Home Prices In 80% Of US Cities Grow Twice Faster Than Wages... And Then There"s Seattle

According to the latest BLS data, average hourly wages for all US workers in November rose at a stubbornly low 2.5% relative to the previous year, well below the Fed"s "target" of 3.5-4.5%, as countless economists are unable to explain how 4.1% unemployment, and "no slack" in the economy fails to boost wage growth. Another problem with tepid wage growth, in addition to crush the Fed"s credibility, is that it keeps a lid on how much general price levels can rise by. With record debt, it has been the Fed"s imperative to boost inflation at any cost (or rather at a cost of $4.5 trillion) to inflate away the debt overhang, however weak wages have made this impossible.

Well, not really. Because a quick look at US housing shows that while wages may be growing at roughly 2.5%, according to the latest Case Shiller data, every single metro area in the US saw home prices grow at a higher rate, while 16 of 20 major U.S. cities experienced home price growth of 5% or higher: double the average wage growth, and something which even the NAR has been complaining about with its chief economist Larry Yun warning that as the disconnect between prices and wages become wider, homes become increasingly unaffordable.

And while this should not come as a surprise - considering we have pointed it out on numerous occasions in the past - one look at the chart below suggests that something strange is taking place in Seattle, which has either become "Vancouver South" when it comes to Chinese hot money laundering, or there is an unprecedented mini housing bubble in the hipster capital of the world. Also worth keeping an eye on: price appreciation in Sin City has quietly surged in recent months, and in September home prices surged 10.2% Y/Y, the only other double digit price increase in the US after Seattle. Considering that Las Vegas was the epicenter of the last housing bubble when prices exploded higher only to crash, it may be a good idea to keep a close eye on price tendencies in this metro area. 

Confirming the recent jump in home prices, at the national level in Octoner home prices for the Top 20 metro areas rose 6.4% YoY according to Case Shiller, the fastest rate since June 2014. As Bloomberg adds, "a lingering shortage of previously owned homes is keeping housing prices elevated. That’s allowed homeowners to recover the equity lost during the housing collapse and recession a decade ago."

“Home prices continue their climb supported by low inventories and increasing sales,” David Blitzer, chairman of the S&P index committee, said in a statement. But that climb may be interrupted by the Federal Reserve hiking interest rates next year, he said. “Since home prices are rising faster than wages, salaries, and inflation, some areas could see potential homebuyers compelled to look at renting."

Meamwhile, for those looking to buy for the first time, conditions are less favorable. Growth in property values is outpacing wage gains and limiting affordability, representing a headwind for the market.

Finally, putting the above data in context, here are two charts courtesy of real-estate expert Mark Hanson, the first of which shows how much household income increase is needed to buy the median priced home in key US cities...

... while the next chart shows the divergence between actual household income, and the income needed to buy the median priced house.

 

The Mother Of All Irrational Exuberance

Authored by David Stockman via Contra Corner blog,

You could almost understand the irrational exuberance of 1999-2000. That"s because everything was seemingly coming up roses, meaning that cap rates arguably had rational room to rise.

But eventually the mania lost all touch with reality; it succumbed to an upwelling of madness that at length made even Alan Greenspan look like a complete fool, as we document below.

So doing, the great tech bubble and crash of 2000 marked a crucial turning point in modern financial history: It reflected the fact that the normal mechanisms of honest price discovery in the stock market had been disabled by heavy-handed central bankers and that the natural balancing and disciplining mechanisms of two-way markets had been destroyed.

Accordingly, the stock market had become a ward of the central bank and a casino-like gambling house, which could no longer self-correct. Now it would relentlessly rise on pure speculative momentum---- until it reached an asymptotic top, and would then collapse in a fiery crash on its own weight.

That"s what subsequently happened in April 2000 when the hottest precincts of the stock market---the NASDAQ 100 stocks----began a perilous 80% dive; and it"s also what happened in the broader markets-----including the S&P 500---in 2008-2009, when a thundering 60% plunge unfolded in a hardly a year"s time.

So with the market raging in self-fueling momentum at the 2600 mark on the S&P 500, we reflect back to the great dotcom crash for vivid reminders of what happens next. That earlier meltdown is especially pertinent because in many ways today"s stock market mania is far less justified than the one back then.

Moreover, the dotcom version was also the first great central bank fueled bubble of modern times---a creature that market participants understandably did not fully grasp. Yet to its everlasting blame, the Fed"s subsequent experiments in reflationary bailouts of the casino gamblers has only caused Wall Street"s muscle memory to atrophy further.

Indeed, after 30 years of Greenspan-style Bubble Finance and two devastating crashes, Wall Street is even more credulous today than it was on the eve of the tech crash. Back then, in fact, there was a considerable phalanx of Wall Street old-timers who warned about the dotcom insanity. Now almost no one sees this one coming.

 

Indeed, today"s nutty forecast by Goldman Sachs that the S&P 500 will hit 3,100 by the end of 2020 makes Greenspan"s earlier bubble blindness look clairvoyant by comparison.

In hindsight, Alan Greenspan did see it coming early on--- when he broached the "irrational exuberance" topic in passing during a speech in December 1996. Unfortunately, he has mostly been dinged for being allegedly way too early in making the call.

In fact, we don"t think he was making much of a call at all---he"s was just musing out loud with no intention of reining-in the then rampaging bull. What he actually did was to conduct several gumming fests at subsequent Fed meetings and then diffidently raised interest rates a single time by a pinprick 25 basis point in April 1997.

After that the Maestro (so-called) apparently forgot all about "irrational exuberance" even as that very thing soon began infecting the entire warp and woof of the financial system.

In fact, Greenspan"s fatuous amnesia became so pronounced that by the very eve of the dotcom crash in April 2000, he proved himself blind as a bat when it comes to central bank created bubbles.

Said the Maestro to a Senate committee on April 8 when asked whether an interest rate increase might prick the stock market bubble:

That presupposes I know there is a bubble....I don"t think we can know there is a bubble until after the fact. To assume we know it currently presupposes we have the capacity to forecast an imminent decline in (stock) prices".

At least he got the latter part right. After the NASDAQ had risen from 835 in December 1996 to 4585 on March 28, 2000---or to an out-of-this-world 5.5X gain in 40 months----Greenspan wasn"t even sure he was seeing a bubble!

Accordingly, he apparently didn"t have that capacity to predict an imminent decline---although the 51% crash to 2250 by the end of the year would seem to have been exactly that.

Indeed, after unloading the above tommyrot at the tippy-top of the NASDAQ-100 bubble, Greenspan proved himself a clueless, pitiable fool when this giant bubble deflated by 81% over the next two years.

