The Big Risk Of A Negative Feedback Loop
22 August 15 10:21 AM | Brian Dightman

Last week was the worst week for stocks in years, with major indices closing near lows on a spike in volume on Friday.  In terms of the growth strategy I manage, I'll be looking to take additional defensive action in client accounts if conditions continue to deteriorate.  I started reducing exposure to stocks earlier this summer and my growth strategy is now underweight stocks by approximately one-third.

The nature of this particular correction has increased the odds we are going to see a steeper decline.  There are a few strings still holding markets together but it would not take much for them to break.  The biggest risk for the U.S. is the impact a potential negative feedback loop could create.  The opposite of the wealth effect, where consumers are supposed to increase their consumption based on higher 401k balances, a negative feedback loop is where bad news causes consumers to pull-back their spending which causes economic conditions to deteriorate making things worse.  The possibility of this type of scenario developing is very high given the currently cynical nature of consumers.  Tired of being lied to and told increasingly what they must do and cannot do, the U.S. consumer is in a foul mood.

Let's start with what is working, U.S. real estate.  As I have mentioned to clients and in public commentary recently, the recovery in U.S. real estate is one of the few bright spots in the U.S. economy.  While the current market sell-off put a dent in some of the investments I have been following in this industry, Home Depot (HD), C B R E Group (CBG), and more broadly the iShares Real Estate ETF (IYR) are trying to hold on.  HD is the strongest of the group and remains just below a recent all-time high breakout earlier this month.  CBG is also trading near an all-time high it hit earlier this year but has move to the bottom of a trading range.  A move lower by this commercial real estate leader would be a bearish development for this market segment.  More broadly, IYR has yet to reach its all-time high back in 2007.  It has a small loss year-to-day and is trading in the lower half of a base it started in February.  Home builders have been doing well in 2015 and Lennar Corp (LEN) remains near the breakout it established earlier this month.  As long as real estate related stocks hold at current levels there is a reasonable chance markets will settle down for a more shallow correction.  Additional weakness in real estate related investments could spell trouble for the broader economy and stock market.

The other factor I am watching closely based on the positive impact it is having on the market right now is good-old innovation, despite the continuous attack on American exceptionalism.  The current IPO market, while not as strong as other cycles, has witnessed many new companies achieve an IPO from technology, healthcare, consumer and many other industries.  The First Trust IPOX 100 EFT (FPX) fell below its 200 day moving average on Friday so ideally this fund can trade back above that level on the way to new all-time highs, something it achieved earlier this year on a history going back to 2006.

In terms of economic growth it remains a mixed picture.  In the U.S. New Jobless Claims continue to come in a bit higher, perhaps marking a bottom.  Housing activity continues to ramp up with existing-home sales up for the 3rd consecutive month.  Internationally, China's manufacturing activity hit a 6-year low and Greece's Prime Minster Alexis Tsipras resigned complicating their ongoing bailout program.

Given the swift and steep selloff in stocks the likelihood of a Fed rate hike in September has fallen.  Expect a full slate of appearances over the coming days designed to bring stability to the markets.  The Fed could find itself in a real bind if markets don't stabilize soon.

With a current forward P/E of 16.5 for the S&P 500, stocks appear only slightly overpriced based on historical measures.  If stocks correct based on a mediocre economy not justifying an above mean forward P/E, a 15% correction would take the market down to a forward P/E of 14.  After last week we are about half there.  This assumes nothing changes with EPS estimates currently at $127.40 according to FactSet.  Any rumblings from corporate America about weaker forward guidance would be very difficult for the market to handle at this juncture.

When you add it all up we find the U.S. stock market and economy in a very precarious position, one were many remain unemployed or under employed. Despite the stats, participation rates are way down and wages have stagnated.  Additional market declines could cause consumers to tighten the purse strings which would crimp corporate sales and earnings; that is when things could get much worse.

While some suggest the sell-off of 2008 was a once in a lifetime event, investors concerned it could happen again should be prepared to take action now.  I successfully navigated the 2008 market with very small declines and have composite performance data to back it up.  I have already generated a good portion of cash in my growth strategy and I will be looking to move more defensively depending on how things unfold going forward.  If this sounds interesting to you drop me a line.  Better days should return but in the meantime it looks like policy makers need to do a much better job of addressing secular changes in our economy if they want to avoid asset bubbles and create a more sustainable recovery.

Crazy Asset-Market Moves
01 August 15 11:00 AM | Brian Dightman

Last week I mentioned August performance may provide some clues to how investors are going to position themselves for the end of the year.  After looking at July returns I raised an eyebrow.  The month served-up many large moves, both up and down; some you would not expect.  Others make you shake your head.  Outside of U.S. stocks there continues to be few good investment opportunities based on current price action.

