Fundamentally Strong

  1. Fundamentally Strong

    The long, smooth, record-setting ride on Wall Street is over. Investor fears about higher interest rates escalated into rapid, computer generated selling Friday and Monday that brought the S&P 500 down almost 8% from its high on January 26. The Chicago Board Options Exchange VIX index measures stock market volatility. Its long term average level is around 20 and it spent most of last year closer to 10. It is now back up over 30. Corrections are marked by a 10% drop in value. Below are some interesting facts to keep in mind: According to Deutsche Bank, the stock market averages a correction about every 357 days, or once a year.  Our last correction was nearly 1,000 days ago, the third longest streak on record. It is this streak that has so many observers believing we are due.  However, you might be curious to know we went 1,800 days without a correction in the mid-1990s. The passage of time alone doesn’t predict a correction. What should matter much more are the fundamentals. And they remain strong. Last Friday we learned that 200,000 jobs were created in January and the official unemployment rate remains at 4.1%. And average hourly wages grew by 2.9% year-over-year, well above the 2.6% economists had expected. Over the past year we have seen a growing body of anecdotal evidence that revealed upward wage pressures in specific geographies and sectors. Now we are seeing that appear in the official, nationwide averages. We are also focusing on the following: Impact of growing revenues…

  2. What can you do for me, Bitcoin?

    Not much, we would argue. History is full of fringe investments that occasionally make the news following a rapid, and oftentimes inexplicable and indefensible, price increase. Bitcoin is only the latest, leaving even casual investors asking “what is it, and should I be buying some?” Bitcoin is an unregulated cryptocurrency created in 2009. A cryptocurrency is a digital asset designed to work as a medium of exchange using cryptography to secure the transactions, to control the creation of additional units, and to verify the transfer of assets. Among the first digital currencies produced, Bitcoin has also become the most well-known. Earlier this year, Abeer ElBahrawy at City University in London, along with some colleagues, examined the cryptocurrency market and found it to be significantly more complex and mature than most had thought. Even if you thought it was already complex. Click here if you want to read for yourself. There have been approximately 1,500 cryptocurrencies introduced since 2009. Many have died since and around 600 are actively traded today. The market value of cryptocurrencies is growing and is estimated at around $300 billion, depending on how Bitcoin trades from day to day, compared to the $60 trillion of money in the world. Bitcoin remains the biggest cryptocurrency, but its lead has been eroded by technological improvements of other competitors. That is one problem with trying to back the right digital currency, there is no barrier to entry for competition. All it takes is a computer and some skill to make an improvement. If that doesn’t…

  3. The Great Correlation Collapse

    As flat as the Kansas prairie. That’s one way to describe a volatility chart for the equity markets in 2017. Seemingly absent from Wall Street this year, volatility indexes are trading near record lows and rarely getting close to long-term averages. Our human nature likes a smooth ride, whether in a car or in our investments. For the former, we can thank good road and suspension engineers, but in the latter it is often less obvious. We should look around a bit more to find out where to direct our appreciation. At the same time that volatility has bottomed, equity indexes have hit dozens of records through the year in a mostly linear way. According to LPL Financial, the S&P 500 recently set a record for how long it has gone without a decline of 3%. As of November 14, it has gone 50 sessions without a drop of 0.5%, a stretch last seen in 1968. And for the year it has experienced only eight sessions where the closing price changed at least 1%, an unusually small number of occurrences. Nothing to see here, please move on. It seems our good fortune comes largely from the collapse in equity market correlations. Correlation refers to the degree to which two different securities, or groups of securities, move in tandem. A correlation of 1.00 means both assets move perfectly in tandem. A correlation of 0.00 means two assets move in completely opposite directions. According to DataTrek, Research, between 2012–2016, average sector correlations were 0.81; last month they…

