A Little Correction

February 27, 2021 ~ richinvesting ~ Leave a comment

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. You can always scroll down a few weeks and find the latest “Long Term” update.

If you lose your bookmark to the blog, google “Rich Investing” and it should show up on the first page or so. The more often you google it and hit the link, the higher it will show in your results.

Economy:

The leading economic indicators from the Conference Board rose .5% and combined with the prior month, they see growth in the economy in the months ahead. New home sales for January were at an annualized rate of 923K, up a bit from the Dec. rate. Initial jobless claims for the prior week were 730K, down markedly from the prior 841K. The second estimate of Q4 GDP was +4.1%, up one tenth from the first estimate. Durable goods orders in January were up 3.4%, a strong move up. Consumer spending in January was up 2.4%, compared to -.4% in December. Consumer sentiment for February from the U. of Michigan improved to 76.8 from 76.2, which is still way down from 100 in 2019.

Every single number looks better; the recovery is on track. The housing market has been strong through the pandemic, on the back of low interest rates. Initial jobless claims were in the 700K range weekly in the late summer, then began to tick up sharply in the fall when the virus began to rage again. New cases of the virus are falling now and the layoff rate is falling also. Companies may be holding on to their workers anticipating a pickup in business activity as vaccinations progress. There is a lot of pent up demand, people have been cooped up, the savings rate went way up if you kept your job, and people want to go out and have a sit down meal in their favorite restaurant. Then they want to take a vacation. The downer in the discussion is the initial jobless claims. They are better, but not enough better. That rate in 2019 was 200K per week, not 700K. If restaurants, bars, and hotels start hiring again, they support a lot of jobs, and that would be very good for the economy.

Geo-Political:

The biggest thing going in Washington is the next Covid relief bill, hopefully the last Covid relief bill. It appears there is no serious attempt at a bipartisan bill, the sides are simply too far apart with the dems at $1.9 trillion and the repubs at $600 billion. The dems probably will have the votes to pass their bill unless Joe Manchin defects, but I would not expect him to do that on relief as W. Virginia is a low income state and would benefit from the bill.

Think about this from Biden’s point of view. You can go for a solution that is well short of getting the job done, or is well large enough to get the job done; nobody knows the number so you will miss low or miss high. If you are the president, what is the answer? You MUST get the job done, so if you are going to miss, miss high. It really is the only thing that makes sense. Personally I would prefer to see things targeted a bit more, and I think Manchin has said the same, so we’ll see. Maybe they can reconcile this after the Senate votes on the bill.

The thinking of the investing pros on TV is that a large relief bill will prevent a large decline in the stock market. That has worked so far in this pandemic, so it is hard to bet against it.

Technical Analysis:

For the week the S&P 500 was down 2.5% and we are 3.5% down from the high, a minor correction so far. The yield on the ten year Treasury bond jumped up higher and faster than expected on Thursday before falling back a little on Friday.

Technically (see chart below) the market looks poor. RSI at the top of the chart is in neutral territory at 43 but it is falling. Momentum shown by MACD at the bottom of the chart is falling and negative. The price action is falling and negative.

I refreshed the chart this week and it is interesting. On a longer term basis, there is a nice rising channel using the lowest blue line. But, on a medium term basis, there is that middle blue line that forms a rising wedge formation with the upper line. A rising wedge is usually resolved to the downside. The wedge could become more narrow so a larger correction is not ensured immediately. The price is sitting on the lower boundary of the wedge, so it could break below soon; that’s another possibility.

Fed chairman Powell tried to reassure the markets that the Fed stood ready to support the economy. Powell is the first chairman in memory to state he is OK with inflation running above the usual target of 2%. That in itself is unsettling to bond traders. Who wants to buy a treasury bond yielding 2% when inflation is running 2.5 or 3%? The bond market may help Powell decide when it is time for the first rate hike, and it could be well before the Fed currently anticipates. What has been a fairly certain interest rate picture now has a bit more uncertainty and the stock market does not like uncertainty.

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

What am I doing? I have a lot of cash, some I got in January when my big bank stocks were called, and some I got last week when I was stopped out of ARKK. All of my call options expired on 2/19 so I am free to sell those stocks if I choose. Sensing weakness I sold AAPL at 128 and bought it back at 124. I sold MPC and can buy it back cheaper. These are small trading opportunities, not major positioning moves. I bought MRK and sold a covered call on it. All purchases are small positions in case the correction deepens. I don’t see a bear market approaching so I will buy this dip. I took a small position in IWN, small cap value ETF. I want to diversify and avoid sky high PE stocks, companies like ZM. ETF XLV for healthcare is dropping with the market, but the PE’s are not sky high so it is on my shopping list. Banks do well when interest rates rise, so XLF goes on the shopping list, and it pays a 2% dividend. Semiconductors are in short supply so SMH should work after it is finished correcting. I’m not buying yet except for special situations, so I wait for a clearer indication the current correction is over. We don’t have that now, so work on your shopping list.

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

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.

I will do trading in my IRA account. I have a core portfolio in a taxable account, stocks I bought at the bottom of the crash in late March of 2020, that I intend to hold for the dividend and hopefully long term capital gains. JPM, GS, BAC, JNJ, HON, ABBV, MSFT are some examples. At particular market peaks I may sell 20% of the holding, and at market lows I may add 20% back, but this will be a slow process, maybe once a year.

Rich Comeau, Rich Investing

Dull Week in the Markets

February 20, 2021 ~ richinvesting ~ Leave a comment

I experienced the Great Texas Freeze of 2021 with all of my friends and family here in Houston. It was cold (about 15 degrees F), we lost power Monday night, got four hours of electricity on Tuesday night, and were without power on Wed. until about 9 PM. Then we lost water pressure due to all the burst pipes in our neighborhood. It got down to 51 degrees in the house, so we wore jackets, hats, and sat under blankets. I had a battery operated LED lamp and a battery operated boom box my kids used to use. Both run on D cell batteries and I had bought a dozen for last hurricane season, so I was good. We cooked a little on my old Coleman propane camping stove, and I keep propane bottles for when we lose electricity. We usually have a case of bottled water on hand, so again, we were good. We made it through and the biggest problem was boredom, and uncertainty, when would we get warm again. Talk about being thrown out of your routine! Former governor Rick Perry is wrong; I would welcome regulation of our power industry if we could ensure we would not have to shut down the state for 4 days because the temperature fell to single digits. Better building codes would help; they don’t have so many burst pipes in the northern states even during the coldest snaps. That has nothing to do with the markets, just a little personal venting. When I got back to my PC on Thursday, I felt out of it since I had not seen much news.

Economy:

Retail sales for January were up a strong 5.3%, helped by the Dec. stimulus checks from Uncle Sam. Initial jobless claims rose 13K in the prior week to 861K, about 4 times higher than 2019 levels, but in line with 2020 levels. Existing home sales for January ran at a 6.69 million annual pace, a healthy and steady one.

Retail sales were good, Initial jobless claims bad, and home sales steady. With few data points, this illustrates the uneven characteristic of the economy.

