Tag Archives: Market commentary

Investing vs. Trading

Market commentary from Brian Wesbury of First Trust.
Are you an investor or a trader? Investors think long-term, while traders focus on short-term price movements.
Trading furs, cloth, commodities, or tulips, has gone back centuries, if not millennium, but was about adding value and moving goods to markets. In other words, through trading many ran businesses that looked a great deal like investing.
The “ticker tape” allowed the trading of financial products, but after the Great Depression many wouldn’t touch stocks for decades. Now, financial market news and quotes are on TV all-day and pushed out over smartphones. This can encourage “trading” over “investing.” Or another way of saying the same thing, the short-term over the long-term.
For example, many people have zero idea what Bitcoin is, why it is needed, or what gives it value, but they are mesmerized by it nonetheless. It’s just digital scrip – an alternative to sovereign currency. It pays no dividend and isn’t widely accepted. No one knows if it will last.
In the meantime, there are monumental events taking place that get missed if one focuses on the trees and not the forest. Horizontal drilling and fracking are one of those.
Remember when the world was about to run out of natural gas and oil? Remember when the Middle East and Russia, because of their energy reserves, could dominate geopolitics?
Well, all that has changed. The US is now the world’s biggest energy producer and, by 2020, the US is likely to become a net energy exporter to the rest of the world. This explains the political upheaval in Saudi Arabia as the royal family moves slowly toward a more free-market friendly environment. Russia faces similar forces that, in the end, will create more global stability.
Because of US supplies, Europe can become less dependent on Russian oil and natural gas. In addition, just like when Ronald Reagan was president of the US, as the pendulum swings toward less regulation, lower tax rates and smaller government, Europe must follow suit.
The combination of these developments causes stronger global economic growth, which is great news for investors. However, the dominance of governments in recent decades, and the reporting of every utterance of Federal Reserve or foreign central bankers, creates anxiety among many investors. Some investors are worried about a flattening, or inversion, of the yield curve as the Fed tightens.
But these concerns are overdone. It’s true that an inverted yield curve signals tight money, but inversions typically don’t happen until the Fed pulls enough reserves out of the system to push the federal funds rate above nominal GDP growth. Right now, that’s about 3.5%, which means the Fed is likely at least two years away. And, the banking system is still stuffed with over $2 trillion in excess bank reserves. Monetary policy, by definition, is not tight until those excess reserves are gone.
Focusing on trading, and not investing, misses these longer-term developments and highlights short-term fears.  Patience, persistence and optimism help avoid the pitfalls of short-term thinking. The current environment will continue to reward those who stay focused on investing.
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The Weekly Market Review

Week of 10/30/17 – 11/03/17:
Last week wrapped up the busiest part of the earnings season with most companies having now reported.  Large caps continued the recent stretch of gains extending the streak of new record highs for the S&P 500, Dow, and Nasdaq.
The Nasdaq led the way last week adding nearly 1% while the S&P and Dow a gained 0.29% and 0.45% respectively.  Small stocks didn’t fair quite as well, own 0.87% as benchmarked by the Russell 2000.
Global stocks recorded gains led by emerging markets, which rallied back from a couple lackluster weeks to add 1.45%.  The ACWI and EAFE closed the week up 0.67% and 0.92%
respectively.
While headlines were primarily focused on earnings releases, investors also continued to monitor the political landscape, especially the announcement of a new Fed chairman –
Jerome Powell.
Rates decreased for the first time in several weeks while the dollar added to it’s recent rally.
The 10 year closed just north of 2.3% while munis and corporates also rallied.  Energy and Technology stocks responded the best to last week’s earnings releases,
while telecoms saw a major decline.
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Time To Drain The Fed Swamp

The Panic of 2008 is widely misunderstood.  Part of this is due to the fact that financial issues are complicated.  How many people, after all, know what “mark to market accounting” is?  Part of it is due to politics.  Government policies encouraged home ownership by lowering lending standards, leading to NINA (“No Income No Assets”) loans.  At one time home prices were rising so fast that people believed that no matter what they paid for a house they could always sell it for more.

A thought-provoking article by Brian Wesbury of First Trust expands on this issue.

 Time To Drain The Fed Swamp

The Panic of 2008 was damaging in more ways than people think. Yes, there were dramatic losses for investors and homeowners, but these markets have recovered. What hasn’t gone back to normal is the size and scope of Washington DC, especially the Federal Reserve. It’s time for that to change.

