Pressure is building to return some sanity to markets as the problem becomes “more impossibler” to ignore. We have read that the former SEC Director of Trading and Markets, John Ramsay, is out discussing market dysfunction in recent days. He told Bloomberg:
“I’ve been able to find my voice on these issues in a way I couldn’t have done when I was in the government, because you’re always limited by internal politics and not wanting to get too far out in front of the agency,” he said. “I feel like I’ve been a little bit uncorked.”
We guess we like the sound of that. We hope it bears some fruit, but we would have to be naïve to wonder for even the nanosecond it takes for a computer to fake a bid as to why he stood silent for so long. Now he is employed by IEX Group, the firm discussed in the book, Flash Boys, which exposed the nuttiness of Wall Street trading last year. IEX hopes to profit by creating a venue that is more fair. We wish them well!
Importantly, the very issue that many point to as the reason one must own stocks is the very reason that owning them is made even more risky. Rates near zero or even negative in many instances is the result of a global economy struggling to grow. That makes revenue and earnings projections subject to major negative surprises as companies attempt to deliver returns in such a difficult environment. Throw in currency volatility and the crystal ball gets cloudier. As we mentioned last month, the collapse in earnings expectations has become quite pronounced as the year begins, though amazingly analysts still have 20% earnings growth in fourth quarter S&P 500 estimates after a few slightly negative quarterly projections for the first part of the year. Good luck.
The February employment report was more of the same. It showed the creation of many low paying jobs, limited wage growth, and a poor labor force participation rate. Roughly 60,000 or 20% of the new jobs that were added came in the restaurant sector. We are guessing a lot of waiters and bartenders are being hired to staff the eateries involved in the restaurant IPO frenzy. Strangely, layoffs that we know to be hitting the energy sector have yet to show up in the data, though the oil rig count has crashed by over one-third. We are reasonably confident that GDP growth this quarter has fallen to closer to 1% based on other data. For instance, retail sales have been negative for three straight months and the business inventory-to-sales ratio is at the highest since 2009. Manufacturing production has now been negative for three months in a row. To check our overall view, we looked at the Atlanta Fed GDP estimate, which is a decent real-time indicator of activity, and it seems to corroborate our expectations. As a result, because employment is a lagging indicator, we would expect hiring to cool as the year progresses in response to this slowing.
Sometimes you can be in a majority and not even know it. It all depends upon your frame of reference and the sample group. Contrarian investors, like us, are often simply aligning themselves with the views of the larger crowd that includes past investors with their experiences as well as current ones. We obviously think most equities are a foolish game right now and current sentiment indicators would suggest we are almost a “lone wolf” with a serious failure to understand the wonders of throwing cash at stocks. We beg to differ. We are in a large and rather overwhelming majority if one considers the large crowd of “historic” investors over the last hundred years who, with the benefit of their hindsight, would likely advise the current fevered masses of today that this time is not different. It never is.
The views expressed on this blog are the opinions of the authors. This information is not intended as investment advice or to recommend the purchase or sale of securities. More information on Strategic Balance, LLC may be obtained by contacting investor relations.