In fact, the index ended up in September 2002 almost exactly where it had been when Greenspan spoke the words "irrational exuberance" and then moved along with the Fed"s printing press at full speed---claiming there was nothing to see.

Still, back then you could almost have made a (lame) excuse for the Fed chairman"s bubble blindness. The Maestro was operating in the early days of monetary central planning and wealth effects management, and its potent capacity to unleash rampant speculation in the financial system was not yet fully understood----even if the underlying monetary theory defied all the canons of sound finance.

Moreover, in addition to rampant bubbles in the financial market, the Fed"s money pumping during the 1990s did also seem to be producing some seemingly robust real world effects on main street and in the booming new tech part of the economy.

And, in turn, these positive macroeconomic developments were unfolding in a global political/strategic environment that had suddenly become more benign that at any time since June 1914.

Indeed, the outside world fairly buzzed with positive developments. These included the fact that the internet/tech revolution still exuded adolescent vigor, the government"s fiscal accounts were nearing balance for the first time in two decades, the vast market of China was convincingly rising from its Maoist slumber and the Committee To Save the World (Greenspan, Summers and Rubin) had just rescued Wall Street with alacrity from the Long-Term Capital Management (LTCM) meltdown.

Likewise, Europe was launching the single currency and expanding the single market. In place of the Soviet Union, which had disappeared from the pages of history in 1991, Russia, its breakaway republics and the former Warsaw Pact (captive) nations were all bursting out of their statist chains and experimenting with home grown capitalism and reaching out to the west via rising trade and capital flows.

In the US, the combination of the end of the cold war and the internet revolution contributed a doubly whammy to growth and prosperity. When defense spending fell from 7% of GDP on the eve of the Soviet collapse to under 4% by the year 2000, substantial domestic resources were released for private investment and a resulting substantial productivity uplift.

In fact, real private nonresidential investment grew at 7.3% per year from the 1990 pre-recession peak through 2000. That was more than double the still respectable 3.4% rate recorded between 1967 and 1990; and causes the anemic 1.4% real growth of fixed investment between the pre-crisis peak (2007) and 2016 to pale into insignificance.

Notwithstanding all of these positives, however, the great bull stock market of the late 1990s ended-up getting way ahead of itself. That was especially the case during the next 18 months after the Fed"s heavy-handed and somewhat panicked bailout of LTCM in September 1998 had confirmed to the newly energized casino gamblers that the Greenspan Put was most definitely operative.

In the Great Deformation we tracked 12 of the highest-flying big cap stocks ("Delirious Dozen") during the period between Greenspan"s December 1996 speech and the April 2000 dotcom bust. During this 40-month period, the combined market cap of these 12 leading momo stocks---including Microsoft, Cisco, Dell, Intel, Juniper Networks, Lucent, AIG, GE  and four others---soared from $600 billion to $3.8 trillion.

That eruption did indeed give the notion of trees which grow to the sky an altogether new definition. To wit, the total market cap of the Delirious Dozen grew by 75% per annum for nearly 4 years running; and the future outlook was claimed to be even more fantastic.

For instance, as of mid-2000 Intel was valued at $500 billion and traded at 53X its $9.4 billion of LTM earnings. Yet it was argued that this nosebleed multiple was more than warranted because the company had grown its net income from $1 billion to $9.4 billion during the previous decade, and that there was nothing but blue sky ahead.

Here"s the thing, however. Intel was and is a great company that, in fact, has never stopped growing.

But during the 17 years since mid-2000, its net income growth rate has sharply slowed to just 1.79% per annum; and its $12.7 billion of LTM net income for September 2017 is valued at only 15.7X or $210 billion.

In short, at the peak of the tech bubble Intel"s market cap had vastly outrun its long run-earnings capacity. Even today it has only earned back 40% of its bubble peak valuation.

Likewise, Cisco was valued at $500 billion in July 200 and sported a 185X PE multiple on its $2.7 billion of LTM net income. And it, too, has continued to grow, posting LTM net income of $9.7 billion for September 2017.

Yet today"s earnings are accorded only a 19X multiple after 17 years of 2.4% per annum growth; Cisco"s current $181 billion market cap, in fact, sits at just 36% of its bubble peak.

Even the mighty Mr. Softie has experienced pretty much the same fate. Back in mid-2000, it posted $8.3 billion of LTM net income and was valued at $600 billion or 72X. Today its net income has tripled to $23.1 billion, but its PE multiple has receded to just 29X.

Stated differently, Microsoft"s net income has grown at 6.1% per annum since the company vastly outran it true value back in early 2000. Accordingly, its market cap gained just 0.4% per annum during the last 17 years. That is, it has taken one of the greatest tech companies of all time upwards of two decades to earn back its peak dotcom era bubble valuation.

And when it comes to the industrial and financial conglomerate empire that Jack (Welch) built, the story is even more dramatic. GE"s mid-2000 market cap of $500 billion stands at just $155 billion today; and its PE multiple of 60X has shrunk to just 22X.

In short, that was irrational exuberance back then, and it did not take long for the vast quantities of bottled air in the market cap of the Delirious Dozen to come rushing out. By the bottom in September 2002, four of these companies had vanished into bankruptcy and the market cap of the survivors had imploded to just $1.1 trillion.

That"s a fact and you can look it up in the papers. In less than 30 months, $2.7 trillion of market cap had literally ionized.  And these were the leading companies of the era.

None of them, it might be noted, were valued at 280X shrinking net income, as is Amazon today; or at infinite PE multiples like much of the biotech sector and momo hobby horses like Tesla.

More importantly, the promising macro-economic situation at the turn of the century has given way to a world precariously balanced on $225 trillion of debt and the tottering $40 trillion Red Ponzi of China.

Likewise, the benign geo-strategic environment of that era has long since disappeared into the madness of RussiaGate, endless wars in the middle east and Africa and the incendiary confrontation between the Fat Boy and the Donald on the Korean peninsula.

Finally, after 30 years of rampant monetary expansion the central banks of the world have been forced to reverse direction and begin to normalize interest rates and balance sheets.

And that now incepting and unprecedented experiment in massive demonetization of public debts is coming at a time when----after 8 years of business cycle expansion---the US, Japan and most of Europe are running monumental "full-employment" budget deficits.

Even then, these reckless fiscal policies are happening in the teeth of a demographically driven tsunami of pension, medical and welfare spending.

For the period just ended, the S&P 500 companies earned $107 per share on an LTM basis---or just 2% more than the $105 per share posted back in September 2014; and also only modestly more than the $85 per share recorded way back at the June 2007 pre-crisis peak.

Stated differently, on a trend basis S&P 500 companies have grown their earnings at 2.33% per annum over the last decade. How that merits a 24.3X PE multiple on today"s 2600 index price is hard to fathom---let alone Goldman"s 3100 target for 2020.