Readers know when I evaluate the health of the U.S. stock market I place a lot of emphasis on the performance of leading stocks.  Leading stocks are those companies with strong sales and earnings growth along with other fundamentals.  When investors are willing to bid up the prices of this category of stocks there is an element of risk taking in the market that tends to be healthy for the market overall.  Right now leading stocks are one of the few categories of stocks performing well and with many coming from the Nasdaq 100 (QQQ) we understand why the index delivered an amazing 4.5% return in July!  Impressive right?

Consider this, 20+ year treasuries (TLT) also had a strong month, up 4.5% too.  This on the verge of a rate-hike cycle kick-off!  Regarding short-term bonds (SHY), they held firm, essentially flat for the month.  The bond market was hardly concerned about rising rates or inflation in July.  To have the Nasdaq 100 and Long Treasuries deliver such strong performance during the same period is well, odd especially in light of other factors.

Real estate (IYR), after getting hammered earlier this year also rallied in July, up 5%!  Real estate, along with other interest-rate sensitive equities (like utilities), have been under pressure most of this year as result of possible higher borrowing costs in the near future.  It is interesting as we approach the actual rate hike event (not!) real estate and utilities rally.  Maybe they over corrected earlier this year but all of these moves during the same period as other events are unfolding has caught my attention.   

One the downside, we have the following in July:

Oil (USO), down -21.5% and commodities (DBC) in general, down -12.6%.  Gold (GLD) fell another -6.6%.  Those are very big ONE MONTH moves!  Perhaps it will mark the final chapter in the multi-year bear market for commodities and the vibrant demand engine policy makers have so diligently tried to create is ready to roar but we are not seeing it in the economic data that is for sure.

Chinese stocks (FXI) listed on U.S. exchanges declined -12.2%, emerging market stocks (EEM) fell -6.3%.

How do we make sense of a bond rally on the verge of rate hikes when stocks are also in rally mode and commodities continue to get crushed?  Some of the bond buying can be attributed to money that has to find its way into that asset class as an investment mandate. There is so much money in the world right now long-bonds appear to be the lucky recipient of money flows by pension managers, insurance companies and the well healed.  Outside of asset inflation there is very little concern about broad consumer-price inflation right now.  However, this could change quickly and when the Chinese start to liquidate their estimated $1.6 Trillion in U.S. Treasuries we could see a divergence between the primary and secondary markets prices/yields for U.S. treasuries.  Let's hope that doesn't actually happen.  For more on the drivers in this area check the article on the following: balance of payments, exchange reserves, current account, etc..

Real estate may also be the lucky recipient of money looking for a home or evidence of inflation hedging long-term.  While the economy continues to underwhelm and talk of debt restructuring abounds, real estate rallies.  In real estate, especially in high demand markets we do have some evidence of inflation where rents and prices have climbed.  Cities with strong economic growth versus those stagnating (urban versus suburban, etc.) are seeing the lion's share of gains.   We also clearly have evidence of money chasing assets (check out this article on Chinese buyers).  Don't get too excited, the asset class (IYR) is still down -6% over the last 6 months.  Whether the recent bounce represents a new leg up for the asset class remains to be seen but the technical picture looks pretty good and on the verge of a breakout.

Deflation continues to be an issue as evidenced by the persistent decline in commodity prices.  Some of the lower prices are the result of supply (energy markets) but that simply cannot be the case for ALL commodities and there are simply very few, if any, commodities where prices are being bid up.  This must be driving central bankers crazy as they desperately try and inflate the global economy.

Taken as a whole, the combination of asset price direction is not very encouraging.  Commodities have been in a multi-year bear market yet to find a bottom.  Emerging market stocks continue to struggle despite an improved U.S. economy and recovery attempts in Europe and Japan.  Bonds are clearly not concerned about rising rates at this point and why should they be.  The Rate normalization the Fed is looking to accomplish can't even lift off so the likelihood of a big-move in short-term rates appears low.  More troubling is the risk-off trade bonds may be signaling.  Long-bond price action could be the result of moving down too far too fast.  If anything you would have expected the bond market to stabilize and maybe move up slightly, not deliver a strong rally.

Here's a list of several leading stocks that are performing well (not recommendations) in the current environment Disney (DIS), Under Armor (UA), Ulta Cosmetics and Fragrance (ULTA), Intrexon Corporation (XON), and Manhattan Associates (MANH).  These are all stocks I have been tracking since they broke-out earlier this year.

