Archives for December 2015

Three Last Minute Year-End Tips

As Kenny Loggins wrote, “Make no mistake where you are. This is it.”

The last day of the last week of the last month of the last quarter of the year. 2015 will soon be in the books and it will go down as a year where the stock market was down a little and the bond market was down more while commodities were down huge.

As I sit here finishing up my final blog post and newsletter of the year, here are four tips which you may able to take advantage of.

1 – To lower your tax bill, consider making that final charitable contribution.

2 – Don’t forget to take those required minimum IRA distributions if you are over 70 1/2 or have an inherited IRA.

3 – Harvest tax losses by selling losers and buying similar but not the exact same investments.

I am sure I will write this another few or so times, but I have really enjoyed writing this blog and interacting with so many people this year. Wishing you and your families a very Happy, Healthy, Safe and Prosperous New Year!

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Santa Claus is in the House!

The last week of 2015. I hope you have been enjoying the holidays.

The major stock market indices continue to behave as I spelled out over the past few weeks. Santa Claus came right on schedule and the seasonal trend has him taking a break to close the year with some mild strength to begin 2016. While I was very pleased that stocks reversed early last week and have followed through on the gains, we still need to see all of the indices close above their Fed day highs from two weeks ago. The S&P 400 and Russell 2000 seem poised to accomplish this right here, but the Dow, S&P 500 and NASDAQ 100 have a little more work to do.

Intermediate-term, last week’s upside reversal could have significant bullish consequences, but given the lower volume and diminished liquidity, I would like to see more confirmation. New highs/news lows, stocks advancing and declining and up and down volume all went from fairly negative to strongly positive over the span of a single week. Historically, that leads to double digit upside over the coming months.

On the sector front, it’s going to be vital for high quality leadership to emerge sooner than later. Defensive sectors like consumer staples have been leading, but the semis and consumer discretionary are trying to step up.

Lots of crosscurrents and trends this time of year, but most are bullish and high probability.

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Santa Needs to Get a Movin’

Since the Fed wrongly raised interest rates last week, the stock market has done a good job of following the script. First, it rallied sharply from 2pm to the close on the day of the announcement. Then, it saw weakness on Thursday and Friday followed by strength to begin the new and holiday shortened week. While that all looks nice, I did not expect the amount of weakness seen when combining Thursday and Friday. That definitely bothered me regardless of what happens from now until year-end.

The model going into this week was for the bulls to make a stand on Monday or Tuesday and then take stocks above last week’s high. Monday began the day okay and ended fine, but it was not very convincing. I expect more from the bulls. Stocks are in the most favorable short-term time of a year within the most favorable intermediate-term time of year. And in that, the Russell 2000 small caps are supposed to see strength and lead. Not only do I still expect that, but portfolios are certainly positioned for it.

I am not going to spend time on sector leadership here, but in short, it’s not what I want to see if stocks are about to surge higher. And maybe that’s the problem. Either the surge isn’t coming or the stock market needs some repair work first which may not be complete by year-end. We shall see.

My biggest short-term concern is that the major stock market indices sold off hard last Thursday and Friday, closing at their daily lows both days. Healthy markets typically do not see an immediate bottom from that set up. Rather, we usually see that lowest point breached over the coming few days and then stocks firm into the close. I know I may be too cute with this, but it’s what I see. Perhaps stocks can run longer and further than they look now and then retrench in January.

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All Signs Point to a Horrifically Wrong Decision by Yellen & the Fed

FINALLY, or YET AGAIN, it’s FOMC statement day. Unlike every meeting since 2007, I do believe the Fed is wrongly going to raise short-term interest rates for the first time since 2006. Since 2008, my thesis has been and continues to be that the Fed should not raise interest rates until the other side of the next recession. This is your “typical” post-financial crisis recovery that’s very uneven. It teases and tantalizes on the upside and frustrates and terrorizes on the downside. Another recession, albeit mild, is coming over the next few years. That’s okay. We’ll get through it. On the other side of it, our economy should get back to trend or average GDP growth, not seen since pre-2008. This could also coincide with Europe getting its fiscal act together after another sovereign debt crisis.

I have heard some pundits use the word “credibility”. The Fed needs to hike rates to either preserve or establish credibility. I am sorry, but that’s idiotic and doesn’t need any further rebuttal. Some believe that an unemployment rate of 5.0% represents “full” or “maximum” employment and that a rate hike is necessary to cool the jobs market. Another reason I totally dismiss as unfounded. How about the labor participation rate at 62.40%, a 38 year low?!?!