Geo-Political:

It appears that bitcoin has replaced gold as the inflation hedge of choice. I don’t like either one, since they go up as long as people want to buy them, and that’s about it. Neither one pays you interest to hold them. When people don’t want to buy them, they go down, way down. It does not appear to be a rational market, so I don’t want to be in it. If you do enter that market, figure out a way to manage your risk. You could look at a chart and try to buy when the market is closer to oversold on the RSI rather than overbought. If you use GBTC (bitcoin ETF), you could use a trailing stop loss order under it to sell you out if the market falls a certain amount. How can you manage your risk? Manage your risk.

Technical Analysis:

For the week the S&P 500 was down 1% and action is dull.

Technically (see chart below) the market looks suspect. RSI at the top of the chart is neutral at 60, but trending down. Momentum shown by MACD at the bottom of the chart is flat, but it looks like the faster moving black line is about to head down. The price action is flat and uninspiring.

We are deep in earnings season so the earnings surprises will soon end.

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

There is a lot of chatter about the threat of rising interest rates, out on the long end of the yield curve like the ten year treasury. As interest rates move up, bonds may eventually become competitors to stocks once again. The Fed will raise rates to a more natural level when the economy has recovered more, but that seems a good way off. If inflation creeps in, and the Fed has been trying to produce inflation, that would require the Fed to raise rates in order to protect the value of the dollar. But, the yield on the ten year bond is moving up; do the bond traders sense something the rest of us don’t? Could inflation kick up before the Fed expects it to, and force the Fed to raise rates when they don’t really want to? It appears that we don’t have to worry about it today, but the stock market is a forecasting machine, trading on factors that are typically thought of as being six months in the future. The smart money moves, then later they let us in on the secret, why did they move a few months back?

I’m going to put up two charts, the ten year bond, and the dollar, both for the last twelve months. Check out what is happening.

Rising interest rates on the long end of the yield curve are generally good for the banks and their stocks are rising. Interest rates generally improve in response to an improved economic outlook, and getting Covid shots in arms gives hope for the economy to recover to normal levels sometime this year.

The falling dollar is a two edged sword. US based multi-national companies like it because it makes the price of their goods more competitive overseas. But goods imported into the US will eventually see price increases to cover the decreased value of the dollar to foreign companies selling their goods to the US. Exchange rates have not mattered much the last few years, but that could be changing.

What am I doing? It was a quiet week for me, no electricity on two days and preoccupied on two days. I mentioned last week my technique for buying into an overbought market, I bought small pieces daily of ARKK and immediately put a trailing stop loss percent order under each piece, 5% down. They all sold on Wednesday while I had been offline for two days, and each sale was at a profit. In total I netted 2% on my investment in 4 weeks, while I minimized my risk. I use this technique occasionally and I have always made a little money while buying slowly into an overbought market, but one that looks like it just wants to keep going up. How do you manage your risk? Manage your risk.

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

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.

Rich Comeau, Rich Investing

Mixed Economy, New Record High

February 13, 2021February 13, 2021 ~ richinvesting ~ 2 Comments

The monthly Long Term update was posted on Wednesday and is just below this post.

Economy:

The CPI for January was up .3%, while the core rate of inflation was zero. Oil is driving the CPI up, and it is not in the core rate. Initial jobless claims for the prior week were 793K, a bad number at this stage of the recovery. Below is a quote from the latest consumer sentiment survey from the U. of Michigan:

“Feb. 12, 2021 – Consumer sentiment edged downward in early February, with the entire loss concentrated in the Expectation Index and among households with incomes below $75,000. Households with incomes in the bottom third reported significant setbacks in their current finances, with fewer of these households mentioning recent income gains than anytime since 2014 (see the chart). When asked to assess their current financial position, the deep divisions become apparent: among those with incomes in the bottom third, just 23% reported improved finances, the lowest since 2014; in contrast, among those with incomes in the top third, 54% reported their finances had improved. Mentions of income gains fell to just 17% among those in the bottom third, compared with 44% in the top income third.” http://www.sca.isr.umich.edu/

It was a poor week for economic data. The shots for Covid are rolling out, but for the bottom third of breadwinners a shot in the arm to prevent Covid is not enough; they need their old job back!

Geo-Political:

I didn’t see anything in Washington this week that would move the stock market.

Let’s take a look at economic conditions in Europe, since we looked at China last week:

“FRANKFURT, Jan. 21 (Xinhua) — The European Central Bank (ECB) said on Thursday that it decided to keep the euro area key interest rates and other pandemic policy responses unchanged following its first monetary policy meeting in 2021.
Eurozone key interest rates will remain at record low levels, with the base interest rate, marginal lending rate and deposit rate unchanged at 0.00 percent, 0.25 percent and minus 0.50 percent, respectively, according to an ECB press release.
The central bank in December added 500 billion euros (607 billion U.S. dollars) to its pandemic emergency purchase program (PEPP), taking the total firepower to 1.85 trillion euros. At the same meeting, it also extended the duration of the program to at least the end of March 2022.
The ECB’s decision to hold fire came at a time when European countries are still struggling to bring down new COVID-19 cases. Germany, the currency bloc’s largest economy, decided this week to extend its strict lockdown measures until mid-February. In France, a nationwide curfew starting at 6 p.m. was put into effect over the weekend.
It was worried that the fresh round of containment measures could again weigh on the eurozone economy that was seen slowly recovering from the immediate economic fallout in the third quarter last year.
In December, the ECB staff forecast the euro area annual real GDP growth at minus 7.3 percent in 2020 and 3.9 percent in 2021 in a baseline scenario. ECB President Christine Lagarde said on Thursday that the December macro-economic projections are “still broadly valid.”
http://www.xinhuanet.com/english/2021-01/22/c_139687942.htm

Europe looks like it is struggling through the Covid pandemic in similar fashion to the US. They are using lockdowns more widely than the US.

Technical Analysis:

For the week the S&P 500 was up about 1% and it set another record high in the process. Technically (see chart below) the market looks very good. RSI at the top of the chart is rising and not yet overbought at 66. Momentum shown by MACD at the bottom of the chart is rising and short term positive. The price action is good with a nice steady climb. The only sign of caution is that the market has moved above the rising green line on the chart, the rate of rise for the 2020 recovery. It is not a large move above the trend, so it might not be anything. It could be optimism for a return to normal in the second half of this year, or maybe it will be corrected down to the 50 day moving average blue wavy line.

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

What am I doing? I try to stay diversified. I am buying more ETF’s and placing a trailing stop loss percent under them, 5% down because we are overvalued and overbought. I buy small chunks on a recurring basis to limit the downside in case of a correction. During the week just past, I bought a little CIBR and QQQJ. My Feb. covered call options expire on 2/19 and I bought to close a few contracts where it was very cheap to close them out. Then I usually put in an order to sell a new option expiring 3/19. The tiny price I pay to close a contract a week early is usually more than made up by selling a new 5 week contract, instead of waiting a week and only selling a new 4 week contract.

