Archive for the ‘Market Update’ Category



Yes, manufacturing.  The lede from  A measure of the U.S. economy from the Chicago Federal Reserve ticked higher in April from March as a stronger performance at factories and a healthy job market offset housing’s weaker contribution.

More:  The Chicago Fed’s index of national economic activity was a positive 0.34 last month, gaining from the upwardly revised positive 0.32 in March, though weaker than a downwardly revised positive 0.73 in February. With the revision, February’s result lost its ranking as the highest reading since October 1999; now, it’s the strongest just since last October, when the index registered a positive 0.86, according to the St. Louis Fed’s FRED database.

Interesting, we were told these jobs would never come back:

More on the Chicago Fed here:

The Liquidity Crisis

Is at Biblical Proportions

Corporate debt is now at a level that has not ended well in past cycles:

Liquidity crisis


Some color from John Mauldin:   The Debt/GDP ratio could go higher still, but I think not much more. Whenever it falls, lenders (including bond fund and ETF investors) will want to sell. Then comes the hard part: to whom?

You see, it’s not just borrowers who’ve become accustomed to easy credit. Many lenders assume they can exit at a moment’s notice. One reason for the Great Recession was so many borrowers had sold short-term commercial paper to buy long-term assets.

Things got worse when they couldn’t roll over the debt and some are now doing exactly the same thing again, except in much riskier high-yield debt.

Interesting stuff, here’s the link to John’s

Hat tip Jesse Colombo

A Friendly Reminder

Market Downturns

Hat tip American Funds

Strike Eagle Over Iraq


From  A U.S. Air Force F-15E Strike Eagle flies over Iraq on May 5, 2018. The F-15E is a dual-role fighter designed to perform air-to-air and air-to-ground missions. An array of avionics and electronics systems gives the F-15E the capability to fight at low altitude, day or night, and in all weather. (U.S. Air Force photo by Staff Sgt. Corey Hook)

Sentiment View

1.) AAII’s(American Association of Individual Investors) neutral reading has been above 40% for 3 straight weeks for first time in 10 months.

2.) Outflows from small cap equity funds: 14 consecutive months (Morningstar).

3.) BAML(Bank of America/Merrill Lynch) Global Fund Manger Survey lowest equity exposure in 18 months.

As contrarians, this is certainly good news.

Hat tip Ryan Detrick

More Awakening in Consumer Staples?

Additional follow up to my post yesterday on options action in Coca Cola (K).

Yesterday someone purchased 20,000 Proctor and Gamble (PG) Jan 77.5 calls for $2.00 when the stock was trading at $72.65.

That was one of the largest single name equity options trades of the day, and worked out to a not trivial 2 million share commitment for a cash outlay of $4 million.

Some Fizz in Consumer Staples?

No sector has struggled more in recent months than Consumer Staples (XLP). Shifting consumer tastes/brand loyalty, pricing pressures at the retail level, higher interest rates offsetting the dividend yields have all contributed to the malaise.
Perhaps some signs of life yesterday and today, based on option activity in Coca Cola (KO).
Yesterday someone bought 15,000 of the June 44 calls right around $1.00 and today another 15,000 traded around $.80, making this strike the second largest in the name. As of this writing, KO is trading at $41.78 and the market on these options is $.84-.87 with a very modest implied volatility reading of about 14.25.
Someone out there is positioning for a rebound in this sector in the coming weeks.

May Sign

Late last week the S&P 500 Index moved back into positive territory for the year.  The index gained a bit more on Friday as well as today.  Significant?  Yes, according to Ryan Detrick’s research:   If the S&P 500 is positive year-to-date any day during the month of May, the entire year has been positive on a total return basis 35 out of the last 36 years.

Impressive numbers.

Hat tip Ryan Detrick/LPLResearch

An Old Scourge Returns

The past few weeks has witnessed the resurfacing of the 3 most dreaded words in the stock market: Audit Committee Investigation.

In plain English, this translates to : Accounting Irregularities and was last seen on a regular basis during the dot com bust of the early 2000’s and the crisis era of 2008-2011 as companies scrambled to protect their business models from a near economic collapse.

Perhaps a “canary in the coal mine” warning about current stock market valuation, 3 large and well known companies have all announced whistle blower allegations of alleged accounting improprieties: Flextronics Ltd. (FLEX, a contract manufacturer for tech companies), Symantec Corp (SYMC, a computer security software vendor) and PPG Industries (PPG, a venerable, old line paint and chemical company).

Naturally, the markets first reaction (and probably rightfully so) is to run first, ask questions later, as FLEX got clobbered by over 20%, SYMC cratered 30%, and PPG lost a more modest 6%. But my experience in such matters gleaned from over 30 years of financial market observation leads me to the likely causes of these (and potentially other) occurrences:

1)The huge (and growing) disparity between GAAP accounting numbers (a.k.a. the true numbers) and Non-GAAP accounting numbers (the make believe, get rid of the bad stuff numbers…often referred to as “Adjusted”). The difference between these two sets of figures is at a historical wide of over 20+%, and in many cases is far greater, as it allows companies to report “earnings” rather than losses. As the pressure builds for companies to “beat” earnings estimates on a quarterly basis, the pressure to cut accounting corners becomes ever so greater. In today’s bull market environment, investors seem to be lulling themselves to sleep accepting Non GAAP accounting as the real thing. It is only when shaken awake by tape bombs mentioned above that perhaps investors might start paying attention to this issue.

2)The merger frenzy (both past and on-going) leads to extensive periods of restructurings, consolidations, write-offs and multiple financial reporting metrics by the newly merged parent company. Again, given the pre-merger talk of “synergies, cost reductions, efficiencies, earnings accretion” etc by company management extolling the virtues of the merger, the pressure to produce those figures must be extraordinary on the CFO’s office. Does that lead to creativity being the order of the day to reach those targets?

Lastly that brings us to the often asked question…are the companies infected by the accounting virus all of a sudden “cheap”? Perhaps, and in today’s world of no news is good news, bad news is good news, and good news is good news, a rebound is theoretically possible in these stocks.

But let me leave you with one sobering reminder: There is no such thing as only one cockroach.

With little information forthcoming from management, it is likely that more bad news is to follow. Remember Equifax (EFX) where the massive data breach is still being unraveled and the company continues to add to the list of compromised information months later as their investigation evolves (meaning lets dribble out the bad news as slowly as possible).

It will be interesting to see if more incidents such as the 3 noted above surface in coming weeks, and the effect (if any) on the overall stock market.

Sell In May?

More May data, from Ryan Detrick:   The S&P 500 Index closed this week at its highest level since March 16 yesterday and is now up 2% for the year. But, what’s the significance?  Well, since 1970, when the S&P 500 has closed higher year-to-date (on any day) during the month of May, the index’s total return for the full year has been positive in every instance except one.  That means 35 out of 36 previous years have lead to a higher full-year return. (The year 1990 being the only exception.)


Always great stuff.  Hat tip LPLResearch/Ryan Detrick

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