Good Morning,

 

When is the next break?

 

Ouch, talk about a cold shower.  The symptoms are obvious – it’s back to work.  No rest for the weary and all that stuff.

 

So let us start the thankfully shortened holiday week with a snapshot of all that happened for the last 12 weeks during summer.

 

The world was almost going to end and then,

It was going to possibly be ok – and then,

It was really in a lot of trouble – and then

The trouble subsided.

But then it got worse

And then it got a lot worse

And then it reached levels we had never seen before

And then it set records on many terrible fronts

And then earnings went up to another record high

And the market rose about 1.2%.

 

I summarized of course.

 

In the meantime, the chart below reminds us that a whole lot of bears showed up to snuff out the bulls:

N. Korea ended our summer with a bang and now the entire world is sitting on pins and needles again.  Can one plan for a global catastrophe?  I am not 100% sure one can ever do that.  So we move forward, just like always.

 

The more immediate issue for some will be Hurricane Irma and where it lands.  One hopes Irma weakens as she hits the islands but if not, then the tip of FL is the current target.

 

I would not be surprised to see this week in the markets remain as choppy as the weather appears.

 

Besides, it only took about an hour this morning before I saw the first headline about “how bad the month of September is for stocks…”

 

Just Remember The Good Stuff…

 

The growth rate in real GDP was revised higher last week, from 2.6% to 3.0% for Q2.

 

On a y/y basis, real GDP was up 2.2%. It has been fluctuating around 2.0% since mid-2010. Excluding government spending, which has been relatively weak during the current expansion, it was up 2.7%.

 

Current estimates for Q3 GDP – still a moving target – show about +3.2%.

 

Inflation-adjusted consumer spending in real GDP rose 2.7% y/y during July.

 

Capital spending rose 4.4% y/y to a new record high during Q2.  Leading the way are record-high capital outlays on information processing equipment (up 7.0% y/y) and industrial equipment (6.8%).

 

There was additional data released along with the first revision of GDP last week.  Quite a bit more data on corporate profits during Q2 was included.

 

Note:  On an after-tax basis, both profits reported to the IRS and adjusted to a cash-flow basis continued to move into record high levels, completely recovering this year from their energy-related haze last year.

 

As covered here often, for reasons most have overlooked, inflation remains MIA. The GDP implicit price deflator rose just 1.6% y/y during Q2.

 

As Dr. Ed highlights, “Leading the way to nowhere new was the PCED, which edged down on a y/y basis during July to 1.4% for both the headline and core readings.” Continuing his theme, also going nowhere special is wage inflation. The average hourly earnings (AHE) measure rose 2.5% y/y for all workers in the private sector.  It helps to note that it has been hovering around this pace since fall 2015.

 

Indeed, wage inflation remains subdued.  But, it does continue to outpace the headline inflation rate. So real income for production and nonsupervisory workers, who currently account for 70% of all private-sector workers, rose to yet another record high during July. Keep in mind that this measure is now up 17.5% since the start of 2000, contrary to the widespread myth that real wages have stagnated since then.

 

This could also explain the steady strength in retail sales we have been seeing in recent quarters – Amazon or no Amazon.

 

Manufacturing output is doing just fine thanks – and a solid drop in inventories is a good thing.  Look for those to be replenished in coming quarters.  The manufacturing PMI has been doing very well, having risen from 56.3 during July to 58.8 last month, with strong readings for New Orders (60.3), Production (61.0), and Employment (59.9).

There is more good news hidden in the data – check the comments from responsers – all impressive:

And last for now, I note again the falling inventories.  On the surface, we will be told this is bad.

 

In real-time, for long-term investors – it is good to see low inventories.  It means a wave of stocking back up is usually right around the corner (that’s a big drop off and the lowest levels we have seen in over 5 years!).

Still, as we speak and as new demands in the pipeline are made for rebuilding needs in Houston and, maybe soon, parts of FL (if IRMA has her way), the insatiable appetite for bonds continues as new lows are set for the year in yields.

 

Recall, just a few weeks ago, the fear was that rates were out of the bag and the Fed increases would kill the rally.

 

Nutty what fear can do to clear, lucid thinking:

What Does It All Mean?

 

It means things (as usual) are bettern than most perceive.  Look for this new drive to lower rates to trigger more corporate refi’s and even lower deb costs – with higher margins afterward.

 

In the past, this week back from Labor Day is usually the week when all the remaining haze wears off.  I picked up a cold right in the last week which I never do so my voice is a little scratchy.

 

We did not get a real summer swoon – so maybe the one-two hurricane punch with a little N. Korea sizzle sprinkled on top will do the trick during September?  One never knows but a steady hand on the wheel tends to be a big help in the long run as history proves.

 

Choppy seas always hide the strong currents.

 

As the sentiment data show you above, the bears are back in droves.  They outnumber the bulls by a wide margin.  My hunch is the margin will expand even more if we stay choppy this week and focused on more bad news.

 

When we pass the seasonal weak spots on the calendar, the stage will be set with a solid undertone of fear and steady earnings and employment as a base.

 

The oldest tool in the investing war chest:  the wall of worry.

 

Don’t become a part of it – benefit from it instead.

 

Stay focused on the Barbell Economy and powerful (but changing) demographics.

 

Until we see you again, may your journey be grand and your legacy significant.