What to Expect From Equities in 2018

Summary: US stocks will likely rise in 2018. By how much is anybody’s guess: the standard deviation of annual returns is too wide to get even close to a correct estimate on a consistent basis. Earnings growth implies 6% price appreciation, but tax cuts could boost that to 13%. Investor psychology could push returns much higher (or lower).
While it’s true that investors are already bullish and valuations are already high, neither of these implies a likelihood of negative returns in 2018. That the stock market rose strongly this year also has no adverse impact on next year’s probable return.
A bear market is always possible but is also unlikely. That said, the S&P typically experiences a drawdown every year of about 10%; even a 14% fall would be within the normal, annual range. It will feel like the end of the bull market when it happens.
The Fed will likely continue to raise rates next year, which normally leads to higher stock prices. While political risks seem high, the stock market usually ignores these. The “Year 2” presidential cycle provides no investment edge.
This article highlights 11 key ideas to explain what to expect in 2018.

This post was published at FinancialSense on 12/19/2017.

Jim Kunstler: “You Can See Where This Has Been Going…”

Lately, fund flow data has all the credibility of a NYT presidential poll two days before the Trump defeats Hillary. On one hand, you have Lipper reporting that investors pulled $16.2bn from U. S.-based equity funds in the past week, the largest withdrawals since December 2016. The same Lipper also reported that taxable-bond mutual funds and ETFs recorded $1.2bn in outflows, with U. S.-based high-yield junk bond funds posting outflows of $922 million. On the other hand, you have EPFR which looking at the same data, and the same time interval, concluded that there was $8.7bn inflows into equities, of which total flows into the US amounted to $7.8bn, the largest in 26 weeks.
How does any of this make sense? We are not sure, although it may be that while Lipper ignores ETF flows, EPFR includes these. Indeed, when breaking down the latest flow data, which still does not foot with the Lipper numbers, Bank of America notes that the $8.7bn in equity inflows is the result of a $31.4bn in ETF inflows – the second largest on record – offset by $22.7bn in mutual fund outflows, the 4th largest on record.
When looking at this staggering divergence, BofA’s Michael Hartnett put it best:
Passive hubris, active humiliation: 2nd largest week of inflows ($31.4bn) ever into equity ETFs vs 4th largest week ever of outflows from equity mutual funds (Chart 1)

This post was published at Zero Hedge on Dec 15, 2017.

Bank Of America: “This Is The First Sign That A Bubble Has Arrived”

Lately, fund flow data has all the credibility of a NYT presidential poll two days before the Trump defeats Hillary. On one hand, you have Lipper reporting that investors pulled $16.2bn from U. S.-based equity funds in the past week, the largest withdrawals since December 2016. The same Lipper also reported that taxable-bond mutual funds and ETFs recorded $1.2bn in outflows, with U. S.-based high-yield junk bond funds posting outflows of $922 million. On the other hand, you have EPFR which looking at the same data, and the same time interval, concluded that there was $8.7bn inflows into equities, of which total flows into the US amounted to $7.8bn, the largest in 26 weeks.
How does any of this make sense? We are not sure, although it may be that while Lipper ignores ETF flows, EPFR includes these. Indeed, when breaking down the latest flow data, which still does not foot with the Lipper numbers, Bank of America notes that the $8.7bn in equity inflows is the result of a $31.4bn in ETF inflows – the second largest on record – offset by $22.7bn in mutual fund outflows, the 4th largest on record.
When looking at this staggering divergence, BofA’s Michael Hartnett put it best:
Passive hubris, active humiliation: 2nd largest week of inflows ($31.4bn) ever into equity ETFs vs 4th largest week ever of outflows from equity mutual funds (Chart 1)

This post was published at Zero Hedge on Dec 15, 2017.

November Jobs Report: 228K New Jobs, Better Than Forecast

This morning’s employment report for November showed a 228K increase in total nonfarm payrolls, which was better than forecasts. The unemployment rate remained at 4.1%. The Investing.com consensus was for 200K new jobs and the unemployment rate to remain at 4.1%. September and October nonfarm payrolls were revised for a total gain of 3K.
Here is an excerpt from the Employment Situation Summary released this morning by the Bureau of Labor Statistics:
Total nonfarm payroll employment increased by 228,000 in November, and the unemployment rate was unchanged at 4.1 percent, the US Bureau of Labor Statistics reported today. Employment continued to trend up in professional and business services, manufacturing, and health care.
Here is a snapshot of the monthly percent change in Nonfarm Employment since 2000. We’ve added a 12-month moving average to highlight the long-term trend.