I said I had been buying small pieces of the ARKK ETF and placing a trailing stop loss under each piece I bought. The market was marching higher, so I snugged up one order from 5% to 4%. That piece was sold last week when ARKK “whipsawed” me. It went up, then spiked down 4.7% in one hour triggering the sale of the one piece I changed to 4%, then moved quickly back to normal price. You don’t normally see that action on an ETF with a bundle of stocks. A friend pointed out that ARKK’s two largest holdings are Tesla and Roku which make up around 15% of the fund. Those are volatile stocks and in many ETF’s, the holdings would not be so concentrated in only two stocks. This does not say don’t buy ARKK and don’t use trailing stops. I will continue to do both. I just report it to illustrate that strange things happen in the stock market all the time, for well explainable reasons. All we can do is learn what happened and why, and then either you are OK with it and will do it again, or you’re not OK with it and you won’t do it again. I just thought it was an interesting little lesson.

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

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.

Rich Comeau, Rich Investing

Long Term – February 2021

February 10, 2021 ~ richinvesting ~ Leave a comment

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 for Q4 2020 GDP is +4% annualized, down from 33.4 in the prior quarter.

The virus is still the primary determinant of economic activity. There was a record fall wave of Covid19 that caused a shortfall of economic activity in Q4, falling well short of the estimate during the quarter of +9%.

Congress passed a Covid 19 Relief package #5 of around $900 billion. The market appeared to expect the bill and there was no surge in stock prices, but there was not correction either. Now that Biden has been sworn in, Congress is working on yet another round of Covid relief.

The +4% GDP in Q4 is a number that we would recognize as something resembling “normal” activity. However, things are not normal yet. Big business activity is holding up well, but mainstreet small businesses are hurting or they have permanently closed. Economic activity remains very uneven. Cruiselines, airlines, and hotels are all suffering.

With GDP positive for Q3 and Q4, we exited the recession levels of Q1 and Q2. This is bullish for the stock market.

Year	Quarter	GDP %
2020	Q4	4.0
2020	Q3	33.4
2020	Q2	-32
2020	Q1	-5.0
2019	Year	2.3
2019	Q4	2.1
2019	Q3	2.1
2019	Q2	2.0
2019	Q1	3.1
2018	Year	2.9
2017	Year	2.6
2016	Year	2.0

Fed interest rates – (unchanged in Feb. from Jan.) The Fed has held the Fed Funds rate near zero since March 2020, and has said they will hold the Funds rate near zero through 2023. They continue to buy bonds and are very accommodative.

Recently we have seen a noticeable uptick in rates on the long end of the yield curve. This is in response to expectation of improved economic activity in 2021 because of the rollout of the vaccine, and because there are also signs of inflation ticking up. The Fed has said that inflation ran below their target of 2% for many years, and now they would be OK seeing inflation run above target for a while. Inflation has just ticked up to +1.5%, so there is room before there is a problem. If the Fed would not mind seeing inflation above 2% for a while, they could be OK with the CPI at 2.5% or even 3% for a while, without triggering a rate hike.

Fed policy is strongly accommodative and hence it is bullish.

Date	Fed Funds Rate	5 Year Treasury	10 Year Treasury	30 Year Treasury
Feb 2021	0.2	.5	1.2	1.9
Jan 2021	0.2	.5	1.1	1.9

Dec 2020	0.2	.4	.9	1.7
Nov 2020	0.2	.4	.9	1.6
Oct 2020	0.2	.4	.8	1.6
Sep 2020	0.2	.3	.7	1.4
Aug 2020	0.2	.3	.7	1.4
Jul 2020	0.2	.3	.6	1.3

2020 Q2	0.2	0.3	0.7	1.4
2020 Q1	1.2	1.3	1.4	2.0

2019 Year Avg	2.2	1.9	2.2	2.6
2018 Year Avg	1.8	2.8	2.9	3.1
2017 Year Avg	1.0	1.9	2.3	2.9

Valuation:

S&P earnings – For Q4 2020, the blended earnings (59% actuals and 41% estimates) growth rate for the S&P 500 is 1.7%. In December the estimate for earnings growth in Q4 was -9% vs. the prior year. Obviously earnings surprised to the upside.

Earnings were poor for all of 2020. Factset projects that will end in 2021 Q1 when earnings are expected to increase over 2020’s poor numbers (this occurred one quarter early, in Q4). This factor is upgraded from bearish to neutral. If Q1 comes in positive I will upgrade this to bullish.

PE on S&P 500 – The current 12-month trailing GAAP PE on the S&P 500 is 42:1, up from 34:1 last month. I used 4 quarters of earnings with the most recent being Q4 2020, with 73% of companies reported at Standard and Poors. The PE has zoomed higher because I picked up a new quarter, Q4, and now ALL of the quarters being used are poor earnings quarters from 2020 that have Covid impact in the numbers. We’ll start to see improvement when Q1 gets reported.

This metric is dangerously 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 substantially overvalued. Above 30 would be dangerously overvalued.

The P/E that I use is higher than what is quoted on TV because I use GAAP earnings (Generally Accepted Accounting Principles). The TV commentators use “operating earnings” which exclude one-time charges, or in other words, the really big mistakes that companies make. That’s not perfectly correct, but it is mostly correct. Right now, due to the pandemic, companies have taken write-downs and the spread between operating earnings and GAAP earnings is quite large. The GAAP earnings are quite low, which makes the ratio of price divided by earnings quite large. It is telling us that valuation is stretched pretty far, which means the market is at risk. The risk is being mitigated by fiscal policy from Congress with the relief bills and the Fed’s low interest rates.

This indicator is dangerously overvalued and bearish in this bull market.

Age of primary move, bull or bear market – The bull market is 11.9 years old. This is neither bullish nor bearish, but it is worthwhile to keep it in mind.

Geo-Political:

COVID-19: The fall wave of COVID infections is in full eruption, spurred by travel and gatherings for Thanksgiving, Christmas, and New Years. There are a few new mutations of the virus that are more highly contagious. The wave is severe in Europe also and causing shutdowns in various cities. That will hurt global demand.

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. (https://www.barrons.com/articles/americans-have-saved-an-extra-1-3-trillion-since-the-pandemic-what-will-happen-to-it-51604322001 )

COVID-19 Vaccine: Inoculations are underway in many countries.

Trump Inpeachment Trial: This is currently underway. I don’t anticipate a major market reaction regardless of the outcome.

Trade War with China: This is on hold.

Central Banks Provide Liquidity: All over the world, banks are reducing interest rates and 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?

Global geo-politics forces are so powerful that they are bearish. The virus is still the dominant factor, but vaccine is now being distributed. The central banks have proven themselves effective, so the bearish forces are being neutralized.

Technical:

Technically the chart is positive.

RSI at the top of the chart is overbought at 70. MACD at the bottom is positive and moving up, but perhaps too quickly. The price action is clearly positive. The price action is a little above the top of the range and that is a bit of a concern so it bears watching.

