Nolte Notes 7.29.19

July 29,2019

The hallmark of the past 10 years has been the unconventional nature of nearly everything economic. From pushing rates to zero (below in foreign countries) to fiscal easing at the end of the economic cycle, it should come as little surprise the Fed is talking about cutting rates. The rate cut is coming a week after the economy showed growth of 2.1%, consistently low jobless claims (indicating a strong jobs market) and decent corporate earnings. Yes, there is a weakness in the manufacturing sector, inflation remains stubbornly below their 2% target and tariffs are taking a toll on global growth. Unconventional tools have been employed by other central banks, from the holding of over 75% of all the ETFs in Japan to aggressive buying of corporate/sovereign debt in Europe. Will the US eventually succumb to those drastic measures? Can monetary policy alone get inflation above 2%? Can an “insurance” cut in rates solve the costs of the tariff war with China? These are some of the questions that may face Chair Powell after the Fed’s decision is made on the 31st. In the words of the great philosophical writer Jerry Garcia, “What a long strange trip it’s been!”

The financial markets once again tapped new all-time highs as investors embraced the thought of lower interest rates from the Fed. Sure, earnings did generally beat very low expectations, but that is like clearing a hurdle lying on the ground, not a feat to celebrate. We highlighted the lower number of stocks making new yearly highs, while those making new yearly lows are rising. This week we noticed that stocks trading above their short-term average price have been falling since the end of June. The flipside is that the net number of stocks rising to falling remains positive on the SP500, however, the broader common stock only net line has flattened out. After a significant rally from the May lows, it may once again be time for a rest for the markets, which may come with the announcement of a rate cut next week. It will be another “buy the rumor, sell the news” moment for the market.

Interest rates have taken a break from their steep drop this year. Long-term, 30-year yields touched 2.5% early in July and have added 10 basis points (bp) since then. Similarly, the 10-year got below 2% and is now nearly 2.1%. While not huge increases in yields, the correction is needed. We still don’t see reasons on the horizon for a large increase in yields as commodity prices remain relatively stable over the past year. Much of the past year, commodity prices have been falling. We use commodity prices as an early warning for higher inflation, as was the case during the 2002-08 period> In that period commodity prices were rising by 10-20% annually, arguing for rate increases to stem the rising inflation pressures. Since late ’11, commodity prices have spent most of the time falling, with only brief periods of prices above year-ago levels.

The momentum trade continues to rule the markets. What is going up, continues to go up while those things going down continue going down. For long-term investors looking for a reversion to long-term means, this has not been your year. One interesting change to the landscape has been the emergence of gold mining companies. Generally following gold prices, the mining companies have sales, earnings and in many cases pay dividends that can be analyzed. Unlike bullion, which has no cash flow, earnings, etc. For years, the mining companies ran their businesses very poorly, failing to invest in profitable projects and losing large amounts of money. Today, new management teams are beginning to turn that around. The price of bullion still factors into their profitability and just recently it stuck above $1400/oz, its highest price in 6 years. Mining stocks, relative to the SP500, bottomed early last October and again in late April and are now leading the SP500 this year. There have been plenty of false starts, with 2016 being the most recent big rally and big decline. Given the better corporate governance, maybe this time the mining companies can shine.

The markets will likely be very volatile around the Fed interest rate announcement and press conference on July 31st. They are expected to set the table for the remainder of the year. Current betting is more cuts to come, but if they cut and signal they are standing aside for a while, stocks could tumble. Friday is also when the employment report is released and watched very closely for signs of weakness.

The opinions expressed in the Investment Newsletter are those of the author and is based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.

CIO Scott Martin Interviewed on Fox Business News

Fox Business News interviews Chief Investment Officer Scott Martin on Alphabet and Amazon.

2:20

SVP Paul Nolte Interviewed on TD Ameritrade Network

TD Ameritrade Network interviewed SVP and Portfolio Manager Paul Nolte on the markets reaction to the GDP, crude oil and OPEC.

7:44

SVP Paul Nolte Interviewed on WGN Radio’s The Opening Bell

Steve Grzanich on The Opening Bell interviews SVP Paul Nolte on the current markets, the economy and the fed.

Hear the full interview here

34:04

SVP Paul Nolte Interviewed by Reuters

Senior Vice President Paul Nolte is interviewed by Reuters on the global market and economic growth.

“GDP growth was not fabulously good and not fabulously bad. It builds a case for the Fed to cut rates by 25 basis points and then sit on the sidelines for the remainder of this year,” said Paul Nolte, portfolio manager at Kingsview Asset Management in Chicago.”

Read the full article here.

SVP Paul Nolte Interviewed by Reuters

Senior Vice President and Portfolio Manager Paul Nolte speaks with Reuters on the current markets.