Indeed, just to retain today"s absurd PE multiple would require $130 per share of GAAP earnings by 2020 at the Goldman target price.

That"s right. By the end of 2020 we would be implicitly in the longest business expansion in recorded history at 140 months (compared to 118 months in the 1990s),

Furthermore, the term structure of interest rates will be 200-300 basis points higher according to the Fed"s current policies, while the US treasury will be running $1 trillion plus annual deficits and experiencing recurring debt ceiling and financial crises.

Even then you would need 7% annual earnings growth to hold onto today"s 24.2X PE multiple at the Goldman S&P 500 target.

As we said, relative to today"s casino madness and the Goldman fairy tale hockey stick, Alan Greenspan circa April 2000 looks like a model of sobriety by comparison.

So if that was Irrational Exuberance back in April 2000, what we have now is surely the mother thereof.

What If The "Exuberance" Is "Irrational"? Then Hold On To Your Hats...

As discussed earlier, Goldman"s entire S&P500 price forecast for 2018 and the next three years is based on two things: tax reform passing, but more broadly, something that David Kostin dubbed "Rational Exuberance", to wit:

“Rational exuberance” best describes our forecast for the trajectory of the S&P 500 during the next several years. Earnings drive stocks over time and should support the index rising to 2850 at year-end 2018, 3000 at the end of 2019, and 3100 by the close of 2020, representing a price gain during the next three years of 20%. Our price targets imply a modest expansion in forward P/E multiple to 18.2x at year-end 2018, a flat multiple in 2019, and a contraction to 18.1x in 2020.

As Kostin describes it, "rational exuberance" is defined by "above-trend US and global economic growth, low inflation, low albeit slowly rising interest rates, and underlying corporate profits boosted by pending corporate tax reform likely to be adopted by early next year."

So far so good, but as Kostin also explained, absent tax reform passing, the S&P will not only not hit 3,100 in 3 years, it may well be lower: "Assuming tax reform passes, we forecast S&P 500 adjusted EPS will jump by 14% to $150 in 2018. Equity investors will be rewarded as the index advances by 11% to 2850 at year-end 2018 and delivers a total return of 13% including the 2% dividend yield." Meanwhile, "If tax reform fails, S&P 500 will fall near-term by 5% to 2450."

It was not clear what would happen to Goldman"s 2020 S&P price target of 3,100 if tax reform does not pass.

What was clear is what would - according to Goldman - happen if the rational exuberance is, in fact, irrational. Here the bank notes that it is impossible to know ex post what flavor the current exuberance has: "Unfortunately, it is only in retrospect that one can definitively establish that assets have reached unsustainable levels. Greenspan was prescient, but three years early. Following Greenspan’s speech warning of the potential for excessive valuations, the S&P 500 subsequently more than doubled (+116%) during the next three years before the Tech bubble finally peaked in March 2000 at a forward P/E multiple of 24x."

So what would happen if the exuberance that awaits the S&P is, in fact, irrational? To that question, Goldman has a ready answer: "We would deem it “irrational exuberance” if the S&P 500 during the next three years followed the exponential trajectory of stocks in the late 1990s."

In such a case, Goldman predicts that the S&P 500 would trade at 5300 by year-end 2020 (a 105% rise from today). If slightly "less irrational" bubble over the next three years would mean stocks instead trade at a similar forward P/E to the Tech Bubble (24x), and would imply a year-end 2020 index level of 4050 (57% above today). During the three years post Greenspan’s speech, S&P 500 EPS rose by 26% ($40 to $50). Translated to today, Goldman calculates such a growth rate would imply 2020 EPS of $166 compared with our estimate of $163.

And for the visual traders, the light blue line in the chart below - i.e., the "irrational" one - would recreate the late 1990s exuberance in the context of today"s market.

"Investing Is Not A Competition... It's A Game Of Long-Term Survival"

Authored by Lance Roberts via RealInvestmentAdvice.com,

Melt-Up Gains Traction

Back in November, just following the election of President Trump, I wrote about the market entering into potentially the final “melt-up” phase of the cyclical bull market.

However, while economic and fundamental realities HAVE NOT changed since the election, markets are pricing in expected impacts of changes to fiscal policy expecting a massive boost to earnings from tax rate reductions and repatriated offshore cash to be used directly for stock buybacks.

To wit:

“We expect tax reform legislation under the Trump administration will encourage firms to repatriate $200 billion of overseas cash next year. A significant portion of returning funds will be directed to buybacks based on the pattern of the tax holiday in 2004.” – Goldman Sachs

“But it is not just the repatriation but lower tax rates that will miraculously boost bottom line earnings. This time from Deutsche Bank:

‘Every 5pt cut in the US corporate tax rate from 35% boosts S&P EPS by $5. Assuming that the US adopts a new corporate tax rate between 20-30%, we expect S&P EPS of $130-140 in 2017 and $140-150 in 2018. We raise our 2017E S&P EPS to $130."”

Of course, since then it has been a “fast and furious” push to buy stocks regardless of what geopolitical or economic event was taking place.

Of course, the advance is stock prices has been based purely on “hope” as nothing legislatively has actually occurred towards passing tax cuts. While no bill has been written as of yet, all of the net benefits of tax cuts has been likely priced in by the markets.

I am not discounting the rush by companies to buy back shares at the greatest clip in the last 20-years to offset the impact to earnings weak revenue growth. However, none of the actions above go to solving the two things currently plaguing the economy – real jobs and real wages. 

“This is also why Trump’s recent tax cut policy will fail to fuel the economic prosperity he is hoping for. With the bottom 80% of the population still earning below $50,000 on average, a tax cut will do little to increase their consumption in the economy. Those in the top 20% may well see a tax-savings from the reform but they are already consuming at a level that will likely not change to any great degree.” – The Bottom 90% & The Failure Of Prosperity

Furthermore, from an economic standpoint, most of the indicators suggest we are in a very late stage cycle relative to the markets and are acting in similar manners as have been seen prior to the last two recessions.

As I stated back in November:

“The rush by Wall Street to price in fiscal policy, which may or may not arrive in a timely manner, will likely push the markets higher in the short-term completing the final leg of the current bull market cycle. This was a point I addressed back in October on the potential for a rise to 2400 in the markets. With the breakout of the market to new highs, the bullish spirits have emboldened investors to rush into the most speculative areas of the market.

For now, it is all about the ‘Trump’ trade. Which is interesting considering that just before the election we were all told how horrible a Trump election would be for the world economy.”

However, it should be noted that despite the “hope” of fiscal support for the markets, longer-term conditions are currently present that have led to rather sharp market reversions in the past.