This post was published at FinancialSense on 12/08/2017.

The Euro Is Not Dead, Claims EU Survey

The mood has shifted.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET. Europeans are finally learning to love the euro, it seems, at least according tothe latest edition of the Eurobarometer, which is published twice yearly by the European Commission: 64% of the respondents, representing 16 out of 19 Eurozone economies, believe that having the euro is ‘a good thing for their country,’ the highest proportion since 2002, and up from 56% in 2016. Only 26% of respondents thought it was a bad thing.
A further 74% of respondents said that the euro is a good thing for the EU as a whole, the highest proportion in the 2010-2017 series. This is somewhat ironic given that even the ECB conceded this week that the main idea behind the euro as a driving force for regional economic convergence has produced, let’s say, mixed results, having essentially failed where it mattered the most, in Southern European economies:
‘It is striking, however, that little convergence has occurred among the early euro adopters, despite their differences in GDP per capita. In contrast to some initial expectations that the establishment of the euro would act as a catalyser of faster real convergence, little convergence, if any, has taken place for the whole period 1999-2016’
Nonetheless, the results of the survey point to a marked improvement in Europe’s love affair with the single currency, as growth in the Eurozone has reached its highest level (a forecast 2.6% for 2017) since the financial crisis began 10 years ago.

This post was published at Wolf Street on Dec 8, 2017.

US Trade Deficit Surges Near Five Year High Despite Sliding Dollar

The US trade balance surprisingly blew out in October, increasing from $44.9 billion to $48.7 billion, as unexpectedly exports decreased and imports increased despite the ongoing dollar weakness, missing estimates of $47.5 billion. October’s number was tied for the widest deficit going back to early 2012…

… and marks a stark divergence with the recent dollar weakness which would suggest an improvement in US trade data.
Broken down by components, the goods deficit increased $3.8 billion in October to $69.1 billion. The services surplus decreased less than $0.1 billion in October to $20.3 billion.

This post was published at Zero Hedge on Dec 5, 2017.

Cable Soars After UK, Ireland Agree On Brexit Border Deal

As several sellside desks have summarized, today will be a binary one for GBP: either deal or no deal. And following an early swoon in cable after speculation rose that a deal would be elusive, the pound soared above 1.35 following a report that EU chief brexit negotiator Barnier told MEPs that a breakthrough is likely today. This was confirmed moments ago by the FT which said that “Britain is heading for a breakthrough on Brexit talks after reaching a compromise with Ireland on the border between the Republic and Northern Ireland, the issue that threatened to derail the negotiations.”
The draft refers to maintaining ‘regulatory alignment’ between Northern Ireland and the Republic after Brexit – a form of words that, according to a senior official involved in the talks, appears to meet Dublin’s deep concerns about a possible hard border on the island and has not raised objections in London. The wording is more comfortable for Britain than previous draft formulations that insisted on ‘no regulatory divergence’.
The BBC confirmed as much after its political editor Laure Kuenssberg said that ‘May and Juncker about to appear together – with a deal seeming to be on the table.”

This post was published at Zero Hedge on Dec 4, 2017.

UK’s Top Fund Manager: “So Many Lights Flashing Red, I’m Losing Count”

