DOW to 20,000 ?

Longtime stock bull Jeremy Siegel told CNBC on Tuesday that he sees favorable market trends-including the prospect for solid economic growth with low inflation-that could send the Dow Jones Industrial Average (Dow Jones Global Indexes: .DJI) past the 20,000 level by the end 2015.

“There are a number of goods things, I think, that need to happen, but certainly that would be even conservative for fair market value if we get some of these favorable trends coming together over this next year,” the Wharton School finance professor said on “Squawk Box .”

He cited economic growth of 3 percent to 4 percent, low inflation, cheap gas prices and an improving job market as some of the factors that could help push stocks higher. But he said, “The 3 percent [GDP], that’s the wild card.” He cautioned that many forecasters are calling for growth of 2 percent to 2.5 percent in the fourth quarter.

During the October selloff, Siegel had started to waver a bit on whether his prediction of Dow 18,000 by year-end would come to pass. But with the market back on track, he told CNBC earlier this month that he’s again confident that blue chips would reach that level after all.

In a lackluster session Monday, the S&P 500 (^GSPC) eked out its 42nd new high of 2014. The index has moved less than one-tenth of a percent in each of the last five sessions, and the Dow has only had one triple-digit point move this month after having 16 in October. The S&P was up almost 10.5 percent for the year as of Monday’s close. The Dow was up about 6.5 percent in 2014.

“Two to three years ago, I thought we were really undervalued given interest rates and earnings,” Siegel told “Squawk Box” on Tuesday. “I thought the bullish calls were really easy to make. I still think we are 10 percent undervalued given the interest rate structure.” Siegel said he’d view the Dow between 19,000 and 19,500 as fair value.

While Siegel kept preaching his bullish message, other market watchers including Carl Icahn are less optimistic. At a Reuters investment summit Monday, the billionaire warned of a “major correction” in the next few years.

Gold Action/ Direction Continues Down : Braggin’ Rights To JAB Part 2

You can review my past articles to confirm my calls:

1) BUY when gold was below $ 900

2) Steady reductions in all positions for Jack A. Bass Managed Funds

from $ 1800 til today.

Friday morning Oct .3 gold fell $20 an ounce – our accounts are smiling – gold bugs are crying conspiracy 

 

THIS Is What We Wrote Last Week

 

Now What ?

We continue to see more downside risk in the next several days

 

: ” as the next major level of support is 1,180 & if that price level is broken prices could slide rather dramatically. Gold prices settled last Friday at 1,216 finishing slightly lower for the trading week as volatility has certainly increased as prices were up $20 a couple of days back on the news of the coalition & the United States bombing ISIS but then prices came right back down as I still think lower prices are ahead as there’s no reason to own gold right now especially with a very strong U.S dollar so continue to play this to the downside making sure you place your stop above the 2 week high.”

No stocks are being spared .

In my book ” The Gold Investors Handbook” – available on Amazon – I pick B2Gold ( BTO) as my top junior . It moves lower and is so very tempting but there is no way to call a bottom. Wait and buy when there is a turn rather than catch all the falling knives.Use the book to develop your own gold watchlist . In the meantime there are so many better places to earn money with less risk.

The ever lower prices for Yamana are almost painful to watch – but there is less pain in the sideline compared to watching your portfolio wither away.

It is criminal in my less than humble opinion the Sprott and Peter Schiff continue to urge investors to buy into the conspiracy theory of manipulation of the commodity price. The printing press in the U.S. runs at full speed 24 hours a day – but the fact is there is still no inflation and no inflation on the horizon. This undermines a central argument for owning gold. Mining costs continue to escalate and thus pressure mining returns at lower commodity prices.

Even the Ukraine and Middle East turmoil and have not proved to be much of a factor to boost gold as a safe haven in times of trouble. Gold bugs are reduced to hoping the stock market stops its advance and the economic recovery in the U.S. runs out of steam.Right now dividend paying stocks in a recovery are more attractive than the gold sector.

