Contrarian Indicators Flashing

Good Morning,

U.S. equities closed mixed on Friday, but squeezed out another record close, while data released Thursday pointed to improving economic conditions in the U.S., with the Philadelphia Federal Reserve manufacturing index hitting its highest level since 1984, while weekly jobless claims remained around their lowest levels in decades.


Our Take

Buy baby buy. Forget any bearish news. Shrug it off and continue to buy stocks. This seems to be the prevailing mood right now with pullbacks lasting hours rather than days.

The issue is that when you look at the underlying fundamentals, they are quite good as companies are posting growth in earnings, rather than gaining because of some vague promise of tax cuts.


Although the rally has left the S&P 500 trading at three times book value for the first time since 2004, market-capitalization weighted earnings likely rose 10 percent in the fourth-quarter from a year earlier, according to data compiled by Bloomberg. Of the 358 members that have reported results so far, 72 percent have shown profit growth.


Furthermore, inflation appears to be finally picking up. Since the global financial crisis, historically low inflation and restrained economic growth has allowed central banks to keep interest rates at record low levels. However, most policy makers are now anxious to return to a more “normal” environment where they will have more latitude to tighten or loosen monetary policy in response to changing circumstances. Even though they have kept policy on hold for now, the Bank of Japan, the Bank of England, the European Central Bank and the Federal Reserve are all anticipating higher inflation ahead, although it isn’t clear how quickly they will start raising rates.


Nevertheless, there are a few key things to take note of so as to take the temperature of the market and maintain one’s good sense as the market moves higher:  


  1. Notorious bears are starting to capitulate. Prem Watsa and George Soros just this week have changed their stance unwinding their shorts and getting long the Trump trade.

  2. The world’s largest sovereign wealth fund increased its allocation to equities: with the amount of noise out there about market being toppish it is interesting to see the Norwegian government looking to increase its allocation to equities. Late on Thursday afternoon, the Norwegian government proposed investing 70% of the country's £723 billion fund in the equity markets.

  3. Hedge funds piled into the consensus trades in Q4 2016: long the USD, long financials, healthcare, consumer discretionary, REITS and short tech, consumer staples, utilities and and bonds. Is the consensus ever right?

  4. There are still a lot of very negative bearish commentary all over the internet regarding the existence of a “bubble” and impending stock crash. This may be a significant contrarian indicator.

  5. There are still several black swan risks. The most significant being Marine Le Pen being elected as President in France. This would surely be a grave threat to the integrity of the European Union. In addition, Eurozone finance ministers and the IMF seem likely to miss next week's deadline to agree on a €7B bailout for Greece.



I was at a financial marketing conference in Orlando this week and had many great opportunities to chat with Americans about their new President Donald Trump. Many showed great disdain, some had no opinion, others expressed concern regarding his unpredictability and some were optimistic. Nevertheless, the prevailing mood amongst the stock market participants that I talked to was that his presidency is just not that relevant with regards to the direction of the stock market.

What lessons can we glean from this? Well first and foremost we should avoid letting our political opinions shape our investing decisions. Whether our savings should be in stocks, bonds or cash depends on our risk profile and our time horizon/investment goals. It should not be a function of our attitudes towards our heads of state.

There is no doubt that uncertainty can cause problems for markets yet allowing our political preferences to influence our investing decisions can cause us to misconstrue risk and/or to see more or less of it when there may in fact be less or more.

What we should remember is that the possibility of a major correction is EVER PRESENT.

This is the case no matter who is at the wheel and is more dependent upon economic cycles than on policy decisions. Thus, given current valuations which appear to be at the high end on a historical basis, the more intelligent question should be whether we are ok with say a 25% correction at this point in our lives?

If the answer is no, then less money should be allocated to stocks. If the answer is yes then perhaps we should keep on keeping on as stocks tend to offer excellent returns over the long term. Consider this illuminating chart from First Trust which highlights the historical performance of the S&P 500 Index throughout the U.S. Bull and Bear markets from 1926 through 2016.


-The average Bull Market period lasted 8.9 years with an average cumulative total return of 490%

-The average Bear Market period lasted 1.3 years with an average cumulative loss of -41%

Thought of the Week

" Roll with it.” -Charlie Munger to Trump Haters

Stories and Ideas of Interest


  • Contrarian indicator or indicator of the end? Wine glimmers like gold as investors see end to stocks rally. The benchmark wine index posted its first gain in six years. Bloomberg finds that: “Prices for fine wines have climbed to their highest levels since October 2011 on speculation that equities near record highs are poised to drop. Wines and the funds that buy them are being viewed much like gold -- as a store of value in uncertain times -- after the U.K. voted to leave the European Union and the U.S. elected Donald Trump as president.”


  • Housing bubble headlines in Canada are back in vogue, driven mostly by strength in the Toronto market. The annual rate of national house price inflation climbed to 13.0% year-over-year in January, up from the prior month's reading of 12.3%, according to the Teranet-National Bank Composite House Price Index. The jump was at least partially due to the ongoing housing boom in Toronto, which saw the annual rate of inflation climb to 20.9% year-over-year, up from 19.7%. Additionally, Reuters reports that Hamilton, an area near Toronto, saw home prices spike by 17.6% year-over-year as buyers were "shut out of the expensive Toronto market." A lot of this bearishness is nothing new yet one thing did jump out at me was new data indicating that the latest census figures show that Toronto’s population is growing at its slowest pace in 40 years. Is this sustainable?   


  • More Canadians are raiding their RRSP to buy a house, make ends meet and pay off debt. A new survey suggests Canadians are dipping into their registered retirement savings plans like never before and the high cost of housing may be driving those decisions.


  • Facebook has mega ambitions for job ads and our brains. Alison Griswold for Quartz suggests that: “Facebook’s users include LinkedIn’s ‘thought leaders’ and white-collar professionals, but they’re also people seeking hourly positions, part-time work, and other opportunities that they’d probably find on sites like Monster, Indeed, or Craigslist long before LinkedIn.” Facebook isn’t chasing Linkedin. It is chasing a far bigger jobs market. In other Facebook news, Bloomberg considers the danger of Facebook’s plan to rewire our lives…


  • Could the chaos of the industrial revolution be about to return? Bloomberg considers the argument that when old jobs are lost to technology, new ones will be created. The author suggests that upon closer study of the industrial revolution, this rosy thesis should be revised as this period of time brought calamity…


  • Fast food can reveal the secrets of an economy. The BBC digs into fast food indicators: “What is an economist’s favourite food? Burgers, chips and pizza might not immediately come to mind – but the consumption of meals like these can signal changes in people’s economic behaviour. Knowing the price of pizza in New York or the cost of a Big Mac in Beirut can tell market-watchers how the world’s cogs are turning.”


  • How can companies become and stay innovative? Fantastic work from BCG complete with excellent data and analysis on the top 50 most innovative companies in 2016.


All the best for a productive week,

Logos LP