All Is Well!

We can officially stop sounding the alarms and relax.  The near demise of the world economy is over.  All is well my friends.

The DOW was up a whopping 320 points, Draghi is telegraphing more QE and lower rates in December in the EU and - drumroll please - after hours shares of Amazon, Google, AT&T and Microsoft are all up on better than expected earnings!!  Oh, happy days are here again!

Heck, Amazon has now even shown a profit for a whole two quarters in a row!  A whopping $79 million this past quarter for a company with a mere 677 million shares outstanding.  Why if they can repeat this feat quarterly, they could show in the future profits of $320 million a year, which is over 50 cents a share!!  More than enough to justify a stock price of  over $600 after hours making Mr. Bezos the third richest man in the U.S. and fifth richest in the world!!

http://www.bloomberg.com/news/articles/2015-10-22/bezos-leaps-to-third-richest-in-u-s-as-amazon-sales-beat-target

He is now worth a nice $55B.  And at its current pace, his company will only take a little over 171 years to make that much profit.  Indeed, through the wonders of math, we can determine that at a pace of $79 million a quarter in profit, if every single penny of profit were to be distributed to shareholders they would receive an amount equal to the stock price in a mere 1200 years, give or take a decade or two.  Wow, that is most impressive!  Makes me reminisce about the good ole days.  You know, 2000.  Ah, now those were P/Es back then.  Mostly negative but outstanding to say the least.

Yes, put away those silly worries of a downturn and break out the champagne! 

10.23.15 update:  With the S&P up again today, you savvy investors once again have bragging rights.  Yes, at this point year-to-date you have not lost any money on average in the S&P!  Yeah team, we're breaking even!

Looking For A Big Prick

I hear in financial and other markets there are a lot of big pricks pretty much anywhere you look.  And we need a big one to prick this humongous bubble we have formed.  Deutsche Bank, for example, is the biggest prick in Europe.  I thought the bad news, as in a $7+ Billion quarterly loss, this past week for Deutsche Bank might do it, especially with its $75 Trillion (that's with a T) or so of derivative exposure.

http://www.zerohedge.com/news/2015-10-07/first-crack-deutsche-bank-preannounces-massive-loss-may-cut-dividend

But alas, after an initial selloff of the stock, bad news once again is good news and it was today trading HIGHER than it was before the announcement.  Yes, higher!

VW is certainly considered a big prick by many, including its customers and environmentalists.  And it is not at all likely to exhibit the old "bad news is good news" syndrome because its bad news can definitely get a lot worse before it is all over with.  Yet, its stock bounced back at least some and was up over 20% from its post-scandal lows this week.  So another big prick rises again.

No, these big pricks apparently are not big enough.  We need a really big one because we have a really big bubble this time.  Now the thing is the Fed and other central banks are running around putting protection on all these big pricks when they arise to prevent them from pricking the bubble.  China did it, Europe did it and the U.S has and will do it.

But eventually we will have one really big bubble in a room for of big pricks and poor Janet with not enough protection in her pocket to go around.  And me thinks that time is coming  . . .

Is That A Fat Lady I Hear Singing?

Well the jobs numbers are in for September and they are miserable, as in 142,000 non-farm payrolls miserable.  In context, the consensus range was 180,000-285,000, so this was a big miss.  And to pour salt in this wound, the prior two months were revised down a collective 59,000.

http://www.calculatedriskblog.com/2015/10/september-employment-report-142000-jobs.html

I am thinking the tune she will likely sing is "I Can't Get No Satisfaction."

That's Going To Leave A Bruise

Well, can't say I didn't tell you so.  The ISM manufacturing index came in this morning at 50.2, below the consensus forecast of 50.4 and continuing a rather distinct downward direction.  Couple that with the foreign trade numbers out earlier this week and the GDPNow Q3 "growth" forecast took a rather noticeable turn for the worse, dropping from 1.8% to .9% in one fell swoop.  Ouch!

https://www.frbatlanta.org/cqer/research/gdpnow.aspx?panel=1

Markets initially reacted poorly but rebounded at the end closing up modestly.  I guess you never know. 

Enjoy Thyself Today

The last day of the quarter and as expected markets are set to paint the tape for the quarter's end.  Certainly not enough paint in the bucket to make this quarter look anything but horrific, but why not end the quarter on an up note.  So enjoy the day - until tomorrow.