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

This is bullish for stocks.

Conclusion:

Following a two quarter recession, GDP returned to growth in Q3 and Q4, so that is bullish. The Fed has short term rates near zero and plans to hold them there through 2023, 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 Q4 are projected to be 1% above Q4 2019, with S&P projecting further improvement in 2021, upgrading this factor to neutral. The PE valuation of the S&P based on the 12 month trailing GAAP number is 42, which is overvalued and bearish. The geo-political factors (COVID19 virus and downturn in US oil jobs) are bearish. Technically the chart looks bullish.

By that way of looking at it, the market is bullish, with three factors bullish, two bearish, and one neutral. A successful vaccine brightens that outlook in the long term.

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

2020 saw the S&P rise to new highs while earnings fell, fueled by low interest rates from the Fed and cash infusion from Congress and the Fed. 2021 will probably see earnings improve back to 2019 levels, but the stock market may not rise as much in 2021, since it has already priced in some of the recovery.

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) It 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

Back in the Saddle Again!

February 6, 2021February 6, 2021 ~ richinvesting ~ Leave a comment

The monthly Long Term update will be posted this coming Wednesday.

Economy:

The ISM Manufacturing index for January came in at 58.7 which is a strong number. The ISM Services index also reported 58.7. Motor vehicle sales for January were 16.6 million annualized, a consistent good number. Initial jobless claims for the prior week were 779K, a slight improvement over recent weeks, but still a hideously high number. Factory orders for Dec. were up 1.1% and that is good. On the employment front the economy only added 49K non-farm payroll jobs, a weak performance. The unemployment rate fell from 6.7% to 6.3% in January, but it is one of those funny numbers where it appears the unemployment rate improved (going down from 6.7 to 6.3%), but things are getting worse.

“The sharp drop in the unemployment came as the labor force participation rate edged lower to 61.4% and 406,000 workers left the labor force.”

Housing and autos continue to perform well, but employment sucks. Congress, the relief bills and the Fed are carrying the economy.

Geo-Political:

The more transmissible variants of the Covid19 virus are the new wildcard. How rapidly will they move around the US, and how well will the vaccines protect against them? Early indications are that there will be some protection, but it may be that you can catch one of the new variants even if you have been vaccinated, but the effect of the virus will not require hospitalization. That is what I have read, but more observation is required. Many nations don’t have the ability to manufacture the vaccine and they can’t buy it because the rich nations already had ordered it, so the impact in the non-industrialized world continues to take its toll. That’s bad for the global economy.

It’s time to go back to “looking around the world” in a bit more detail than I did during the Covid19 year. I don’t think we’ll get fully back to normal this year, but we should start to head in that direction. It seems prudent to start watching what the rest of the world is doing.

One thing that will make things hard to evaluate is that there have been changes in the economy, the way it runs, and some of those changes will not go back the way they were. Old rules of thumb may not hold.

Let’s check up on China:

“Jan. 17, 2021 – BEIJING — China reported Monday that its economy grew 2.3% last year as the world struggled to contain the coronavirus pandemic.
Gross domestic product rose by 6.5% in the fourth quarter from a year ago, official data from the National Bureau of Statistics showed. Those numbers beat analysts’ expectations.
However, Chinese consumers remained reluctant to spend, as retail sales contracted 3.9% for the year. Retail sales for the fourth quarter rose 4.6% from a year ago.
Online sales of consumer goods rose at a relatively rapid pace of 14.8% last year, the statistics bureau said, but the proportion of overall retail sales held fairly steady at around one-fourth.”
https://www.cnbc.com/2021/01/18/china-economy-release-of-fourth-quarter-full-year-2020-gdp.html

Things are improving in China.

Technical Analysis:

For the week the S&P 500 was up 5% and closed at a new record high.

Technically (see chart below) the market ended its one week correction and bolted to a new high. RSI at the top of the chart is neutral at 61. Momentum shown by MACD at the bottom of the chart is about to turn positive. The price action is clearly positive.

With the vaccine rollout going fairly well, people are looking for an improving economy in the second half of the year. That is why we’ve seen airline and cruise line stocks improve so much since summer. The “recovery trade” is on. Meanwhile, many of the “stay at home” stocks have suffered, such as Zoom. It is way up over the last 12 months, but is down significantly from its peak.

We also see a significant rise in the yield on longer dated bonds, the 10 and 30 year treasuries. The ten year is up from .6% to 1.2% since summer, while the 30 year is up from 1.2% to near 2%. Those moves help the big banks, which appear to have moved on the news already. The risk from rising rates is that when they are plugged into the market pricing models, they will indicate that the market does not support the high P/E level (also called the market multiple) that we see today. The Fed has not indicated any hurry to raise short term interest rates via the Fed Funds rate, but the market has started to pressure long term rates. Commentators on TV say they don’t see much risk to the stock market until the 10 year Treasury hits 2 – 2.5%, but they don’t always get it right.

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

What am I doing? Right now it looks like the market wants to go up. I was buying chunks of ARKK and placing a separate trailing stop loss percent order under each purchase. I am buying gingerly since the market is already stretched here. On the drop in price, I picked up a little QRVO and QCOM. I continue to nibble at PRU and BAC on pullbacks.

If I am buying a little on pullbacks, when should you stop buying? This brings up a professional trading term called “full position” in a stock. There is no formal definition that I could find, but here is how I view it. You never want all of your eggs in one basket, or stock. That would lack diversification. Many pros think you should hold at least 20 stocks for adequate diversification, and spread them across industries. If you pick 20 stocks as your target, then a full position in each would be 5% of your portfolio. When you reach that limit, you would stop adding to that company. Obviously it is a guideline. If you love Apple stock and it is doing well, nobody is going to send the portfolio police after you if you allowed your Apple position to swell to 10%, especially if it is growing that much faster than the other stocks in your portfolio. Just be aware you are operating outside your plan guidelines and mitigate that risk in some way. You might use a trailing stop loss order when you normally do not. Or you might just check it every day to be sure there is no new problem.

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

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.

Rich Comeau, Rich Investing

The Gamestop Correction

January 30, 2021January 30, 2021 ~ richinvesting ~ Leave a comment

Economy:

Durable goods orders rose .2% in Dec., down from +1.2% in Nov. Initial jobless claims for the prior week were 847K, down a little from the week before that was 914K. The first estimate of Q4 GDP is +4%. New home sales for Dec. were 842K and the median sale price was 356K. The leading economic indicators (LEI) advanced .3% so there is no cautionary note there. Consumer spending was down .2% in Dec. after falling .7% in Nov. Consumer sentiment from the U. of Michigan was 79.0, down slightly from 79.2 in the prior period, or you could say it was flat.

The net is a very sluggish economy, with a robust housing market. There is bad news in the housing market with the median price at $356K. Abnormally low interest rates tend to create bubbles, and we are seeing one blow up in housing. People who are not laid off can afford the higher home price because abnormally low interest rates keep the monthly note low. What will happen when the Fed raises rates in a couple of years?