As I addressed this past week, the current environment is diametrically opposed to that of the Reagan era “tax cuts.” Therefore, the “hopes” being built into the market may ultimately be met with rather severe disappointment.

Regardless, the market is currently ignoring such realities as the belief “this time is different” has become overwhelming pervasive. As noted last week, we increased equity exposure in portfolios with the breakout above 2500. However, with the sharp rise over the last two weeks, we are beginning to look to take some profits out of small and mid-capitalization exposure and have been aggressively buying bonds this past week.

While we remain bullishly allocated currently, we are also keenly aware of the risk. As an example, the current deviation above the long-term trend line has reached more extreme levels. There is also the issue of deviations above the long-term trend line. Trend lines and moving averages are like “gravity.”  Prices can only deviate so far from their underlying trends before eventually “reverting to the mean.” However, as we saw in 2013-14, given enough liquidity prices can remain deviated far longer than would normally be expected. But even that advance finally gave way.

Currently, the deviation above the long-term trend and the first major level of support are a good bit lower. A decline to the bullish trend would be roughly a -7% decline, whereas a decline to the first major level of support would entail a -17.6% decline. 

Given the length of time the market hasn’t even seen a 1%, much less a 3%, decline, a drop of these magnitudes will “feel” substantially worse than they are.

---

Most Hated Bull Market Ever?

This past week, my friend and colleague, Dana Lyons, penned the following note:

“Perma-bulls like to label this bull market the ‘most hated’ in history. While the rally is historic by some metrics, the ‘most hated’ status, to the degree that it was ever applicable, has certainly fallen by the wayside by now. To be sure, there are plenty of vocal and visible perma-bears that have been spewing copious amounts of ‘hate’ at this rally for years now. However, if one steps away from the confines of financial social media and guru-dom, evidence shows that public sentiment has grown to now reflect among the most bullish conditions in recorded history.”

I agree. As I noted in Friday’s post entitled “A Bull Market In Complacency,” both our indicator of investor exuberance and equity allocations concur with Dana’s point.

Dana also denotes another indicator hitting excessively bullish highs.

“One example comes from our Chart Of The Day based on the University of Michigan’s Survey of Consumers. One of the questions asked of respondents in the survey is their estimation of the ‘probability of an increase in the stock market in the next year’. Among the various ways that UM breaks down the data is by taking the mean response to that question. And in August’s survey, the mean response came in at 62.7%.

That trails only June 2015‘s 63.1% and joins July 2007‘s 62.2% as the only 3 readings above 62% in the history of the survey.”

And, as Jesse Felder noted this past week, the long-term return outlook is exceedingly poor.

“As Mr. Buffett has famously said, “the price you pay determines your rate of return.” Because investors are paying one of the highest prices in history, according to this measure, they are likely to experience some of the lowest future returns on record. In fact, this measure now suggests they will experience an average annual loss of 2.8% per year over the coming decade.”

Oh, just in case you didn’t notice those charts just busted some of the most commonly held beliefs:

• There is NO CASH on sidelines


• Markets DON’T return 8% a year, and;


• Investors are all in.

---

This Won’t End Well

Here are some interesting stats from Adam Taggart via Peak Prosperity:

• It has been over 100 months (more than 8.5 years) since the current bull market began in April of 2009


• It has been 15 months since the last (and very brief) drop of 5% in the S&P 500


• This past September saw record low volatility, including a stretch now claimed to be “the most peaceful days in the history of the markets”


• Since last year’s presidential election, at which point the markets were already considered dangerously overvalued, the Dow Jones Industrial Average is up over 20%


• As of this article’s publishing, the Dow, the S&P, and the NASDAQ are all trading at record highs

Or visually:

Adam goes on to state:

“The stock market is now 70% higher than it was at the previous bubble peak immediately preceding the 2008 Great Financial Crisis.

Reflect for a moment how painful the crash from Oct 2008-March 2009 was. How much more painful will a crash from today’s much dizzier heights be?

Prudent investors have asked themselves that very same question as the markets have become increasingly overvalued over the past 8+ years. Many of them — myself included — concluded that the future risks greatly outweigh the prospect of future returns, and pulled much of their capital out of the markets onto the sidelines. And since doing so, many of them — again, myself included — have watched prices climb higher and still higher again.

It’s understandable to feel great frustration both at the irrationality of today’s market prices and at the emotional sting of missing out on the gains they’ve been delivering to those who have blithely remained long.

But it’s very important to remember we’ve been here before many times throughout history (and pretty recently when reflecting back on the Tech and Housing bubbles). While today’s levels are at a historic extreme, markets have always swung from periods of overvaluation to undervaluation — and then back again.

During the peaking process, the siren call to join the party is incredibly hard to resist. Waiting out the irrational exuberance leading up to a market top is painful. Profitable returns are everywhere. How can you turn down making such easy money?

As Tom Petty sympathized: The waiting is the hardest part.”

The “siren’s song” of tax cuts and tax reforms will likely turn out to be the very rocks this ship cracks up on. The potential for disappointment dramatically outweighs the potential of Congress meeting the current expectations of the market participants.

As I noted in the 80/20 rule of investing:

“Importantly, as a portfolio manager, I am buying the breakout because I have to. If I don’t, I suffer career risk, plain and simple.

However, you don’t have to. If you are truly a long-term investor, you have to question the risk being undertaken to achieve further returns in the market.”

While we remain long the market currently, we are doing it with a very keen eye towards the risk we are taking. We continue to carry tight stop-loss levels and are de-risking portfolios by trimming exposures as needed and being opportunistic with our fixed income exposure.

As I concluded previously:

“However, the longer-term dynamics are turning more bearish. When those negative price dynamics are combined with the fundamental and economic backdrop, the “risk” of having excessive exposure to the markets greatly outweighs the potential “reward. “

While it is certainly advisable to be more “bullish” currently, like picking up a “porcupine,” do so carefully.

Investing is not a competition.

It is a game of long-term survival.”

New Home Prices Are Over 50% Higher In Canada Than The US

Authored by Kaitlin Last via BetterDwelling.com,

The price of new homes is quickly diverging in Canada and the US.

 Data from the Canadian Housing and Mortgage Corporation (CMHC) show that new homes are selling for substantially more than the same time last year.

Meanwhile south of the border, data from the US Bureau of Census show that new home prices are on the decline.

This has lead to an even wider gap between the average price of a new home in Canada and the US.

Canadian New Construction Is Higher

The price of a new home across Canada is up for the second month in a row. The average sale price in April was CA$751,881 (US$559,123). This represents an 11% increase from the same time last year, when measured in Canadian dollars. When compared in US dollars, that increase drops to a much more conservative 2.64%. Even after factoring in the loonie’s decreased buying power in Canada, new home prices still climbed.

