Necessary Evil

The current market environment yields a difficult-to-digest entry point. On one hand a majority of solid, stable, and secure “blue-chip” companies look to be trading at incredible discounts, on the other hand an investor would surely not want to get burned entering the stock market in the midst of a current pullback. Also incredible-momentum stocks (TSLA, NFLX, FB) are seriously waning. The best option is to not trade in this environment, it seems like the “froth” is being taken out. This is a good thing for long-term investor.

A bad sign to compound the difficult entry point dilemma (of many bad signs) is that the employment to population ratio is normalizing. This ratio is normalizing because of the growing number of long-term unemployed. The ratio was skewed very badly during the great recession. This is worrisome and indicative of a structural shift. However, a contrary trend is emerging in an age-range of the population:
Hiring over the past 12 months has outpaced population growth. More workers in the prime 25- to 54-year-old age group are finding jobs. The winter freeze was less destructive to hiring than had been assumed. Layoffs have declined since February. And an increase in hours worked suggest that incomes will rise. Link

Also, unemployment claims are threatening to fall even lower, it MIGHT be from increased hiring or (more likely) frustrated unemployed, working-age citizens are collectively saying “sour grapes,” and willingly leaving or dropping off the reports due to length of unemployment. Despite, the relatively recent trend the economy was adding MORE people to the labor force than people leaving. Now getting a clean unemployment number is tricky, because many youths that have never entered the labor-force but are looking for employment cannot be counted.

To augment the hiring issues, through less options being available, is that ultra-discount stores like Family Dollar were hurt especially hard during the winter slowdown. Strangely, these types of stores outperform in tough economic environments. In difficult economic environments, ultra-discount stores perform very well since a majority of consumers are looking to cut corners on day-to-day expenses. However, in economic up-cycles (such as this one) those stores perform poorly, this recovery has a greater amount of structural issues so the current recovery has a lower slope than previous recoveries, this is the new normal.

It does seem like consumers (who can) are spending more per holiday. What would be interesting to see, is if the rate of consumer spending per holiday has kept up or outpaced inflation.
“[…]Yet Americans are on track to spend $15.9 billion on the holiday this year, according to the National Retail Federation. The average consumer (age 18 or older) who celebrates the holiday says she plans to spend an average of $137.46, up 42 percent from a decade ago. (Yes, these surveys of what consumers intend to do are notoriously inaccurate in terms of dollar figures,  but they do give insight into actual spending trends.)” Link

This is a positive trend. Slowly, well-off consumers will start to spend year-round. The increased profits will translate to larger pay for managers, the in turn will, (likely) reimburse their employees more, their employees will follow the same pattern, not as quickly, of course. This is essentially trickle down economics. With more and more people spending more on holiday shopping, this will eventually flow through to earnings. Equities are amid an earnings season right now, towards the end of this earnings period, at the very beginning of this period, the earnings were distorted by a lack of consumer traffic, blamed on the weather.

There has been activity, and definitely buying in the IPO (Initial Public Offering) spectrum. Be cautious IF investing in an IPO. If investing betting (currently) in an IPO, look for a metric called “monetization.” Monetization means the strategy in place for the firm to make money, or, monetize their product offering. This metric should be closely watched for fledgling tech startups, they could have a major cash inflow from one large
buyer, yet have little cash flow the following quarter.

A country that has certainly had a great deal of activity, as well as a rash of Tech IPO’s is China. Currently, there exist fears that the Chinese boom may be ending.While China has undoubtedly served as a strong global economic locomotive, especially in the aftermath of the 2008 global financial crisis, expectations are for this role to diminish going forward. More of the heavy lifting is expected to be borne by the U.S. and Europe -- and indeed, needs to be borne by those economic powerhouses. That shift will optimally occur in the content of a proper rebalancing of global growth engines and an orderly, gradual normalization of experimental monetary policies.

As said in the quote, China has served as a robust economic growth engine, going forward, however, it will, most likely, slow its pace of expansion, as there is a shift from production to consumption. Eventually, the country supplying China will likely have a robust growth period, and the cycle continues.   Buying here, with the market at depressed levels, makes sense. Buying “story” stocks (FB, TWTR, etc) is probably not too, considering this is PROBABLY the back end of the pullback. Snapping up cheaper (now), blue-chip (high-quality), dividend-paying stocks would be an excellent way to take advantage of high-quality names. There was not really a good opportunity last year, however, barring a catastrophic fall, high-quality names mat not be at this price level for long.

After a few rocky days for stocks, it's time to set aside fear and buy growth companies on the cheap, says T. Rowe Price portfolio manager Josh Spencer. Link

Another point of concern emanating from China is the fact that their property market is heating up very quickly. This may predicate a global growth slowdown, hopefully the MINT countries can help with the growth reduction, and lessen the blow to growth. “The far flung smaller cities account for almost 70% of all home sales, according to Japanese brokerage Nomura.”  A potential issue with the dislocation of home sales, is that most sales are occurring away from production hubs, meaning a shift from export driven money may be well underway. Since a slowdown would surely affect citizens (the driving consumption behind GDP), the overheating of the property market would definitely harm the global recovery.

Since China being an economic superpower is relatively young perhaps there is not ample data to indicate China will pull down the global economy. That might be too optimistic. Many, systemically important, economies are tied to health of the Chinese economy as well. This could bode poorly for global growth, so best to lighten Chinese allocation, and pick up cheaper high-quality, dividend-paying, names.

The Chinese economy is indeed globally important, and to belie what was said in the last paragraph; China is a systemically important economy. That economy provides the fuel for growth for many economies. What is interesting is the fact that many well-off oriental citizens have developed a penchant for European goods. Perhaps their current shift towards consumption will boost exports from Europe and aid the ongoing economic calamity there.