“It’s just another manic Monday
I wish it were a Sunday
That’s my funday
An I-don’t-have-to-run day
It’s just another manic Monday”
— The Bangles
“Manic depression is searching my soul
I know what I want
But I just don’t know
How to go about getting it”
— Jimmy Hendrix
The markets are clearly in manic depressive mood. Last Wednesday my growth strategy had one of its best days ever. Yesterday, it had one of its worst days since the dark days of 2011 when the US Government had its sovereign debt downgraded. What seemed then like a seminal event, turned out to be just another manic-depressive period of time. Ditto for the Chinese currency devaluation in the summer of 2015. When you go through these periods, simply put, you want to lose your lunch on your computer keyboard. However, you also have to be disciplined and not panic.
When we endure corrections, I always look for mean reversion. By that I look for markets to find some mid-point price equilibrium. For example, the Standard & Poor’s 500 (SPX) peaked at 2,940 and declined to as low as 2,604. The mean (average) is 2,772. We hit that level last week. Other US Indexes regained their correction midpoints last week as well. After mean reversion we tend to bounce around a bit before resuming an upward trend. Hence, we have a condition of manic-depression in the markets.
What’s different now versus 2011 and 2015? On the plus side, economic growth in the US was pathetic in 2011 and 2015. It is robust right now. On the negative side, short term interest rates were near zero back then. Now they are on the rise; yet still at historically low levels. Of course, interest rates are tied to two major factors – employment and inflation.
In 2011 the Consumer Price Index (CPI) was about 3.5% (give or take). In 2015 the CPI was about 0 – ½%. Now it stands around 2.5%. Going back over 100 years – to before World War I – the rate of inflation in the US averages between 2 5/8% and 3 ¼%. The extreme periods of inflation were just after WWI, just after WWII and during the two crude oil spikes in the mid-1970s and early 1980s.
What continues unabated is huge productivity gains. What this means is that our economy generates more output per labor hour. With an increasing labor force; and, a boom in labor force participation (since bottoming out in September 2015) the US economy is in its best condition in decades. What causes productivity gains? Technology. Technology. Technology.
Unlike the last economic boom which was formulated from a toxic combination of real estate speculation and benevolent lending standards, the current economic expansion is generated from a more manageable combination of consumer demand and factory output. This is despite weakening economies in Europe and China, from which demand is tepid.
Therein lies the rub. On Monday, the markets were reading the tea leaves such that the rest of the world (ROW) was going to pull down the US economy. One such matter of speculation came form a company called Lumentum (LITE). Lumentum sounds like a drug company, but it manufactures optical equipment. LITE announced that its largest customer for 3-D equipment asked the company to reduce shipments, after receiving requests to expedite shipments a few weeks ago. Apple (AAPL) is LITE’s largest customer. That news in turn crushed AAPL stock price as well as the price of chip and other tech companies. We do not know if indeed AAPL was the customer that cut its orders. It was a deduction. The shoot-first-ask-questions later crowd was in control. We also cannot say that AAPL is exhibiting sales weakness and if so, where? Is it the US? Is it China? Is it ROW? Another possibility is that AAPL may have expedited orders ahead of the recent new product launch and is just normalizing them now. Recall that AAPL management recently specified that sales would be hurt by as much as $2 billion in the current quarter due to the strong US Dollar (USD).
Also, note that AAPL has more tricks in its bag than do it’s suppliers. The company can buy back huge amounts of stock. It can re-price its products and services. Also, Warren Buffett’s Berkshire Hathaway (BRK/A, BRK/B) can buy additional billions of dollars of AAPL stock as well.
Other curious signs of ROW weakness are declines in crude oil and material prices. However, this can be a misleading indicator. To begin with, crude oil and materials are priced in USD terms here in the USA. The USD remains strong, causing a decline in pricing. Furthermore, demand for foreign sourced crude oil has diminished tremendously. So whether we source it from home or buy it overseas, it is cheaper in USD terms. Iran is pumping like there is no tomorrow and selling to ROW, despite US prohibitions. Lastly, the Saudis have yet to make substantive cuts in production.
So where is the weakness in these commodity prices being driven from? It must be from overseas demand — China. China’s GDP has been in decline since 2012. On the other hand, Alibaba’s (BABA) Singles’ Day Sales rose an enormous 27% this year (Single’s Day is 11/11 every year). So, if the tariff theory is correct, China’s economy is strong within its borders and weak outside.
As an investor and economist, I always ask: are these transitory or medium-term permanent conditions? I am inclined to say transitory. Why is that? Here are some reasons: 1) Tariff squabbles with China, once settled will resume normalized trade. An end to tariff anxiety will be alleviated with a US-Sino agreement at the G20 meeting the end of this month. 2) Europe is still mired in Brexit negotiations. It appears that there is a framework for a divorce agreement. That could be announced in the next week or two. 3) The FOMC should come to grips with the damage that it has done to the USD and global financial markets. Since the FOMC remains dogmatic we may have to wait until after a December rate hike for that to occur. 4) If the AAPL weakness theory is not true, then AAPL CEO Tim Cook will assure investors that iPhone sales are not weak, and the company resumes supply chain orders.
Getting caught up in Monday’s mania was Goldman Sachs (GS) being embroiled in an overseas scandal and the California conflagration.
What got lost in all the manic-depressive market action was the escalation of hostilities in Gaza. In my opinion, this could be the source of a real market event.
Some of my other thoughts on the markets (and why I did not publish recently) were expressed in two recent interviews:
From TD Ameritrade
It is always darkest before the dawn. Dawn will come.
But first, some classic music videos
Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView AssetManagement, LLC was long AAPL. BABA, SPY, SSO & SPXL although positions can change at any time.
Scott Rothbort is the President & Founder of LakeView Asset Management, LLC, a registered investment advisor specializing in high net worth private wealth management. For more information on investing with LakeView Asset Management, LLC call us at 888-9LAKEVIEW or request more information by clicking on the contact button on the top right hand corner of the website. LakeView Management, LLC is a Nevada LLC, with its principal office located in Henderson, NV and branch office located in Millburn, NJ
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