US New Construction Is Lower

American new home builders aren’t seeing such steep climbs in sale prices. Actually, they aren’t seeing climbs at all. The average price of a new home in the US was CA$495,271 (US$368,300). This represents a 3% decline from the same time last year, when measured in US dollars. In Canadian dollars, this was a 0.49% decline from the same time last year. Both forms of measurement show declining home prices in the US, curious since their economy is in a much better state than Canada right now.

US Vs. Canadian Prices

New homes are trading at substantially higher values in Canada than the US in April. The average new home in April 2017 was 51% higher in Canada than the US. The same time last year, prices in Canada were only 36% higher. It appears in a post-crash United States, new home buyers are taking much more conservative strides. In a hasn’t-crashed-in-decades Canada, new home buyers are optimistic about future values.

The gap between new home sale prices in Canada and the US is growing substantially. The US is a country with a booming economy, almost 10 times the population of Canada, and less land mass. Somehow, new home prices in the US are dropping compared to the same time last year. In sparsely populated Canada, prices are increasing – despite the precarious position of our economy.

Are Americans being overly cautious on homeownership, or are Canadians demonstrating irrational exuberance for homeownership, much like the US did in a pre-2006 America? Tell us your thoughts in the comments.

What Happens When The Fed Warns The Market Is Overvalued

While investors hang on every dovish word bluffed from a venerable Fed speaker"s mouth, the cognitive dissonance when something negative is uttered is stunning. Since Greenspan"s "irrational exuberance" moment, asset-gatherers and commission-takers have advised ignoring Fedspeak on stocks... historically, that was a mistake for investors.

Having shocked a soaring market yesterday with the Minutes stating:

"Broad U.S. equity price indexes increased over the intermeeting period, and some measures of valuations, such as price-to-earnings ratios, rose further above historical norms. ... Some participants viewed equity prices as quite high relative to standard valuation measures."

Of course, business media was quick to assert this is nothing to worry about, however, as CNBC"s Mike Santoli reports, traders shouldn"t be so quick to dismiss these comments from Fed officials.

History shows when worries about valuation appear in these official minutes, stocks often struggle in the following year.

We found six mentions of an overvalued stock market in the minutes by searching the Fed"s website for the word "valuation" going back to 1996. According to Kensho, here"s the performance of the major market averages one year after the meeting when such a mention took place.

Here are the specific mentions of high "valuation" in the minutes, according to the Fed"s website, along with the S&P 500"s subsequent return from the meeting when that mention was made.

Meeting: April 28-29 — 2015 S&P 500 return 1-year later: -1.97%

"However, some indicators suggested that valuations remained stretched for some asset classes. An estimate of the expected real return on equities moved down, reflecting an increase in stock prices and downward revisions to forecasts of corporate earnings, and corporate bond spreads declined somewhat."

Sept. 16-17, 2014 — S&P 500 return 1-year later: -0.57%

"Some financial developments that could undermine financial stability over time were noted, including a deterioration in leveraged lending standards, stretched stock market valuations, and compressed risk spreads."

Jan. 27-28, 2004 — S&P 500 return 1-year later: +3.8%

"A number of members commented that expectations of sustained policy accommodation appeared to have contributed to valuations in financial markets that left little room for downside risks, and the change in wording might prompt those markets to adjust more appropriately to changing economic circumstances in the future."

Dec. 11, 2001 — S&P 500 return 1-year later: -20.39%

"Among those risks, members cited the apparently reduced prospects for additional fiscal stimulus legislation, the vulnerability of current stock market valuations should forecasts of a robust rebound in earnings fail to materialize, the possibility of further terrorist incidents, and especially the potentially adverse effect on consumer confidence and spending of additional deterioration in labor market conditions."

March 21, 2000 — S&P 500 return 1-year later: -24.88%

"The divergence, at least until recently, in the stock market between the valuations of high-tech firms and those of more traditional, established firms was inducing a redirection of investment funds to business activities that were perceived to be more productive. While the associated capital investments undoubtedly had contributed to the acceleration in productivity, some members expressed concern that the historically elevated valuations of many high-tech stocks were subject to a sizable market adjustment at some point. That risk was underscored by the increased volatility of the stock market."

Dec. 17, 1996 — S&P 500 return 1-year later: 32.99%

"The rise over recent years had been extraordinary and had brought market valuations to fairly high levels relative to earnings and dividends. In these circumstances, the members recognized the need to monitor with special care price movements in the stock market and asset markets more generally for their implications for consumer and other spending."

Of course, it"s different this time though and markets can only go up... because Trump tax reform... stimulus... earnings... right?

Trump Obamacare Repeal Blew Up Bigly Because of a House Divided Against Itself

Trump’s really big supporters openly grieved that the explosion of his emphatically promised Obamacare replacement bodes poorly for all of Trump’s plans. Fox’s Sean Hannity and Lou Dobb’s regaled the Republican party for failing to take the reins and lead now that the party finally has the chance to prove it can do what it has promised. Hannity stated that numerous high authorities told him this marks the end of any Obamacare repeal for 2017.

This first attempt by Trump and his party to see if they can accomplish anything together was by everyone’s account (except Trump’s) a dismal failure. Even Paul Ryan, who drafted the plan that Trump endorsed, admitted the enormity of failure quite honestly. The least I can say for him (not being one who likes him in the slightest) is that he owned it.

Ryan picked up the argument leveled against Republicans by Democrats when they were running congress, which said that it is easy to be an opposition party and simply stand against everything, but quite a different matter to be creative and actually govern. Democrats long argued that Republicans really have no plan to replace Obamacare that could possibly succeed — that they were all talk — and Republicans just proved them right. Since Republicans kept Democrats completely out of the discussion, it’s fair to say Republicans failed entirely on their own.

Ryan failed embarrassingly, and I question whether his leadership will survive this failure, except for the fact that the faction most responsible for the failure (outside of Ryan himself) is the one that would likely seek his blood if Ryan had succeeded. Nevertheless, they cannot stand him and would probably join any other faction that now wants to bring him down.

Trump failed bigly, too, because the truth is that he swore over and over to his supporters that he would get a “great” replacement through congress as one of his first orders of business. Granted he did not say he would succeed right away, but only that he would make it his first order of business. It is, however, now questionable that he will ever get a replacement through, much less a great one. He has three more years to try again, but a total failure within your own party to get your first order of business done, especially when it is something the entire Republican party has said it will do over and over for years and when you are in your honeymoon period, is no small failure.

Ryan has manned up to that. The party needs to also. Trump blamed it on Democrats, but that actually is deplorable, because Trump knew every time he made the promise that he didn’t have a ghost of a chance at getting Democrat support, given how much he attacked them over the plan. How could he not know that unless he is delusional? The last group in the world that would help him repeal Obamacare would be Democrats. So, if the repeal’s failure is their fault, give that they were never even included in the discussion, the failure to realize the obvious — that they would never support him — was his own.

