Revisions, Revisions

November 2, 2019

On this week’s podcast, Karl discusses the good jobs report and how investors bought the news.  But, should we believe the numbers?

Hey, good morning everybody. Welcome to the podcast. This is Creating Richer Lives. Our telephone number is (210) 526-0057, our website and this podcast is brought to you by Covenant Lifestyle. Legacy. Philanthropy.

All right. Busy week in the markets, wasn’t it? Well, let’s jump right in and tell you a little bit about what was going on because it was really ultimately about the federal reserve and are they doing the right thing or not the right thing? And the economy, and those two things should be tied together, and they kind of are.

So Monday we came in, stocks opened at a record high for the S&P 500. And we’re seeing, we’re in the middle of earning season, which we talked about. So companies are reporting their profits and earnings beats are at a very, very high level. So we’re seeing the expectations were lowered, companies are coming in beating those expectations. That’s a good thing. But the growth of the earnings is the slowest since 2016, so not a good thing

So again, we know the growth is slowing, but the beats are high. So we know the expectations were low. And apparently investors care more about the expectations and the beat because the stock market continues to push to a new all time high.

Now we’re also watching interest rates very, very closely, and we’ll get to that in just a minute. Another little bullish deal I noticed on Monday was the fact that new lows, when you look at the stocks that are making new highs, you look at the number of stocks making new lows. The new lows are very microscopic, and that’s a good thing. There’s not many companies making new lows.

Now on Tuesday, pretty flat talk but we started to hear more about impeachment and people are asking me, “Is the impeachment going to affect the markets and the process of that?”

You know that we have obviously ISIS killings and we have geopolitical risk and uncertainty all over the world. Those things matter to our lives. Sometimes they don’t matter to the market. Ultimately the market is going up based on profits of companies in the long term. You’re buying earnings, that’s what you buy when you buy stocks. But it’s also looking at, investors are looking at interest rates in the economy.

So the impeachment or somebody being killed, whether they’re an ISIS leader or not, again, positives and negatives, yes, but those are on the back burner in terms of what moves the market on a daily basis.

Now, Wednesday we had a pretty heavy economic report day. We had ADP came in and the growth rate of employment fell to one and a half percent. That was the weakest growth rate since March of ’11.

So remember on last week’s podcast, we spent a lot of time talking about our biggest concern here at Covenant from an economic standpoint is will the consumer keep us in this game? Will the consumer keep spending? And they will keep spending probably if they’re employed, if their wages are going up in they’re employed. And so we saw ADP, which is a private payroll number, private company, and the growth of the employment is what we’re watching. It’s slowing down a little bit, so that was a negative. We did see GDP though come out 1.9%, which was much better than the expected 1.6% estimate, so that was a positive thing.

We also heard on Wednesday, and I talked about this months ago, the US, I think will issue something longer than a 30 year treasury. And we saw it again, the treasury department came out and said, “The US may begin issuing 50 year ultra-long government bonds for the first time.” And when I originally talked about that, I said, “Why not?” Right? Interest rates are low, why not? If there’s that big of an appetite for our bonds, why not issue 50 year bonds, hundred year bonds? And it looks like that may happen.

That was on Wednesday and they said, “They’re exploring potential additions to the current suite of treasury securities.” The suite like it’s this gourmet menu at a fancy restaurant; they’re treasury securities. And so they’re looking at a 20 year nominal coupon bond, a 50 year nominal coupon bond and a one year floating rate bond linked to the secured overnight financing rate. So some of this is addressing, remember we talked about in the last several weeks and a couple of months ago, some of this overnight repo. Remember that? Some of this is to address that.

And then of course to cap off Wednesday, we had the Fed cutting rates by a quarter of a percent. That was not the surprise. Little bit of a surprise when the Fed’s signaled that they may be, may be finished in this cycle cutting rates. We’ll see on that. So it’s a bit more what they would call hawkish. And interest rates actually went down that day and people were questioning why would that be if they’re signaling that they may be done cutting rates, why would long term interest rates actually go down? The thought process is if the Fed’s more hawkish, and they don’t cut rates, the economy could slow, hints, people go buy bonds when that happens. So it’s like you have to think ahead a few steps here, and that’s why people are a little confused at the market reaction.