From my seat, it looks like an 80% likelihood and the markets are expecting the rate hike. China has stabilized, but is far from fixed. Europe is teetering on recession but that’s been the case. The dollar is well off the highs, but the bull market has at least another 20% left on the upside.

This will be the first rate hike ever with inflation under 1%.

This will be the first rate hike ever with the annual social security COLA at 0%.

This will be the first rate hike ever with wage growth needing to jump 100% to hit the Fed’s target.

This will be the first rate hike ever with industrial production on the verge of recessionary levels.

This will be the first  rate hike ever with GDP barely 2%.

This will be the first rate hike ever with inflation expectations close to 0%.

This will be the first rate hike ever with retail sales closer to recession than escape velocity.

This will be the first rate hike ever with non-farm payroll job growth continuing to decelerate.

Where’s the fire?!?!

What’s the hurry???

I could go on and on, but I think you get the picture.This is not a normal first  rate hike where the Fed is trying to tamp down inflation and/or worry about an overheating economy. This is simply to move off the 0% emergency level and get going. It’s also the wrong decision.


Money velocity, which tells us how often a dollar is turned over during a given period of time, has been in a steady downtrend since 1998 and stands at the lowest level since records were kept. See the chart above. It saw a small rally from 2003 to 2006 which the Fed quickly extinguished with rate hikes. Now they are going to raise rates with this important indicator at all-time lows.

Unfortunately, I do not believe this is a one and done deal for Yellen et al. With the voting members of the FOMC changing substantially in 2016, the Fed will become much more hawkish next year. I forecast a .25% rate hike every quarter next year in March, June, September and December to end 2016 in the 1.375% zone.

Finally, the historical trend for today is to see the major indices trade in a +0.50% to -0.50% range until 2pm est and rally into the close.

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Third Avenue Travesty

After peaking way back in 2014 and declining ever since, the high yield (junk) bond market has finally made national news over the past week with the very high profile blow up of the Third Avenue Focused Credit Fund (TAFCF). This was not some fly by night little fund or fund family. It’s a small, mainstream mutual fund family and the fund itself had more than $3 billion in assets in 2014. Last week, after massive withdrawals, the fund announced it was closing and that shareholders could not redeem their shares for cash anytime soon. Third Avenue was going to conduct an “orderly” liquidation. Good luck with that!

Over the past 20 years, my peers and I have often discussed this is exact scenario. What happens when there is a mass exodus in an illiquid asset class like junk bonds? If Third Avenue was a closed end fund (CEF) or exchange traded fund (ETF), sellers would simply drive the price lower and lower until sufficient buyers came in, presumably when the share price of the CEF or ETF was significantly below the value of the underlying assets in the fund. In other words, the CEF or ETF would trade at a discount to the net asset value of the fund.

In Third Avenue’s case, it is an open ended fund that issues more and more shares to meet investor demand. When redemptions swell, the manager chooses what to sell and when. And it’s unlikely that securities are sold on a pro rata basis. As TAFCF’s assets collapsed, my sense is that the fund manager sold most or all of the bonds that were easier to sell, i.e., liquid, hoping that he could stem the tide and high yield bonds would stabilize or even bounce. When the liquidations never ceased, the fund was probably left with the true crap of crap instead of the well diversified portfolio it had weeks, months or quarters earlier. In other words, at the detriment of the shareholders who stuck by the fund, they were left with illiquid garbage.

This raises a whole series of questions regarding the fund manager’s and fund company’s fiduciary responsibility to its shareholders. Clearly, they had absolutely no plan for a mass exodus, like disaster planning for many firms in my space. How could they allow the fund manager to sell the better quality bonds and turn the fund into a heap of crap? How could they penalize investors like this? While I am sure they will hide behind the nonsensical legalese of the prospectus, this is a travesty!

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Bye Bye Bernie

I have been watching the various presidential debates and haven’t missed one for the most part. I find them to be sometimes informative and on the entertaining side although the recent democratic one was a bit tortuous in my opinion (more on that later). The democrats have only had one, but I can’t get Bernie Sanders’ voice out of my head when I watch Seinfeld reruns. He sounds exactly like the actor who plays Yankees’ owner George Steinbrenner.

I remember standing in line at Panera behind two millennials who were wearing Sanders tee shirts. The order taker complimented them on their shirts and told them she couldn’t wait until he was president. One of the millennials answered that “it was about time the wealth was shared. There are too many rich people driving BMWs. I don’t even own a car.” I chuckled and before I could shut my mouth, the guy turned around and said, “they should tax all those rich people and give the money to everyone else.”

Anyway, when I saw the senator on the cover of Time in late September in a positive light, I thought it was the kiss of death for his candidacy, a view I still share today. At that time, he was riding high in the polls and neck and neck with Hillary Clinton. Sanders tee shirts and yard signs were everywhere. He was the flavor of the moment, which is why Time gave him such publicity.

