stock.  You want to avoid the situation where unexpected bad news for a company can materially hurt your portfolio, so “don’t put all your eggs in one basket”.  My rule is that if my ideal portfolio is 20 stocks to spread the risk, then I should not have more than 5% of my  portfolio in one stock.  Your number could be a little different, but somehow you should limit your single stock exposure.

———————–   If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

I would like to call your attention to a page of my blog called “CLASSICS”.  It is located at the top of the blog, on the banner just under the title.  The banner has links to “Home”, “About”, and now “Classics”.  These are articles that I wrote one time for the blog, but they are valuable insights at all times for investors.  I will announce in the weekly blog when I add a new classic.

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update.

I am a retired person and preserving capital and seeking income are important objectives for me.  I also want a growth component to my portfolio, while minimizing major risk.  My style of investing will not suit everyone.  I like to sleep well at night.

Rich Comeau, Rich Investing

Another Boring Record High

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  The monthly “Long Term” update will be on the second Wednesday of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.

If you lose your bookmark to the blog, google “Rich Investing” and it should show up on the first page or so.

The monthly Long Term update follows just below this one.

Economy:

The CPI for July was up .5% for a 6% annual rate, which is way above the Fed target of 2% annual rate.  The year-over-year increase in the CPI was +5.4%.  Initial jobless claims for the prior week were 375K, and new pandemic low.  The U of Michigan consumer sentiment index for mid-August fell a large 11 points to 70.2, on fears of the rise of the Covid delta variant and inflation.  I have quit posting the mid-month consumer sentiment index, but this one was so dramatic, you needed to see it ASAP.

We better hope the Fed is right and that this high inflation rate backs down because if the Fed lets this get out of control they will have to raise rates faster than anyone wants to see and that would slow the economy, perhaps too much.  I read that home prices and rents are up 15% in the last year, that’s way too fast.  There is talk that the Fed will announce a taper to the asset purchase program in Sept. to begin in Oct., maybe dropping from $120 billion a month to $100 billion a month.  The first rate hike is projected by Fed watchers for late 2022 or early 2023, but if inflation keeps kicking up, that target could move in.

Geo-Political:

The Senate passed the $1 trillion bi-partisan infrastructure bill so now it goes over to the House. 

There is a follow-on budget reconciliation bill where the Senate will pass a large spending increase, I hear numbers around $3 trillion, to fund long-held Democrat programs.  That is how the repubs passed the tax cuts in 2017, under budget reconciliation, because that only requires a simple majority.  This will be passed on a straight party line vote, 50 dems against 50 repubs, and the Vice President will cast the tie breaking vote to pass it for the dems.  The proposal started at about $6 trillion, but Joe Manchin would not vote for it, and the dems MUST have his vote.  He’s a moderate and he has the swing vote in the Senate.

I want to talk a little about why health care costs so much in the US.  There are two roots of the problem, 1) how we use health insurance, and 2) lobbyists.

Let’s talk about health insurance.  Health insurance is a “must have” item for anyone with reasonably enough money to afford it.  Many people face bankruptcy if they have a serious illness and don’t have insurance, so if you can afford it, you will get it.  Most of us get our insurance through our employer, so it is subsidized to us in the workplace, but since health costs have risen by two or three times the general inflation rate, companies have pushed more and more of the cost onto the employees. 

So, why do health care costs go up at twice the general inflation rate?  The answer is that nobody with enough power has any incentive to hold down costs, and in particular, the insurance companies.  Read the previous sentence again, because it is important, and if you think someone with sufficient power has an incentive to keep costs down, send me an email, explain who it is and what their incentive is, and I will publish it next week.

Health insurance companies collect premiums we pay for policies that say the insurance company will cover certain illnesses and procedures.  Out of the premiums they collect, they pay out the benefits for the illnesses and procedures that the policy covers.  Usually they collect more in premiums than they pay out, so they make a profit. 