The Challenge – a guarantee of a minimum of 12 % for your annual investment return

Investors and pensions need efficient methods to screen, research, perform due diligence and monitor managers in their quest to deliver returns. They need to know the data they are using is accurate and fresh — and represents the best options available worldwide across every asset class. They must take into account their own assets and liabilities and the impact to portfolio risk while screening strategies and tracking exposures. They also need polished reports and presentations to provide evidence of a sound, inclusive selection processes for regulators and committees.

Placing these decisions in Jack A. Bass Managed Accounts removes the work from your hands to ours .

Meeting the Challenge

Jack A. Bass Managed Accounts offers a comprehensive suite of solutions for screening and monitoring, as well as risk assessment leveraging the data of the most important databases. In fact, 89% of surveyed clients agree that Jack A. Bass Managed Accounts helps them save their time during the due diligence process, while 75% of pension clients agreed .

The answer to When? – is always NOW ! – not tomorrow.
Contact Information

Information must proceed action and that is why we offer a no cost / no obligation inquiry service if you are not already a client.

Email info@jackbassteam.com OR

Call Jack direct at 604-868-3202 Pacific Time 10:00- 4:00 Monday to Friday

( Same time zone as Los Angeles)

The Gold Sector :The Worst Slump In Prices In 30 Years Will Continue

The gold industry, recovering from the worst slump in prices in 30 years, needs more mergers to help

improve investor returns and eliminate unprofitable mines or prices will continue to fall said Jack A.

Bass , author of The Gold Investors Handbook.

ABN Amro’s commodity analysts put it plainly last week. They expect gold’s 11% rise in the first-half of 2014 to be “temporary” because US Fed rates hikes are coming, while the outlook is “positive” for equities. Such thinking makes sense based on 2013′s example. Taper talk pushed bond prices down last year, nudging market interest rates higher. The S&P500 meanwhile returned 32%, a little more than gold prices fell.
Logic might also see a trade-off between gold and rising returns on other assets. Because the metal yields nothing and does nothing. It can’t even rust. Equities and interest-paying investments on the other hand work to increase your money. So gold prices should fall when equities rise, and also when the markets expect higher interest rates. Or so analysts now think.
GOLD was a universal “sell” for professional analysts at New Year, writes Adrian Ash at BullionVault.
Losing 30% in 2013, the gold price faced the long-awaited start of US Fed tapering – widely supposed to make fixed-income bonds go down, nudging interest rates higher – plus strong hopes for further gains in world equities. Who needed the barbarous relic?

Gold producers, which are gathering for the annual invitation-only Denver Gold Forum that began yesterday, cut budgets, sold assets and adjusted mine plans after the metal plunged 28 percent last year, prompting more than $26 billion of writedowns. The industry already has started a consolidation process.

“The industry did a very poor job from a capital-allocation standpoint, from a risk-management standpoint and from an operational-execution standpoint,” he said. “For long-term oriented investors it would be better for the industry to get more right-sized where companies are focused on generating profit at a conservative gold price assumption.”

‘Darwinistic Scenarios’

Combining companies can help eliminate their respective unprofitable operations, he said. Weak companies with good assets may also be targeted by stronger producers, he said.

“Or the least appealing of the Darwinistic scenarios is a company that has gotten all of those things — capital allocation, risk management and operational execution — wrong and they wind up going bankrupt,” he said.

There have already been some moves toward consolidation this year. Yamana Gold Inc. and Agnico Eagle Mines Ltd. bought Osisko Mining Corp. after beating out a hostile bid from Goldcorp Inc. Barrick Gold Corp. (ABX) and Newmont Mining Corp., the two largest producers by sales, also discussed a merger this year before breaking off talks in April.

“I do believe the gold industry is in the process of consolidating,” Wickwire of Fidelity  said.

‘Survivors and Thrivers’

Wickwire said as an investor he focuses on companies he terms “survivors and thrivers”: those with good management and strategy. He is also interested in enterprises that may have poor strategy or boards and management but own good assets that would be better operated by another producer. He declined to name specific companies.