Geo-Political:

The virus infection and hospitalization rates are beginning to fall, following the holiday season surge. Vaccinations are proceeding, too slow for most people’s expectations, but when you have to vaccinate 350 million people, someone has to wait for a while. Things could go better, and I expect they will when officials get more experience with the flow of medicine. Of concern are the new mutations in Britain, S. Africa and Brazil. It is no surprise to the medical community as we know there are many strains of the flu virus. It is Darwin’s theory in action, the virus that spreads most efficiently will beat out the others, and it is expected that the British and S. African strains will become dominant in the US. The news on the vaccine effectiveness on the new strains is pretty good. They may not prevent you from getting Covid19, but they will probably keep you from having to go to the hospital. That sounds generally good for the economy in the second half of the year.

Congress is still talking about the next Covid relief bill; we’ll get something between 1 and 2 trillion dollars, I think. (thanks to Linden for a correction here, billion to trillion)

Biden put us back in the Paris Climate Treaty and if they can push clean energy, it can create jobs in new industries. There is so much development in electric vehicles that they must see consumer demand. Biden wants to make the government fleet of vehicles use electric power. The package delivery companies want to go electric. We will have to build out a national charging network. Companies are working on batteries for cars and for use at home to store electricity generated from solar panels. Things are going to move to renewable sources of electricity. We’ll see more electricity from wind, but some of that will be done offshore. Some businesses will die or shrink, and some new ones will emerge. Our job as investors will be to find winning companies and avoid shrinking ones. This won’t happen overnight, but it appears to me that it will happen. I would like my next vehicle to be electric. If I don’t see exactly what I want when I am ready to buy, I may lease a vehicle for 3 years to bridge me to a better set of electrics.

Technical Analysis:

For the week the S&P 500 was down 4% from a record high the week before. It was due for a pullback. It was kind of perplexing that Apple and Facebook reported great quarters and sold off a few percent. What was going on with that? Market pros on CNBC explained that when the hedge funds were caught overly short on Gamestop, they received margin calls. They had bet Gamestop was going to go down, with borrowed money and under an agreement that they had to maintain a certain cash level as collateral on the loan. Eventually they had to sell stocks they held in order to meet the margin requirement. When they have to raise cash quickly, they sell off the most liquid stocks they have, and in this case, they were blue chips like Apple and Facebook along with a host of other stocks.

The market needed a correction anyhow, and the Gamestop deal started it. Now the question is, when will the correction end? I don’t expect this to end the bull market. When a correction starts, nobody knows how long it will last nor how low it will go. But, the Gamestop trade does not look like a major deal, so I will guess this is a normal 5 – 10% correction, but 15 or 20% would not shock me.

Hopefully you did some selling a couple of weeks ago into the overbought conditions. Now is the time to think about your buy list for when the correction is over. Maybe you could place a few stupid low ball buy bids out there now. If we got into a hard selloff sometimes those lowball buy orders hit. I was selling Put’s last week, and they are essentially lowball buy orders where the option purchaser pays you to wait to see of the stock goes low enough for him to “put the shares to you”.

Technically (see chart below) the market has started to correct . RSI at the top of the chart has fallen to neutral at 43. Momentum shown by MACD at the bottom of the chart has turned down which is bearish in the short term. The price action is negative and falling.

We are at the first line of support, the 50-day moving average (blue line). There is minor support at 3550, and then major support at the 200-day moving average (red line), which coincides with the bottom of the channel that I kept around since 2019 (straight blue line), at 3350. You can also see that the corrections in Sept. and late Oct. both halted around 3300, so there is a lot of support in the 3300 – 3350 area. The areas of support are important to watch because corrections can stop at a support level and turn back higher, or they can fall through support levels and go down to the next one. The market can do anything on a given day, but my guess is we have farther to fall since we have not reached an oversold level on the RSI.

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

What am I doing? I added a very little bit of VZ which is below 57 and in the lower end of its usual trading range. I didn’t actually do much last week. I had the call options on all of my big bank stocks assigned two weeks ago, so that gives me a lot of cash. The cash protected me from much of this correction, and I will have the opportunity to buy some of the stocks back at a price below where I sold them. JPM was called away from me at 135 and Friday it closed at 129. I’m not ready to buy, I want to see the market stabilize first. I don’t know how much longer the Gamestop trade will take to stabilize, but we’ll know when GME is below $30. I did have a lowball buy order on PRU that was filled, a small piece to start a position. I was holding some LUMN shares at $11, and it poped to $16 this week, so I sold the shares that were not covering a call option. It was back down to 12.50 Friday. As they say, sometimes it is better to be lucky than good!

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

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.

Rich Comeau, Rich Investing

Floating on Government Money

January 23, 2021 ~ richinvesting ~ Leave a comment

Economy:

Initial jobless claims for the prior week were 900K, way to high and it is trending up over the last seven weeks. That’s bad. Existing home sales for Dec. ran at an annualized rate of 6.76 million, about the same as Nov., and a healthy pace.

Home sales have been strong despite the pandemic because interest rates have been so low. There have not been that many homes for sale since people are not transferring or moving in the pandemic, and new home builders have let inventories draw down in the bad time. The result is that the price paid for a home has risen because if you are in the market to buy a home and few are available, there have been bidding wars in many markets. Why not go ahead and pay too much for a house, with interest rates near record lows, you can afford to pay more for the house because the monthly note will be low. This works out well, UNTIL interest rates start to rise for a while. In three or four years, people who overpaid for their house today will find they can’t sell it for what they paid, after interest rates rise.

Geo-Political:

President Biden was sworn in, amid an armed capitol. His top agenda items are more Covid relief for those who have lost their jobs, and improving the rollout of the vaccine administration. I have a date for my shot on Feb. 8.

England is having a bad time with the current Covid surge and has gone into lockdown of their economy.

Technical Analysis:

For the week the S&P 500 was up about 2%.

Technically (see chart below) the market looks good. RSI at the top of the chart is positive at 67. Momentum shown by MACD at the bottom of the chart is flat. The price action is positive with the S&P going to a record high during the week.

My concern remains the steep rate of increase of the S&P, the green up-sloping line on the chart. It doesn’t look like a sustainable rate of rise, particularly with the Covid surge in the country. We are being carried along by wave after wave of government relief and cheap money from the Fed.

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

What am I doing? I have been more inclined to sell things at overbought highs, like QRVO. My big bank stocks were all called last week, so I sold put options to buy back one-third of the position I sold, such as a JPM Feb 19 120 put. Being retired I continue to need some income, so I bought some XLU, the electric utility ETF that pays 3.3%. Electric utilities react negatively to a rising interest rate environment, but that probably won’t occur for at least one year. VZ is at a low point, so I bought a little VZ for the dividend and hopefully the price will run back up into the low 60’s. I bought some CNP near 21.

