• Current Conditions

  • Week in Review: 7/25/2014

    Week in Review: 7/25/2014

    There was not much economic news this past week. Much of it centered around the construction sector. The Architectural Billings Index rose in June. This index has tended to lead construction activity, which means overall construction should continue to be healthy for at least a few months.


    New home sales took a big drop last month, and the 12-month percent change in sales is below zero. Maybe there simply aren’t enough new homes on the market to create an upward trend in sales. In any case, this report was unexpectedly bad.

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    Fortunately, sales of existing homes rose in June. I think it’s most important to evaluate the housing industry by total sales (new plus existing homes). The fact that new home sales were poor is bad news for construction companies and workers. But, the level of existing home sales dwarfs that of new homes. With existing home sales trending higher,

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  • Week in Review: 7/18/2014

    Week in Review: 7/18/2014

    Because of political and military instability in Ukraine and the Middle East, volatility rose in the U.S. stock market this past week. In addition, unfolding events caused a flight to the safety of U.S. Treasury securities, which caused yields on those securities to drop. According to the business media, China was also a big buyer of our bonds.

    In spite of the issues around the world, the stock market closed the week on a strong note. For the week, the S&P 500 rose 0.5% and the NASDAQ Composite was up 0.4%.

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    The stock market environment is unchanged—excessive valuations, bullish sentiment, and upward price momentum with only small corrections. We are in the part of the cycle when many investors are afraid to sell stocks because they perceive there is no other alternative. My view continues to be that many years from now we will look back at today as a

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  • Week in Review: 7/11/2014

    Week in Review: 7/11/2014

    I have written that economic conditions in the U.S. were fairly decent, but many foreign countries were not yet out of the woods. U.S. investors have become complacent about the state of the world economy, acting is if the U.S. carries the key to world economic growth, which is no longer the case. This complacency is quantified in the two charts below. In reality, the size of the U.S. economy has shrunk in relation to the rest of the world to the point that our economy and markets are more likely to be highly influenced by what is happening elsewhere. And when investors get very complacent, they are more susceptible to negative news coming from abroad.


    This past week, the complacency of U.S. investors was shattered by bad news coming from Portugal, China, and Japan. The result was a flight to the safety of U.S. Treasury securities, which caused

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  • Week in Review: 7/3/2014

    Week in Review: 7/3/2014

    This past week brought the monthly employment data, which everyone interpreted as being bullish for the economy. Certainly, with the payroll, household, ADP, and online help wanted employment surveys all indicating that hiring was very strong in June, and the unemployment rate dropping to 6.1%, there was reason for encouragement.

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    However, there were a few “interesting” (code word for “disturbing”) data in the reports. First, most of the new jobs were in the service sector, which tend to be low-paying. Second, the increase in hourly wages continued to be very low and is barely keeping up with inflation. With this combination, the only way our economy will gain substantial strength is by people borrowing more money. Our collective debt is already high, which leaves our economy susceptible to weakness caused by rising interest rates (see interest rate comments below).


    Finally, there was a huge increase in part-time workers in June.

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  • Week in Review: 6/27/2014

    Week in Review: 6/27/2014

    It has been rare over the past year when a week’s economic news was either all great or bad. This past week was no exception. A bright spot was the housing sector. Both new and existing home sales rose strongly in May. Although the level of these sales is still well below pre-recession levels, the May news is encouraging. Consumers are probably becoming convinced that mortgage rates are only going higher (they may or may not be correct). In addition, the declining unemployment rate and the rising percentage of people who are quitting their jobs are indications that people are feeling more financially secure. Finally, lending institutions are loosening their borrowing standards. All of these factors tend to improve the home-buying market.


    According to the Case-Shiller survey, home prices rose for the second consecutive month in April. However, the 12-month percent change in home prices seems to have peaked. If

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  • Week in Review: 6/20/2014

    Week in Review: 6/20/2014

    This past week, the stock market recovered from its recent “correction” of about 1%, with the S&P 500 up 1.4% and the NASDAQ Composite rising 1.3%. The S&P 500 is overvalued by a whopping 43%. Certainly, prices can go higher—another 5-10% by the end of the year. But, I think that’s the best case. The downside potential for stocks is so much higher.


    The reason stocks are holding up so well is the almost constant chanting from the Federal Reserve Board (FRB) that interest rates will remain low for a long time and won’t begin rising at least until next year. FRB Chair Janet Yellen reiterated the FRB stance this week, which was the primarily reason stocks performed so well. Investors don’t seem to recall that when the FRB begins raising rates it tends to be the death knell for bull markets. The FRB is telling us that this

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  • Week in Review: 6/13/2014

    Week in Review: 6/13/2014

    A high level of investor complacency, which we have recently been experiencing, makes markets susceptible to unexpected shocks. Political troubles in Iraq reached a boiling point this past week, causing higher oil prices, fears of increasing tension among Middle Eastern countries, and worries that the U.S. could get embroiled in another no-win military situation.

    Should the unrest in Iraq build, there will be higher worldwide energy prices that would have a dampening effect on economic growth because a larger part of consumer discretionary income must be paid for gasoline, heating, cooling and other energy. The world economy is already in slow growth mode and can little stand significantly higher oil prices.


    The Iraq news brought investors back to the reality that sometimes bad things happen that can impact their portfolios. As a result of the slight shift in sentiment, the S&P 500 Index was down 0.7% and the NASDAQ Composite

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  • Week in Review: 6/6/2014

    Week in Review: 6/6/2014

    I hate this part of the stock market cycle. No, hate is not a strong enough word. I LOATHE this part of the cycle. Because my strength as an investment professional is the 3-10 year outlook, I am always early in looking for cyclical market tops and bottoms. We’re now in the part of the cycle when I will continue to write about the market’s overvaluation and the low expected returns. Meanwhile, the stock market continues to rise. As in the past, I have become “that guy who is always bearish.”

    People who follow me closely know that I was extremely bullish in the 4th quarter of 2008—and characteristically early. I was “sweating bullets,” with an overweighting to stocks and urging others to do so (no luck persuading most people), while the stock market continued to drop and the investment world worried about the end of our financial system.

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  • Month-End Observations: May 2014

    Month-End Observations: May 2014

    Many of the charts I maintain are only updated once per month, even though there may be more frequent data available. The reason I hesitate to update these charts more often is because the daily or weekly data usually does not change my views, in addition to the fact that the more data someone tries to digest, the less able the brain is to process it logically. So, here are a few observations from the end of May, 2014 data.


    I know I have been writing a lot about the stock market’s overvaluation. The problem with using valuation as a decision tool is that over valuation conditions can persist for years before reverting to reasonable levels. However, revert they do. When I write that the stock market is significantly overvalued, it is never a judgment about the near term. Rather, these measurements are most useful looking out 3-10 years.

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  • Week in Review: 5/30/2014

    Week in Review: 5/30/2014

    (Note to readers: I have received a few comments that some of my blog is cut off for those who receive email notifications of a new post. These notification emails only contain a portion of the post. To read the entire post, click on the title in the email (which is usually highlighted in blue), and the entire post should appear.

    The stock market continued upward this past week with the S&P 500 gaining 1.1% and the NASDAQ Composite up 1.4%. The environment for stocks continues to be one of significant overvaluation (41%—the highest level of overvaluation since the 4th quarter of 2007), very high bullishness (a contrary indicator), and upward momentum. Since stock markets can be overvalued for a long time, I am watching for any sign of a downward break in momentum. Although the stock market has been rising, it has not shown signs of

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