The problem with the Time cover is that it usually means the end of the trend is close at hand. It takes so much public awareness for a person or event to be cover worthy that by the time it hits, it usually about over. While Sanders socialistic agenda and $16 trillion government program expansion may sit well with the populists and disenchanted, the markets never gave him any credibility nor chance to beat Hillary, let alone win the general election. By the time the primaries begin, he will barely be a footnote.

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Buy Small Caps for the Next Three Weeks

In my previous post, Underwhelming Rally but Don’t Count Out the Bulls, I was concerned about another “few percent” pullback given last Friday’s weak beneath the surface rally. So far, this week has been all red and it looks like stocks are getting closer to the low where the Santa Claus rally will begin. While the odds favor one more decline below Wednesday’s low over the coming few days, it’s anything but a slam dunk. I have been pounding the table to buy on weakness, not necessarily trying to pick the bottom. It’s not the time to get cute.

This time of year has a very strong seasonal bias for the Russell 2000 (small caps) to do well both in absolute and relative terms. On a relative basis, small caps tend to outperform the other major indices from early December through mid January. On an absolute basis, they are also strong over the final few weeks of the year and early in the new year.

Through the first 49 weeks of 2015, the Russell 2000 is down by 4.64%. That sparked my curiosity if that portends any trend over the final three weeks. I asked my friend and uber data miner Jason Goepfert from to  help me with the research.

The first result shows all instances of the Russell 2000 being down for 49 weeks and the resulting 3 weeks in chronological order. I also added if stocks were in a bear market or corrective one, which was most of the time including currently.

The second table was sorted by the poorest 49 week returns to best. Finally, the last table shows the best final 3 week returns from weakest to strongest. The bottom line is that the trend says it’s a good time to own small caps although the best final 3 weeks in the Russell 2000 usually occur during bear markets.


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Underwhelming Rally but Don’t Count Out the Bulls

Friday’s huge rally was fraught with bits of weakness. The ratio of stocks going up to down was just 2:1 on a 2%+ day when it should have been much, much stronger. The ratio of volume in those stocks should have been multiples stronger. New highs to new lows didn’t move much at all. The rally was narrow and underwhelming beneath the surface. As has been the case since summer, the stocks with the heaviest weightings in the cap weighted indices are leading the charge without a lot of support. More often than not, this leads to some short-term weakness, but typically does not spell the end of the rally.

My takeaway is that it’s a good time to stand pat or perhaps even prune some weak positions, but continue to buy weakness until proven otherwise. This looks like yet another mild pullback of a few percent before heading to new highs.

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Yellen Dousing Dollar & Stocks

After a big day for the bulls on Tuesday that did not close above the levels I spoke about to cause a spurt, stocks reversed on Wednesday and it looks really ugly on a chart. Bears will point to similar reversals at the major peaks in 2000 and 2007, which is true, but these kinds of reversals also occur routinely throughout a bull market. In analyzing their predictive power, they certainly have led to some short-term weakness, but the longer the time horizon, the less effective they are.

With Janet Yellen renewing her warnings that the Fed will raise interest rates for the first time since 2006 on December 16, the stock market is looking a tiny bit tired. The odds favor a very mild 2-4% pullback to set the stage for Santa Claus to come calling. This is a good time to prune and make sure you love what you own.

I am sure there will be lots of talk about the enormous rally in the Euro (fall in the dollar). It became a very crowded trade, especially in the hedge fund space (sheep & lemmings) on a leveraged basis. I do not believe the dollar trade is over, not by a long shot. I still think the Euro is heading to all-time lows below 80 by 2018 and the Yen will drop by another 25-50%. This is a shake out to rid the trade of weak handed holders.

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Spurt or Pullback???

Stocks continue to digest the gains made in early November without giving up against the negative news backdrop. That’s a well supported, resilient market. When the major indices close above their November highs, we should see a quick spurt to the upside. If they fail to do so this week, I would not be surprised at all to see a mild 1-3% pullback lasting a week or two to set up the Santa Claus rally into 2016. My theme remains the exact same as it’s been since late August. Buy weakness!

Sector leadership remains very strong and encouraging, despite what I keep reading about a narrow stock market rally. Semis are breaking out. Consumer discretionary is near all-time highs. Banks should break out later this month. Transports seem to be gearing up for a move.

My main concern continues to be the putrid performance of the high yield (junk) bond sector. With energy, metals and mining in real danger, those bonds are at risk for default, not to mention the very real possibility that some of these companies won’t be able to refinance next year.

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