Hard to believe that we are approaching the end of August – nearly 2/3’s of 2016 is already in the history books. One more weekend and then the official end of summer Labor Day weekend will be here. Before you know it, we will be getting warnings about “early Holiday Season shopping” traffic or worse, the pain retailers will go through while we hit yet more new records in overall sales. You will be convinced that sales are down – pay attention.
Lost in Records
The problem with all the records we are setting is the crowd gets lost in percentages of the pace of change and numbers. The media reporting process, drowned out by too many experts available every minute of the day, is the confusing use of percentage changes. It goes something like this:
Me: “Bob, that’s a new record low in jobless claims – we have never had more people working in the US.”
Bob: “Mike, the year or year percentage change has fallen for the last two quarters – and on a month over month basis.”
Me: “Bob, do you realize that the latest new home sales show numbers not seen since 2007?”
Bob: “Mike, that’s only because interest rates are low. Wait for them to tick up and Yellen will crush the economy.”
Me: “Hey Bob, corporate dividend increases are setting new records for the next 12 months – still far higher than the 10-year treasury.”
Bob: “Mike, corporations are just going deeper in debt and sticking it to the little guy selling them bonds that will blow up later as rates rise.”
Me: “Bob, the masses have been terrified for the wrong reasons. Markets are at record highs yet the AAII bullish sentiment has been under its long-term average of 40% for 44 straight weeks – a record unto itself.”
Bob: “Mike you don’t get how bad it is out there. Earnings, the consumer is dying, retailers are getting crushed, Zika is here and getting worse – it will make Ebola look tame. You got China in a secret pact to devalue, a terrible election choice, we still don’t know about Brexit and industrial output is in the tank.”
Me: “But Bob, markets are at record highs.”
Bob: “Yes and that means they can fall an awfully long way….anyway, you missed my point.”
Me: “Bob, cash flows are at record highs. Cash levels are too. Consumers haver $9 Trillion in the bank – that;s a “T” Bob.”
Bob: “Mike, the pace of increase has been falling for the last 6 months and missed estimates last month by .02%. Corporations have amassed cash because they cannot find anything worth investing in. Consumers have cash because, well, look how unclear the future remains.”
Me: “Bob, that miss was on top of 6 straight quarters of exceeding estimates on higher cash flows by a cumulative 14%.”
Bob: “That’s not the point.”
The point to all that chatter?
While theatrical, Bob sounds like he knows what he is talking about. Bob sounds like he is really paying attention to the very latest, making certain every snippet is covered. It sounds smarter. It feels like it is more solid. Whereas, I just sound like I am being too simple. I mean, it cannot be that way can it? It can’t be simple, right?
I have said this often before – too many wrongly relate simple with “easy” or worse, “stupid.”
Both scenarios are gravely incorrect and lead the masses to assume that investing and building for the future must be difficult. It must be mixed with very twisted views of simple facts and dizzying layers of comparable month-over-month, quarter-over-quarter or year-over-year changes and their collective pace of change.
The Energy Trick
A perfect example of all of this is the most recent 6 quarters of turmoil in earnings as it related to the energy sector setback. That sector’s earnings were decimated. Restructure, bankruptcy and debt problems have been the focus. There was knock-on effect in some industrial channels as equipment orders plummeted. But, other sectors of the economy kept right on growing.
Overall, we are now already closing in on new highs in collective earnings – including the energy setbacks.
By ignoring the facts outside of the energy focus – too many missed too much. Fretting has remained the only game in town as stress is the key. Stress must be present for Wall Street to create its “value” over time. If investors stepped back and slowed the pace of taking data in – simplifying the process – history tells us they would realize doing less often ends up being more.
Not reacting to every element that rolls over the bow is tough – but following that effort simplifies. In the end, you will find that keeping things simple and overlooking the madness of the crowd will be one of the tougher things you will ever accomplish in building for your family’s future.
The Real Estate Wave
As we all know, real estate and mortgages were the primary culprit in the Great Recession meltdown of 2008-2009. We know now that we built too much for too few buyers. Simple really – but when you stacked on complete fabrications in the financing market – the problem compounded geometrically.
Then, experts said it would take decades to get out of trouble. Today? Well – not really.
We have a new “problem” – not enough stuff to sell to the coming wave of people and expansion. Yes – I know – that is hard to pull out of the avalanche of noise as it relates to all the problems we face.
But let’s take a look:
As much as everyone wants to assume otherwise, this summer is like most: People are away – focused on family, friends and vacations. It’s normal to be slower than usual. Be that as it may, we learned this week that US consumers are alive, well, and spending mightily on homes and everything needed to fill them.
