What a Difference a Few Days Make (plus a bit of decent news)

US stocks are on track to have their best week since January 2013. http://www.startribune.com/business/280149832.html And global stocks are also heading to their best week of the year.

This was following a few weeks of tremendous uncertainty, volatility and market declines.

As an active investor in the markets since 1978 and having studied with some of the best and analytic minds in NYC during my graduate work at Columbia University, there are only a few things we, as investors, know with certainty:

• It is impossible to predict what the markets will do tomorrow or next week. (There are absolutely NO certain projecting tools, models, or systems.) (Fortunately, the SEC and Federal Prosecutors are enhancing their enforcement of insider trading, which through history had been the only way to “know” tomorrow’s results with very high confidence and this continues to be illegal.)

• Assessment of facts and details, evaluating likelihoods of occurrences and projecting outwards, not by days or weeks, but by months and several quarters, provides the highest likelihood of investing success in the longer term.

• Since the beginning of the US’s stock markets, the highs have continued to go higher and the lows have continued to move higher, over time. Yes, between the new highs are pull backs and retracements, but the highs have with certainty moved higher. Lows have moved higher over the course of time, as well. Thus, patience has continued to be rewarded. See the chart below going back 114 years. (It is presented in logarithmic scale to permit its inclusion on one screen.)

Okay – so what changed since mid-week last week?

• WTI Oil pricing has stopped its free fall. After hitting a low of $79.10 per barrel on 10/16, it has not traded below $80 this week. (This is a great illustration of a price “swinging like a pendulum”. Whether it is a commodity or a stock, prices will typically swing wide of what may be a more appropriate value, typically driven by momentum traders and speculators. Like a pendulum, the direction always changes at some point in time.) http://data.cnbc.com/quotes/@CL.1

• $80 per barrel is considered the “price floor” at which most production continues to remain profitable.

• The Ebola spread in Dallas appears to have ended with the two nurses. Each of the two have responded well to treatment and one is in the process of being discharged today after being declared free of the virus. http://time.com/3536743/ebola-dallas-nurse/

• The CDC appears to have stepped up their efforts and many of the initial people being monitored have been cleared. http://www.nytimes.com/interactive/2014/10/20/us/cascade-of-contacts-from-ebola-case.html?_r=0

• The Ebola fear still remains, especially today, after a doctor returning from Africa to NYC has been diagnosed with the disease, http://www.cnn.com/2014/10/24/health/new-york-ebola-timeline/index.html and he had bowled, rode the subway, etc…. The US markets have not responded negatively to today’s news.

• The European Central Bank (“ECB”) re-commenced bond buying, which may investors had been waiting for. http://online.wsj.com/articles/ecb-starts-to-buy-covered-bonds-1413807746 .

• The European economy may not be as bad as thought last week:

• Spanish economy is finally improving, as their unemployment level has declined to levels not seen since 2011. http://www.bloomberg.com/news/2014-10-23/spanish-unemployment-drops-to-lowest-since-2011-as-economy-grows.html

• The Euro region Purchasing Mangers’ Index rose in October from September, though economists predicted a decline. http://www.bloomberg.com/news/2014-10-23/european-factories-avoid-contraction-as-demand-drop-shows-risks.html

• Anticipation has increased that ECB will do a QE program. http://www.bloomberg.com/news/2014-10-24/wall-street-economists-split-on-ecb-ever-buying-government-bonds.html

• US economy showed continued strength, rather than weakness, in the report that jobless claims are running at a 14 year low! http://www.bloomberg.com/news/2014-10-23/fewest-americans-in-14-years-filed-jobless-claims-in-past-month.html This signals that layoffs are very limited and demand is expected to continue to be solid or growing. http://www.bloomberg.com/news/2014-10-23/spanish-unemployment-drops-to-lowest-since-2011-as-economy-grows.html

• There is growing opinion in the popular press that interest rates in the US will remain low, even after the Fed finishes QE3, and that the $4 trillion of bonds purchased by the Fed over the past few years and now not available to be traded on the markets will keep bond supply unusually low, supporting high prices and low interest rates. http://www.bloomberg.com/news/2014-10-24/fed-s-4-trillion-holdings-keep-boosting-growth-beyond-end-of-qe.html

• Mortgage applications for refinancing rose this week, as interest rates and mortgage rates declined to recent lows. Refinancing provides additional disposable income to those who refinance, thus boosting the economy. http://www.bloomberg.com/news/2014-10-22/mortgage-applications-in-u-s-jump-11-6-as-refinancing-surges.html

• Sales of existing homes in the US rose during September to their highest level in one year in September. http://www.bloomberg.com/news/2014-10-21/sales-of-existing-u-s-homes-rose-in-september-to-one-year-high.html

• Corporate profits and revenues on average have increased more than had been projected by analysts, and less companies than typical have reported earnings below expectations. Of course, it is corporate profits that drive stock valuations. http://www.valuewalk.com/2014/10/q3-earnings-sales-growth-rate/

So all those items above are good, what is not so good?

• Mortgage applications for purchase of homes was down 4.6% in September. http://www.bloomberg.com/news/2014-10-22/mortgage-applications-in-u-s-jump-11-6-as-refinancing-surges.html

• Sales of new homes in September was flat from the prior month. http://www.bloomberg.com/news/2014-10-24/sales-of-new-u-s-homes-little-changed-after-august-revised-down.html

• A good number of companies have reported their 3rd quarter earnings numbers this week. Some companies reported better than expected, others worse. So a mixed bag. Also, forward looks were mixed as well. http://www.zacks.com/commentary/34991/q3-earnings-not-great-but-not-bad-either

• The ECB has done their health tests of the 130 largest European banks, and their findings, though not formally released, show that 25 major banks have failed the stress test and 10 continue to have capital shortfalls. http://www.reuters.com/article/2014/10/24/us-markets-forex-idUSKCN0IC2Q420141024

• With a second person climbing the fence onto White House grounds and a Canadian soldier killed in an attack this week, we are reminded that terrorism in North America does exist and vigilance remains very important and valuable. Though the impact is unquantifiable, the uncertainty has impacted the markets.

• As shown in the chart below depicting the number of mortgage applications for home purchases, the volume before this week was 30% lower than last year’s peak and it is running at levels near to those back in 1996, indicating the relative weakness in the housing markets and the need for continued low rates to support it. (Thanks to David Wilson at Bloomberg.)

It is important to note that though we often speak of the “markets” and indices. Markets and indices are actually composed of individual companies and sectors. This is why when CapitalRock is investing for clients, we will break data down and look at the individual companies and sectors and industries, so as to better manage the risks of equity investing and to fine tune portfolios to optimally achieve clients’ needs and goals.

We are very happy to see this week’s rebounds. We have identified some new opportunities, as some stock prices that were driven down continue to remain attractively priced. We are optimistic regarding the balance of the year, between the economic signals we are reading, the seasonal trends we have identified, and the overall stability and safety of the US economy.

Of course, please reach out with any questions, at any time. If we can assist a family member, friend, or colleague with their investments or financial plan, or provide a second opinion, please share our contact information.

Have a great weekend!

Howard Isaacson

Financial Planning and Advisor

Naples, FL

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