Neil Woodford is the founder of Woodford Investment Management, with $20 billion under management, and was appointed a Commander of the Order of the British Empire (CBE) for services to the economy in the Queen’s 2013 Birthday Honours List. However, he’s not very happy in his latest outlook for equity markets, nor is he happy with the recent performance of his funds, although he’s been in this situation before – ahead of the tech crash in 2000 and the sub-prime crisis in 2008. According to the Financial Times.
Neil Woodford, the UK’s most high-profile fund manager, has said he believes stock markets around the world are in a ‘bubble’ which when it bursts could prove ‘even bigger and more dangerous’ than some of the worst market crashes in history. The founder of Woodford Investment Management, which manages 15bn of assets, warned investors to be wary of ‘extreme and unsustainable valuations’ in an interview with the Financial Times, likening the level of risk to the dotcom bubble of the early 2000s. ‘Ten years on from the global financial crisis, we are witnessing the product of the biggest monetary policy experiment in history,’ he said. ‘Investors have forgotten about risk and this is playing out in inflated asset prices and inflated valuations. ‘Whether it’s bitcoin going through $10,000, European junk bonds yielding less than US Treasuries, historic low levels of volatility or triple-leveraged exchange traded funds attracting gigantic inflows – there are so many lights flashing red that I am losing count.’ Woodford likes to be contrarian: few people believed that Brexit was a buying opportunity, for example. Given his value investing style, it’s not surprising that’s he’s avoiding high-profile momentum driven names and boosting holdings in old economy ‘bricks and mortar’ companies, literally. The FT continues.

This post was published at Zero Hedge on Dec 1, 2017.

Minimum Wage Laws Have Many Victims

Minimum wage laws are often put forward as regulations that help everyone. If anyone is hurt, it is wealthy capitalists who can afford to lose a little money. Unfortunately, this is rarely the reality. In order to decode the impact of minimum wage laws, one has to examine the effects on multiple levels, examining both the seen and the unseen consequences. Increases in wages have to be paid for somehow, and given the interdependent relationship of a market, there are three major players who are impacted by minimum wages: employers, employees, and the consumers.
1. Employers Employers are faced with the increased costs of the factors of production without any corresponding increase in value. Although minimum wages are argued by pointing at multinational companies and the profits they are raking in, MacDonald’s and Wal-Mart are not the only ones paying minimum wages. Indeed, they are the least affected, since their enormous profits enable them to cope with the increase in wages.
It is the small emerging businesses that are harmed the most, the local businesses that provide employment in their neighborhood to people who would have otherwise remained unemployed. Minimum wages punish small time entrepreneurs by decreased profits – especially when profit margins are razor thin, as is usually the case. This fact helps to deter entrepreneurs from opening businesses, and this is doubly unfortunate when we consider the fact that minimum wages are often a legislative reaction to an excess labor supply in the first place. When wages are low is precisely the time when we need new entrepreneurs the most.

This post was published at Ludwig von Mises Institute on Dec 1, 2017.

Market Talk- November 17, 2017

The tax reform bill passing the US House yesterday certainly added to sentiment, after great earnings releases for markets but Asia need more help for cash today. Having opened strong all core markets then drifted and even saw the Nikkei trade negative. For the week it closes down 1.3% which has broken a two month rally. The Hang Seng performed well all day closing up around +0.6% but only off-set the decline in the Shanghai (-0.5%). India traded well following Thursday’s credit upgrade eventually adding an additional +0.7% onto yesterdays gain. All eyes are still on the DXY as we approach the weekend as just below we have the 50 Day Moving Average at 93.50. Oil has bounced following comments from potential output cuts led by OPEC.

This post was published at Armstrong Economics on Nov 17, 2017.

Housing Starts, Permits Rebound In October After Storm-Soaked September

Following September’s storm-driven tumble, October has seen a big rebound in Housing Starts (+13.7% MoM) and Permits (+5.9% MoM) both beating expectations, as multi-family starts explode.
Housing starts printed above all analysts’ guesses (4 standard deviations above expectations) for the biggest monthly jump in a year.
The surge in starts was driven by a major rebound in multifamily units…

This post was published at Zero Hedge on Nov 17, 2017.