Now lets say you have 1000 shares of stock outstanding for your insurance company.  If a drug company comes along with a drug and they say the cost is $100,000 to cure a patient, what incentive does the insurance company have to negotiate the price down to $50,000?  Most health insurance companies operate on a 15% margin of profit.  If your total costs were this one drug, say 100,000, then at a 15% profit you would take in $115,000 in premiums and profit $15,000, so your earnings per share would be $15 per share.  If you negotiated down the cost of the drug to $50,000, you would be charging about $57,000 in premiums and paying out $50,000, you would show a profit of $7,000 and your company now would have earnings per share of $7, and you would have screwed the CEO’s bonus, and screwed all the shareholders because the stock would not be as valuable earning $7 per share instead of $15 per share.  My percentages are off a little, but the magnitude would be similar and I don’t care to go through an arithmetic problem at 11:30 PM.

If you are not going to lose many customers if you raise the price of your product, you have pricing power, then there is no known incentive for insurance companies to negotiate the lowest price on anything with hospitals, service providers like imaging clinics or dialysis, or drug companies.  If your profit is 15% of the pie, and your share count is constant, then you want the pie to be as large as possible to maximize your earnings per share and your stock price.

The above is true, until many people stop buying your product.  If you don’t think it is true, first I would say that by general observation that is what I see in the real world.  Second I would say if you don’t believe this and can produce a clear counter example and show what the incentive would be for an insurance company to negotiate large discounts from all of the service providers, then I will publish it.  Also, feel free to use the comment feature.

Now let’s look at a specific example of Sovaldi from Gilead in 2017:

Nov. 28, 2017 – In 2015, when executives at Gilead started negotiating with China’s drug authorities on the price of its hepatitis C blockbuster Sovaldi in that country, the company was enjoying a leading position in the emerging market for antivirals that wipe out the disease in most patients. Fast forward two years and Gilead finds itself in quite a different position: Sovaldi is now approved in China, but it’s facing competition there from Bristol-Myers Squibb and AbbVie, and a rival drug from Merck is on the way. What’s more, pressure from payers around the world has brought Sovaldi’s average price way down from its widely criticized $84,000-per-course launch price in the U.S.

No doubt all of those challenges played into Gilead’s decision to price the drug at 58,980 yuan ($8,939) in China. The price, reported by a Chinese financial media service, is estimated to be one-fifth of the current cost of Sovaldi in the U.S., which has fallen precipitously since its 2013 launch.

It was expected that Gilead would deeply discount Sovaldi for the Chinese market, but the reported price is still much higher than in other emerging markets where it has licensed the drug to generics makers. In early 2015, while facing severe backlash for a U.S. list price that equated to $1,000 per pill, Gilead formed manufacturing and marketing licenses that slashed the price to $10 per pill in India and many other emerging markets.


https://www.fiercepharma.com/financials/gilead-prices-hep-c-giant-sovaldi-china-at-one-fifth-u-s-price-report

Everyone thinks private industry is so much more efficient than government, but in this case, the Chinese government negotiated an 80% discount on Sovaldi versus what the US private insurance companies have negotiated.  I cite this as proof that our insurance companies have no incentive to negotiate the lowest possible price from our service providers.  In a word, it is because they are a third party payer with a profit incentive for themselves, and the result is a horribly inefficient system for the United States nation.  (By the way, I found an article that the British National Institute of Health, their single payer government run healthcare system, negotiated a price for Sovaldi about 25% lower than what our insurance companies paid in the US, when the drug came out, so it’s not just China.)

Healthcare makes up about 20% of our total spend as a nation.  In most developed nations they spend around 10%.  If you want to make US industry more competitive, make the delivery of healthcare more efficient.  But the way we do it, with a third party payer with a profit incentive for themselves, I don’t see any powerful entity with an incentive to bring down costs.  To make it dramatically more efficient, we have to dramatically change the system, and if we keep the insurance companies, they must have an incentive to negotiate the lowest cost for services from their providers. 

So, why doesn’t the system change?  Go up to the top and look at item #2, the lobbyist. 

My dos centavos!  I hope you like that, it wore me out to write it, but it’s been on my mind for a while.  I find it hard to tackle a topic as big as all outdoors and approach it concisely, in organized manner, with sound logic, and a good example.