You see tomorrow the ISM Manufacturing index numbers come out and me thinks they will have an unfavorable aroma associated with them.  Since all (as in Philly, NY, Dallas, Chicago, Richmond, Kansas and Milwaukee) the regional numbers out the past couple of weeks, including the latest on Milwaukee today, sucked big time, tomorrow's number is not likely to inspire a lot of happy feelings.

http://www.zerohedge.com/news/2015-09-30/another-regional-fed-survey-collapses-ism-milwaukee-crashes-2009-lows

So while the GDPNow forecast by the Atlanta Fed rose to its highest level for the third quarter earlier this week with a whopping 1.8%, based largely on folks now briefly spending more than they make (yeah!), don't expect this glowing number to hold.

The bigger question to start pondering is what will the month of October hold for the markets.  October is known historically for some very prominent crashes, like 1929 and 1987, so it has an emotional connotation to it you cannot ignore.  Indeed, with stocks highly overvalued by all historical standards, whether they will stay overvalued is only a matter of emotion, not fundamentals.  Where do you think the emotion is right now?  Does it support folks wanting to take risk in October and maintain or increase the overvaluation?  Or have fear and risk aversion set in with  it being likely we will have more reversion to mean (or as Dr. Hussman notes in his weekly article this week, reversion to inversion)  The question is, are you feeling lucky?  Or, better yet, are people in general feeling lucky?  I think you know the answer.

Let's Just Call Him Dick

I was listening to a financial advisor on the radio over the weekend.  I hesitate to use his real name, so let's just call him Dick Forthefun.  Dick was noting how interest rates continue to be at lows of a lifetime and everyone should take advantage of it and buy a house or a bigger house or refinance if they can.  Dick even gave an example of a couple with an existing 30 year mortgage with only 10 years left to pay and said they should refinance into a new 30 year mortgage at 4% and lower their monthly payments.  This was thrown out there without any facts of said hypothetical couple other than what I just gave.  Nothing on their age, current rate, retirement plans, monetary situation or anything else.  Just hey, rates are low and you are an idiot not to take advantage.

Well I agree that it makes sense to take advantage of the low rates in certain circumstances, but in my book you have to look at each individual's circumstances.  If you are retiring in 10 years or have a kid going to school then, perhaps having NO mortgage in 10 years instead of lower payments for 30 years makes sense.  Or maybe, if you can refinance with no or minimal closing costs or points, you can do a 10 year mortgage at 3.75%.  Monthly payments should still go down, just not as much, and you are still done in 10 years.

I've refinanced three times in the past seven years.  The first two times I refinanced into new 30 year mortgages and while my payments did go down as I went from the original 7% to 5.5% to 4.5% and did no cost refinancing, I nonetheless realized at the end of the day that here I was 10 years into my home ownership and still had 28 years of mortgage payments and largely the same loan balance as when I started (since very little goes to equity in the first years of a 30 year mortgage). Those financially intelligent moves just seemed to make less sense in this context.  So the last time I refinance three years ago I did a 15 year mortgage, which I was able to get for a fixed 3%.  Yes, my payments went up some but my house will be paid for now in 12 years when I am ready to retire.  I can stay in it then with no mortgage at all or sell it and have full use of the proceeds.  No risk of housing slumping and going under water.  My preference is very much to go into retirement debt free.  Certainly takes some strain off the golden years.

So Dick, stop throwing around out of context stupid advice.  And maybe your announced belief that interest rates are going up, which formed the context of the entire show you did that day, is full of it as well.  There was no rate increase in September and presently the vast majority of economists say none this year.  For once, I agree with the majority of economists on their forecast.  Indeed, I think we will see NIRP before any increase and our dear friend Janet has hinted it is not out of the question.

And Dick, I also heard you the other day touting how wonderful you are in having discovered ETFs long before most financial planners and how you have been steering your clients to these instead of mutual funds for years.  So far, so good as there are some benefits to these while the market is rising.  Let's just see how that works out now that the market is heading south and the whole liquidity thingy is raising its ugly head.  You failed to mention there may be situation where ETFs cannot fund redemptions.  Ooops, I guess you didn't consider that one.

http://www.zerohedge.com/news/2015-09-09/mom-and-pop-will-probably-get-trampled-alliance-bernstein-warns-bond-etf-Armageddon

It would seem that none other than Carl Ichan agrees that ETFs are a dangerous place for the average investor:

http://www.zerohedge.com/news/2015-07-16/icahn-vs-fink-wall-street-legends-clash-over-dangerous-etfs

I don't hear you telling your listeners or clients about the ETF flash crashes this month or how many of them have been hastily trying to line up lines of credit to deal with liquidity issues, which must be reassuring..