  4. Global warming

    We lifted the title for this post from Ed Yardeni who runs Yardeni Research, an investment strategy research firm. Ed offers a checkup on an economic theory debate that has been simmering for several years in the economics community, nicely tucked away from the wider world. The crux of the issue is finding an explanation for the frustratingly slow pace of economic recovery coming out of the crisis of 2008. Emerging from the ensuing recession, the U.S. economy was forecasted to grow in the same 3-4% range as in other recoveries. We crossed 3% a quarter here and there, but overall annual growth rates hovered around 2%. Aggressive forecasts were constantly scaled back, but the answers to the shortfalls weren’t obvious. In 2013, Larry Summers, a Harvard professor, gave a speech that suggested the United States was stuck in an extended period of secular stagnation. This is the idea that our economic problems weren’t a product of the business cycle, but are permanent drags on the modern economy. The term was coined by economist Alvin Hansen in 1938 to explain the sluggish recovery throughout the preceeding decade. The core of Hansen’s thesis stated that slower population growth and a lower speed of technological progress would permanently thwart economic growth. World War II helped to change these circumstances, but a long peacetime expansion that followed put the theory on the shelf to gather dust, until now. Kenneth Rogoff, also a professor at Harvard, sits on the other side of the issue, dismissing secular stagnation as a…

  5. What are you afraid of?

    In 2016, Chapman University, a private, non-profit university located in Orange, California, produced its third annual survey of American Fears. The survey asked respondents about 65 fears across a broad range of categories including fears about the government, crime, the environment, the future, technology, health, natural disasters, as well as fears of public speaking, spiders, heights, ghosts and many other personal anxieties. The greatest number of respondents, 61%, report a fear of corruption of government officials. The rest of the top ten are represented between 35% and 41% of respondents. These include becoming victims of a terrorist attack, loss or illness of a loved one, economic/financial collapse and even fear of the Affordable Health Care Act, itself an effort to alleviate the fear of having no health insurance. That’s a lot of fear. The composition of the list also presents another perspective. Just how many of these fears can be addressed; can we do anything about them to mitigate our anxiety? For example, what can we do about corruption of government officials? Arguably, such untrustworthy officials can and should be dealt with at the voting booth. Joseph de Maistre, a French lawyer, diplomat, writer and philosopher who died in 1821 is credited with the quote, “In a democracy people get the leaders they deserve.” How about the fear of becoming a victim of terrorism? We could stay home all day in order to reduce our exposure to the unfathomably small probabilities, but that is hardly practical to help us navigate life successfully. What about the…

  6. The end of daylight savings.

    The idea of shifting our clocks to make better use of daylight is as old as Benjamin Franklin, who first penned the idea while living in Paris in 1784 when he noticed people used candles at night and slept past dawn in the morning. However, the notion wasn’t given serious consideration until the early 1900’s, and during World War I the first laws were passed driven largely by economic considerations. Now 70 countries have instituted Daylight Savings Time to some degree. Despite many adjustments since then, observance today in America is nearly universal, except in the case of Hawaii and most of Arizona. Arizona felt that with its hot climate, it argued that people prefer to do their activities in the cooler evening temperatures after the sun sets. Hawaii sits so close to the equator that its sunrise and sunset are consistent already and therefore has little need for extra light. Most countries located around the equator have opted out for the same reason. The theoretical arguments for DST – lighter evenings mean lower demand for illumination and electricity – have been debated at length, but it was rather hard to prove. However, when Indiana adopted DST statewide in 2006, after previously observing it county by county, researchers were able to study before-and-after electricity use across the state. In a 2008 National Bureau of Economic Research study, the team found that lighting demand dropped, but the warmer hour of extra daylight tacked on each evening also led to more air conditioning use which more than…

  7. (Ir)Rational Behavior

    There is a Nobel Prize given for the dismal science — economics. Since prevailing economic theories seem to change with the weather, it may seem pointless to award a prize in the field. The recent award to Richard Thaler, however, is spot on. Thaler’s work is in the area of behavioral economics. Simply put, he studies the irrational behavior of humans in the way they handle their finances. For example: You have $10,000 in a savings account earning virtually nothing. Say you have $7,000 in credit card debt charging 18% interest. Logic would indicate you should tap the former to pay off the latter. Many, if not most, people do not. Why? Thaler found that people place a higher value on what they have than what they do not, therefore it seems more important to keep the cash than to part with it, even though there is future expense involved. He found that when the price of gasoline drops, many drivers switch to premium rather than save the difference. He learned that if a cab driver is having a slow day, he will work longer hours to try to make up for it; conversely, if he is having a busy day, he will quit early, even though the exact reverse would make better economic sense. You can read more here. It is well documented that when employees are offered a default choice to opt into a retirement savings plan rather than to opt out, many more join the plan, though the number should logically be…