What does it have to do with the stock market?  If you are big in health insurance company stocks, you need to know how they operate, and what kind of risk they face if government policy changed.  But, that may not be the most interesting aspect you derive from the discussion.  And, I need some justification for going off the reservation regarding the intent of my blog.

Technical Analysis:

For the week the S&P 500 was up about a half of a percent, and closed at a new high.

Technically (see chart below) the market looks good.  RSI at the top of the chart is high-neutral and slightly rising.  Momentum shown by MACD at the bottom of the chart is flat, so the market does not show much energy as it creeps higher.  The price action is positive.

Looking at the stock market, it says “hey, no problem” and creeps only upward.  If you look at the economy, inflation is rising which could eventually affect corporate profits if they cannot pass along their labor and input price increases.  Also, the Covid delta variant could slow economic growth.  I don’t expect any shutdown because we have the vaccine, but oldsters like me are not going to restaurants as much because we are trying to avoid a breakthrough infection.

Click THIS LINK to open the chart in a separate window.

What am I doing?  I did a lot of option deals, selling covered calls and selling put options that might allow me to buy a stock at a lower price, and earns income of the option premium if the stock does not fall far enough, to the option strike price.  I’ve continued to buy into XLF and XLV, with trailing stop loss percent orders under them for protection.  I think those sectors may do better than the SPY since there are some hard hit sectors like airlines and hotels in the SPY.

———————–   If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

I would like to call your attention to a page of my blog called “CLASSICS”.  It is located at the top of the blog, on the banner just under the title.  The banner has links to “Home”, “About”, and now “Classics”.  These are articles that I wrote one time for the blog, but they are valuable insights at all times for investors.  I will announce in the weekly blog when I add a new classic.

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update.

I am a retired person and preserving capital and seeking income are important objectives for me.  I also want a growth component to my portfolio, while minimizing major risk.  My style of investing will not suit everyone.  I like to sleep well at night.

Rich Comeau, Rich Investing

Long Term – August 2021

Once a month, on the second Wednesday of the month, I will put up a long term view of the market.  This is provided for investors who don’t want to trade secondary swings in the market, but would like to exit the stock market relatively soon after a bear market begins, or enter the market after a new bull market begins (change in the primary trend).  In the blog, they will always have a title called “Long Term (month) (year)”, so you can use your browser “Find” function and easily find them.

Economics:

GDP The first estimate of Q2 GDP is +6.5%, a strong number.

The Covid19 vaccine rollout was a success, but infections from the delta variant are increasing, with the highest infection rate in the states with the lower vaccination rate.  Vaccinations are picking up, but I expect to see an impact on the economy. 

Congress passed the $1.9 trillion Covid relief bill in December, with extended unemployment benefits, rent assistance, plus cash payments; it helped carry the economy into summer.  The Senate just passed the $1 trillion infrastructure bill, and that could boost certain stocks like CAT, and the whole economy for a few years of build-out.

This is bullish for the stock market. 

YearQuarterGDP %
2021Q26.5%
2021Q16.4%
2020Year0.1
2020Q44.0
2020Q333.4
2020Q2-32
2020Q1-5.0
2019Year2.3
2018Year2.9
2017Year2.6
2016Year2.0

Fed interest rates –  The Fed has held the Fed Funds rate near zero since March 2020, and Jerome Powell said in the winter that he did not see the Fed raising interest rates this year (2021).  They continue to buy bonds and are very accommodative.

There are signs that inflation is picking up, which is not unusual as we come out of last year’s recession.  The Fed has said it is willing to let inflation run a bit above the long term target of 2% annually.  If it rises too fast, inflation could force the Fed to act sooner than they currently plan.  Higher rates could put a drag on the economy.

The Fed met on July 27-28 and announced no change in their interest rate or asset purchase program.  One Fed governor said if employment gains remain strong and unemployment continues downward, he would support beginning to taper this fall.  One Fed governor does not mean the policy will change, but at least it will be discussed.

Fed policy is strongly accommodative and hence it is bullish. 

