Why Don’t We Use Just Common-Only A-D Numbers?

By Tom McClellan

Common Only A-D Line
March 24, 2017

For as long as there have been Advance-Decline (A-D) data that people have been interested in following, there have been criticisms of that very A-D data for including “the wrong sorts” of issues.  Back in 1962, Joe Granville and Richard Russell both pointed to the big divergence between the NYSE A-D Line and the major averages like the DJIA.  That divergence preceded a 27% decline in the DJIA, so in that moment the A-D Line suddenly became much more interesting to a lot of people.

But critics noted then that the NYSE-listed issues contained utilities and insurance company stocks which were “interest rate sensitive”, and which were supposedly contaminating the data.  The same criticism persists today, but now it is leveled against preferred stocks, bond related closed end funds (CEFs), and other issues that trade like stocks on the NYSE.  Those other issues make up about 40% of the issues, although they trade only a small fraction of the volume.

Many analysts assert that one should preferentially follow the A-D numbers for “common stocks”, sometimes referred to as “operating companies only”.  This distinction supposedly filters out those damned contaminants.  So everyone would supposedly be happier and better off if they just followed the right sorts of data, and ignored those “others”.

The problem is that the purified A-D data are actually not always better.  The chart above shows that when the Common Only A-D Line disagrees with the NYSE Composite Index, it is usually the price index that ends up being right.  This is a big problem.  The whole reason for hiring an A-D Line to work for you is to give you a different answer from what the price indices are saying.  Having an index give you the same message that prices give you is useless.  And having data that give you the wrong answer at a pivotal time is worse than useless.

The one type of issue on the NYSE that is most often blamed for contaminating the A-D data is the closed end bond funds.  They only make up about 7% of the listed issues, and hardly trade any of the volume, but they are continually trotted out as the “usual suspects” for messing up the A-D data.

This is problematic both from the standpoint of raw prejudice, and more importantly because it is just not true.  These issues tend to be the better canaries in the coal mine, warning of trouble ahead of when such warnings come from the common-only A-D data or other indications.

Continue reading Why Don’t We Use Just Common-Only A-D Numbers?

The Inverse Trump Trade

By Jared Dillian

The market dumped on Tuesday. For a good graphical representation, look at the three-day chart of the S&P 500 I keep on my desktop.

I like three day charts. If you want to know where you’re going, it’s good to know where you’ve been.

You can see a pretty radical change in price action from one day to the next.

What happened?

The job of financial journalism is to try to explain the day-to-day variations in the stock market. Oftentimes, there is nothing to report—lots of randomness. This time, on the other hand, stocks went down hard—so there must be a story behind it.

Is there?

As far as I can tell, the best explanation as to why stocks dumped on Tuesday is because it became increasingly unlikely that the “repeal and replace” of the Affordable Care Act would pass, because of a group of about 26 holdout Republican legislators.

For what it’s worth, I agree with the holdout legislators. The proposed law isn’t a repeal at all. It’s a collection of tweaks designed to get the original Obamacare working properly—along with a giant tax cut.

It is not the tax cut I disagree with. Tax cuts are great. But here’s the thing: if this doesn’t pass, the market doesn’t get the tax cut. And the market cares about tax cuts more.

Furthermore, if the ACA repeal doesn’t pass, it will cripple the Trump administration politically and delay a complete tax reform package even further, possibly into next year—if it happens at all.

Remember, the whole reason that the market ran up after the election was because Trump was this can-do businessman, capitalist president, who was going to cut corporate and marginal rates to the bone. That is looking less and less likely. Maybe even impossible.

I have been telling people (privately) that it was a big mistake for the Trump administration not to pursue tax reform first. Instead, we issued a couple of ham-handed executive orders that pissed everyone off and lost a lot of political capital, and then dove into the hornets’ nest of healthcare.

It’s odd—this group of people who were pretty smart about winning the election are turning out to be pretty dumb about legislative priorities.

Worse, both Trump and Mnuchin have said that people can use the stock market as a yardstick of the administration’s performance.

Continue reading The Inverse Trump Trade

The Inverse of Keynes

By Jeffrey Snider of Alhambra

In fundamental terms of earnings, there is only further confirmation of a lack of growth

With nearly all of the S&P 500 companies having reported their Q4 numbers, we can safely claim that it was a very bad earnings season. It may seem incredulous to categorize the quarter that way given that EPS growth (as reported) was +29%, but even that rate tells us something significant about how there is, actually, a relationship between economy and at least corporate profits. Keynes famously said that we should never worry about the long run for there we will all be dead, but EPS has arrived at the long run and there is still quite a lot of living to do.

As late as October, analysts were projecting $29 in earnings for the S&P 500 in Q4 2016. As of the middle of the earnings reports last month, that estimate suddenly dropped to just $26.37. In the month since that time, with the almost all of the rest having now reported, the current figure is just $24.15 – a decline of over $2 in four weeks. Therefore, 29% growth is hugely disappointing because it wasn’t 55% growth as was projected when the quarter began.