As long as we have decent action with leading stocks I will maintain my exposure to Nasdaq and S&P 500 stocks.  Once this part of the market breaks down the likelihood we will enter into a longer-term correction will increase, in my opinion.  All of which should represent a buying opportunity as policy makers cook up another batch of QE/stimulus to reflate once again.  Then again, there is so much money sloshing around in the global economy every time we get a 5% correction money flows in to take advantage of the lower prices.  It has been laugh at by just maybe we will see Dow 30,000 before the next bear market materializes.  In a policy driven market investors have to be prepared for just about anything.

Technical Update on Global Asset Classes, Q2 Earnings Season
27 July 15 12:44 PM | Brian Dightman

There's been a lot of saw tooth chart patterns created recently in many asset classes.  However, we may be in the early stages of some telltale signs on how investors are positioning themselves.

In terms of U.S. stocks, the Nasdaq 100 (QQQ) has clearly diverged to the upside but remains under pressure since topping out on the 21st.  The Dow Jones Industrial Average (DIA), on the other hand, has fallen below support levels but it's the smallcaps that have caught my attention.  The Russel 2000 (IWM) is right at $120 support and a move lower would be a divergence from how the index has corrected since October.  On the whole we are seeing mild divergences and continued weakness in U.S. stocks.

I would watch real estate here.  The iShares Real Estate (IYR) fund is trying to rally after selling off since the start of the year but continues to turn tail and fall further.  Home Depot (HD) continues to hold its ground and even trend slightly to the upside.  CBRE Group (CBG) is also holding up.  Real estate activity in the U.S. is one of the few areas where activity is self-evident so weakness in this asset class could spell trouble ahead.

The selloff in high yield, senior loan and convertible bond market may be picking up steam.  Predictably, high-yield bonds (HYG) seem to be taking the biggest hit so far.

Probably the most interesting look in bonds comes from investment grade long-maturity bonds like the iShares 20+ Year Treasury Fund (TLT).   After selling off most of the year it looks like itmay have found support the last couple of months and be on the verge of a break out.  A continued rally in this asset class could end up being one of the more bearish developments for stocks.

Commodities continue to get crushed, evidence of a global economy performing well below potential.  Sure, some commodity supply dynamics are at play especially in energy markets, but across the board demand appears to be down.  The entire commodity complex (DBA) and the decline in gold (GLD) in particular ring of deflation despite ongoing money printing and stimulus efforts by central bankers.  On the positive, some corporate earnings have definitely been the beneficiary of lower input costs.

In terms of leading stocks, Monday's aggressive sell-off is not the way you want to start a new week.  Stock market trouble in China seemed to carry into other countries so near term it may be policy action out of China that provides direction to stocks globally.  International developed country (EFA) stocks have not recovered well from the Greece sell-off and are close to breaking down technically.  Emerging market (EEM) stocks have already reached  new lows going back 18 months.

Earnings season has turned out mixed so far, with around 40% of companies reporting.  However, the negative influence from the energy sector is significant and may explain why U.S. stocks are trying to hold on to gains amid timid forward guidance overall.  The slowdown in corporate earnings is expected to continue through Q315 and sales through Q415.  The bigger issue is the fewer number of companies beating on sales estimates.  Whether this turns out to be a mid-cycle slowdown or a trend reversal will take more time to reveal. 

Despite Declines, Leading Stock Hold, Top Stories - July 25th 2015
25 July 15 05:59 AM | Brian Dightman

U.S. stocks came under pressure again as selling increased despite a mostly positive week of quarterly earnings reports.  A strong report form Apple was muted by soft forward guidance while Amazon turned in a surprise profit.

Greece banks are open again with strict capital controls but the stock market remained closed.  Talk of a future debt write-down continued a possible longer-term solution.

Starbucks and Chipotle shares responded favorably to their quarterly reports.

Several merger & acquisition deals were announced including deals between Lockheed Martin & United Technologies helicopter unit (Sikorsky), SunEdison & solar panel installer Vivint Solar, St. Jude & Thorac, and Home Depot & Interline Brands.

Visa turned in a solid quarterly report and hopes to complete a deal with Visa Europe by October.

Several airlines reported an increase in passenger capacity led by Spirit with a 30% jump in Q2.  Both United Airlines and American Airlines disclosed share buybacks.  Southwest and Alaska Air both announced expansion plans.

Overall not much changed during the week and leading stocks continue to hold their ground.   For the week the Nasdaq declined -2.3%, the S&P 500  was down -2.2% and fell below its 50-day moving average.  The Leading Stock IBD 50 Index only declined -0.6%.

Performance Of Cash Triggers Caution
11 July 15 05:33 AM | Brian Dightman

It was a wild week for stock investors as markets around the globe were rattled by a default in Greece and a viscous stock market correction in China. 