DateFed Funds Rate5 Year Treasury10 Year Treasury30 Year Treasury
Aug 20210.2.81.32.0
Jul 20210.2.81.42.0
Jun 20210.2.81.52.2
May 20210.2.81.62.4
Apr 20210.2.81.62.3
Mar 20210.2.81.52.3
Feb 20210.2.51.21.9
Jan 20210.2.51.11.9
2020 Q40.20.40.91.6
2020 Q30.20.30.71.4
2020 Q20.20.30.71.4
2020 Q11.21.31.42.0
     
2019 Year Avg2.21.92.22.6
2018 Year Avg1.82.82.93.1
2017 Year Avg1.01.92.32.9

Valuation:

S&P 500 earnings – Factset shows that with 90% of companies reporting, Q2 earnings are 90% above Q2 2020.  Of course, Q2 2020 was when the economy was shut down for Covid19.  The Factset forward PE on the S&P is 21.1, compared to their ten year average of 16, so things are richly valued.

The outlook for earnings is bullish.

PE on S&P 500 – The current 12-month trailing GAAP PE on the S&P 500 is 28:1, down slightly from 31 last month.  I used 4 quarters of earnings with the most recent being Q2 2021 (90% reported). 

Valuation has made significant progress in the last two quarters of recovery earnings.  We’re not out of the woods, but we are definitely headed in the right direction.  One of the reason that valuations have improved is that all businesses cut cost during the lockdown period and as business comes back, they have much more revenue growth while costs remain at low levels.  Inflation of the cost of input materials and labor will change that in the future, but right now, the story is good in most companies.

This metric is significantly overvalued relative to my trimmed 30 year average of 19.  I trimmed out the quarters during recessions for my 30 year average, since the P/E behaves very abnormally during those times.  I go in 5 point increments for my terminology, so 20 – 25 would be moderately overvalued, while 25 – 30 would be significantly overvalued.  Above 30 would be dangerously overvalued.

This indicator is bearish.

Age of primary move, bull or bear market – The bull market is 12.4 years old.  This is neither bullish nor bearish, but it is worthwhile to keep it in mind.

Geo-Political:

COVID-19:  After looking better in the spring for the US and selected countries like the UK, where the vaccine has been rolling out, the new more transmissible variants are taking a heavy toll in countries without the means to roll the vaccine out.  There is an uptick in the US infection rate due to the delta variant, which is a new concern for our economy.

Liquidity:  Congress had made money available to businesses and individuals to help through the Covid pandemic.  The national savings rate is very high for 2020 since people did not drive to work, they did not eat out, bypassed vacations, did not shop at malls, etc.  That money earns nothing in money market accounts per Fed policy so it is making its way into the stock market.  The risk is that we blow up a bubble in the stock market.

All over the world, banks have dropped interest rates to the floor and they are providing liquidity including bond purchases, helping to hold stock markets up.  How long can that continue, and what will be the after effects of such high levels of central bank money printing?  We are seeing inflation tick up.

Oil:  The price of oil has doubled since the pandemic low last summer.  Many people had stopped driving, demand fell and drove the price down.  Smaller producers around the world went bankrupt so a lot of production went offline.  Saudi cut their production and with some economic recovery, oil prices have climbed back to pre-pandemic levels.

Geo-politics is currently neutral.

Technical:

Technically the chart is positive.

RSI at the top of the chart remains overbought at 78.  MACD at the bottom is positive and moving up, but perhaps too quickly.  Notice that the histogram on MACD all the way on the right has shrunk a little from the previous bar, so the upward momentum in stock prices slowed just a tad in July.  The price action is clearly positive.  The price action is moving well above the top of the range and that is a bit of a concern so it bears watching.  When you look at the black vertical line I added in the price action in April, I am pointing out how extended to the upside the market has become, relative to the 50 month moving average.  Sooner or later we will need to get some “reversion to the mean”, in other words, a correction.

The rally really took off in January after the FDA approved the Covid vaccines.  People believed that economic activity would pick up to normal levels, but that means a rapid growth rate from the pandemic depressed level.  We are seeing rapid above trend recovery growth, fueled by congressional spending programs and Fed accommodative policies.  You can see the rise in the chart at an above normal rate.  The infrastructure bill will provide a boost to economic activity for years to come, but the taxes to pay for it will put some drag on it.  But there is no doubt we need infrastructure improvements, and we have needed them for 20 years.