And then Thursday, we started to see the stock market sell off. The Dow is down almost 300 at one point. And it finished down about 140 points. There were some negative headlines about the trade deal, and I tweeted out, “Look, if you’re trying to trade your account based on trade headlines, good luck with that.” Because China talks about, “We may not want a long term deal.” And then of course president Trump, Larry Kudlow get on TV and they say, “Things are progressing very well.” And it’s the ping pong match that we’ve continued to see.

So it got the markets off to a weak start on Thursday with that negative trade headline. And really, I think it was a little bit of a leftover from perhaps the Federal Reserve and that they may be done cutting in this particular cycle.

But there was really, what was interesting about Thursday and Wednesday, was on the up day Wednesday and on up down day Thursday, you really didn’t get any intensity in terms of a real violent move one way or the other. Up days and down days, there’s not… It’s just like everybody’s kind of watching just a few participants in the market. But Thursday, excuse me, Friday, we got the all-important jobs number. This was the biggie. It’s like the Superbowl. Nonfarm payrolls came out, 128,000, now that was the number of jobs added nonfarm payrolls in October. The estimate was for at 85,000, so a huge beat. But more importantly was that September’s was revised up by 44,000. This caught a lot of people by surprise because there was a GM strike. So many believed, “Hey, this number is going to come in kind of weak.” And in it didn’t, it was strong and then last months was revised up as well.

But the revision as good as it was, therein lies the problem. These numbers get revised by such a big amount. I mean the beat was a beat of 43,000, and the revision was a change of 44,000. Who’s to say that when next month’s job report comes out that we don’t look in the rear view mirror and say, “Oh wait, that one was revised down by 50,000 or something like that.” We don’t know. And so take some of these with a grain of salt and look at the trend over a few months is the idea.

Unemployment was steady, it ticked up a little bit to 3.6%. There’s an important figure, I don’t have it in front of me, but it’s something like over 300,000 new participants came into the workforce last month. That’s a bullish thing. Those are spenders. Again people, first time jobs being plopped in there, and so because you have more people getting jobs. That’s why the number got bigger with unemployment rate. And of course we always look at are people getting raises? And the average hourly earnings rose a little less than expected.

So when we take all this into consideration, the Bulls would say this is Goldilocks. We have the economy still growing, slowing as we’ve been saying for weeks, if not months, it’s been slowing but still going forward and we have a Federal Reserve that up until now has continued to cut interest rates. That’s a great combination. And I’m probably in that camp as well, but we do need to continue to watch what happens with this employment. Because, again, I just told you some of these employment numbers start to slow a little bit and we’ve kind of peaked and then the hours worked. Remember I talked about that last week? The hours work starts to go down as well. People have less money in their pockets, they’re going to spend less, hence the economy starts to slow down.

So that is something to watch. But a really busy week regarding the economy, regarding the Fed, but the market certainly liked it. On Fridays the Dow Jones went up over 300 points. Now for the week, markets were up about a percent and a half if you look at the major averages, pretty strong week. International markets were up in the same ballpark as well. But speaking of international, and this is interesting. If you look at the number of countries that are at 52 week highs. So again, we look at an index of a particular country, whether it’s Mexico, the United States. If you look at 70 different countries, this comes from Topdown Charts, 70 different countries. We have 15 countries are at a new 52 week high.

You wouldn’t probably think that. If you think, “Well, 15 out of 70 I’d done sound like a big deal.” This is the highest level it’s been at in two years. So we could be starting now where all these other countries are starting to push to new highs. And that’s something interesting because we know stocks can be a leading indicator. So perhaps they’re telling us that the economy in these countries will soon get better as well. Because remember some of this reason that the market’s going up is because things aren’t as bad as people perceived. It’s all about perception versus reality. Things don’t have to be good, they just have to be less bad. But the fact that we’re seeing these countries hit new highs is something very interesting to watch, including the US obviously.

The other thing I want to point out is sentiment. This is huge sentiment, again, how people feel about the market. There was a study done recently, and it’s an indicator that’s out there called the Bob Farrell Sentiment Indicator. And what’s fascinating about this to me is that earlier this week, and it’s a concoction to kind of get the panic and the fear and the confidence barometer, where does that lie? Investors were more fearful earlier this week than they were in January of 2019. Remember January of 2019, we’d just come off of a 20% stock market decline in the fourth quarter of ’18, and so in January 19 people were scared. They’re more fearful now.