The Fidelity Select Gold Portfolio rose 17 percent this year through Sept. 12, compared with a 2.4 percent increase in New York gold futures. The Philadelphia Stock Exchange Gold and Silver Index of 30 companies gained 8.9 percent.

Wickwire holds both bullion and gold equities in his fund. While gold miners underperformed the metal in the past two years, they can also outperform strongly when companies’ operations, capital allocation and risk-management decisions improve, he said.

“Under the appropriate backdrops, if you have a 10 percent movement in the gold price, some companies out there have the potential to generate 30 to 40 or 50 percent cash flow and earnings-per-share growth,” Wickwire said. “And when the companies are executing, the market rewards that dynamic aspect with a higher valuation.”

WTI – and Gold – Drops on Date – as Global Manufacturing Misses Estimates

West Texas Intermediate crude fell amid speculation that weakening manufacturing from Germany to China will cap global oil demand. Brent declined in London.

Futures dropped as much as 1.2 percent from the Aug. 29 close. Floor trading in New York was shut for the Labor Day holiday, and transactions will be booked for settlement purposes today. Purchasing manufacturing indexes for Germany, Italy, the U.K. and China all came in below estimates for August, while OPEC’s output increased to the highest level in a year.

“All eyes are on the demand side, and weaker statistics for example in China are bearish,” Bjarne Schieldrop, chief commodity analyst in Oslo at SEB AB, said by telephone. “The increase in tension between Russia and Ukraine is bearish for oil” because economic sanctions on Russia may eventually result in a slowdown in Europe, he said.

WTI for October delivery declined as much as $1.19 to $94.77 a barrel in electronic trading on the New York Mercantile Exchange and was at $94.88 at 1:46 p.m. London time. The volume of all futures traded was more than double the 100-day average for the time of day. Prices decreased 2.3 percent last month and are down 3.6 percent this year.

Brent for October settlement was $1.11 lower at $101.68 a barrel on the London-based ICE Futures Europe exchange. The European benchmark crude traded at a premium of $6.83 to WTI, compared with a close of $7.23 on Aug. 29.

Factory Output

China’s manufacturing slowed more than projected last month, joining weaker-than-anticipated credit, production and investment data in indicating that the economy is losing momentum. The nation is the world’s second-largest oil consumer.

Markit Economics’ euro-area gauge slid more than initially predicted, with the index for Italy unexpectedly falling below 50, signaling the first contraction in 14 months. In the U.K., manufacturing expanded by the least in more than a year.

A final reading of Markit’s U.S. manufacturing PMI is due today, along with the Institute for Supply Management’s factory index for August, which economists forecast will drop to 57, from 57.1 in July.

“There are slowdowns occurring,” Jonathan Barratt, the chief investment officer at Ayers Alliance Securities in Sydney, said by phone. “OPEC is producing enough oil to placate any issues.”

Production from the 12-member Organization of Petroleum Exporting Countries rose by 891,000 barrels a day to 31 million in August, according to a Bloomberg survey of oil companies, producers and analysts. Nigeria, Saudi Arabia and Angola led supply gains as new deposits came online, security improved and field-maintenance programs ended. Iran and Venezuela were the only members to reduce output.

Ukraine warned of an escalating conflict in its easternmost regions as U.S. President Barack Obama headed to eastern Europe to reassure NATO members. Ukraine’s army will take on Russia’s “full-scale invasion,” Defense Minister Valeriy Geletey said on Facebook, a shift away from the government’s earlier communication that focused on battling insurgents.

Dollar Strengthens Before Data as Bonds Decline With Gold

The dollar strengthened to a seven-month high against the yen, government bonds tumbled and gold fell before data that analysts forecast will show expansion in U.S. manufacturing.

The dollar climbed 0.6 percent to 104.93 yen at 8:42 a.m. in New York and gained 0.4 percent to $1.6535 per British pound. Yields on 10-year Treasury notes increased four basis points to 2.38 percent. Futures (SPX) on the Standard & Poor’s 500 Index added 0.1 percent after the index rallied the most since February last month. Gold dropped 1.5 percent.