S&P 500 – Ten Year Chart of Months

Click on this LINK to open the chart in a larger separate window.

This is bullish for stocks in the long run, but cautionary for a correction in the intermediate term. 

Conclusion:

GDP returned to growth so that is bullish.  The Fed has short term rates near zero and plans to hold them there through this year, plus they are buying bonds to keep longer term rates low, and that is bullish (old saying, “don’t fight the Fed”).  S&P earnings for Q2 are 90% above Q2 2020 (which was the “shut down” quarter), with S&P projecting further improvement in 2021, keeping this factor bullish.   The PE valuation of the S&P based on the 12 month trailing GAAP number is 28, which is overvalued and bearish.   The geo-political factors are neutral.   Technically the chart looks bullish.

By that way of looking at it, the market is bullish, with four factors bullish, one neutral and one bearish.  A successful vaccine rollout brightens the outlook for 2021. 

My conclusion is that I am constructive on the market, but with the valuation stretched there is always the risk of a short term correction. 

Long Term Issues to Keep in Mind:

Federal Deficit:  (Updated March 2020) – Well this is going to get a lot worse.  Looks like the politicians are going to be printing money and dropping it from helicopters.  But all the other major economies will do the same thing, so relatively, the dollar may not drop much (which would be bad for inflation).

(Negative – Noted Jan. 2018)  The deficit will go up despite the republicans saying that if the tax cut bill is “dynamically scored” using “possible” increases in economic activity, it will hold down the deficit by increasing tax receipts.  This has not been shown to work in the past.  The US added $980 billion to the national debt in fiscal 2019 (ended 9/30/2019), a tragedy in good financial times.

The total national debt exceeds $26 Trillion (late 2020), and as interest rates rise, the component of the annual budget allocated to “interest on the debt” will increase, putting pressure on existing programs, or increasing the deficit.  If the deficit is allowed to rise too much in good economic times, the value of the dollar will fall and that is inflationary which is usually bad.  The thing saving us today is how poorly all the other nations are managing their economies, so the dollar continues to hold up.

Rich Comeau, Rich Investing

Strong Earnings Bolster the Market

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  The monthly “Long Term” update will be on the second Wednesday of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.

If you lose your bookmark to the blog, google “Rich Investing” and it should show up on the first page or so.

The monthly long term update will be posted Wed. the 11th.

Economy:

The ISM manufacturing index for July declined one point to a still-high 59.5, while the ISM services index rose by 4 points to 64.1.  Factory orders rose 1.5% in June.  Motor vehicle sales ran at an annualized rate of 14.8 million units, the lightest we have seen in a while and certainly impacted by the chip shortage.  Initial jobless claims for the prior week were 385K, still near the recovery low (when the economy is normal this usually is about 250K per week).  Non-farm payrolls rose 943K in July, a robust number, while the unemployment rate fell to 5.4%.  Those are all good numbers, except motor vehicle sales.

Geo-Political:

The big deal in Washington is the bi-partisan infrastructure deal.  The Senate is trying to get it passed before the summer recess.

What about the Fed, interest rates and inflation.  At the July meeting the Fed said inflation was running hotter than they had expected.  Has the beginning of the taper moved closer in time; it appears so, pending more data.

August 2, 2021 – Federal Reserve Governor Christopher Waller said that if the next two monthly U.S. employment reports show continued gains, he could back an announcement soon on scaling back the central bank’s bond purchases.

“I think you could be ready to do an announcement by September,” Waller said Monday in an interview on CNBC. “That depends on what the next two jobs reports do. If they come in as strong as the last one, then I think you have made the progress you need. If they don’t, then I think you are probably going to have to push things back a couple of months.”

The Federal Open Market Committee last week held interest rates near zero and said it would maintain its $120 billion monthly pace of asset purchases until “substantial further progress” had been made on employment and inflation. But the FOMC also said that the economy had made progress toward these goals and that policy makers would continue to assess progress at coming meetings.