  8. Retirement Success Needs a Good Plan

    Benjamin Franklin is supposed to have once said, “If you fail to plan, you are planning to fail.” When we want to get from here to there, leaving success to chance is a fool’s errand. The path to a successful retirement is long and winding. Creating a plan for your family is critical to anticipate and prepare for change, to measure your progress, and clarify roles and responsibilities. According to the Department of Labor, fewer than half of Americans have calculated, let alone simply thought about, how much they need for retirement. In 2014, 30% of private industry workers with access to a defined contribution plan (such as a 401k), did not participate. Keep in mind that the average American spends 20 years in retirement, which means many spend much more time. They also suggest the following sensible steps, click here to find out more: 1. Start saving and keep saving. You should save for retirement with your first paycheck and continue to your last. Some experts recommend saving as much as 15 percent of each paycheck — after tax. 2. Figure out your retirement needs. Think about what you want to do. 3. Contribute to your employers retirement savings plan, as much as possible 4. Do you have a pension plan? Learn about it. 5. Consider basic investment principals such as inflation, diversification, compounding and the like. Educate yourself. 6. Don’t touch your retirement savings for anything other than retirement. 7. If your employer doesn’t offer a plan, ask them to start one. Be…

  9. A hand up

    Give a man a fish, and you feed him for a day. Teach a man to fish and feed him for a lifetime. Never definitively attributed to one source, the spirit of this proverb encapsulates the mission of Metro Lutheran Ministries (“MLM”), who want to offer a hand up, rather than a hand out. Started in 1971 by Kansas City Lutheran churches working in partnership, MLM helps people in need regardless of race, religion and nationality. Their goal is to provide clients a clear path to self-sufficiency through a continuum of care that immediately addresses short term stability and eventually helps clients achieve lasting stability. Immediate needs are met through food assistance programs offering breakfasts, sack lunches and monthly food distributions and community gardens. Other initiatives focus on housing security and stability to help clients live in dignity and safety. Longer term needs are addressed through income sufficiency programs designed to educate and empower families to better control their own finances and futures. Through offices in mid-town Kansas City, Kansas City-North and Wyandotte County, KS., MLM relies on over 2,000 volunteers that give over 17,000 hours of their time, a crucial component to meet the needs before them. Last year alone, they distributed 800 sack lunches to clients who came in for other types of assistance. They staffed and ran the Christmas Store, an annual effort to make Christmas a little merrier, helping more than 4,000 clients. They maintained the orchard and community gardens which produced over 2,400 pounds of healthy fare for the nearby…

  10. A new airport – it is time

    The debate concerning what to do about Kansas City’s airport goes on. And on. Once the triple-horseshoe configuration at KCI seemed futuristic. It was convenient. It was architecturally outstanding. It was a landmark. Then things changed. Pre-boarding security was initiated weeks after the airport’s completion in 1972. This has led to the disruptive multi-gate security divisions and the resultant crowded passenger waiting areas with inadequate facilities and extremely limited concessions. Incoming passengers are forced to navigate these spaces through unmarked exits and milling passengers waiting to board. Concessionaires are not interested in serving the airport because there is no common waiting area beyond security where enough people gather to make operating viable. Airlines have adopted hub-and-spoke flight systems, eliminating Kansas City from the possibility of becoming a hub because of the difficulty of changing gates or terminals. The two operating terminals have become old and dilapidated, and remodeling them would be costly without resolving the basic problems. The third has been closed for lack of demand since 2014. This has all been obvious for years, as the city council has failed to state the issues clearly and dithered over architectural and financing issues while local infrequent fliers cling to the idea of curbside drop-off, ignoring the operational deficiencies. Regular fliers will recognize that KCI offers a poor welcome to the city, and that while some other airports have become endless construction sites, we have a chance to get it right. A new terminal will cost taxpayers nothing. It will either be privately financed as Burns…