U.S. investors return after the Labor Day break with manufacturing and construction spending reports. Gauges of factory output in Europe and China signal slower growth, boosting speculation that policy makers will need to boost stimulus measures. European money markets are pricing in about a 50 percent probability that the European Central Bank will cut interest rates by 10 basis points this week, according to BNP Paribas SA.

“In the U.S. across the board we have had strong data,”said Niels Christensen, chief currency strategist at Nordea Bank AB in Copenhagen. “That will keep growth momentum going. We have had a positive dollar trend for the past two months. I find it difficult to see this trend is going to disappear in the short term.”

U.S. Reports

The Institute for Supply Management’s August factory gauge probably held last month near the highest since April 2011, according to the median of 70 estimates in a Bloomberg survey. Another report probably will show U.S. construction rebounded in July, a Bloomberg survey showed. Reports yesterday signaled manufacturing slowed in China, the U.K. and the euro area.

The yen fell to its lowest level against the dollar since Jan. 16 amid speculation Japan’s Prime Minister Shinzo Abe will appoint an ally to head the ministry in charge of reforming the Government Pension Investment Fund, potentially boosting investment overseas. The currency weakened to 105.44 on Jan. 2, a level not seen since October 2008.

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, climbed 0.3 percent to 1,033.71 and touched 1,034.16, the strongest since January.

The pound weakened after a YouGov Plc poll showed growing support for Scottish independence before this month’s referendum. One-month implied volatility on sterling versus the dollar jumped by the most in almost six years.

Government Bonds

European government bonds fell as Germany’s 10-year yield increased four basis points to 0.91 percent and the U.K.’s rose five basis points to 2.43 percent.

The euro overnight index average, or Eonia, which measures the cost of lending between euro-area banks, fell to a record minus 0.013 percent yesterday.

Corporate borrowing costs fell to a record in Europe, with the average yield demanded to hold investment-grade bonds in euros dropping to 1.28 percent, according to Bank of America Merrill Lynch index data. The gauge declined 19 basis points in the past month on stimulus speculation.

The Stoxx 600 of European shares fell 0.1 percent after increasing 0.5 percent in the past two days.

Vallourec SA climbed 4 percent after UBS AG advised investors to buy shares of the French producer of steel pipes for the oil and gas industry. Weir Group Plc gained 2.9 percent after Credit Suisse Group AG raised its recommendation on the British supplier of pressure pumps to outperform from neutral.

S&P 500 Tops Record Level

U.S. stocks climbed, sending the Standard & Poor’s 500 Index above a closing record, as investors speculated the Federal Reserve will continue to support the economy as central bankers meet in Jackson Hole.

The S&P 500 added 0.1 percent to 1,988.94 at 9:34 a.m. in New York, above a closing high of 1,987.98 reached July 24.

“Markets are looking for some indication from Yellen as to what happens once quantitative easing stops,” Peter Dixon, a global equities economist at Commerzbank AG in London, said by phone. “I suspect she’ll say that it depends on the data. The U.S. economy is in reasonable shape. The task for central banks, and Yellen is at the forefront, is how to wean markets away from almost unlimited liquidity provisions when the economy is recovering but remains fragile.”

The S&P 500 rose 0.3 percent yesterday, closing within two points of a record. The benchmark index has rebounded 4 percent from a three-month low on Aug. 7 as investors speculated central banks will keep interest rates low even as the economy shows signs of recovery.

Fed Minutes

Minutes to the central banks’ July meeting released yesterday showed that officials raised the possibility that aggressive stimulus will end sooner than anticipated, even as they acknowledged persistent slack in the labor market. The central bank will probably wind up its asset-purchase program at its October meeting, according to a Bloomberg survey of economists.

Data today showed fewer Americans than forecast applied for unemployment benefits last week. Yellen has highlighted uneven progress in the labor market in making the case for further accommodation.