A few regional Fed presidents, including Waller’s former boss at the St. Louis Fed, James Bullard, have urged the U.S. central bank to get started this fall with tapering of bond buying in light of the risk of higher inflation.


https://www.bloomberg.com/news/articles/2021-08-02/waller-says-strong-job-reports-may-warrant-september-taper-call

Remember that tapering the asset purchase program does not mean the Fed is ready for the first interest rate hike (although I think they should begin to hike in the usual small increment of ¼%, but not at each Fed meeting, and not above 1% for a while)

The stock market is usually volatile around those type of announcements, but it is usually temporary.  Then an analyst says something like “it is actually good news that the Fed finally thinks the economy is strong enough to warrant a hike in the Fed Funds rate”.  Come on folks, we knew that before the market went down.

The yield on the ten year Treasury bond rose to 1.3% and some think we may have seen the low on the ten year bond yield.

Technical Analysis:

For the week the S&P 500 was up about 1% for the week, closing at another record high.

Technically (see chart below) the market looks good.  RSI at the top of the chart is neutral at 63.  Momentum shown by MACD at the bottom of the chart is neutral and moving sideways.  The price action is neutral but shows a slight upward bias in the last week.

We’re in the tail end of earnings season and after it ends there may not be much good news to propel the market higher.  An infrastructure bill would be a catalyst for gains in some stocks such as CAT, but they may have already run up.  Earnings are great again this quarter and that will help normalize the P/E ratio a bit, but the market is still richly valued.  The fiscal stimulus from Congress and monetary stimulus from the Fed (zero interest rate on Fed Funds, plus $120 billion per month of bond purchases) keep the market pumped up.  Things will get tricky when those conditions change.

Click THIS LINK to open the chart in a separate window.

What am I doing?  I was not too active last week.  I bought-to-close a few 8/17 covered calls where I had captured 90% of the premium, and sold new 9/17 calls in their place.  As I said last week, I made a few small purchases of QQQJ and placed a trailing stop loss percent order (trailing at 5%, personal choice) under each piece.  I do that so I don’t put a lot of chips in at the top and they get caught by a woosh down that would cost me a lot.  The technique has worked well for me over the years.  I can participate in a market rally, even when the market is overvalued and overbought, without too much risk.  I also started selling 9/17 puts on stocks I would like to own at lower prices.  I sold MSFT recently at 286 and I would like to buy it back at a lower price.

———————–   If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

I would like to call your attention to a page of my blog called “CLASSICS”.  It is located at the top of the blog, on the banner just under the title.  The banner has links to “Home”, “About”, and now “Classics”.  These are articles that I wrote one time for the blog, but they are valuable insights at all times for investors.  I will announce in the weekly blog when I add a new classic.

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update.

I am a retired person and preserving capital and seeking income are important objectives for me.  I also want a growth component to my portfolio, while minimizing major risk.  My style of investing will not suit everyone.  I like to sleep well at night.

Rich Comeau, Rich Investing

Mega-Tech has reported

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  The monthly “Long Term” update will be on the second Wednesday of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.

If you lose your bookmark to the blog, google “Rich Investing” and it should show up on the first page or so.

Economy:

New-home sales dropped 6.6% in June to 676,000 annual rate, hurt by high home prices and limited supply of new homes.  Durable goods orders for June were up .8%.  Initial jobless claims for the prior week were 400K, near the pandemic low.  The first estimate of Q2 GDP is +6.5% which is strong.  Consumer spending in June was up 1%.  The U. of Michigan consumer sentiment index for July was 81.2, up slightly.

Rant alert on.

There was negative commentary on CNBC about initial jobless claims “missing the estimate” of 380K.  Oh my god, the actual was 20K above the “estimate”!  AND, Q2 GDP was only +6.5%, well below the “estimate” of 8.5%!!!  These folks act like their “estimate” is some sort of religiously significant number, not to be violated.  Balderdash!  It’s just a guess, well a somewhat educated guess, but a guess nonetheless.  The initial jobless claim of 400K is in line with recent recovery lows, and it is an OK number.  Q2 GDP at +6.5% is great, normal GDP numbers are in the range of +2 to +3% for anyone who remembers normal.  It’s almost as if someone wants to create a negative view of the economy by estimating high, then complaining about a miss.  Both numbers are fine.