It is also the timing of the downgrades that is important as it relates to both “reflation” and the economy meant to support it. All throughout last year, in the aftermath of the near-recession to start 2016, EPS estimates for Q4 (and beyond) were very stable, unusually so given the recent past. That shows us how analysts, at least, were expecting the economy to go once it got past “global turmoil.” It was the “V” shaped rebound typical for past cyclical behavior.

But it wasn’t until companies actually started reporting earnings that the belief was tested and then found severely lacking. With just $24.15 for Q4, total EPS was for the calendar year less than $95, the ninth straight quarter below the $100 level. More importantly, on a trailing-twelve month basis, EPS don’t appear to be in any hurry (except in future estimates) to revisit the prior peak of $106 all the way back in Q3 2014.

Continue reading The Inverse of Keynes

“As Greedy as a Pig”: Investors Pull Most From Bank Funds in a Year

By Heisenberg

Somehow I doubt this will come as a surprise to anyone, but investors yanked the most money from bank sector funds in more than year over the last week, as the Fed’s “dovish” hike exacerbated fears that popular Trump trades may have run their course.

As a reminder, this is how things have shaped up for banks since the Fed:


Yeah, so that kinda sucks, but you know what? That’s what you get for piling into (another) one-way bet on the same narrative and steadfastly refusing to take some off the table after a a good run.

Here’s what I mean about being greedy (this is the same chart, only since the election):


Or, more poignantly…


More from Reuters:

Investors eased off from “Trump trade” bets during the latest week, snatching the most money from bank sector funds in more than a year and stockpiling bonds, Lipper data for U.S.-based funds showed on Thursday.

Banks were set to prosper under an administration pushing infrastructure spending along with cuts to taxes and regulation.

A hawkish response by the U.S. Federal Reserve was expected to keep interest rates rising, boosting bank earnings but keeping Treasuries under severe selling pressure.

The bearish-bond and bullish-bank trades have both diminished since November, and on Tuesday investors delivered a body blow to U.S. stocks and fled to safe-haven bonds.

Tapping the Breaks?

By Tim Knight

Since it seems the fate of the free world depends on this stupid healthcare vote, let’s talk about something – ANYTHING – else!

Below is the front month of crude oil. As much as I’d like it to plunge into the abyss, what I “like” doesn’t have much say-so in market direction. It seems to me that the commodity is steadying itself at the trendline and could be preparing for a turnaround back to major resistance at about $52.30 or so. Just a thought.


For equities in general, though, I would simply offer this headline on ZH that just came up:


‘Real’ Performance Comparison

By Steve Saville

Inserted below is a chart that compares the long-term inflation-adjusted (IA) performances of several markets. This chart makes some interesting points, such as:

1) Market volatility increased dramatically in the early-1970s when the current monetary system was introduced. This shows that the generally higher levels of monetary inflation and the larger variations in the rate of monetary inflation that occurred after the official link to gold was abandoned didn’t only affect nominal prices. Real prices were affected in a big way and boom-bust oscillations were hugely amplified. As an aside, economists of the Keynesian School are oblivious to the swings in relative ‘real’ prices caused by monetary inflation and the depressing effects that these policy-induced price swings have on economic progress.

2) Commodities in general (the green line on the chart) experienced much smaller performance oscillations than the two ‘monetary’ commodities (gold and silver). This is consistent with my view that there aren’t really any long-term broad-based commodity bull markets, just gold bull markets driven by monetary distortions in which most commodities end up participating. The “commodity super-cycle” has always been a fictional story.

3) Apart from the Commodity Index (GNX), the markets and indices included in the chart have taken turns in leading the real performance comparison. The chart shows that gold and the Dow Industrials Index are the current leaders with nearly-identical percentage gains since the chart’s January-1959 starting point. Note, however, that if dividends were included, that is, if total returns were considered, the Dow would currently have a significant lead.


Chart Notes:

a) I use a method of adjusting for the effects of US$ inflation that was first described in a 2010 article. This method isn’t reliable over periods of two years or less, but it should come close to reflecting reality over the long term.

b) To make it easier to compare relative performance, the January-1959 starting value of each of the markets included in the above chart was set to 100. In other words, the chart shows performance assuming that each market started at 100.

c) The monthly performance of the scaled IA silver price peaked at more than 2600 in early-1980, but for the sake of clarity the chart’s maximum Y-axis value was set to 1500. In other words, the chart doesn’t show the full extent of the early-1980 upward spike in the IA silver price.

d) The commodity index (the green line on the chart) uses CRB Index data up to 1992 and Goldman Sachs Spot Commodity Index (GNX) data thereafter.