For several of the stocks I own, I sold “straddles” in options, selling an “out of the money” call option (which gives the buyer of the option the right to buy my stock at a mutually agreed strike price), and also selling an “out of the money” put option that gives the buyer of that option the right to sell shares of the stock to me at a preset price at which I am willing to buy the stock. As the owner of the stock shares, I generate income (the option premium paid by the buyer of the option) and agree to sell my stock at a price I find attractive, or buy more stock at a price I think is attractive. If the stock does not move too far up or down, I pocket the option premiums, and sell a new straddle at the expiration date of the option contracts. Most of my option deals have a 30 – 45 day life and they target the “monthly option” that expires on the third Friday of the month. There are weekly options that expire almost every Friday, but trading volume can be thin so I seldom use them because it is sometimes hard or impossible to close out the contract by buying it back, if there are no sellers. When you sell a put option, you need to have the money available to buy the stock if it goes down to the strike price. All option contracts are for 100 shares. I sold an IBM Feb 19 110 Put, so if I held that to expiration and IBM is at or below 110, I would be assigned the contract and have to pay $11,000 for 100 shares of IBM. I could have done a “buy to close” order and bought back the option that I sold, which might occur either at a profit or a loss to me.

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

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.

Rich Comeau, Rich Investing

Bank Stocks Fly High

January 16, 2021 ~ richinvesting ~ Leave a comment

The monthly Long Term update was posted on Wednesday so it is just below this post.

Economy:

The CPI in December was up .4%, and it was up .1% when excluding energy and food, which is called the “core rate of inflation”. The CPI was up 1.4% in the past 12 months. Initial jobless claims for the prior week were 965K, a five month high, and well up from the prior week’s read of 784K. Two months ago initial jobless claims were running 700K per week and had been shrinking. Then they ticked up to 800K and now well above 900K. Retail sales in December were down .7% following a 1.4% decline in November, which is really bad in the holiday season.

The CPI being up .4% in Dec. equals an annualized rate of 4.8%. Will we hit that rate in the next year? I don’t think so, but if monthly readings pick up beyond the usual .2% we have been seeing, then inflation will return. The Fed has been trying to produce inflation since 2010 and they have failed. Why do they want inflation? Inflation can be stopped by raising rates high enough to slow business activity and we have succeeded at that in the past. Deflation is worse if it becomes a cycle and stopping it is problematic. You can drop interest rates, but if people are unemployed they will not spend. You can stop people from spending by raising interest rates very high, but you cannot make people spend if they don’t want to. So from the Fed point of view, deflation is horrible and to be avoided at all costs.

With all the debt we are running up, the dollar has weakened, which raises the price of all imported goods, unless the country that is exporting has a weaker currency than we do which is not likely today. With the recovery taking hold since summer, oil prices have risen as demand has returned somewhat. The Saudi’s are controlling production and that is also boosting oil prices while US production has been curtailed.

The bottom line on inflation is that it is not a problem right now, but if this .4% monthly CPI became a trend, it could become a problem. Keep an eye on it.

The six week rising trend on initial jobless claims is a problematic trend, period. Big business is fine, but main street is hurting, restaurants, small retail shops, etc. This new wave of the virus shows it is not ending, it is expanding. The vaccine rollout is too slow and needs to speed up. People won’t go out and shop or dine out until they feel safe.

Geo-Political:

I went long in the previous section, and I bombed y’all the last two weeks, so you have this week off from Geo-Political land. I’m mentally a little tired also.

Trump was impeached for the second time on Wednesday, but there was not much market reaction since he was leaving on the 20^th anyhow. It will be very interesting to see how the republicans play this one. For the traditional republicans, if they want to hobble Trump’s influence, convicting him of inciting an insurrection and barring him from holding federal office again would be a good way.

Technical Analysis:

For the week the S&P 500 was down about 1%.

Technically (see chart below) the market looks OK but there are a few concerns. RSI at the top of the chart has fallen from overbought to neutral at 58, but it still remains in a sideways range of 55 to 70. Momentum shown by MACD at the bottom of the chart remains flat showing no momentum in either direction. The price action is good, but the green trend line going back to summer is much steeper than the longer term growth rate shown by the blue lines, so I remain cautious about a correction.

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

What am I doing? Last week I said I tightened my “trailing stop loss percent” orders on a few ETF’s and I was stopped out of them this week at a small profit. That is what I expected, but I gave myself the opportunity to score a larger gain if the market wanted to run. I didn’t buy anything. I sold some cash covered put options on stocks I would like to buy at lower prices. If the market does not come down, I have some income in the meantime from selling the put options.

Let’s take a look at my JPM trade that I started last April. I was in it for 10 months so I sold covered calls in 9 months (each about a 30 day option) against all of the shares. I wanted to make it to April and get long term capital gain treatment for the income tax, but I didn’t make it. My last call option was sold in mid-December with the stock at 120 and I sold a Jan 15 135 call. The stock had jumped up in December, and I didn’t think it would make such a large move two months in a row, but I was wrong. In the stock market, nobody gets everything right all the time. We play the percentages. As it is, I am not too disappointed with what happened, in fact, let’s follow it a month or two more, and it may work out as a good thing that it got called. Look at the chart below and I’ll explain why.

The first thing you notice is that from April to today I had a good gain. The second thing you notice on the right is that JPM has been rising like a rocket lately. It is strongly overbought looking at the RSI, and the price is above last winter’s pre-Covid price. Last year’s price provides a decent idea of what the standard price should be without government stimulus in the market, and we have overshot that. At the bottom of the chart, MACD has risen rapidly, but the histograms are beginning to shrink, and the faster moving black line looks like it is just starting to turn down. Did I catch the top? I don’t know, but it will be entertaining for me to watch this one. Now, suppose there was a 5% tax advantage to getting a long term capital gain on the trade. Now, suppose JPM corrected from the high by more than 5% and I bought it back at the next low point. Suppose it corrected 10% down and I bought it back, I would come out better than if I held through to April to get the long term capital gain. So, that is what I will try to do, if the market will cooperate with me a little (it seldom does however!).

I bought two other big banks last April and they were called today, GS, BAC. Now I have a lot of cash to invest, but I will wait for better prices.

The big banks have had a great run, but when you look at today’s prices compared to last year’s price, they may not actually have that much farther to run. I do like the dividend that they pay. A reasonable thing is to question whether my next move should be back into the banks, or just put a little back into the banks at lower price and move to another sector. What worked last year at the pandemic bottom may not work as well this year, in fact I suspect it will not.

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

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.

Rich Comeau, Rich Investing

Long Term – January 2021

January 13, 2021 ~ richinvesting ~ Leave a comment

Economics:

GDP – The third estimate for Q3 GDP is +33.4% annualized, up from 33.1 at the second estimate.

Q2 was -32% which included April being shutdown and May being a slow restart. These numbers are annualized, so we can say Q2 was -8% and Q3 made it up at +8%.

The current GDPNow estimate for Q4 GDP is +9%, and the market should like that.

The virus is still the primary determinant of economic activity. We are now seeing a record fall resurgence which is bad news.

Congress passed a Covid 19 Relief package #5 of around $900 billion. The market appeared to expect the bill and there was no surge in stock prices, but there was not correction either.