Now you may be thinking, “Well, is that a good thing? Is it a bad thing?” It’s a good thing. The reason why is if somebody is scared, they’re probably not going to have all their money in the stock market. They have some dry powder, they have some cash. We’ve been hearing about that the last few months, people kind of holding back thinking about the election, thinking about the recession, pending recession. The fear of a recession, I should say. Worried about tariffs, all of that. And so when you take that into consideration, those people are on the sidelines and when you break out to new highs as we have recently, sometimes you get some capitulation, you get some chasing, you get money coming in. So rarely do you see a market at a high, and yet people as fearful as they are right now. In fact, they’re almost as fearful right now as they were in late ’15, early 2016.

Well remember at that point, if my memory serves me correctly, we had an earnings recession, two quarters in a row of negative growth. We probably had a mini recession, we had oil cratering. So it’s fascinating to me that we’re sitting at all-time highs and people hate this rally. So that’s a good thing from a contrarian standpoint. And not to project out what might happen, because we don’t really do it that way, right. We look at the tea leaves and what’s happened in right now and we make our… We put all our brains together and we come up with our allocations.

But if we were to fast forward a bit, we could be setting ourselves up for a nice rally. We continue to rally and then we come into mid next year, and guess what? The fear of the recession starts, or excuse me, the fear of the presidential election I should say, really comes into focus. And maybe a recession too, but comes into focus. And hypothetically if we have President Trump versus Elizabeth Warren. You have very polar opposite views. And remember the stock market’s kind of a discounting mechanism. So how do you go buy a stock when you don’t know what the rules of the game might be or might not be?

So that’s something to watch for. But again that speculation. We don’t know, we don’t do anything today based on that, but it’s something to watch.

I did get an email from a gentleman who basically said, “It’s so obvious how corrupt and slanted quote unquote the system is, and it makes me fear the worst. Hence, I ask you this because I feel that given all available information you speak, truth in reality, I’m not a party pooper, only concerned about being as well prepared as possible when the dollar is a worthless currency. Peace with you, brother.”

But there was an article attached and the article was from market watch and it essentially said, “Why would the,” it’s titled, “Why would the Fed cut interest rates a third time in a row even at stocks near record highs?” And so I wrote back and I said, I won’t give you his name, “Hey. The problem with this article is that it starts with the title, ‘Why would the Fed cut interest rates a third time in a row even as stocks near records?'” And I said, “The Fed doesn’t raise and lower rates based on what stocks are doing.” At least they shouldn’t, right? And so those two things are different. Why would they cut rates? Because they see the economy slowing, that’s why they’re cutting rates.

So regardless of where the stock market is, that’s the way it should happen. They say it, you can decide if they really do that or not, but the fact of the matter is the economy is slowing. The Fed shouldn’t have raised rates in late 2018, and they did, and they’re now behind the curve. And I wrote this earlier in the week, they’re behind the curve. So they should lower them now.

Now why are stocks continuing to go up? Because the Fed is cutting rates. Profits are still high. Taxes are lower. A trade deal’s likely. Brexit’s likely. Those are all positive things. Hence, the stock market’s going up. And I said, “I study the data and monitor the economy as well, but most important, I study investors in the flows in and out of the market.” Investors are speaking with their dollars. We can argue why are stocks at highs, we could argue all of that, but people are buying stocks. Now, we talked about the sentiment being sour. So there’s a lot of people who are fearful the market, but the ones that are in there trading, there’s more buyers and sellers. Hence, new record highs.

Now, I told them, “Look, we’re likely to have a recession at some point, it could be in 2020, but the stock market may have already priced that in.” And I’ve been telling you guys the same thing that, look, over the past two years, the stock market really didn’t make any meaningful appreciation. It’s just now starting to get going. A lot of volatility, but it peaked in January of 18 because of tariffs, fear of recession, all that. So how do we know that the market investors weren’t priced in that in already?

“People have feared the worst,” and I’m reading again from my reply to him. “People have feared the worst since 2008 because that was a horrible recession and crash. The doubt and fear is what’s been causing the market to go up. Sounds weird, but there’s an old adage on Wall Street, that Wall Street climbs the wall of worry. Investors are stills fearful now as they were several years ago. That means there’s plenty of money on the sideline.”

