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No, Thank You, I Don’t Think So, I Think I’m Smellin’ a Rat

Those words are part of the chorus of Don Henley’s song “No, Thank You” from his Cass County album which debuted last October.  I think they succinctly sum up this Presidential Election, with Hillary and Donald recording the highest disapproval ratings in history.  Here are two snippets of Henley’s song:

These are hard times we’re living in, Nobody cuts you any slack.  We got Space Age machinery, Stone Age emotions, Today a man had better watch his back.

Everybody’s selling somethin’, the baron and the bumpkin, A man has got to fight for what is his.  If what they’re offering to you looks too good to be true, You can bet your bottom dollar that it is

No, thank you, I don’t think so, I think I’m smellin’ a rat, Don’t tell me what you’re gonna do for me, ‘Cause I’ve been there, done that.

Later in the song, he goes on to say:

B.S. blaring from the radio, the TV, Hot wind blowin’ off the Hill.  It’s a mystery to me we can’t agree to disagree, It’s lookin’ like we never, ever will.

Like a drunkard in the night, swingin’ left and swingin’ right, Republican or Democrat.  Well, I ain’t got no love for none of the above, cause I’ve been there, done that.

We’re not about to tell anyone how to vote, but I did come across some good wisdom this past week on this topic that would benefit anyone.  It came from John Wesley, an Anglican cleric and Theologian who in October 1774 gave a sermon on politics.  He said back then, “I met those of our society who had votes in the ensuing election and advised them this way:

  1. To vote without fee or reward for the person they judged most worthy
  2. To speak no evil of the person they voted against, and
  3. To take care their spirits were not sharpened against those that voted on the other side

Thanks to Biola Communications Professor Tim Muehlhoff for the illustration.

The Election Impact on Markets

I’ve stated before that we think that Federal Reserve policy is more important to the financial markets than who wins the Presidency, and nothing has changed in that assessment.  Right now, the Fed is expected to raise rates at their December meeting, and though that may not be the nail in the coffin to the stock market, it is not going to help (but it needs to be done).

The good news is we are about to enter the strongest seasonal period for stocks, which mostly runs from November to April.  The Cycle Composite for 2016 from Ned Davis Research (shown below), suggests that stocks should be bottoming now, and mostly rising until January.

presidential-cycle-chart

Given that we’ve recently seen confirmation of price highs with most breadth indicators, along with corporate high yield bonds continuing to make new highs, I suspect the narrow trading range of the past few months will eventually yield to an upside breakout.  We’ll see.

Investment Allocations Update

There’s been little change in this area.  Tactical equity allocations remain at about 64%, and we expect this will increase to 76% in the next week or so, as our seasonal risk model will be turning positive.  Our real estate model remains on its March BUY signal, though prices have weakened in the last month with the backup in yields, as the 10-year Treasury note has jumped from a low of 1.39% to 1.74%.  As mentioned above, high yield bonds are making new highs and our risk model remains on its February BUY signal.  We added to positions in this area about one month ago, and are now nearly 70% invested, certainly with a dose of regret for not being fully invested.

Overall, the sum message from our stock and bond risk models is that of a moderately positive environment.  It does not appear time to leave the party yet.

Valuation Headwinds

We’ve mentioned many times that stock market valuation tools are terrible timing indicators.  But, eventually, they do (and will) matter.  One measurement below, also courtesy of Ned Davis Research, is the median Price/Earnings Ratio of the S&P 500.

sp-500-median-price_earnings

The data goes back to 1964, and the current reading is at 23.7, while the 52 -year median is just under 17. Just to get back to fair value, the S&P 500 would need to fall by nearly 30%.  That is likely to happen at some point.  But who knows, maybe the PE goes to 27 first, as it has done twice before since 1998. Remember, anything can happen in the stock and bond markets.

Material of a Less Serious Nature

I couldn’t resist, so this month, you get two political jokes.  You’re guaranteed to laugh, no matter who you’re voting for.

Hillary and Donald are in a life raft out in the middle of the Atlantic Ocean.  Who survives?

………..THE UNITED STATES!

And, now here’s number two.  Once upon a time there was a king who wanted to go fishing.  He called the royal weather forecaster and inquired as to the forecast for the next few hours.  The weatherman assured him that there was no chance of rain in the coming days.

So, the king went fishing with his wife, the queen.  On the way, he met a farmer on his donkey.  Upon seeing the king, the farmer said, “Your majesty, you should return to the palace at once because in just a short time I expect a huge amount of rain in this area.”  The king was polite and considerate, and replied “I hold the palace meteorologist in high regard.  He is an extensively educated and experienced professional.  And besides, I pay him very high wages.  He gave me a very different forecast.  I trust him and will continue on my way.”

So, he continued on his way.  However, a short time later a torrential rain fell from the sky.  The King and Queen were totally soaked and their entourage chuckled upon seeing them in such a shameful condition.

Furious, the King returned to the palace and gave the order to fire the professional.  Then, he summoned the farmer and offered him the prestigious and high paying role of royal forecaster.  The farmer said, “Your Majesty, I do not know anything about forecasting.  I obtain my information from my donkey.  If I see my donkey’s ears drooping, it means with certainty that it will rain.”

So, the King hired the donkey.  Thus, began the practice of hiring dumb asses to work in the government and occupy its highest and most influential offices.  The practice continues to this day.

 

By the way, if you’re wondering who I’m voting for. . . . .it’s MADISON BUMGARNER!

Sincerely,

bkargenian_signature

Bob Kargenian, CMT
President

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By Bob Kargenian | Monthly Updates