Republicans could learn from this and do better, but it remains to be seen whether they are able and willing to learn. That requires humility, which is always scarce in congress. In the meantime, the failure to deliver Trump’s big promise of “immediate Obamacare repeal” is a death knell to the Trump Rally, and the clock is ticking against all of Trump’s plans.

(It doesn’t guarantee that the stock market will immediately crash, though it easily could; but its rally days are over. My prediction last year was that the rally would end as soon as Trump and congress had to actually work together. That is when investors would be forced to grasp reality and see that nothing Trump has promised is anywhere near as likely to come to pass as they believe. That is when I expected they will start to let go of their Tumphoria. Candidate promises are easily made. Legislation is not, and congress has never been more divided. Neither has that congressional subset called Republicans.

A house divided against itself

Here is how it all came down.

The proposed American Health Care Act (AHCA) died because the House Republican Conference (the official name for the entire Republican caucus in the House of Representatives) is divided into factions that aligned in three groups.  When the center group — the largest group of Republicans who solidly backed Paul Ryan’s bill — tried to move further right to appease the most conservative group, it lost votes from the group that is furthest left (more centrist with respect to American politics overall). There are nowhere near enough votes in the center group of Republicans to beat Democratic opposition, and compromise toward one faction lost the other; so no House majority could be built.

It is hard to say exactly who was in each group because no vote was taken to put members on record, but this appears to be generally how things fell apart:

1) By far the largest group would have consisted of the house’s largest conservative faction (172 members), known as the Republican Study Committee, probably joined by members of the House Republican Conference who do not identify with any particular faction. I’m talking here about the group that solidly supported President Trump and Speaker of the House Paul Ryan on the AHCA as originally drafted.

The Republican Study Committee — formed in 1973 to keep an eye on the party’s moderate leadership during the Nixon-Ford years — is the House’s oldest active faction. It has allied itself over the years with the National Rifle Association, the Heritage Foundation, Focus on the Family, the religious right, Concerned Women for America, the conservative magazine National Review.  One might now categorize it as representing the center of the House Republican Conference (though the truest middle consists people who don’t belong to any faction).

This caucus, as the House Republican Conference’s mainstay faction, has included such Republican luminaries as Vice President Dan Quayle, former Vice President Dick Cheney, Majority Leader Eric Cantor, former House Majority Leader Tom DeLay, and current Vice President Mike Pence. House Speaker John Boehner was not a member of the group.

2) The smallest, rewest, and most conservative faction of the House Republican Conference, called the “Freedom Caucus,” was established in 2015 to battle then Speaker John Boehner, particularly to fight his approval of Obamacare (the Affordable Care Act). These members of congress can be seen as the present rabble rousers because this is the faction that was willing to shut down the government in the original fight against Obamacare. Naturally, this group remains set toward making sure Obamacare is completely repealed and is willing to shut down government again, including apparently the leader of the House and the President just to make sure Obamacare is fully repealed. Not compromising on abolishing Obamacare was more important to them than whether or not Trump succeeds by getting off to a strong start.

The Freedom Caucus is tough enough that it forced John Boehner to remove his butt from the speaker’s cushion, which led to his exiting congress altogether, so Paul Ryan knows full well they could accomplish that again. This battle-hardened caucus embraces the tea party folks, but it is not the Tea Party Caucus, which is now nearly inactive because the official Tea Party Caucus was largely rejected by citizens in the tea party movement (including members of congress, such as Marco Rubio, who were elected by those citizens). It was rejected because the tea party movement saw the Tea Party Caucus as a Republican attempt to hijack a grass-roots movement. By nature, those who identify themselves as part of the tea party movement do not want to see their movement institutionalized or co-opted by the establishment.

The Freedom Caucus currently has thirty-one members. The group that initially opposed the ACHA certainly included this faction and likely some of the Republicans’ more libertarian faction, formed by Representative Ron Paul, called the Liberty Caucus. These two factions overlap in membership. Michelle Bachman, for example, was a founder of the Tea Party Caucus (now largely subsumed by the Freedom Caucus) and a member of the Liberty Caucus.

3) A larger faction of the House Republican Conference consists of about fifty people, who are the left-most Republicans in the House of Representatives (meaning only that they are moderates since no one in the Republican party is a leftist). This group was established in 1994 as the “Tuesday Group” when Republicans took control of the House under the more conservative leadership of Newt Gingrich. Gingrich rallied Republicans around his Contract with America. The Tuesday Group formed to resist Gingrich’s more conservative positioning of the Republican party.

The actual battle went like this: Unquestionably, those aligned with the Freedom Caucus felt the original AHCA bill, as proposed by Paul Ryan, did not go far enough in repealing Obamacare. Therefore, the group of Republicans who were with Trump and Ryan modified the bill to strip out more of Obamacare by taking down some of its Medicaid provisions and other benefits in order go gain some of the more conservative votes. That resulted in those aligned with the Tuesday Group (the most moderate Republicans) feeling the bill now went further right than they could tolerate. As a result, the Republicans lost some moderate votes when they compromised to pick up more conservative votes, and they never gained all of the conservative votes. So, they could not find a majority that could agree on any bill, and they had already thumbed their noses at Democrats completely, so they certainly wouldn’t get any help there.

Why Trump faces big-league troubles in enacting any of his stimulus plans

As Lincoln said in quoting Jesus Christ, “A house divided against itself cannot stand.” (Lincoln was talking about government. Jesus was talking about the devil. Beg me to describe the difference.)

One major accusation Democrats made against Republicans when Republicans ran an opposition government against Obama was that it is easy to simply be against everything. It is quite another job to govern — to have a clear vision, a good vision that will actually do something for America, and then to unite behind it. Anybody can oppose things without an idea in his or her head as to what will actually work to do some good.

Now that he’s been knocked around by his own party, Paul Ryan co-opted the argument as his own: (See his comments at the start and then at the 6:30 time maker and especially 8:12 marker.)

And this is exactly why Trump is going to have a hard time getting his legislation passed. Republicans could somewhat unite in opposing anything Democrats came up with because even enemies are known to unite around a common foe. However, the formation of the Freedom Caucus and its overthrow of John Boehner proves even that kind of unity is never complete and hard to achieve. Coming up with great ideas, which Trump entrusted to Ryan, and then uniting around something you can support, though not fully, is harder still.

As the new opposition government, Democrats are solidly united against Trump, and the Republican party is too divided to create a large enough majority to overcome the Democrats. It has become increasingly divided since the tea-party movement began, so that will not easily change. It could change now that all Republicans should be able to see that, if they don’t unite around something, they will get nothing at all; but will it?