“That’s been the M.O. for earnings for a while,” said Paul Nolte, portfolio manager at Kingsview Asset Management in Chicago. “The financial engineering such as buybacks and cost-cutting continues to go on, and that’s why you’re seeing these beats, while the top-line growth is constrained by a slowdown in global growth in general.”

Corporate results are increasingly pointing to an economic slowdown in the midst of a protracted trade war between the United States and China, which should encourage the U.S. Federal Reserve to cut interest rates next Wednesday for the first time in a decade.

“Investors are waiting for our ECB counterpart next week when (Fed) chairman Powell makes his statement and see how that sets us up for the rest of the year,” Nolte added.”

Read the full article here

CIO Scott Martin Interviewed on Fox Business News

Charles Payne on Fox Business News interviews CIO Scott Martin on the current markets.

1:45

Nolte Notes 7.22.19

July 22, 2019

Investors continue to guess the next Fed move-quarter or half-point cut in interest rates in ten days. What is clear is the unevenness of the economic data over the past week. Retail sales remain relatively strong, indicating the consumer remains “happy” with the economy and feels comfortable spending. The regional report from the Fed’s
New York district looked pretty rosy. Finally, the weekly jobless claims remain near generational lows. The leading economic index from the Conference Board was the only real black mark on the economic data. The earnings reported last week were generally uneven as companies within the same industry sector provided wildly different reports. From the bad of Netflix and CSX to the nearly great of Microsoft, IBM and Danaher, the reports were unbalanced This does cloud the “should we cut/hold interest rates” at the next meeting. The markets reflected that back and forth as well, losing some ground on the week, but in a very quiet, seemingly apathetic way. This week brings a dearth of economic data for investors to chew on, but plenty of company reports to review to glean any information on the health of the economy. It is not easy being a central banker these days!

There wasn’t anything alarming in last week’s decline, following six straight weeks of advances it was time for a rest. As investors wait for the Fed to send up their white cloud indicating a rate cut of the expected quarter- point, the markets are likely to flounder a bit. Once the deed is done, the markets may rally on the expectation for more rate cuts at future meetings. However, even as the averages push higher, the number of stocks making new highs vs. lows is disconcerting. A month ago, 10% of stocks on the NYSE made yearly highs. Today, the markets are straining to push 6% to new yearly highs. Meanwhile, those making new lows have consistently been above 2% stretching back to mid-May. A healthy market that is rising, should not be seeing as many stocks making new lows. This is a sign that there may be something wrong beneath the surface. This can be seen too with the smaller stock index lagging the more popular SP500, which we’ll discuss below.

The talk of cutting interest rates in what seemed to be a decent economic environment scared the bond market for a bit. Yields rose as bond investors feared inflationary pressures would surely show up as a result of such a silly move by the Fed. However, after a week of fretting, interest rates once again began to drop as inflation has yet to show up in any persistent way. Commodity prices backed off last week, pushing our bond model firmly in the “lower rates ahead” camp. The model has been calling for lower rates since late November when the 10-year bond yield was nearly a full percentage point higher. Little has changed since then as rates continue to surprise investors by heading lower. Until we see persistently higher inflation and/or economic growth above 3%, interest rates are likely to be stuck in low gear for the foreseeable future.

Wall Street must have heard us complain about the dominance of the SP500, as it took a back seat to bonds, emerging markets, and broad international indices. Value and even commodity prices did better last week. While we can cheer one week, like inflation or economic growth discussed above, the performance of other asset classes needs to be persistent. The case has been made by many that growth is well ahead of value and should revert toward the long-term mean. International, especially emerging markets continues to be valued extremely cheaply vs. the US markets. If the Fed goes through with a rate cut at their next meeting, we could see the dollar decline vs. other currencies, pushing international investments higher. We could also see a larger rush into “cheaper” stocks that provide good income possibilities for investors looking for more than a 2% yield from bonds. On the other hand, investors could continue to throw caution to the wind and buy the largest US stocks and hope that they continue to deliver on growth as the world economy slows down. At some point, there will be a rebalancing back to historical trends. Well….we’re waiting!

We expect the markets to remain quiet until the Fed meeting in 10 days. Individual companies will likely move based upon their own earnings reports this week. Bond investors should continue to do well as interest rates are likely to remain stable if not fall further in the weeks ahead.

The opinions expressed in the Investment Newsletter are those of the author and is based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.

SVP Paul Nolte Interviewed on WGN Radio’s The Opening Bell

Steve Grzanich on WGN Radio’s The Opening Bell interviews Senior Vice President Paul Nolte on the Federal Reserve as they adjust interest rates.

Hear the full interview here : The Opening Bell

30:25

SVP Paul Nolte Interviewed on TD Ameritrade Network

Senior Vice President Paul Nolte is interviewed on TD Ameritrade Network on the markets.

5:21