The truth of the matter is, I recently wrote an article titled Don?t Stop Believing in US Equities, primarily because I truly believe that longer term, there are certain dynamics in place that support the potential for a secular bull market, akin to the recent 30-year run in bonds. These dynamics are:?
1. Aging global populations.2. Ten thousand baby boomers?retiring per day?in the US -- boomers?who have been hand-fed stock data and market color via a 24/7 deluge from media outlets, that is.
3. The relative lack of yield or income to support these people, or ?the yield grab.? ?This poses the question: Will income-oriented equities be the core of most portfolios??
4. The massive change in the capital structures of corporate balances sheets as companies continue to lock in cheap/long-term financing in order to retire higher-yielding debt and give back to shareholders via massive equity buybacks and dividends, and/or dividend increases. Revenues in general, may not be growing robustly from an organic perspective, but the change in capital structure could serve to offset that factor for some time to come, as buybacks reduce stock floats and buoy bottom-line earnings. David Goldman, a brilliant macro strategist, recently pointed out that, ?All-in corporate yields of 2.7% (for the Bank of America/Merrill Lynch Index) mean that the cost of carrying corporate debt is the lowest on record, down from 40% of cash flow in the early 2000s to a projected 13% by the end of 2015."
5. Finally, as rates creep higher -- mainly in relation to the most recent smoke signals being sent by the Federal Reserve -- and duration begins to take an adverse effect on bond portfolios, we may in fact start to see the ?Great Rotation? ?(out of bonds into stocks). David ?Dr.? Tepper alluded to this fact recently in his CNBC rant in support of being long stocks. As a result, that same day, Dow theorists were dancing in the streets as the Dow Jones Industrial Average (INDEXDJX:.DJI) reached a new all-time high at 15,215.25, and, this new high was confirmed by a new all -time high for the Dow Jones Transportation Average (INDEXDJX:DJT), which climbed 121.78 to 6465.78, keeping the potential for a secular bull market intact. ?
However, I?m a bit bummed out today. Todd Harrison recently wrote a very cogent article titled The Most-Hated Rally of All Time. Todd and many others are talking about the fact that underneath the surface of the explosive rally we have seen across most markets, people just do not feel that good. This rally has been inspired mainly by monetary policy, the likes of which this global economy has never seen. I sat down at my computer one morning this week and was made aware of more layoffs in the financial service sector. On a personal level, these particular layoffs hit me hard. I will admit that by virtue of working in financial services for the better part of 19 years, my perspective may seem a bit skewed, or myopic to some. But with every passing week, I learn of another peer, contact, or friend who has been affected by the commoditization of trading and consequent lower commission rates, the compressed margins financial service companies are dealing with from both a primary and secondary standpoint, and the effects of increased regulation as Dodd/Frank and Basel III take effect in earnest. ?
I ask readers to please not misconstrue what I?m trying to convey. Changes in marketplace structure, low-cost trading vehicles, and financial products are necessary and, overall, good for the investing public. Throughout history, all industries have gone through dynamic changes, resulting in margin compression and consolidation. I?m just trying to convey that the changes taking place affect many on a personal level, which is a great segue to my next point: The underlying economic recovery that has taken place in general is not making people feel a whole lot better.
First on the topic of jobs, we can look at the most recent non-farm payroll numbers and glean that under the surface there?s some caveats that make the gains seem hollow. Delving a bit deeper into the report, we see that Americans worked less in April than in March. The drop in average weekly hours (from 34.8 to 34.6) for all private employees outweighed the 165,000 increase in the headline jobs number. According to the survey, weekly hours worked totaled 4.683 billion in April vs. 4.704 billion in March. The increase in employment combined with lower hours worked probably reflects an increase in poor quality jobs -- a shift in hiring in low-wage industries (retail and hospitality) to reduce the cost of health and other benefits. ?In essence, goods-producing employment fell, which is not a good sign. Moreover, we know the unemployment rate has been trickling lower, but this is due in part to many Americans dropping out of the workforce, or saying, ?I give up.?
In response to this, some will say, "But look at my portfolio! Stocks are going to the moon. Housing is improving. And the Fed seems to be remaining accommodative." Yes, that is true, but that?s if in fact one is actually invested or continuing to invest at all. Again, in general terms, many people are not benefiting from the rally in stocks and bonds at all. The truth is that the dynamic of lower-quality jobs being created also offers fewer benefits. In general, people are paying more for health care, making less money, and less is being contributed to 401(k) plans and IRAs on both corporate and personal levels. Just yesterday, Gallup released the results from a study that asked Americans the following question:??Do you, personally, or jointly with a spouse, have any money invested in the stock market right now ? either and individual stock, a stock mutual fund, or in a self-directed 401(k) or IRA?"
The results showed 52% responded yes, 47% responded no, and 1% had no opinion. To put that result into context, it?s the lowest reading since the poll was first conducted in September 1998. Moreover, at the last market peak, in 2007, 65% of respondents answered yes to having stock exposure. Now, again, although I?m having a "terrible, horrible, no good, very bad day,? this low reading can be construed as a positive, as market tops are typically defined by the odd lot theory or retail panic into markets. This most recent Gallup poll tells us the most recent rally has been institutional in nature.
As far as real estate is concerned, there is no denying that the housing market is improving; 70% of Americans own a home. I have reached out to many industry experts on both the commercial and residential side with questions.The general message has been that there?s still a long way to go up.
Depressed markets in Florida, Nevada, and Arizona are still recording double-digit gains, and housing prices overall are up 8% year over year. However, the caveat here is that most of the buying to this point has again been at the institutional level, as the big homebuilders spent most of their time at the lows of the cycle acquiring land and permits and are now benefitting as the cycle begins to turn. Just recently, the NAHB Index rang in at 44 vs. a survey result of 41. We know that 50+ signals expansion, so there?s still a ways to go to even get to equilibrium. Most origination to this point has been flipping foreclosures, or the larger institutional players buying distressed properties and sitting on the purchases by renting them. Just now they?re starting to sell. On a personal level, we know that credit remains tight, and overall, potential buyers are having a hard time getting a loan. Moreover, the loan process is as cumbersome as ever, and appraisals as well are creating a lot of issues. These dynamics need to ease a bit for the positive trend to continue, or so one would think. So again, to this point, the rally in real estate has been primarily beneficial for the larger institutions, and therefore the benefits are being felt less at the individual level. ?
Conclusively, I?m far from a Debbie Downer. I?m a glass-half-full fella. Overall, the economy is improving; the stock market and housing market are soaring. But there are also reminders on a daily basis that underneath the surface, a different story can exist. We continue to see collateral damage that has resulted from the fragile recovery underpinning this massive rally in most asset classes. So in the book Alexander and the Terrible, Horrible, No Good, Very Bad Day, we know it?s a Murphy?s Law day for Alexander. ?From the moment he wakes up, things go wrong -- gum gets stuck in his hair; he trips on the skateboard and drops his sweater into the sink while the water is running; at school his teacher does not like the picture he drew. But in the end, young Alexander is reminded by his mother that ?everybody has bad days, even people who live in Australia.? ?We also know that although it may seem a bit trite, there?s another side to every story and?we must stay cognizant of it. ?????????????????????????????????????????????
No positions in stocks mentioned.
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