The Freedom Caucus has not exactly shown itself to be a group that is amendable to softening its positions toward the party’s center, and the Tuesday Group, which might soften toward the party’s center, will never go as far right on anything as the Freedom Caucus demands. That said, other issues may be less polarizing than Obamacare, given that the Freedom Caucus largely formed around the intention of defeating Obamacare during the Boehner years.

It took only took a matter of days for plan number one to fall embarrassingly flat on its face. That’s a bitter reality for both Trump and Ryan because promises to repeal and replace Obamacare or just abolish it entirely were the biggest and most frequent pledges heard from all Republicans. So, if they can’t get together on that …

Trump also blinked on his get-tough negotiations with his own party. He said he was going to force a vote so that Republicans who voted against this repeal and replacement of parts of Obamacare would be held accountable on election day. He reneged and backed Ryan’s desire to simply pull the vote so that no one is held accountable and no one can see by what margin it actually failed. (Perhaps the failure was bigger than we know.)

As a result, no one had to go on record as being the reason hope of an Obamacare repeal in 2017 failed. As Ryan announced in the video above, Obamacare now stands as the law of the land for the foreseeable future because Republicans could not find any plan around which they could form a congressional majority. (In other words, he will not approve another go at it in this session of congress because the votes are not there, nor is the hope of compromise; and any future party leader is going to be hesitant to take this battle on, seeing how Ryan got clobbered.)

Due to a small faction demanding everything, no Republican got anything they could take back to their voters. Even strong supporters of President Trump like Lou Hobbs and Sean Hannity see this as a massive failure of the Republican House to accomplish anything:

As Hannity said to all congressional Republicans in the video above just before the bill’s final hour,

It’s time for you to give the American people a bill that you have now promised them for almost eight years. I would argue tonight, Failure is not an option for the president of the United States and his first piece of legislation. If you don’t succeed, you will have nobody to blame but yourselves…. And here’s my message to you people in congress: For the love of God, after eight years, can you please do your job? Can you please find a way to work together? Can you please find a way to serve your country, not yourselves, not your re-election?

They just couldn’t do it. They could not succeed even in the slightest compromise even with the promise that this was only phase one and more of their wishes would come later. Republicans now have all the reins of power, and they still accomplished nothing!

What it all means for the Trump Rally

This total fiasco — which was huge, really huge — demonstrates why I’ve said all along that Trump’s road to getting his plans enacted through congress, even with Republicans in control of both houses, is far from being the likelihood that has been priced into the stock market by the Trump Rally.

While the AHCA defeat is not the end of the game for Trump’s plans, it shows exactly why I’ve said the Trump Rally is a clear case of irrational exuberance on the scale that precedes a major crash (said when writing about the stock market’s response to Trump’s stimulus plans back in December):

Is the stock market irrational in its exuberance for shifting so much just because of Trump’s pledges, which are far, far from becoming reality? I think so. I haven’t even talked about Democrat resistance to Trump’s plans, and he’s already got resistance from the Republican leader of the senate…. That doesn’t mean the market won’t keep going up. Who knows what the maximum height or duration of irrational exuberance is (because who knows how crazy people can get); but I am certain of this much: the higher the stock market rockets upward on such irrationality, the harder it falls into the chasm of ever-growing debt from which it has been constructed…. There is nothing you’re going to do that can stop the markets (in stocks and bonds) from having their hangover when the bubbly stuff is over and irrational exuberance suddenly looks like delirium. Our greatest economic crashes have always happened when least expected. (“Irrational Exuberance in US Stock Market Grasps at 20K for Dow“)

This past week proves the stock market was irrationally premature in rising to Trump’s stimulus talk. Trump has no possibility of any support from Democrats, who hate his guts on just about everything he stands for, and we have now seen proof that he has no majority support he can count on in his own party.

This is one major reason I have refused to join those who believe things will and are now turning around economically because of Trump’s election, even though it has probably cost me readers (given that my audience is largely anti-establishment). For Trump’s plans to become reality, he has to build consensus around a plan that can save the economy, and he is far from either consensus or a plan that can save the economy from its fundamental flaws. The best his plan would do — if he could get it enacted — is pump it higher for a little longer. You can accomplish a little bit in the US by executive decree, but not much. Maybe Republicans will now join around a tax plan, but time is not on their side.

So, my prediction remains that the economy, including the stock market, goes down this year for the numerous reasons I’ve given beyond the solitary reason that has just played out above. He hasn’t even started squaring off with the Democrat’s opposition. This one went down just from the opposition within his own party!

It’s time to wake up and smell the ammonia!

The Problem With Forecasts

Submitted by Lance Roberts via RealInvestemntAdvice.com,

The Problem With Forecasts

We can’t predict the future – if it was actually possible fortune tellers would all win the lottery.  They don’t, we can’t, and we aren’t going to try. However, this doesn’t stop the annual parade of Wall Street analysts from pegging 12-month price targets on the S&P 500 as if there was an actual science behind what is nothing more than a “WAG.” (Wild Ass Guess).

In reality, all we can do is analyze what has happened in the past, weed through the noise of the present and try to discern the possible outcomes of the future.

The biggest single problem with Wall Street, both today and in the past, is the consistent disregard of the possibilities for unexpected, random events. In a 2010 study, by the McKinsey Group, they found that analysts have been persistently overly optimistic for 25 years. During the 25-year time frame, Wall Street analysts pegged earnings growth at 10-12% a year when in reality earnings grew at 6% which, as we have discussed in the past, is the growth rate of the economy.

Ed Yardeni published the two following charts which shows that analysts are always overly optimistic in their estimates.

This is why using forward earnings estimates as a valuation metric is so incredibly flawed – as the estimates are always overly optimistic roughly 33% on average. Furthermore, the reason that earnings only grew at 6% over the last 25 years is because the companies that make up the stock market are a reflection of real economic growth. Stocks cannot outgrow the economy in the long term…remember that.

The McKenzie study noted that on average “analysts’ forecasts have been almost 100% too high” and this leads investors into making much more aggressive bets in the financial markets. Wall Street is a group of highly conflicted marketing and PR firms. Companies hire Wall Street to “market” for them so that their stock prices will rise and with executive pay tied to stock-based compensation you can understand their desire.

However, if analysts are bearish on the companies they cover – their access to information to the company they cover is cut off. This reduces fees from the company to the Wall Street firm hurting their revenue. Furthermore, Wall Street has to have a customer to sell their products to – that would be you.

Talk about conflicted. Just ask yourself WHY Wall Street spends BILLIONS of dollars each year in marketing and advertising trying to keep you invested at all times.