As the largest economy in the world China is an important player on the global scene.  Policy maker there have already implemented several rule changes and how their stock market resolves over the coming days and weeks will be an important test.  Government intervention currently being enforced put the brakes on falling stock prices for now but whether markets will stabilize on their own remains to be seen.  The situation certainly argues for investing caution in the entire region.

Thursday stock market recovery attempt was disappointing as the market gave back most of the day's gains by the close. Friday's action was much stronger on more news Greece was ready to accept some bailout conditions but volume remained light.

Broad U.S. stock index have fallen to around their 200 moving average except the Nasdaq which continues to show a bit more strength.  How indexes recover from here may give us a much better idea of how the second half of the year will go.  Mutual funds have pulled back on the amount of money they are putting to work according to a report from Investor's Business Daily so a big part of market participation may be starting to wane.

Despite broad market selling pressure leading stocks have held up.  Only a few of the high-quality stocks I follow have hit exit prices.  Take a look at ULTA, DIS, NKE, MAHN, NCLH, & EPAM for examples of leading stocks that are holding up and performing well in the current environment.

HD and CBG were two stocks I mentioned back in May due to their close ties with real estate activity, one area in the economy where we have seen a pick-up recently.  Both stocks remain in a base pattern with a slight downward bias, a development I will keep an eye on.

Economic data continues to be a mixed bag.  The economy had a better go of it in Q2 than Q1 but it remains to be seen how well activity during the period translated into corporate sales and earnings growth.  Next week a variety of S&P 500 companies are schedule to deliver earnings.

The number one factor working against stock and the economy may be confidence.  It appears central planners remain in command for now but a level of tension is building and a break in confidence could have widespread implications for stocks and the economy as a whole.  The stock market looks head 6 months and right now it may be concerned the economy has not actually kicked into a stronger growth trend.  Just last week the IMF lowered their 2015 growth forecast for the U.S.

As a result of weakness internationally, in late June cash (3-month T-Bills) started to outperform international stocks in my model and as of yesterday's close cash is outperforming U.S. stocks as well.  I reduced exposure to international stocks in my Global Growth strategy back on July 2nd and then again on July 10th on the recovery bounce.  The performance of cash versus other asset classes is only one of my risk-management tools; I also use a moving average trigger and so far it has not suggested a bigger defensive move.  But, when cash becomes the #1 performing asset class out of ten, I start looking to hold more in my strategy.

As I recently told clients, how stocks recover can often tell us more about the near-term direction of stocks then the initial selling pressure.  Investors concerned about the level of risk in their investment accounts may be well served to pay a bit more attention to stock market performance as we move further into the summer, or consider my services to do it for them.

Home Depot, CBRE Group & Strength of U.S. Economy
23 May 15 10:53 AM | Brian Dightman

It is no secret that real estate activity, both commercial and residential, is one of the few bright spots in the current economic recovery.  Activity in the real estate market, especially new construction and remodeling projects, has wide ranging impacts on material, transportation, labor and finance industries.

As we enter another year with subpar, almost dismal economic activity, we might be able to discern future economic direction by watching the price performance of stocks that have been performing well in the current environment with strong ties to real estate activity.

Home Depot (HD) has broad exposure to construction markets.  The company reported earnings last week and turned in sales growth of 6% and earnings growth of 21% according to Marketsmith.  The stock has delivered an impressive recovery from 2008 levels.  HD has been consolidating gains over the last 12 weeks following a 7 month rally.

Ideally HD can move back above its 50-day moving average (blue line) on its way back into new high territory.  Recent high-volume selling is of some concern.

CBRE Group Inc. (CBG) provides commercial property investment management, loan servicing and origination, and leasing advice with 370 offices worldwide.  CBRE Group Inc. stock was crushed during the 2008-09 Great Recession.  It's most recent rally started in 2011 and the stock is on the verge of firmly moving into new high territory, something it has not done since 2007.  In their most recent earnings report the company delivered sales growth of 10% and earnings growth of 28% according the Marketsmith.

A recent pullback to the 50-day moving average has provided a support level and big volume on higher prices is an encouraging sign.

While broad indexes like the S&P 500 and Nasdaq continue to hold up and repeatedly touch new high territory, "The second most important indicator of a primary change in market direction", according to Investor's Business Daily founder Bill O'Neil, "is the way leading stocks are acting." from his bestselling How to Make Money in Stocks (4th Edition).

As a discounting mechanism of future earnings the stock market and leading stocks look out 6 months in advance to determine current price levels.  The last few years have been pretty smooth sailing for stocks.  Eventually this cycle will come to an end and leading stocks can offer an excellent early warning indicator to those trained to interpret their behavior.