Business Cycles and Inflation – Part I

Incrementum Advisory Board Meeting Q4 2017 – Special Guest Ben Hunt, Author and Editor of Epsilon Theory
The quarterly meeting of the Incrementum Fund’s Advisory Board took place on October 10 and we had the great pleasure to be joined by special guest Ben Hunt this time, who is probably known to many of our readers as the main author and editor of Epsilon Theory. He is also chief risk officer at investment management firm Salient Partners. As always, a transcript of the discussion is available for download below.
As usual, we will add a few words here to expand a little on the discussion. A wide range of issues relevant to the markets was debated at the conference call, but we want to focus on just one particular point here that we only briefly mentioned in the discussion. In fact, as you will see we are about to go off on quite a tangent (note: Part II will be posted shortly as well).
Among the things Ben Hunt specializes in are the narratives accompanying economic and financial trends, and not to forget, economic and monetary policy, which inform the ‘Common Knowledge Game’ (in his introductory remarks, Ronald Stoeferle provides this brief definition: ‘It’s not what the crowd believes that’s important; it’s what the crowd believes that the crowd believes’). This reminded us of something George Soros first mentioned in a speech he delivered in the early 1990s:
Economic history is a never-ending series of episodes based on falsehoods and lies, not truths. It represents the path to big money. The object is to recognize the trend whose premise is false, ride that trend, and step off before it is discredited.

This post was published at Acting-Man on November 17, 2017.

China’s 10-year Yield Bumping 4%

Even before President Trump’s Asia trip, Chinese 10-year sovereign bond yields have been pushing higher. And that means we should expect the same for US 10-year T-Note yields.
I wrote about this relationship back in May 2017, noting that a big spread between the yields in China and the US can mark an inflection point for US yields. To identify when the spread was getting to an actionable point, I used 50-2 Bollinger Bands. That designation means that the bands are set 2 standard deviations above and below a 50-day moving average. I have left that moving average off the chart just to help reduce visual clutter.

This post was published at FinancialSense on 11/16/2017.

Gold Bounces Off Key Technical Support On Massive Volume

The last 48 hours has been quite a chaotic one in precious metals markets with massive volumes of ‘paper’ gold flushed in and out of the futures markets. This morning – shortly after the US open failed to spark a panic-bid in stocks – gold futures bounced off their 200-day moving average on huge volume (around $4.5 billion notional) breaking above the 100DMA…

This post was published at Zero Hedge on Nov 14, 2017.

Our New Bullish Predictions for Gold Prices and Gold Stocks Before 2018

This is a syndicated repost courtesy of Money Morning – We Make Investing Profitable. To view original, click here. Reposted with permission.
Bulls and bears kept pulling gold prices in different directions over the last month. Despite rising 0.4% last week, the price of gold is down 2.1% since Oct. 13.
The U. S. dollar’s rally has been the primary reason for gold’s decline. The U. S. Dollar Index (DXY) – which compares the dollar to other currencies like the yen and euro – is up from 93.09 on Oct. 13 to 94.52 today (Monday, Nov. 13).
But the gold price action is starting to look constructive again…
We know that gold prices tend to put in an interim bottom in October each year since this secular bull market began in 2001. For instance, the metal plunged to a four-month low of $1,252 on Oct. 7, 2016.
Also, if we look at gold’s overall positive years since 2001, we see the average return on gold stocks between late October and late February is an impressive 15%. Given how the Dow Jones Gold Mining Index – which tracks gold mining stocks – is up 10.4% in 2017, I think these companies have much more room to run through next February.
And any reasonable correction in stocks could help to trigger such bullish action. That’s why, today, I’ll share with you my bold forecast for both gold prices and gold stocks through the end of the year.
First, let’s check out last week’s gold performance – and what that says about the price of gold moving forward…

This post was published at Wall Street Examiner by Peter Krauth ‘ November 13, 2017.

Macro Plan Still on Track for Stocks, Commodities And Gold

As I’ve been noting again, again, again, again, and again the macro backdrop is marching toward changes. I’d originally thought those changes would come about within the Q4 window and while that may still be the case, it can easily extend into the first half of 2018 based on new information and data points that have come in.
One thing that has not changed is that stock sectors, commodities and the inflation-dependent risk ‘on’ trades and the gold sector, Treasury bonds and the risk ‘off’ trades are all keyed on the interest rate backdrop; and I am not talking about the Fed, with its measured Fed Funds increases. I am talking about long-term Treasury bond yields and yield relationships (i.e. the yield curve).
People seem to prefer linear subjects like chart patterns, momentum indicators, Elliott Waves, fundamental stock picks or the various aspects of ‘the economy’ or the political backdrop. They want distinct, easy answers and if they can’t ascertain them themselves, they seek them out from ‘experts’. But all of that crap (and more) exists within an ecosystem called the macro market. When you get the macro right you then bore down and get investment right. That’s the ‘top down’ approach and I adhere to it like a market nerd on steroids. And with the recent decline in long-term bond yields and the end of week bounce, the preferred plan is still playing out.
So let’s briefly update the bond market picture with respect to its implications for the stock market, commodities and gold.