Since optimism is what sells products, it is not surprising, as we head into 2017, to see Wall Street’s average expectation ratcheted up another 4.7% this year. Of course, comparing your portfolio to the market is a major mistake to begin with.

As I wrote previously:

“Comparison is the cause of more unhappiness in the world than anything else. Perhaps it is inevitable that human beings as social animals have an urge to compare themselves with one another. Maybe it is just because we are all terminally insecure in some cosmic sense. Social comparison comes in many different guises. ‘Keeping up with the Joneses,’ is one well-known way.

If your boss gave you a Mercedes as a yearly bonus, you would be thrilled—right up until you found out everyone else in the office got two cars. Then you are ticked. But really, are you deprived of getting a Mercedes? Isn’t that enough?

Comparison-created unhappiness and insecurity is pervasive, judging from the amount of spam touting everything from weight-loss to plastic surgery. The basic principle seems to be that whatever we have is enough, until we see someone else who has more. Whatever the reason, comparison in financial markets can lead to remarkably bad decisions.

It is this ongoing measurement against some random benchmark index which remains the key reason why investors have trouble patiently sitting on their hands, letting whatever process they are comfortable with, work for them. They get waylaid by some comparison along the way and lose their focus. If you tell a client that they made 12% on their account, they are very pleased. If you subsequently inform them that “everyone else” made 14%, you have made them upset. The whole financial services industry, as it is constructed now, is predicated on making people upset so they will move their money around in a frenzy.

Money in motion creates fees and commissions. The creation of more and more benchmarks and style boxes is nothing more than the creation of more things to COMPARE to, allowing clients to stay in a perpetual state of outrage.”

Focus on what is important to you, your goals and your money. In the end, this is why you started investing in the first place.

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A Note On Risk Management

This is why I always focus on the management of risks. Greater returns are generated from the management of “risks” rather than the attempt to create returns. Although it may seem contradictory, embracing uncertainty reduces risk while denial increases it.

Another benefit of acknowledged uncertainty is it keeps you honest.

“A healthy respect for uncertainty and focus on probability drives you never to be satisfied with your conclusions.  It keeps you moving forward to seek out more information, to question conventional thinking and to continually refine your judgments and understanding that difference between certainty and likelihood can make all the difference.”  – Robert Rubin

The reality is that we can’t control outcomes; the most we can do is influence the probability of certain outcomes which is why the day to day management of risks and investing based on probabilities, rather than possibilities, is important not only to capital preservation but to investment success over time.

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This Is Interesting

If you didn’t happen to read Friday’s reading list, I want to repeat this little blurb.

As I stated in the weekend newsletter entitle “Dow 20,000” the market was beginning to take on an eerily similar feeling:

“If this market rally seems eerily familiar, it’s because it is. If fact, the backdrop of the rally reminds me much of what was happening in 1999.

1999

• Fed was hiking rates as worries about inflationary pressures were present.


• Economic growth was improving 


• Interest and inflation were rising


• Earnings were rising through the use of “new metrics,” share buybacks and an M&A spree. (Who can forget the market greats of Enron, Worldcom & Global Crossing)


• Stock market was beginning to go parabolic as exuberance exploded in a “can’t lose market.”

If you were around then, you will remember.”

With Janet Yellen and the Fed once again chasing an imaginary inflation “boogeyman” (inflation is currently lower than any pre-recessionary period since the 1970’s) the tightening of monetary policy, with already weak economic growth, may once again prove problematic.

“But Lance, this is the most hated bull market ever?”

If price acceleration in the market is a sign of investor optimism, then the chart recently published by MarketWatch should raise some alarm bells.

The only other time in history where the Dow advanced 5000 points over a 24-month period was during the 1998-1999 period of “irrational exuberance” as the Fed was fighting the fears an inflationary advance, while valuations were rising and GDP growth rates were slowing.

Maybe it’s just coincidence.

Maybe “this time is different.”

Or it could just be the inevitable beginning of the ending of the current bull market cycle.

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Decennial & Presidential Election Cycles

As I noted in last weekend’s newsletter we are heading into 2017 with:

• Markets pushing historic levels of extreme overbought conditions,


• 2nd highest levels of valuation on record,


• Extreme deviations from long-term growth trend lines,


• Investor sentiment and confidence pushing extreme bullishness,


• Investors fully committed to the market with low levels of cash, and;


• High levels of leverage in terms of margin debt and corporate debt.

In other words, after 8 straight years of a bull market advance, what is the risk you are taking to garner additional returns?

With markets pushing overbought, overvalued, and bullish extremes the future outcomes have not been terrific

However, what does the Decennial cycle have to say about 2017?

As we enter into the 7th year of the decade, what do the decennial trends tell us about the probabilities of stock market returns in the coming year? Here is the entire history back to 1833.  Interestingly, you will note at the bottom of the chart the 7th year of the Decennial cycle is the WORST performing year of the decade.

You will also note the 7th year of the decade has been negatively biased over its history turning in an average return of -4.08%.  Furthermore, the negative return years matched the positive 9 to 9, or rather it was a coin flip (50/50) as to the outcome.

However, as noted by the highlights, the market has been NEGATIVE 7 of 9 times when the 7th year of the Decennial cycle coincided with the 1st year of a Presidential election cycle. Like this year.

With a win/loss ratio of 50%, the odds are equally balanced on the guess of an outcome. However, while the average return of an up year has been 11.29%, the average of down years has been a more damaging -20.29%  

Help From The Oval Office?

The stock market is also moving into the first year of the Presidential election cycle. With President Obama completing his final year of his term – the market, and the economy, are dealing with higher costs and taxes from the Affordable Care Act combined with reduced liquidity from the Federal Reserve. Furthermore, the ongoing debate and drama from Washington is unlikely to end soon, and fiscal policy will likely fall short of current expectations.

The good news is the first year of the President’s term sports an average return of 3.10%. However, the return has to tempered with just a 47.83% winning percentage. Since 1833 the market has been positive 22 out of 46 post-election years.

While the odds of a positive year in 2017 are more, or less, evenly balanced, one should not dismiss the potential for a decline. With the current market already well advanced and pushing overvaluation levels and extreme deviations from long-term means, the risk of a decline like outweighs the potential of a further advance.

I read most of the mainstream analyst’s predictions to get a gauge on the “consensus.”  This year, more so than most, the outlook for 2017 is universally, and to some degree exuberantly, bullish.

What comes to mind is Bob Farrell’s Rule #9 which states:

“When everyone agrees…something else is bound to happen.”

The real economy is not supportive of asset prices at current levels and further elevations in prices increase the potential for a future market dislocation. For investors that are close to or in retirement, some consideration should be given to capital preservation over chasing potential market returns.

Will 2017 turn in another positive performance? Maybe. But, honestly, I don’t really know.