For those interested in monitoring another encouraging area of the current economic recovery and stock market rally check out charts for NXPI, SWKS, and AMBA.  There has been a bit of a renaissance for chip makers and these three companies have been leading the charge.


Stocks Deliver a Timid Recovery
28 March 15 06:45 AM | Brian Dightman

Stocks spent most of last week under pressure but a late in the day rally Friday produced a positive close for global stocks.  For the week markets delivered the following:

Major Markets Friday For The Week
U.S. Stocks (SPY) 0.23% -2.22%
International Stocks (EFA) 0.26% -0.79%
Emerging Market Stocks (EEM) 0.28% -1.55%
U.S. Bonds (AGG) 0.14% -0.12%
Gold (GLD) -0.36% 1.31%
Oil (USO) -5.88% 4.32%
U.S. Dollar (UUP) 0.08% -0.62%
Data provided by

In terms of the Dightman Capital Long-Term portfolio, YTD it has returned 2%.  This portfolio is a long-term buy and hold representation of global investments in a roughly 65% stock, 35% bond mix.

YTD Since Inception
DCG LT Portfolio 2.0% 145.6%
S&P 500 0.5% 153.7%
Data provided by
Since inception October 1, 2003
Rebalanced annually

Some whispers about a weak Q1 earnings season have started to circulate but analysts are busy adjusting their forecasts so if this quarter is anything like past reporting periods we should be able to get through it without much damage.  Stocks also receive some good (bad news) after the close on Friday.  Fed Chair Yellen suggested the U.S. economy is not strong enough to stand on its own and therefore the timing of a rate hike is not certain.

This is a very important development.  I have long felt the secular trends driving productivity up and prices down are very difficult to reverse, especially without a well thought out and multi-pronged fiscal policy aimed at addressing them.  The age of low interest rates has no end in sight.  Eventually the passage of time has the potential to play a role as labor participants' age but that can take decades, as we are witnessing.  I am not suggesting rates will not tick up in the next year.  Sure, we could rise a bit from current levels but are likely to remain below the long-term averages for a considerable period unless something dramatic changes in our labor markets.

With a new administration leading economic policy in a couple of years we might see the introduction of policy aimed at addressing this area but given the state of our political climate I am not holding out much hope.  No, more likely we are going to continue to experience an economy with many bright prospects aimed at making our lives better but providing fewer employment opportunities.  For those trying to determine how to cope with an this type of labor market I suggest improving your creative skills, problem solving skills, people skills and challenging yourself with difficult subject matter in an effort to demonstrate your cerebral capability.  Do all those things within a strong personal network and you should be just fine.

Stock investors must also concern themselves with the world's leading economy in a near stall-speed growth rate.  It will not take much for the economy to slow dramatically which would likely impact corporate earnings in a way that even analyst can't adjust for, impacting prices negatively.  Right now it appears there is enough momentum to keep the economy and markets afloat near-term but the longer were progress down this underwhelming economic road the closer we may be coming to the opposite of what we have been expecting.  Instead of a liftoff we get a nosedive.

Right now stocks that you would expect to be most vulnerable to a severe pullback are holding up well.  Perhaps the stock market correction continues next week especially in light of recent developments in the middle east (what a mess) but as you can tell from the data below top performing stocks and mutual funds are off to a great start in 2015!

Investors' Business Daily Indexes Friday For The Week YTD
IBD BigCap 20 0.9% -3.4% 10.3%
IBD 50 Index 1.2% -3.6% 10.9%
IBD 85/85 Index 1.2% -2.1% 6.2%
IBD New America 6 Months 1.0% -2.5% 7.6%
IBD Mutual Fund Index 0.6% -2.4% 3.1%
Data provided by William O'Neill & Company

Despite Friday's timid volume level (NASDAQ trading was down 16% from Thursday and the NYSE saw trading decline 14%) price action for IBD indexes was strong relative to the NASDAQ return of 0.57% and the S&P advance of 0.23%.  That type of price action lends support for a continued advance, especially when you consider many of the stocks covered in the IBD indexes are not only performing well, but they tend to be new and innovative companies, a very bright spot in the American economy.

Out Of Money, Again
06 March 15 08:39 AM | Brian Dightman

It's tax season and the U.S. Federal Government is running out of money again - six years from the abyss of the 2008-09 Great Recession.  It has been a difficult recovery and challenges remain but economic growth continues as confirmed this morning by a stronger than expected Jobs Report.  295,000 new nonfarm payrolls were added last month, well ahead of the 238,000 expected by economists.

Economic data throughout this recovery has been inconsistent and underwhelming but it has been improving.  The graph below of Federal Government current tax receipts through Q3 of 2014 may summarize this fact as well as any.

