News for the Week of August 8 – August 12, 2016
by David Abuaf, CFA
Investment Manager, RJFS
Government / Political / non-Economic
1. A suicide bombing in Pakistan targeting a crowd of lawyers killed at least 69 people
2. States and localities are resisting infrastructure spending despite plunging interest rates. Government bond issues have fallen to level not seen in 20 years!
3. The opening ceremony of Rio Olympics drew 26.5m viewers, a 35% decline from London’s opener in 2012
4. Darn! Islamic State and the Taliban have forged a patchwork cease-fire across much of eastern Afghanistan…for a long while they were fighting each other!
5. Erdogan and Putin are set to meet to patch up their relationship as each of their countries are facing strained relationships with the West
6. Israel charged a UN aid worker in the Gaza Strip of assisting Islamist movement Hamas. No surprise; the UN recognizes Palestine, which has never before been a country and instead occupies territories that Israel legally owns – it’s like the UN recognizing Texas as an independent country!
7. The Justice Department is likely to call for changes in Baltimore’s police department after finding a pattern of unconstitutional practices…that reminds me of the HBO series The Wire
8. The DEA said marijuana will remain on its most-restricted list but backed more research into the drug. This I don’t get. The DoJ says they won’t prosecute small amounts of marijuana, multiple states have legalized it, yet the enforcement agencies are still searching for criminals who possess it?
General Markets / Economic
1. Debt issuers are calling bonds at the fastest pace in four years as they take advantage of low interest rates
· What they’re doing is selling new bonds in the marketplace for low interest rates and using that money to buy back (or call) older bonds with higher interest rates
2. China’s exports fell in July
3. 8 big banks are forming a group to combat cybercriminals targeting the financial service industry
4. US household debt rose $35B last quarter, driven by car loans and bigger credit card balances. This is actually good news. It means consumers are more confident in the market!
5. US home prices rose to near their peak from 10 years prior, driven by tight supply
1. A Delta power outage grounded thousands of passengers world-wide and highlighted problems with airline computer systems
· Stranded customers were left with fewer options due to reduced cooperation among some carriers
2. WalMart agreed to buy Jet.com for $3.3B
3. This is not good for Facebook: P&G is moving away from ads on Facebook that target specific consumers, seeing limited effectiveness
4. Macy’s said it would close 100 stores, admitting some sites were worth more as real estate than retail outlets – I wonder when Sears will follow suit (their real estate assets are sky high!)
1. A group of scientists concluded that a theoretical particle hunted by physicists for two decades doesn’t exist
2. Parents who restrict their kids’ diet to veganism can face punishment in Italy
3. The Australian branch of PETA says apples and cherries are grown in Tasmania, and Tasmania should rename the “Eggs and Bacon Bay” to “Apple and Cherry Bay”…because that name would be “much better, kinder, compassionate and healthy.” Seriously…sticks and stones AND words can break your bones!
Commentary for Week of August 8 – August 12, 2016
by David Abuaf, CFA
Investment Manager, RJFS
The stock market finished little changed last week in quiet summer trading. August doldrums were punctuated briefly by all-time highs set on Thursday, though prices retreated slightly on Friday.
That said, all three major US indexes hit highs simultaneously on Thursday, the first time that has happened since December 31, 1999.
According to Douglas Cote at Voya Investment Management, investors live in a world of low corporate profit growth and low bond yields. He says that’s conducive to making an already pricey market – the S&P 500’s PE ratio is at 18.5x – more expensive. As such, the desperate search for yield continues, as evidenced by the better than 18% returns this year the telecom and utilities sectors (S&P 500 sector indices). Consequently, says Cote, the market shouldn’t be measured against its own historical average P/E, about 15 times, which suggests it is expensive. Instead it should be compared to bonds and other alternatives.
All that said, the more stocks go up, the more those sitting on the sidelines will be forced to capitulate and join in. As such, the market can continue to get more expensive in the context of low bond yields (the Treasury’s 10-year note is yielding around 1.5%).
In a way, this market – though much less expensive than it was in the dot-com era, when its P/E hit 28x – has something in common with that old bull. In those days, there was an emotional euphoria about powerful profit-growth expectations, driven by the new Internet stocks. Today, another emotion – a desperation for yield – mirrors that euphoria. And desperation may yet lead to more extreme valuations.
All opinions presented are those of David Abuaf, and not of Raymond James or Forman Investment Services.
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