This post was published at GoldSeek on 10 November 2017.

“The Leaders Are Crashing” – It’s Not Just Junk Bonds That Have Given Up

We have been warning about significant divergences between equity prices and other asset classes for a few weeks (most notably the decoupling from equity risk and credit risk, junk bonds), but as BofA notes its not just these assets that are breaking away from soaring Nasdaq levels, in fact many of the rally’s leaders are crashing… in a way we have not seen recently.
High yield risk has suddenly decoupled from equity markets…

This post was published at Zero Hedge on Nov 10, 2017.

Psychological Warfare in the Precious Metals Markets

For almost a year now the PM stock indexes have been building out a triangle trading range that has yet to be determined if it is going to be a consolidation pattern or a reversal pattern. With big patterns one can lose sight of what is really there, as the longer a trading range develops the more trendlines one puts on a chart, and the more confusing things become.
Tonight I would like to show you, from a Chartology perspective, what the basic patterns are, from the short term to the longer term. The bigger a trading range the more chart patterns can develop before we see the final product. Sometimes it’s totally different from the early stages of the trading range. It’s important to clear ones mind of all the preconceived notions of what they think is happening to just what the charts are suggesting. It’s a hard thing for most investors to do because of all the things we read each and everyday which works on our subconscious. More than anything else we are playing a game of psychological warfare.
Lets start by looking at a short term daily chart for the HUI which is showing the H&S top we’ve been following since early October. The H&S top is pretty symmetrical and the breakout below the neckline was accompanied by a breakout gap. This is what we know to be true at this point in time. If the price action can trade back above the neckline then this scenario will be thrown out the window, but until that time the H&S top is valid. Also when the neckline gave way so did the 200 day moving average.

This post was published at GoldSeek on 9 November 2017.

Negative Divergence in the Gold Stocks

After a severe selloff, precious metals have enjoyed a bit of a respite. Corrections are a function of time and/or price. The correction to the recent selloff has been more in time than price. Metals and miners have stabilized over the past nine trading days but have not rebounded much in price terms. Gold has barely rallied $20/oz while GDX and GDXJ have rebounded less than 4% and 5% respectively. In addition to the weakness of this rally, the gold stocks are sporting a negative divergence and that does not bode well for an end of the year rally.
The negative divergence is visible in the daily bar charts below. We plot Gold along with the gold stock ETF’s and are own ‘mini’ GDXJ index. The price action in Gold since October looks constructive. The market has held its October low and the 200-day moving average. It could have a chance to reach $1300-$1310. However, the miners are saying no to that possibility. Everything from large miners to small juniors made a new low while Gold did not. The second negative divergence is in regards to the 200-day moving average.

This post was published at GoldSeek on Thursday, 9 November 2017.

Is There A Housing Bubble In Your City?

My analysis below highlights how out of scope house prices are from end-user, shelter-buyer, employment & income fundamentals in the most economically important cities.
This massive divergence has been driven largely from the things present in all bubbles; unorthodox capital, credit & liquidity driving speculation.
Like Bubble 1.0, house prices in the most lofty regions have been driven for years by ‘non-end-users’ SPECULATING on rentals, second/vaca homes, and flipping – riding a wave of cheap & easy credit, liquidity & leverage – believing prices always go up.
While speculative cycles come & go, end-user, shelter-buyer demand is omnipresent. And end-user employment, income & credit fundamentals are what house prices will ultimately gravitate to.
With between 40% & 50% of buyers putting less than 10% down for years – and because it takes at least 10% equity to sell & rebuy – it doesn’t take much downside to swamp the nation in ‘effective negative equity’ once again.
ITEM 1) INCOME INCREASE NEEDED TO BUY THE MEDIAN PRICED HOUSE IN KEY CITIES.
Bottom Line: On a ‘national’ basis, it doesn’t look too badly. But, most of the most economically important US cities are experiencing ‘BUBBLE-LIKE’ conditions again.

This post was published at Zero Hedge on Nov 7, 2017.