It is clear Federal Government tax receipts have surpassed previous highs hit just before the Great Recession.  I chose to start my look at this data with 1970 because that is just before the U.S. Government removed the gold standard from the U.S. Dollar in 1971.  Once the gold standard was removed Federal budget constraints were removed and new debt could be issued on demand to cover revenue shortfalls of an expanding government.

These charts may tell us more about the future than we realize.  Note the gray vertical lines in the charts.  The shaded areas represents periods where the U.S economy was in a recessions.  The recession in the mid-70's dropped tax receipts by approximately 22.5% (199.6 to 155.9), in the early 80's by approximately 10% (418.6 to 379.4), and mid-90's a paltry 3% (650.9 to 631.4) as shown in the chart below.  Everything was going pretty well up to this point.

Contrast those tax receipt contractions with the first two recessions of the 21st century.

The scale on this graph has been changed to remove the dramatic visual drops of recent recessions compared to those later in the 20th century.  The 2000 recession resulted in an 18.22% decline (1,309.6 to 1,071.0) to be followed by the 2008 recession decline of 28.9% (1,637.1 to 1,163.7).  Two significant contractions don't make a trend but it is worth noting the most recent recessions have resulted in deep tax receipt contractions.

It is important to remember we are early in the U.S Dollar decoupling from the gold standard.  Certainly a great deal of economic expansion has materialize since the dollar left the gold standard and a more "flexible" monetary  environment likely contributed to the expansion we have experienced since the event.  What investors have to be mindful of is how a lack of monetary discipline may ultimately lead to a very negative outcome, perhaps more so than what we experiences in the Great Recession.

Tax receipts have dramatically improved over the last six years surpassing the previous high mark back in 2007.  The economy is improving and the stock market roaring.  Yet, next Friday Treasury Sectretary Jack Lew is expected to deliver a letter to House Speaker John Boehner warning of a potential government shutdown and the need to invoke special measures until Congress increases the debt ceiling. 

Leaving the gold standard in 1970 provided the U.S. government more financial flexibility.  It also provided them the ability to spend without constraint.  Despite the fact that Government revenues are at all-time highs it's not enough money for our government to operate in a fiscally sound manner.  We should all be concerned about the acceleration of this trend. 

As the U.S. economy appears to be on the verge of a long anticipated pick-up in growth be mindful of the next downturn and how it might place the U.S. government in an even more precarious financial position.  Imagine the pressure on the Federal budget with a 25% reduction in tax receipts.  But don't worry too much, another five or ten trillion in debt ought to get us through the bind.  That, my friends, is the world we find ourselves in and should be prepared to address. 

The culmination of these developments has elevated the demands on savers, investors and financial advisors. There are strategies to consider and I would be more than happy to share a few ideas with you.  Balancing the possibility innovation and ingenuity of the American worker will grow the U.S. economy to the point of a sustainable financial position with the risk the Federal government may push the budget conditions of the country too far is a good place to start.  Let me know if I can help.

Is Productivity Responsible For Drop In Commodity Prices?
13 February 15 10:01 AM | Brian Dightman

One of the more perplexing developments in the economic recovery from the Great Recession is the collapsing prices of commodities. During an economic expansion demand for commodities typically rises, sending prices higher. That has not been the case in this recovery.

Metals, agriculture, energy, livestock and cotton - all of these commodities are trading at prices well below levels at the start of 2012.

The economic growth rate coming out of the Great Recession has been uneven, inconsistent and underwhelming. But the economy is growing. We only need to look at the recovery in corporate sales and earnings for hard evidence. Why then are prices for commodities essentially collapsing?

Could it be productivity is also reducing the amount of materials we consume, much like it has structurally changed the employment market? After all, we have gone from mobile phones the size and weight of a brick to those of a paper weight. Are products lasting longer, extending the replacement cycle?

One exception in the general commodity price behavior of this recovery can be found in timber prices.


Timber has seen a rise in price and it is one of the few renewable resources, so what gives? Paper production is one of the primary uses for timber. What is one of the primary areas paper is used? That’s right, packaging. This might explain why timber has been able to see prices rise and would also confirm part of the growth in corporate sales. Could it be companies are selling products which require more packaging material than product material?

An examination of the entire supply chain may shed more light on developments in commodity markets that have led to a reduction in prices. Could it be the process of extracting, refining, and shipping raw materials has gone through a revolution similar to fracking in the energy industry?

I ask this question as the Nasdaq is on the verge of breaching its all-time high, 15 years later. There have been periods during the recovery from the Great Recession where it seemed unlikely the S&P 500 would be able to make that mark. We now look back on that accomplishment.