So Dick, thanks but no thanks for the advice.

Good Thing I Am Not An Economist

I read about macoeconomic stuff because I find it interesting.  I have no formal education in the area, which makes it of even more interest to me.  I also think this assists me greatly coming to it without a formal education as I did not have years of professors brainwashing me with any specific disposition.  Indeed, my niece just started college and is studying economics and finance, so I wrote to her and asked that she learn what she can but keep an open mind.  To me an open mind is critical.  I cannot name a single author or blog I agree with all the time and my thinking has changed over time.  Some theories I agree with generally and some I do not.  But one thing that has proven itself repeatedly and seems to be THE most sound economic principle is that economists are terrible at forecasts.

Let's take this past week's decision by the Fed to continue ZIRP.  Going into the meeting I think the result was pretty much expected by surveyed economists, but I saw some reports were close to 50/50.  Yet just a few weeks ago the majority of economists predicted an increase this meeting.  Indeed, in July and August over 80% predicted a September increase and over 75% have predicted a September or earlier increase all year.  Go back to January and over 60% predicted it to happen by June.

http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2015/09/economists%20are%20always%20wrong.png

Now if you look at April just under 90% were predicting an increase by September.  Yet in the first half of April I posted here noting that I did not see the Fed increasing rates this year or next and was more likely to start QE4. 


I never changed that belief and am happy to see more folks starting to share it.  Not a difficult call in my book.  The economic outfall around the globe has been there for the whole year for those who cared to look.  The question has never been whether the economy is doing well, it isn't, but how well ZIPR, NIRP and QE around the world can continue mask it.  Mind you, NOT avoid it, just mask it.  They masked the problems for a long time but the cracks are definitely starting to show.  I just don't see why trained economists cannot see this.  Perhaps this is what they were trained to do.  And, more likely, their jobs call for them to be economic cheerleaders, not unbiased readers of the tea leaves.

It does not stop with the rate increase.  On a regular basis dozens of economists come in with a broad range of predictions and it amazes me how often the results are not in their range or even close.  For example, at the end of July I predicted a market crash by the end of the third quarter and the beginning of a recession this year.  Specifically, I said:

Unfortunately, I truly believe it will take a near disaster at this point to teach us this lesson.  Indeed a recession of epic proportions is needed and, like it or not, it is upon us sooner than we would like.  I am going out on a limb here and predicting just such a recession beginning in the last half of this year.  And I will be surprised if the markets do not crash before this quarter is out.  So then we will get to the bottom line and truly see if all's well that ends.

http://financialspiltmilk.blogspot.com/2015/07/alls-well-that-ends.html

It was a guess of course, but an educated one based on an array of reports suggesting the time had come.  Dr. Hussman's website, for one, is a nice place to visit to find some of the best reliable stats and I particularly enjoy his weekly market comment.:

http://www.hussman.net/

And if  you like charts and stats that prove the point, then you will find a host of them nicely summarized here in one place:

http://seekingalpha.com/article/3538036-the-market-in-pictures-the-aging-bull?ifp=0&app=1

All pointing in to the same conclusion.

But few if any economists thought the market was in for a crash this quarter.  Yet we are in the worst global market quarter in over four years and as summarized at The Economic Collapse link below, a crash is happening in the U.S. and around the world.

http://theeconomiccollapseblog.com/archives/the-stock-markets-of-the-10-largest-global-economies-are-all-crashing

Note I say "is happening" and not "has happened."  I think one has happened but do not in the least think it is over yet and the worst is yet to come. 

As for my recession prediction, only time will tell as they do not call a recession until long after it occurs.  We can say for certain, however, that economists are not seeing one.  If you visit the GDPNow website of the Atlanta Fed you will see the consensus range of predictions for third quarter GDP is in the range of just under 2% to just over 3%.  They certainly do not see a recession starting before the end of the year - or at all for that matter.  We will see.

So decide for yourself if you want to believe the economists.  To me, you are better off reading a host of opposing views on this, looking at the facts and deciding for yourself.