The Fed minutes showed “many participants” still see “a larger gap between current labor market conditions and those consistent with their assessments of normal levels of labor utilization.” At the same time, “many members” noted that the “characterization of labor market underutilization might have to change before long,” particularly if the job market makes faster-than-anticipated progress, the minutes also said.

Jackson Hole

Fed Chair Janet Yellen will speak tomorrow at the Fed Bank of Kansas City’s economic symposium that starts today in Jackson Hole, Wyoming. European Central Bank President Mario Draghi will also speak.

The S&P 500 has almost tripled since its March 2009 low, helped by three rounds of Fed stimulus, coupled with better-than-projected corporate earnings. The gauge has not had a decline of 10 percent in almost three years. It trades at 17.8 times the reported earnings of its companies, near the highest level since 2010.

Soft Touch

Investors are betting that a soft touch on monetary policy will continue to suppress stock volatility, pouring a record stretch of cash into an exchange-traded note that rallies as calm returns to equities. The Chicago Board Options Exchange Volatility Index, the gauge known as the VIX (VIX), has lost 31 percent this month, closing at its lowest level since July 23.

Among other economic reports today, data at 9:45 a.m. may show a preliminary gauge of manufacturing slipped to 55.7 this month from 55.8 in July. Another report may indicate existing-home sales expanded at a slower pace in July while the Conference Board’s index of leading indicators, a measure of the outlook for the next three to six months, rose 0.6 percent in July, economists forecast.

Gap Inc. and Salesforce.com Inc. are among eight S&P 500 companies reporting earnings today.

WSJ Forecasts for the second half of 2014

I post various economic forecasts because I believe they should be carefully monitored. However, as those familiar with this blog are aware, I do not necessarily agree with many of the consensus estimates and much of the commentary in these forecast surveys.

As seen in the “Recession Probability” section, the average response as to the odds of another recession starting within the next 12 months was 12.1%; July’s average response was 12.13%.

The current average forecasts among economists polled include the following:

GDP:

full-year 2014: 2.0%

full-year 2015: 2.9%

full-year 2016: 2.9%

Unemployment Rate:

December 2014: 5.9%

December 2015: 5.5%

December 2016: 5.2%
10-Year Treasury Yield:

December 2014: 3.04%

December 2015: 3.72%

December 2016: 4.18%

CPI:

December 2014: 2.2%

December 2015: 2.2%

December 2016: 2.4%

Crude Oil ($ per bbl):

for 12/31/2014: $96.08

for 12/31/2015: $94.92

Halfway Through a Correction

By Barry Ritholtz
Last month, we discussed how we might be on the verge of a correction. We also noted the futility of trying to time the start and finish of such events. What actually matters is how you react — or overreact.

As my colleague Josh Brown has observed, “since the end of World War II (1945), there have been 27 corrections of 10 percent or more, versus only 12 full-blown bear markets (20 percent or worse).”

However, the data show that the distribution of corrections isn’t smooth. Indeed, almost half (45 percent) of the corrections occurred either in the 1970s or the 2000s. Both eras were part of longer-term secular bear markets, characterized by strong rallies, vicious sell-offs and earnings contractions.

It is noteworthy that almost half of the corrections occurred in two out of seven decades. I suspect this fact isn’t a coincidence. From a 30,000 foot view, it may be a key to understanding how likely a more severe correction might be.

Consider the various narratives that have been used as an excuse for a correction. The downgrade of U.S. debt by Standard & Poor’s was going to be a deathblow; it wasn’t. Treasuries rallied on the downgrade, just to prove that no one knows nuthin’. The sequestration of government spending was sure to cause a slow down in markets; it didn’t. Rising interest rates, the Federal Reserve’s taper, earnings misses, and of course, our winter of discontent, were all cited as triggers for corrections. And did I mention the Hindenburg Omen?

The punditry then shifted to valuations: We have heard repeatedly that markets are wildly overpriced, that we are in a bubble. Or if not a broad market bubble, then a tech bubble or an initial-public-offering bubble or a merger bubble. Some advanced the theory that Twenty-First Century Fox’s bid for Times Warner was itself proof of a top.

