Friday, November 22, 2019

Some Personal News

I live in a town across the Golden Gate Bridge called Mill Valley. My wife and I moved here in 1999 with our two small children who were 4 and 1 years old at the time. It was near the end of the dot.com bubble. We were both consultants living in Silicon Valley and experienced this period up close.

I told my wife that I thought we were buying our house at the top of the market. She turned to me and said: "We are not buying a house, we are buying a home. This is where we raise our children. This is where we make our life."

As usual, she was right. I coached Little League and soccer for 10 years. My kids both ran the Dipsea Race every year. My son became an Eagle Scout. We all volunteered for our local library. Both kids started kindergarten here and graduated from the local high school, all public. They've now moved away. They're adults.

Outside of work and writing The Fat Pitch, I have run a 501(c) benefiting our library and chaired our town's Planning Commission. We love this town, we want to make it the best it can be, we will never leave. We believe in action, not words. We don't just talk, we do.

In September, I wrote a piece on the US economy and then went on a trip overseas for the rest of the month. When I returned, I started a campaign to run for elected office on our town's City Council. I met with every living former mayor, explained who I was and what I wanted to accomplish, and was endorsed by all, 19 in total. I am doing the same with as many other community leaders as I can and if they are in a position to endorse a candidate, then they have endorsed me. I am extremely grateful and humbled by everyone's support and encouragement. This feels right. I'm excited.

This has been time consuming, but I can't think of anything more important. I sat with an owner of an vital and iconic shop in downtown Mill Valley this week, a person raised here, retired here and who has over the past several decades met with every future mayor. He grilled me on housing, finances, traffic, human resources and every other topic of importance. 90 minutes went by like it was 5. It was thrilling, and I once again learned many things I didn't know the day before.

I have never run for public office. I never thought this is where life would lead me. I'm 56 years old, I have lived here for 20 years, I have been deeply involved in my community and I feel like I can make a difference. I don't have an answer for everything, there's a lot I don't know, but I will listen, I will ask questions, I will study, I will act with integrity and honesty, I will give this my every effort and I will try to do the right thing.

I have put a lot of effort into writing The Fat Pitch. I have wanted it to be the best source of financial and economic analysis that I could create. I wanted to help anyone willing to read it to learn and question and think and hopefully improve. It did all of those things for me. I don't believe in half measures, so I haven't written in a while. When I can commit the needed time, I will start writing again. I miss it, I'm committed to it and I will return to it.

If you are reading this and happen to live in Mill Valley, please get in touch. If you know someone here, spread the word. I am trying to run a different type of campaign, one where thousands of mailers and hundreds of lawn signs are replaced by email, phone calls, meetings at coffee shops and by my feet walking in neighborhoods.  I want every voter to have met me, read about me or to have heard about me from a trusted friend. I don't want a vote based on a lawn sign or a piece of mail. That is all landfill. The recent fires and power shutdown in California are a timely reminder that we need to change the way we do things, and it starts with something as simple as a local election. It starts now.

You can read more here: https://urbancarmel.com/


Friday, September 6, 2019

September Macro Update: Rising Possibility of a Recession in 2020

Summary: The balance of the macro data remains positive. A recession starting in 2019 is unlikely, but, for the first time, a recession in 2020 is a rising possibility.

The bond market sees weakening growth. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (dots). The lag between inversion and the start of the next recession has been long: at least 7 months and in several instances as long as 2-3 years. Notably, the yield curve finally inverted in August; on this basis, the current expansion will likely last through 2019 but 2020 is now at risk (from JPM). Enlarge any image by clicking on it.


Monday, August 19, 2019

2Q Corporate Results: 2% Earnings Growth Expected in 2019

Summary: Overall, corporate results in the second quarter of 2019 were fine, but growth has slowed. Sales and earnings were up were 5% and 4% yoy, respectively. Margins rebounded from the end of 2018 but are still below the cycle high made in 3Q18.

Looking ahead, analysts' expectations for 10% earnings growth in 2019 have been revised down to just 2%. This estimate will be about right if margins can be maintained at the current level and the dollar doesn't further appreciate, but another drop in oil prices could cause earnings growth to decline towards zero.

For 2020, analysts currently expect growth of 5% to sales and 11% to earnings. This is too optimistic. Assuming no change in the dollar, oil and margins, earnings growth is likely to be halved. Margin compression (likely) would lower growth much more.

Valuations are now back to their 25-year average. They are not cheap, but if investors once again become ebullient, there is room for valuations to expand. With earnings growth likely to be negligible, the key for share price appreciation in 2019 (and 2020) is likely to hinge almost entirely on valuations expanding.

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93% of the companies in the S&P 500 have released their second quarter (2Q19) financial reports. The headline numbers were fine, but growth has slowed. Here are the details:


Sales

Quarterly sales grew 5% over the past year, to a new all-time high (ATH). On a trailing 12-month basis (TTM), sales were 7% higher yoy (all financial data in this post is from S&P). Enlarge any image by clicking on it.


Friday, August 2, 2019

August Macro Update: Housing Weak But Recession Unlikely In 2019

Summary: The 25bp rate cut by the FOMC this week was warranted given ongoing weakness in housing, but the balance of the macro data remains positive, meaning a recession starting in 2019 is unlikely.

The bond market sees continued but modest growth. The yield curve has 'inverted' (10 year yields less than 2-year yields) ahead of every recession in the past 40 years (dots). The lag between inversion and the start of the next recession has been long: at least 7 months and in several instances as long as 2-3 years. The yield curve has not yet inverted; on this basis, the current expansion will likely to last through 2019 at a minimum (from JPM). Enlarge any image by clicking on it.


Thursday, August 1, 2019

High Consumer Confidence Is A Notable Stock Market Warning

Summary:  In July, the Consumer Confidence Index (CCI) jumped to its highest level since last September, right before stocks started a 20% correction. Sometimes a high in the CCI coincides closely with a 5% or greater fall in stocks, but at other times the lag has been many months. In general, however, the risk/reward for investors over the next 6 months has not be favorable.

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In July, the Conference Board's Consumer Confidence Index (CCI) jumped to the highest level since last September. According to the Conference Board: “Consumers are once again optimistic about current and prospective business and labor market conditions. In addition, their expectations regarding their financial outlook also improved."

The CCI was created in 1967, based on a monthly survey of 5,000 households. The report gives details about consumer attitudes (how would you rate the current business and employment situation; do you think your income will be higher or lower in 6 months) and buying intentions.

Increasing confidence is generally good for the economy as it drives consumption, which is 70% of the US economy.

But excessive confidence is not good, especially for the stock market. The timing is far from perfect but risk/reward and forward returns are often poor.

The current CCI is now 136. It has been higher in only 3 other periods: the late 1960s, the late 1990s and last year (the next 4 charts are from Sentimentrader; to become a subscriber and support the Fat Pitch, click here). Enlarge any chart by clicking on it.