With GDP positive for Q3, we exited the recession levels of Q1 and Q2. This is bullish for the stock market.

Year	Quarter	GDP %
2020	Q3	33.4
2020	Q2	-32
2020	Q1	-5.0
2019	Year	2.3
2019	Q4	2.1
2019	Q3	2.1
2019	Q2	2.0
2019	Q1	3.1
2018	Year	2.9
2017	Year	2.6
2016	Year	2.0

Fed interest rates – The Fed has held the Fed Funds rate near zero since March 2020, and has said they will hold the Funds rate near zero through 2023. They continue to buy bonds and are very accommodative.

Over the last month we have seen a noticeable uptick in rates on the long end of the yield curve. This is in response to expectation of improved economic activity in 2021 because of the rollout of the vaccine, and because there are also signs of inflation ticking up. The Fed has said that inflation ran below their target of 2% for many years, and now they would be OK seeing inflation run above target for a while. Inflation has just ticked up to +1.5%, so there is room before there is a problem. If the Fed would not mind seeing inflation above 2% for a while, they could be OK with the CPI at 2.5% or even 3% for a while, without triggering a rate hike.

Fed policy is strongly accommodative and hence it is bullish.

Date	Fed Funds Rate	5 Year Treasury	10 Year Treasury	30 Year Treasury
Jan 2021	0.2	.5	1.1	1.9

Dec 2020	0.2	.4	.9	1.7
Nov 2020	0.2	.4	.9	1.6
Oct 2020	0.2	.4	.8	1.6
Sep 2020	0.2	.3	.7	1.4
Aug 2020	0.2	.3	.7	1.4
Jul 2020	0.2	.3	.6	1.3

2020 Q2	0.2	0.3	0.7	1.4
2020 Q1	1.2	1.3	1.4	2.0

2019 Year Avg	2.2	1.9	2.2	2.6
2018 Year Avg	1.8	2.8	2.9	3.1
2017 Year Avg	1.0	1.9	2.3	2.9

Valuation:

S&P earnings – Factset projects that for Q4, earnings will be 9% lower vs. 2019, and that for the full year, calendar 2020 earning fell 13% vs. 2019. They also project that in 2021 Q1 earnings will grow 17% versus the prior year (2020, which was a poor number). 2020 was a very poor year, so comparisons to 2020 will be easy and every quarter should show growth in 2021. At least that’s the theory.

Earnings have been poor all of 2020. Factset projects that will end in 2021 Q1 when earnings are expected to increase over 2020’s poor numbers. This factor is upgraded from bearish to neutral, pending PROOF that earnings are growing again, but that proof will not be confirmed until May 2021.

PE on S&P 500 – The current 12-month trailing GAAP PE on the S&P 500 is 34:1, down from 37:1 last month. I used 4 quarters of earnings with the most recent being Q3 2020, with all companies reported.

The stock market has moved up, while earnings have not. This is not a good development. However, it does not mean that a major downturn is near. In 1996 Alan Greenspan (then Fed chairman) said the stock market was “irrationally exuberant”, but the major downturn was still 4 years in the future. Many feel that today’s abnormally low “zero interest rate policy” (ZIRP) justifies a higher PE than normal, and to an extent, I agree. The question will be how do we return to a more normal valuation? Will earnings recover enough to do it, and at what rate will earnings recover? Standard and Poors Company projects that for 2021, earnings will recover to the 2019 level and that expectation is holding the stock market up. While the stock market is being held up, in my opinion there is significant risk of a pullback at any time. I need to see earnings actually improve before I begin to relax, not just a projection of improvement, because sometimes those projections fail to materialize.

This indicator is dangerously overvalued and bearish in this bull market.

Age of primary move, bull or bear market – The bull market is 11.9 years old. This is neither bullish nor bearish, but it is worthwhile to keep it in mind.

Geo-Political:

Insurrection in Washington DC at the Capitol: Trump has complained the November election was stolen from him, but in 60 lawsuits filed by his campaign, no court recognized evidence of significant voter fraud. Trump invited his supporters to Washington on the day Congress was to certify the Electoral College votes and officially making Biden the winner of the election. Following Trump’s speech to his supporters, they went to the Capitol and went on a violent rampage, making it necessary to evacuate House and Senate members from the Capitol. It is likely that Trump will be impeached by the House by nightfall on Wednesday Jan. 13^th. This is a significant political event, but it is not likely to have a major impact on the market since Biden is expected to be sworn in on the 20^th anyhow. If widespread violence were to breakout by Trump supporters, that would probably cause a market pullback until the situation was stabilized.

COVID-19 Vaccine: Inoculations are underway in many countries.

Trade War with China: This is on hold until after Biden is sworn in.

Technical:

Technically the chart is positive.

RSI at the top of the chart is high-neutral at 69 and moving up. MACD at the bottom is positive and moving up, but perhaps too quickly. The price action is clearly positive. The price action is at the top of the range and that is a bit of a concern so it bears watching.

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

This is bullish for stocks.

Conclusion:

Following a two quarter recession, GDP returned to growth in Q3, so that is bullish. The Fed has short term rates near zero and plans to hold them there through 2023, 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 Q4 are projected to be 9% below Q4 2019, but projects are for S&P earnings to begin growing in Q1, upgrading this factor to neutral. The PE valuation of the S&P based on the 12 month trailing GAAP number is 34, which is overvalued and bearish. The geo-political factors (COVID19 virus and downturn in US oil jobs) are bearish. Technically the chart looks bullish.

By that way of looking at it, the market is bullish, three factors bullish, two bearish, and one neutral. A successful vaccine brightens that outlook in the long term.

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

2020 saw the S&P rise to new highs while earnings fell, fueled by low interest rates from the Fed and cash infusion from Congress and the Fed. 2021 will see earnings improve back to 2019 levels, but the stock market may not rise as much in 2021, since it has already priced in some of the recovery.

Long Term Issues to Keep in Mind:

Rich Comeau, Rich Investing

New Record High

January 9, 2021January 9, 2021 ~ richinvesting ~ 2 Comments

The monthly Long Term update will be posted on Wed. Jan. 13^th.

Economy:

The ISM Manufacturing index was 60.7 in December, up from 57.5 and a strong number since anything over 50 shows growth. The ISM Services index was also strong at 57.2. Factory orders were up 1% for November. Initial jobless claims for the prior week were 787K, a very high number that is three times higher than January 2020. The US lost 140K jobs in December, the first time we lost jobs in eight months, and much of it came at restaurants and bars which people are avoiding due to the winter surge in Covid cases. The unemployment rate stayed steady at 6.7%.

The big business side of the economy looks good, but the main street family owned businesses are suffering.

Geo-Political:

There was that insurrection thing at the Capitol on Wednesday, but the market shrugged it off. On Tuesday, voters in Georgia elected democrats to their two senate seats, which will split the Senate at 50 to 50, with Kamala Harris casting a vote in case of ties. Chuck Schumer will become the Senate Majority leader and the democrats will have much more influence than in recent history. The market absorbed all that with ease.