Stuck in Yesterday

By Jeffrey Snider of Alhambra

Crude oil never did fully embrace “reflation” because it couldn’t, and that tells us something

It is understandable why everyone is right now fixated on Washington. The repeal, or not, of Obamacare is, to paraphrase former Vice President Biden, a big deal. In terms of market expectations, it is difficult to discern by how much. That was to be, after all, but one step of several reductions to the administrative burden on the economy. Maybe as the first it is given outsized importance not because it might deliver the biggest impact, but rather because as the first it can tell us something about the realistic nature of what is supposed to happen differently under a Trump administration.

Even though to this point it has been a disappointment for the “reflation” idea, I believe it is more so a distraction to parts that may be far more important. Attention might better be removed to Oklahoma than DC. As noted yesterday, there has been a sizable shift in the dynamics for oil, far removed from the interminable nature of “stimulus” politics. It has been oil above all else where “reflation” is governed, given the gloss of realism first by its rise from the ashes of last February and then at first its apparent staying power, lingering above $50 for months so as to allow those political hopes a realistic basis by which to cling on for however much longer.

Physical fundamentals are ruthless, though, and have a tendency to ruin mistimed romance. The connected nature of inventory in gasoline and crude point to the underlying truth of today, which toward the end of March 2017 probably should have by now at least started to look like that tomorrow.

Continue reading Stuck in Yesterday

Silver Wheaton (SLW) is Still a Tax Cheating Company

By Inca Kola News

Randy must think he’s really really clever.

Back in 2015 this humble corner of cyberspace noted, in the midst of the new hoo-hah around the Canadian tax people putting Silver Wheaton (SLW) under tax evasion investigation, that SLW contributed virtually nothing in the way of taxes despite its multi-billion dollar market cap (and very unlike peer company Franco-Nevada (FNV), a company that plays fair with the tax man. Therefore it’s sad to report that SLW is still cheating the tax man. Here’s a chart that shows the amount of pre-tax earnings, tax paid and net earnings over the past six years at SLW:

Impressively, the tax cheats run by Randy Smallwood have managed to book U$1.756Bn of pre tax earnings and pay just U$12.2m on that sum, a corporate tax rate of 0.7%. There should be a law…wait, there is!

Funny how Randy “owns his decisions” but feels no obligation whatsoever to his country.

The Trumpcare Vote: Previewing Thursday’s Big Event

By Heisenberg

Needless to say, the focus Thursday will be on the GOP proposal to repeal and replace the ACA.

Why do we care so much about this, you ask? Well, for one thing it represents a dubious attempt to replace one thing that isn’t working so well with something that won’t work at all. Which is funny – right up until you realize that it’s about healthcare. So you know, people’s lives are on the line.

But aside from that, the healthcare debate is seen as a kind of microcosm of the broader effort to implement Trump’s agenda. ACA repeal is generally seen as a prerequisite for moving forward with tax reform and other things that matter for the economy and, by extension, for markets.

Indeed, Tuesday’s selloff was at least partially attributable to jitters around the healthcare debate and if this thing stalls, well, let’s just say that doesn’t bode well for tax cuts and fiscal stimulus.

“House Republican’s ACA repeal/replacement failure doesn’t automatically equate to tax reform failure, though defeat would doubtless delay efforts and cut chances for comprehensive tax overhaul,” FBR’s Edward Mills wrote in note out Wednesday. He sees three possible outcomes:

  • Congress approves healthcare bill within weeks, increasing tax reform chances in the coming year
  • House passes bill but Senate doesn’t, or approves bill with changes that can’t get back through the House; tax reform would still be alive, but would be heavier lift
  • House fails to pass a healthcare bill, raising serious questions about Congressional Republicans’ ability to govern

So with all of this in mind, consider the following more comprehensive preview from Goldman, which should help to frame the issue that will be making headlines throughout the day.

Continue reading The Trumpcare Vote: Previewing Thursday’s Big Event

Economics Through the Economics of Oil

By Jeffrey Snider of Alhambra

The last time oil inventory grew at anywhere close to this pace was during each of the last two selloffs, the first in late 2014/early 2015 and the second following about a year after. Those events were relatively easy to explain in terms of both price and fundamentals, though the mainstream managed to screw it up anyway (“supply glut”). By and large, the massive contango of the futures curve that showed up as a result of “dollar” conditions made it enormously profitable to pull crude out of current flow and deposit it wherever storage might be available, even at some considerable cost (so steep was the contango). It was the symbolic intersection between economy and finance which told the world there was nothing good about those times.

This time, however, there is only minor contango in WTI (or Brent) futures and a curve that isn’t much changed over the last year. And still crude is pouring into Cushing at an alarming rate, so much so that by earlier this month oil investors started to leak out of the over-crowded long trade. You have to believe that the unusually steady price of WTI from mid-December forward despite almost everyone being long was related to this once again gaining imbalance – no matter how hard you try to fashion “rate hikes” into a much more robust future economy there is this very visible degree of caution that cries out “not so fast.”

Continue reading Economics Through the Economics of Oil