None of those claims gained much traction. The next set of catalysts for disaster was geopolitical. Russia’s annexation of Crimea was going to cause a spike in oil prices and a crash — only it didn’t. Then came the imminent invasion of Ukraine. UBS’s Art Cashin buried that trope yesterday. The Israel-Gaza war is another source of potential oil spikes and market crashes, which have yet to come to pass.

Now, today’s weak futures are blamed on the threatened U.S. airstrikes on ISIS, dragging America into another Middle East war. Each time I think I have finally put George W. Bush’s misadventures out of my mind, something comes about to remind us how utterly bereft of reason or intelligence the decision to invade Iraq was. It is likely to haunt the U.S. even longer than the disastrous Vietnam War.

But is that what is driving the markets? Probably not.

The simple reality is that corrections come along on a regular basis, and for reasons that are undecipherable or indeterminate. This is the way it is and always has been. Anyone who tells you he can predict when a 5 percent or even 10 percent correction is going to start and end, and do so with any degree of consistency, has something very expensive and mostly worthless to sell you.

Almost 500 trading days have passed without a 10 percent retreat. If you have grown so complacent as to have forgotten this, then you might very well be in the wrong line of work.

Corrections happen. Get used to it.

One of the worst trading days this year has even market bulls warning investors to brace for sharper pullbacks and volatility in days to come.</p>
<p>” />   Fears over Argentina’s default sent equity markets tumbling Thursday, as analysts say that investors are becoming less forgiving of worrisome economic and geopolitical news, warning that a stock correction could be looming. The S&P 500 fell 39.4 points or 2%, or to close at 1,930.67, while the Dow Jones Industrial Average saw its gains for the year erased after falling 317.06 points or 1.9% to 16,563.30. The S&P/TSX Composite slid 194.08 points or 1.3% to 15,330.74. “We are witnessing … classic signs of an impending correction,” said Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch who was once seen as the biggest cheerleader of the current rally. “We expect volatility will rise in coming months. TORONTO — North American stock markets had their biggest one-day tumble since early February on Thursday but analysts were hard-pressed to identify a single reason for the drop. The S&P/TSX composite index in Toronto fell 194.08 points to 15,330.74, as a number of big Canadian corporations missed earnings forecasts, but the index remained up about 1,736 points since the beginning of the year. New York’s Dow Jones industrials plunged 317.06 points to 16,563.3, leaving the index below where it started the year by about a dozen points. The Nasdaq lost 93.13 points to 4,369.77 and the S&P 500 index declined 39.4 points to 1,930.67.   The loonie closed down 0.02 of a cent to And volume is less than usual with many market participants on holidays. But the stock market declines also come at a time when many investors have registered substantial gains. “You get thinner markets and it doesn‘t take much to move things around,” said Wes Mills, chief investment officer Scotia Private Client Group. “Clearly everyone has made good money and there is no evidence that people are taking money off the table yet. It‘s probably just an overdue correction in a thin summer market with a combination of factors.” Valeant Pharmaceuticals International Inc., which is making a hostile takeover bid for Botox maker Allergan, posted a quarterly net profit of $126 million or 37 cents a share. Adjusted income was $651 million, or $1.91 per share, missing estimates of $1.98 a share, and its shares fell $9.59 or 7% to $127.83. Barrick Gold Corp. delivered a US$269-million quarterly net loss and $159-million of adjusted earnings in the second quarter, missing analyst estimates on both counts. The adjusted profit amounted to 14 cents US per share, two cents below estimates. Barrick shares dipped 44 cents to $19.70. 91.71 cents US. The U.S. Federal Reserve indicated Wednesday that it will keep short-term interest rates low “for a considerable time” after it ends its bond purchases, likely in October. The Fed is expected to start hiking rates mid-2015, but stronger than expected economic growth in the second quarter has investors concerned that the Fed could raise rates sooner. Argentina moved into a debt default for the second time in 13 years after a deadline of midnight Wednesday night came and went without a deal with bondholders.</p>
		</div>
		<div class=

Permalink

Investment Management: Quarterly Review and Outlook, Second Quarter 2014

By John Mauldin
It’s time for our Quarterly Review & Outlook from Lacy Hunt of Hoisington Investment Management, who leads off this month with a helpful explanation of the relationship between the U.S. GDP growth rate and 30 year treasury yields. That’s an important relationship, because long term interest rates above nominal GDP growth (as they are now) tend to retard economic activity and vice versa.