D.C. institutions got away with blaming the crisis on the private sector, and used this narrative to grow their influence, budgets, and size. They also created the narrative that government saved the US economy, but that is highly questionable.

Without going too much in depth, one thing no one talks about is that Fannie Mae and Freddie Mac, at the direction of HUD, were forced to buy subprime loans in order to meet politically-driven, social policy objectives. In 2007, they owned 76% of all subprime paper (See Peter Wallison: Hidden in Plain Sight).

At the same time, the real reason the crisis spread so rapidly and expanded so greatly was not derivatives, but mark-to-market accounting.

It wasn’t government that saved the economy. Quantitative Easing was started in September 2008. TARP was passed on October 3, 2008. Yet, for the next five months markets continued to implode, the economy plummeted and private money did not flow to private banks.

On March 9, 2009, with the announcement that insanely rigid mark-to-market accounting rules would be changed, the markets stopped falling, the economy turned toward growth and private investors started investing in banks. All this happened immediately when the accounting rule was changed. No longer could these crazy rules wipe out bank capital by marking down asset values despite little to no change in cash flows. Changing this rule was the key to recovery, not QE, TARP or “stress tests.”

The Fed, and supporters of government intervention, ignore all these facts. They never address them. Why? First, institutions protect themselves even if it’s at the expense of the truth. Second, human nature doesn’t like to admit mistakes. Third, Washington DC always uses crises to grow. Admitting that their policies haven’t worked would lead to a smaller government with less power.

The Fed has become massive. Its balance sheet is nearly 25% of GDP. Never before has it been this large. And yet, the economy has grown relatively slowly. Back in the 1980s and 1990s, with a much smaller Fed balance sheet, the economy grew far more rapidly.

So how do you drain the Fed? By not appointing anyone that is already waiting in D.C.’s revolving door of career elites. We need someone willing to challenge Fed and D.C. orthodoxy. If we had our pick to fill the chair and vice chair positions (with Stanley Fischer announcing his departure) we would be focused on the likes of John Taylor, Peter Wallison, or Bill Isaac.

They would bring new blood to the Fed and hold it to account for its mistakes. It’s time for the Fed to own up and stop defending the nonsensical story that government, and not entrepreneurs, saved the US economy. Ben Bernanke and Janet Yellen have never fracked a well or written an App. We need a government that is willing to support the private sector and stop acting as if the “swamp” itself creates wealth.

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The Trump Trade after three months.

The election of Donald Trump was followed by what many called “The Trump Trade.”  Based on the promises made by Trump during the campaign: to lower taxes and reduce regulations – two factors that inhibit economic growth – the stock market rose sharply.  But it’s going to take time and a lot of hard bargaining to actually get to the point where real economic benefits result.

Brian Wesbury, Chief Economist at First Trust:

As we wrote three months ago, it’s going to take much more than animal spirits to lift economic growth from the sluggish pace of the past several years. Measures of consumer and business confidence continue to perform much better than before the election. But where the economic rubber hits the road, in terms of actual production not so much.  It looks like real GDP growth will clock in at a 1.3% annual rate in the first quarter.

He says that we still have a “Plow Horse Economy” and it will take time to unhitch the plow and saddle up the “Racehorse.”

Trump has signed a number of executive orders that will have an impact on regulation, but the bureaucracy is still staffed with the last administration’s appointees and the pace of approving new appointments is glacially slow.

Waiting is the hardest part.

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The “Plow Horse Economy” Keeps Plowing

The stock market defied the bears again and rose despite mixed economic news. We are in the camp that believes that the economy and the market will continue its slow and plodding rise despite a brutal winter and government policies that make doing business more complicated.

That being said, we would not be surprised us if the stock market experienced a correction. In fact, we construct our portfolios with this possibility in mind. The world is full of surprises and events – either local or global – can cause a temporary disruption. One of the things that surprised many bond traders is that interest rates actually declined in the last year, catching many pundits off guard.

Moving ahead, conditions appear to favor actively managed portfolios. We constantly review our manager line-up and re-balance your portfolios on a regular basis to keep you – and all the rest of our clients – within the risk bands that you have established.

Year-to-date, most of the broad global market indexes are positive. In the U.S., the NASDAQ was the best performing stock index. Interest rates remain low by historical standards, meaning that money in savings and checking accounts is losing purchasing power. The rise of food and energy prices is causing a problem for those who bailed out of the market in 2008 and never re-entered.

If you have not yet visited our new website, please take this opportunity to go to www.korvingco.com and invite your friends to check us out. We welcome your comments and suggestions for ways we can be of greater service to you.

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