Geo-Political:

The Fed ended their July meeting on Wednesday and at the press conference, Chairman Powell did not announce any big changes.  The Fed funds rate remains unchanged, as do the asset purchase plans.  Inflation is running a little hotter than the Fed expected, but employment is below target so they will let inflation run a little hot until employment improves.  Some Fed watchers disagree with this loose Fed policy, and think inflation in the future could become a serious problem, worse than today’s unemployment.  We’ll see, but the bad news is that if the Fed watchers are right, we’re making a mistake and correcting the mistake (high inflation) could be more painful than today’s problem with moderately high unemployment. 

The Fed just gets ONE MECHANISM, the Fed Funds rate, to manage an economy whose structure changes over time.  The US has changed from an agricultural economy to an industrial one, and now on to an information economy.  The population has tripled in the last 70 years.  Demographics have changed as medicine allows people to live on average ten years longer than in the 1950’s.  The level of international trade has skyrocketed over the years.  And the Fed has one mechanism to manage the economy, the Fed Funds Rate!  Just how well do you think it works?  Does it work just as well as it did in the 1950’s?  Or, when the Fed cuts interest rates to zero, is it like taking an aspirin and seeing if everything is ok in the morning (does the economy really heal itself over time, sort of like a common cold)?  It brings to mind a childhood memory of Dorothy finding out the truth about the Great and Powerful Wizard of Oz….  Just think about it folks, what’s the truth?

The bipartisan infrastructure bill is still alive and being negotiated, with notable progress last week on a bill of about $1 trillion.  Everyone agrees we need to fix our bridges and highways, and expand broadband access.  And we need to pay for it, and not just dump more on the national debt.

Technical Analysis:

For the week the S&P 500 was down marginally, about .5%.

Technically (see chart below) the market looks good.  RSI at the top of the chart is neutral at 60.  Momentum shown by MACD at the bottom of the chart is neural.  The price action is positive.

Notice that I have updated the chart a bit, I went back to 2020 and came forward as before, and I included data points that were outside the previous channel.  This is OK on a long term trend, as new data comes available, it needs to be included.  The channel is a little wider, and the rising wedge is still there, but not as tight as before.

Click THIS LINK to open the chart in a separate window.

Last week was much anticipated with AAPL, GOOG, MSFT, and AMZN reporting.  They all reported huge increases in revenue and earnings, except AMZN which got punished, but their stock prices did not soar.  It appears the market had priced in the good news.  So, the question becomes, as Q2 earnings reports come finish up, what will hold the market up, or propel it higher?  Will the surge in Covid delta variant slow the economy down enough to cause a correction?

What am I doing?  I did a little bargain hunting and added a little to F, GM and TSM.  I sold some Puts to try and pick up PFE on a pullback.  I intentionally did not sell covered calls on some stocks over the last two weeks, because I was waiting for them to announce earnings.  I thought the earnings would be good, the stock price would pop up, and then I would sell the call and collect more premium for it, or sell at a higher strike price, and either would be to my advantage.  That worked out well.  When dealing with options, earnings announcements are significant events and you should try to use them to your advantage. I am cautious about a correction, but earnings continue to roll in and they are generally good. We have a couple more weeks of earnings reports. Next week I plan to buy QQQJ, not the NASDAQ 100, but the next 100 smaller companies. The tech giants appear fully valued, so hopefully the smaller companies will be growing faster. I will split my purchases into ten pieces and buy every day, then place a trailing stop loss percent order under the ETF to protect from a correction. I do that in an IRA account so my income tax work is minimized.

———————–   If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

I would like to call your attention to a page of my blog called “CLASSICS”.  It is located at the top of the blog, on the banner just under the title.  The banner has links to “Home”, “About”, and now “Classics”.  These are articles that I wrote one time for the blog, but they are valuable insights at all times for investors.  I will announce in the weekly blog when I add a new classic.

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update.

I am a retired person and preserving capital and seeking income are important objectives for me.  I also want a growth component to my portfolio, while minimizing major risk.  My style of investing will not suit everyone.  I like to sleep well at night.

Rich Comeau, Rich Investing