So I’m answering that question in terms of the dollar being worthless. Again, it’s a relative game. The dollar may be the best house in a bad neighborhood, and hence why some people want to do cryptocurrencies and want to see that succeed. But the dollar has been very strong and I think it will weaken, but I think it will weaken against other currencies. So we don’t have an alternative right now, nor does the rest of the world. And no, it’s not gold. This is not a commentary on whether I like gold now or not, it’s just it’s not gold. So the dollar is still the place to be in terms of a currency, and I don’t think it will be worthless.

What is true, and this is something really important, why we do this, is that the dollar does lose value over time. You lose purchasing power by holding more dollars. That’s why you invest your money in stocks, bonds, real estate, private equity, whatever it might be. Because those things keep up with inflation and beat inflation over time. Whereas the dollar, you’re falling behind. You hold dollars, the cost of goods goes up. So yes, the dollar is going to lose value, but does it lose value relative to other things, other currencies? And so far it has not, at least in the last couple of years here.

Now lastly, I got another question. Is the market looking toppy? Is it stretched? And what’s fascinating about it is if you look at the stock market, and we’ll talk technicals for a minute here, the stock market broke out. Remember it peaked in July, fell, went up again in September, fell. And remember I kept saying, “Can’t break out, can’t break out.” It broke out this week. The stock market is at an all-time high. It broke out.

And furthermore, on Thursday when the Dow was down at 300, guess what? It bounced. It bounced on that old breakout level. And so Wednesday and Thursday, the stock market did not close on its highs. In fact, it bounced off. If you draw a horizontal line at the peak in July and the peak in September and what would have looked like the peak in October. It broke out above that, came down, tested it, we bounced on Thursday and we bounced significantly on Friday.

So do I think it stretched? Maybe a little in the short term, but remember when we break out to new highs, especially after consolidating for a while, you’re going to get people chasing it a little bit. And again, we could have a correction at any time for any reason based on a tweet, based on a comment, you name it. None of us can ever predict that, see that. But in terms of bull markets and bear markets, I still don’t see any evidence of a bull market becoming a bear market. And I really, the fact that we have those sentiment indicators that are so sour, that is is a lot of fuel, I think for further gains.

Now again, we’re going to continue to get headlines. But has the market stretched here? I don’t really see it stretched. Again, zoom out a little bit, and I think you’ll see what I’m talking about, which is we were really struggling for a year and a half and we’re just now breaking out. I mean, we were around 2,900 on the S&P 500 and we were at a lot of volatility, all of that. And then just recently have we broken up above and now we’re at 3066 as of Friday’s close.

So we’re getting some momentum going here and again, some of the stuff could be lining up. If we hear more about prey Brexit, if we get a trade deal done and that’s announced, earnings continue to come in better than expected. Still negative for the growth, but better than expected. And we get some economic data that we got on Friday that at least has people saying, “Shoo, I’m I’m glad it wasn’t a horrible employment number, a good employment number.” It’s a relief rally, and so I don’t see it stretched. As always, asset allocation. What’s your situation versus somebody else? Totally different how much stocks and bonds you should have. But again, we’re not making any drastic moves because I don’t think it’s warranted.

So a solid week in the markets and overall a nice finish to the week. If you’re long stocks, if you’re short stocks and you’re a permabear, pretty tough week, but overall, pretty good week.

Have a great weekend, enjoy the… It’s been cold but beautiful weather back and forth here the last couple of weeks. So we are officially in the cold season as we approach Thanksgiving and Christmas and so forth.

All right, have a wonderful weekend. And don’t forget (210) 526-0057 is our phone number and our website is And you can get the podcast on all the podcast services, or I should say most of them. So make sure you do that. Feel free to give us some feedback, questions, we love it. Keep them coming. Have a wonderful weekend. Take care everybody.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy or product, including the investments and or investment strategies recommended or undertaken by Covenant Multifamily Offices, LLC, Covenant, or any non-investment related content will be profitable, equal any corresponding indicated historical performance levels, be suitable for your portfolio or individual situation or prove successful.

Moreover, you should not assume that any discussion or information serves as the receipt of or as a substitute for personalized investment advice from Covenant. To the extent that a listener has any questions regarding the applicability of any specific issue discussed above to his/her individual situation. He/she is encouraged to consult with a professional advisor of his/her choosing.

Covenant is neither a law firm nor certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of our current written disclosure brochure discussing our advisory services and fees is available upon request or at