Central bank policy and its influence most definitely complicates analysis in this economic recovery.  But as innovation advances along with the prices of stocks it is reasonable to suggest fundamental changes in productivity may have played a role in the price declines experienced in those markets at a time of economic expansion.

I will leave readers with one more thought to ponder. An industry very closely related to all of the commodity markets has done very well during the recovery. If you have not looked yet the chart below is from the Chemical industry.


Could it be their advancements have contributed to the price pressures of commodities markets? After all, there are a lot of chemicals used to bring commodities to market.

There are many factors driving the supply and demand of each commodity market. Some are related, others are unique. Despite these differences a large portion of the commodities complex is under pricing pressure at a time where the U.S. and much of the world economy is growing. If the price declines are primarily based on weak demand we can eventually expect a recession to arrive.  And if commodity price declines are any indication of what is in store, look out below. If something else is at work, perhaps this recovery will last a bit longer than some might expect.  Commodities look to be attempting a bottom here and could turn out to be the story that shapes 2015.

Oil and the U.S. Economy
17 January 15 07:52 AM | Brian Dightman

With the price of gasoline at the pump falling some investors are confused about how that could be bad for the U.S. economy.  The topic of lower prices or more broadly, deflation, is complex.  As much as monetary policy makers consider deflation to the equivalent of kryptonite to Superman, the fact of the matter is many prices have continuously fallen and industry still thrives (think televisions).  Intuitively it is reasonable to believe less money spent on energy costs by consumers would lead to spending in other areas.  However, you have to take into account the impact lower oil prices might have on the energy industry as a whole.

The energy sector in the U.S. represents approximately 8% of the U.S. economy.  The shale and fracking exploration booms have increased employment (many are high paying jobs) and capital expenditures in the industry.  Some economists attribute the boom in the energy industry as a major contributor to the U.S. economic recovery since the 2008 recession; it may be playing a more important economic role than many realize.

The price of oil must maintain a minimum level to justify the costs of drilling.  Back in 2008 it was estimated that the equilibrium for oil exploration in the U.S. was around $70 a barrel.  It is believe to be higher today due to the more challenging drilling techniques being deployed (horizontal fracking).

If oil falls below the equilibrium cost to drill explorers shut down production and cancel capital expenditures, both of which are happening as the price of oil falls.

While lower prices at the pump are welcome by consumers, the weak consumer spending in December suggests any saving at the pump is not necessarily being spent.

The more perplexing challenge is trying to determine if the decline in oil is based on increases in supply or decreases in demand.  Generally speaking you don't want to see a decrease in demand.  That would suggest a slowing economy.  In the U.S demand is somewhat flat as a function of better MPG, migration to cities, and telecommuting (the inconsistent economic recovery may also be responsible for lighter energy demand in the U.S.).  Normally energy use would be increasing during an economic growth cycle but technology and structural changes are at play.  Globally we would expect countries like China and India to see a big demand increase based on their large populations and modernizing economies.  However, other explorers are now using the same techniques pioneered in the U.S. to increase oil extraction globally so supply issues are certainly at play.  Over the longer-term low-cost energy should be a plus for the global economy.

In terms of economic growth, for the balance of this decade it will be important for the price of oil to find equilibrium  Ideally that equilibrium will allow the energy industry in the U.S. to continue expanding exploration and the capital expenditures and jobs that come with it.

Bullishness Returns
04 October 14 01:40 PM | Brian Dightman

After being under pressure most of September Friday's market rally added to gains from Thursday to help stocks finish the week with strength.

The U.S. received a good employment report on Friday helping to push stocks higher.  It wasn't too strong or too weak, the number was just about right.  With the employment picture stabilizing confidence is returning to the economy, a helpful ingredient as we enter into the 4th quarter retail season.

The Dightman Capital Leading Stocks portfolio had an excellent day Friday with 12 of 28 stocks generating returns of greater than 2%.  6 stocks posted gains of 3% or higher.  Only 5 stocks experienced declines of -1.2% or less.

After strong performance in August stocks gave back gains in September; July experienced a small decline.  On balance global stocks turned in small losses for Q3 which  may turn out to be a good setup for Q4.  Year-to-date stocks have delivered low single-digit positive returns.

International stocks, especially developed markets, have experienced a deeper correction and have not shown as much conviction in their recovery.  Stagnant economic growth and high debt levels appear to be the main culprits on top of a growing list of geopolitical issues.

Russian sanctions are having a significant impact on parts of an already struggling European economy.  Japan recently suffered its biggest economic contraction since 2009, triggered by a consumer-tax increase.  China's economy it at risk of delivering less than a 7.5% target growth-rate as factory output delivered its slowest expansion in 5 years and the real estate market starts to slump.  Unrest in Hong Kong is certainly not helping.