The author adds that the average four quarter growth rate of real GDP during the present recovery is 1.8%, well below the 4.2% average in all of the previous post war expansions; and despite six years of federal deficits totaling $6.27 trillion and another $3.63 trillion in quantitative easing by the Fed, the growth rate of the economy continues to erode.

So what gives? We’re simply too indebted, says Lacy; and too much of the debt is nonproductive. (Total U.S. public and private debt rose to 349.3% of GDP in the first quarter, up from 343.7% in the third quarter of 2013.) And as Hyman Minsky and Charles Kindleberger showed us, higher levels of debt slow economic growth when the debt is unbalanced toward the type of borrowing that doesn’t create an income stream sufficient to repay principal and interest.

And it’s not just the US. Lacy notes that the world’s largest economies have a higher total debt to GDP ratio today than at the onset of the Great Recession in 2008, and foreign households are living farther above their means than they were six years ago.

Simply put, the developed (and much of the developing) world is fast approaching the end of a 60-year-long debt supercycle, as I (hope I) conclusively demonstrated in Endgame and reaffirmed in Code Red.
Hoisington Investment Management Company (www.Hoisingtonmgt.com) is a registered investment advisor specializing in fixed income portfolios for large institutional clients. Located in Austin, Texas, the firm has over $5 billion under management and is the sub adviser of the Wasatch-Hoisington U.S. Treasury Fund (WHOSX).

Some readers may have noticed that there was no Thoughts from the Frontline in their inboxes this weekend. As has happened only once or twice in the last 14 years, I found myself in an intellectual cul-de-sac, and there was not enough time to back out. Knowing that I was going to be involved in a fascinating conference over the weekend, I had planned to do a rather simple analysis of a new book on how GDP is constructed. But as I got deeper into thinking about the topic and doing more research, I remembered something I read 20 years ago about the misleading nature of GDP, and I realized that a simple analysis just wouldn’t cut it.

 

Is This A Stealth Correction – Are We Too Optimistic

The second “stealth correction” of the year had been underway below the surface for a few weeks, with a broadening selection of B-list stocks tiring and investor risk appetites ebbing, and is now threatening to break into the open.

The task of playing for a more damaging break in the upward trend is complicated, though, by the fact that several such threats have proved empty in the recent past. And the sudden rush for safety amid shrill geopolitical news headlines Thursday is just the sort of hasty reflex action that has indicated decent Buy signals during this largely imperturbable bull run.

Yellen’s market call

One of the ironies of Federal Reserve Chair Janet Yellen’s singling out of small-cap, biotech and social media stocks as appearing overvalued is that these sectors have been under pressure for months.

These three market segments – as measured by exchange-traded funds tracking the iShares Russell 2000 (IWM), iShares Nasdaq Biotechnology (IBB) and Global X Social Media (SOCL) indexes – have lagged the blue-chip Standard & Poor’s 500 by between five and 15 percentage points in the past four months. Yellen was mostly voicing the conventional wisdom circa March 31 in commenting on isolated evidence of excessive investor confidence. As Yellen’s remarks were scrutinized, these pockets of the market saw selloffs.
.
Selloffs Post Yellen testimony.
Sliced up differently, the largest 500 stocks in the market as tracked by Russell were up more than 8% in 2014 before Thursday, and the smallest 500 down an average of 6% – a huge performance spread that shows a marked preference this year for stable, global companies over fast-moving, speculative ones. From July 1 through Wednesday, too, the largest 500 names were about flat even as the littlest 500 slid more than 5%, according to Pension Partners.