Last week we looked at the long term “debt to GDP ratio” which has risen in each decade. Much of that debt in the last ten years has been bought by the Fed and carried on the Fed’s balance sheet. It has not demonstrated negative affects to the average person yet, but what are the risks? I found the following article from earlier this year:

March 10, 2020 – When the Federal Reserve began expanding its balance sheet with quantitative easing, it was seen as an emergency measure. Yet a decade later, the Fed is again in jeopardy of hitting zero lower bound and its balance sheet remains large.
Berenberg Capital Markets Chief Economist for the U.S. Americas and Asia Mickey Levy worries “the Fed has boxed itself in by trying to do much and now has an unhealthy relationship with the markets, where the markets expect the Fed to do too much.” Speaking at the Shadow Open Market Committee meeting held Friday, Levy said, the Fed “needs to step away from its clear easing tint.”
In fact, one question at Federal Reserve Chair Jerome Powell’s press conference after the emergency cut dealt with raising rates if the effects of COVID-19 on the economy did not match expectations, and the chair said the panel “won’t hesitate” if it’s appropriate. Levy said he is concerned “when the virus fears pass, the Fed will not take away the cuts.”
The Fed has expanded the role of monetary policy and its toolkit since the financial crisis.
Federal Reserve Bank of Kansas City President Esther George, also speaking at the SOMC meeting, under the auspices of the Manhattan Institute, addressed her concerns about the Fed’s large balance sheet and its independence.
She said, “the use of negative interest rates gives me pause as a way to address a future encounter with the effective lower bound,” and noted “the potential side effects of balance sheet policies that pose risks to financial stability and threaten the central bank’s policy independence.”
https://www.bondbuyer.com/news/why-the-feds-large-balance-sheet-poses-a-problem-as-zero-lower-bound-nears

The Fed’s dual mandate is maximum employment and stable prices. The level of the stock market is not a stated objective of the Fed, yet early in the quote Mr. Levy worries “the Fed has boxed itself in by trying to do much and now has an unhealthy relationship with the markets, where the markets expect the Fed to do too much.” Basically, the markets want low interest rates to make it easy for companies to expand, yet rates that are too low can enable excessive risk taking that can destabilize the corporate environment in the long run. When the Fed tried to raise rates the last 10 years, the stock market would sell off, and the Fed backs off. It is like corporate America is setting the rates, and it leads to a comment by Ester George and what she calls “the Fed losing its independence”.

Ms. George says: “the use of negative interest rates gives me pause as a way to address a future encounter with the effective lower bound,” The US does not have negative interest rates, the Fed Funds rate is 0.2% and that’s positive. That is true of the “nominal” interest rate, or that which is stated. The “real” interest rate is the nominal rate minus the rate of inflation, or currently 0.2% minus 1.5%, giving us a real interest rate of -1.3%, which is a negative real interest rate. You have to follow Fed speak over a period of time to know what their shorthand terms mean. I also believe Ms. George uses the term “effective lower bound” to mean a Fed Funds rate of 0%. I could be wrong, but this is my interpretation. She knows what she means, and she assumes everyone in the room she is speaking to knows what she means, and she is not speaking to all of America. I encounter the same difficulty in my writing of this blog, but I try to consider my audience and explain things that some may not know.

The most profound statement that she makes is “the potential side effects of balance sheet policies that pose risks to financial stability and threaten the central bank’s policy independence.”. What does that mean? I think she is talking about the risk that I spoke of last week in this section. Maybe I was on to something… The US has been in such good financial condition for the last century since the great depression, that the Fed has been largely free to pursue interest rate policy at their discretion to deal with economic conditions. The European Union now has a GDP near the size of the US, as does China. The huge deficits we chronically run put us in a weaker position. The Fed at some point might want to continue a low interest rate policy, but inflation in the US caused by massive money printing might force the Fed to raise rates even though they do not want to. In that case, they would lose their independence to set rates as they see fit, and be forced to set a rate to deal with a negative economic reality, likely that the Fed and Congress have created.

Last week, this is how I termed it, but it means what Ms. George said:

3. The flexibility of the government is reduced in being able to deal with the next crisis. We won’t be able to print large sums of money without apparent impact, since the value of the dollar could be negatively impacted to the extent that is materially is harmful to our standard of living. Currently we are seeing a negative impact to the dollar.
4. Eventually the government may be forced to raise taxes to reduce the deficit, and we may not be able to pick a good time like when the economy is good. They could also be forced to raise interest rates to cool inflation, at a time when the economy is not strong. Basically, we could lose control of the situation and be forced to take actions that are not overall beneficial to the economy, because external factors force us into those actions. That is not a good situation.

So, that is what is wrong with running chronic huge deficits, and having the Fed buy the debt and place it on their balance sheet. Clearly that trick works for a while. In corporate America, it is what is called “financial engineering”. This is not a sound trick, it is a risky trick built on a mountain of debt.

It doesn’t look good to me, in the long run. Usually the Piper has to be paid.

What got me onto this topic is the trillions of dollars the government is spending on Covid relief.

Someone complained that last week’s article was too long, and this week’s is too long also. I apologize. Honestly, I don’t know how to address a rather nebulous conceptual issue in fewer words and do it justice. I will try to be mindful and take it easy on you the next few weeks.

I worked pretty hard on these two articles on the debt and Fed policy. If you enjoyed them, or have criticism, you can comment on the blog, or send me an email. I’d like to hear from you!

Technical Analysis:

For the week the S&P 500 was up .3% despite an insurrection at the capitol and a raging Covid pandemic, rather remarkable.

Technically (see chart below) the market looks good. RSI at the top of the chart has moved up to 70 so it is fully overbought. Momentum shown by MACD at the bottom of the chart continues its sideways movement but it has turned up slightly. The price action is good, up all week and right at the top of the upsloping green line that represents the top of the trend.

Earnings season kicks off next week and Factset projects earnings to fall 7% below the prior year’s Q4. But as usual, most companies will beat lowered expectations. The yield on the ten year bond has risen from a low of .5% last July to 1.1% today, on expectations that with the Covid vaccine being rolled out, business will improve in 2021.

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

What am I doing? I don’t want to be buying stock at these levels, with the market overbought. I sold some Put options to buy some stocks if the price falls, like JNJ at 150. I hold some index funds like IVV and SPYV and I snugged up my “trailing stop loss percent” orders from 4% to 2% trail. My big option expiration date is next Friday, Jan. 15^th. I own a lot of big banks and with JPM trading at 120 a month ago, I sold a covered call at 135. The yield curve has been steepening (long term rates rising faster than short term rates) based on expectation of an improving economy and that is good for banks “net interest margin” (NIM), so the big bank stocks jumped up. My hope is the banks jumped up too far too fast and they may pullback next week and I can keep my stock for a long term capital gain in April. If I lose the stock to a call being exercised, maybe I can buy it back in a 5% pullback and achieve the same objective financially.

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Rich Comeau, Rich Investing

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