New home sales jumped a shocking 12.4% in July m/m to an annual rate of 654,000 units, the highest level since 2007 (see charts above from Dr. Ed). Vacations interrupted things a bit as existing home sales fell 3.2% m/m in July to a seasonally adjusted annual rate of 5.39 million units BUT that was off the new cyclical high of 5.57 million in June.
As we noted at the time: The first decrease since February was blamed on a lack of supply rather than a lack of demand.
Supply in the new home market remains tight as well, indicating that the market should stay strong going forward. “Tuesday’s report showed there was a 4.3-month supply of newly built homes available at the end of July. That was the smallest supply in three years. The median sale price of a new home sold in July was $294,600, down slightly from $296,000 a year earlier,” was the quote from an 8/23 WSJ summary.
Keep in mind – this is no secret to members:
The 654,000 annualized rate of new homes sold in July remains well below the peak of 1.39 million in July 2005 but it does return the market to levels last seen in 1992, when the US population was much smaller.
In fact, last month’s annualized rate remains well below the 900,000 to 1 million homes sold from 2001 to 2003, as was noted by Toll Brothers’ executive chairman during the company’s recent Q3 conference call. Like KB Homes in the weeks prior, first-time shopper demand was “surprising” and he added,
“Just imagine what the housing market would look like for us if we began to approach those numbers again?”
Take a gander at those charts above – take the data in quietly without all the headline noise. It is very hard to find something bad in those charts unless you are looking for ghosts.
Even more valuable? Gen Y is just getting started – tens of millions more will move out and start their own lives over the next decade – setting the stage for a wave of demand we have yet to witness.
Look – the economic world we all fret with each day has been ending since the first day I arrived in this business. This phenomena is unlikely to change in my lifetime. We will continue to face peril if we focus on the garbage of life. This is not rocket science.
Instead let’s realize this: Since 1982 (I reference only because that is when I started), an endless stream of problems have fallen on our doorstep. Each one was worse than the last – surely to create multiple reasons for impending doom.
This is good. We should hope for it to continue. Why?
Simple again: while all of those terrible things were unfolding – as they are sure to continue to unfold over the next 33-34 years as well – markets went up over 18 times.
The key word? “While”
Let’s hope for those setback all the experts are shouting about. Let’s hope for technical test and washout of the breakout. Let’s embrace the red ink for the long-term investor value that it almost always becomes over time.
As stated yesterday, I still Ms. Yellen spooks us with some reference to a coming rate hike. The setbacks to come afterward would likely serve as another opportunity to build for the future.
One more thing on elections: A chart first – and then notes:
I have been told that the average stock market return during a presidential year is 11.2% and the median has been 13.5%.
Of the 22 presidential elections since 1926, stocks were down in 4 of those years; 1932, 1940, 2000 and 2008. If you feel those elections caused the Great Depression, the dot-com bubble or the Great Recession, there’s no need to continue reading.
Now, with stocks near all-time highs, you’re probably seeing some gains in your portfolio. That’s excellent but makes this next idea tougher: Reacting to election chatter is the same culprit we cover often: sounds smart indeed – but it is (again) letting your emotions drive decisions.
Guess what: Stocks fall before, during and after elections.
Why? Because that chance always exists with risk assets.
Listen, welcome the nervous chatter – and those elections coming up. We tend to worry when no one is nervous.
When red ink comes stay focused on the Barbell Economy.
The data above continue to confirm it is doing just fine thanks.
Bottom Line Summary
Do NOT be surprised by chop and even louder, scarier news events. As stated, Yellen, the Fed-head chatter and rate hike fears should fill the volume dial for the next several days. Be assured her Jackson Hole speech will be sliced and diced all day and into the weekend.
Volume in markets will likely remain choppy and is set to get even lighter for the last 10 days of summer. This can set the stage for odd, knee-jerk reactions.
Stay focused, be patient, remain disciplined. As has been the case for sometime now, the more important underlying data remain strong. This market is set for continued surprises to the upside as sentiment remains tepid (see above) at best – and shrinks back immediately with any red ink.
Use the hoped for setbacks to your advantage. An early Fall swoon is just fine as well. Keep the elements below in mind as a more simplified, larger-view backdrop to your planning:
The demographic structure of the US is significant, world-leading and rare.
This slow-moving but persistent strength is set to overcome the processes we are seeing near-term – positioning us well for the decades of demand ahead.
When under stress, pause for a moment and think demographics – not economics.
The future is far brighter than many care to accept today – even as trouble will always be included in the pathway, whether we like it or not.
Until we see again, may your journey be grand and your legacy significant.