Before the S&P 500 on Thursday dropped 1.14%, breaking a 62-day streak without at least a 1% move, Canaccord Genuity strategist Tony Dwyer was citing other signs of ragged tape action and subtle weakness in reiterating his call for a 5%-plus market correction (which he feels should be bought for a powerful surge to his year-end S&P 500 target of 2,185, up more than 11% from Thursday’s close).

A time-proven gauge of internal market energy, the Lowry’s Buying Power index, has sagged to the lowest reading of the year. And despite the headline indexes being right up against all-time highs, fewer than one quarter of New York Stock Exchange names were within 2% of a 52-week high.

Such indicators “tell us the broad market is already in correction mode,” Dwyer says. “Many times, the correction shows up in the mega-cap stocks and major market indexes toward the tail end of a market correction.” Of course, in the springtime the damage never hit the headline large-stock benchmarks hard, as what I call an “immaculate rotation” shifted money from aggressive stocks to stable, bond-like shares instead.

The already-substantial pain in smaller-company stocks could even mean this trend of small-cap underperformance, something that often occurs later in a bull market, might not have quite as far to run in the immediate future as the growing consensus seems to believe.

Will Nasgovitz, portfolio manager of Heartland Select Value Fund (HRSVX), who hunts for inexpensive, out-of-favor stocks of all sizes, says, “It’s unfair to make a blanket statement about elevated [valuations] of small caps.” He says it’s mostly the lower-quality, more speculative subset of small stocks in the Russell 2000 index that are making the whole category appear overvalued. Indeed, the iShares Morningstar Small-Cap Value ETF (JKL) has handily outperformed its all-inclusive Russell 2000 counterpart during this choppy period.

Worrisome optimism

A nagging vulnerability of the market coming into the summer has been the pervasive optimism among active investors and traders. The proportion of investment-advisory newsletter writers tracked by Investors Intelligence who were bullish on stocks has been near historic highs since May, and the Bank of America Merrill Lynch global fund manager survey this month showed the second-highest tilt toward equities in 13 years.

Michael Hartnett, global strategist at Merrill and steward of that survey, has been firmly and correctly bullish on stocks and other riskier assets in recent years. Yet the fund manager ebullience – along with Merrill retail wealth management clients riding their highest equity allocation in at least nine years – prompted Hartnett to say Thursday that “an autumn correction is increasingly likely.”

As noted, of course, persistent predictions of a true, cleansing correction that pares stretched valuations and tempers investor expectations have failed to take hold since late 2012. The list of would-be or actual crises overseas that put a fleeting scare into the market includes the Cyprus insolvency episode, the Arab Spring, Syrian civil war, Iraq insurgency, Ukraine-Russia conflict and the current Israel-Hamas conflict.

If the current bout of unnerving foreign unrest proves a catalyst for a deeper and more inclusive Wall Street pullback, it will likely be more excuse than cause. The annals of major bull market tops and subsequent bear markets are generally free of pure military or geopolitical triggers.

The fact that the market conversation is now focused on whether or when a correction might arise – rather than whether a severe and prolonged market downturn is on the way – reflects the general sense that leading indicators of the economy are relatively encouraging.

Credit markets, while a bit softer lately, are far from signaling economic distress to come. Stocks are more expensive than the historical norm, but not dramatically so. Earnings have held up OK, even if they’re no longer growing rapidly. And corporate animal spirits, in the form of capital spending and mergers and acquisition activity, are on the rise yet haven’t tipped over to recklessness.

One sign that prior periods of news-driven market setbacks have run their course has been a spurt in trader anxiety, which has tended to well up forcefully with fairly shallow 2% or 3% index dips. There were some hints of this Thursday, with a rush for protective stock options driving the CBOE Volatility Index smartly higher – a jump well in excess of what would generally accompany a 1%-ish daily market drop. And the CNN/Money Fear and Greed Index sinking fast toward extreme fear.

One of these times, such familiar tactical signals for buying a dip won’t work and the market will break rather than bend. Are we there yet?

Follow

Get every new post delivered to your Inbox.

Join 2,149 other followers