There is a lot of talk in the financial press about the stock market being at a top.  That may turn out to be true but recent market strength, especially in leading stocks, suggests there may be more upside.   In the current correction other risk assets stabilized ahead of stocks which delivered a sense of clam in other parts of the market.  Currency markets are in a bit of frenzy.  The Dollar has advanced while the Yen & Euro tumbled.  Staying the course and overweighting U.S. stocks has so far been the right path for growth investors in 2014.

As we move into Q4 I will be communicating some updates to the Global Growth strategies at Dightman Capital.  In an effort to provide more service the Moderate Global Growth strategy will emphasize more income oriented investments.  The benchmark will remain the same.

The most exciting announcement will be the stock strategy I expect to announce later this quarter.  After many years of following leading stocks I have developed an investment strategy I feel confident I can deliver.  I have already personally invested one of my accounts in the new strategy.  This strategy is designed to be more aggressive than the Aggressive Global Growth strategy but does incorporate risk-management elements.  I look forward to sharing more details with you in the future.

Bullishness remains in the air but investors have been reminded stocks can get ahead of themselves and when factors that drive earnings are impacted stocks take notice.  Seasoned investors are well aware of the length of the current market rally and the complacency the can accompany it.  Market pullbacks are healthy but it was nice to finish last week on strength.  It makes the weekend that much easier to enjoy!

Absent Strong Q2 Earnings, Significant Correction Could Materialize
08 July 14 09:42 AM | Brian Dightman

With the 4th of July weekend behind us now is a great time to start thinking about how the summer might shape for stocks and bonds.  All of the geopolitical turmoil aside, there are two major themes likely to shape the near-term performance of U.S. stocks and bonds:  Interest Rates and Earnings.

A rise in short-term lending rates is not expected until the second half of 2015 and from the current ultra-low levels a tick up is not expected to inflict much damage on the stock market initially.  At least that is how stocks have behaved in the past.  Generally it is after a series or rate hikes in an attempt to cool inflation that rate hikes become problematic for the stock market.  The last couple of rate hike cycles did not occur after a prolonged period of ultra-low rates so it is reasonable to expect a different reaction when rates do start to move higher but that is not expected any time soon.

Earnings, on the other hand, are expected to have grown by around 5% duiring the second quarter as reported by Factset.  This will represent a significant pickup from Q1's 3.3% earnings growth decline.  A slowdown in earnings growth would be more problematic for the current stock market rally.  Just this morning Walmart CEO, Bill Simon, suggested their customers are not spending on a consistent basis.  If a slowdown in consumer spending during Q2 turns out to be a broader issue we could see an impact on both sales and earnings growth by U.S. companies.  This could prove challenging for the stock market because as the graphic below illustrates,  the stock market may be entering a less forgiving stage.

After the approximately 55% decline during the credit crash of 2008-2009 the SPY (S&P 500 ETF) went on to post a 195% gain in just over 5 years.

Compare the current rally to the prior rally from the DotCom Crash of 2000.

After the approximately 48% decline in the SPY during the tech crash of 2000-2003 the ETF when on to post a 107% return in just over 5 years.

The two recoveries are very different and there are numerous dynamics involved.  Currently stocks don't appear expensive based on forward earnings expectations.  If those expectations are not met we should expect a correction.  A close look at price action in the current rally is also absence downside volatility the last couple of years.  We are also reminded by the two graphics above the current market could be entering what is often referred to as the euphoric stage of the market cycle.  This would be the final phase before a significant correction materializes.

So far it has been a decent year for both stocks and bonds.  Bonds should hold their ground if earnings disappoint and stocks correct.  On the other hand, if earnings support current price action bonds will likely correct as stocks rally.  It is all about Q2 earnings and by the end of next week we should have a pretty good indication of how things are going to shape up for stocks and bonds this summer.

The Black Hole of Debt Expansion
29 May 14 08:49 AM | Brian Dightman


  • Bonds rally the day after stocks follow through.
  • 30-year yield back around 3.25%.
  • No U.S. economic acceleration, says the bond market.

I recently published a mostly positive commentary on the stock market suggesting the balance of 2014 would be good for stocks as long as interest rates remained low. Outside of economic growth accelerating over the next couple of months, I feel rates are not likely to move higher in 2014. In terms of the ability for the economy to accelerate, I acknowledge that it could happen, but I expect the current slow pace of growth to continue.

When referring to interest rates, I was referencing the short-term lending rate controlled by The Fed called the Discount Rate. When The Fed becomes concerned about the economy overheating (inflation) they raise the discount rate, which usually moves rates up along the maturity term. There has been some talk of rate hikes by The Fed in 2015, but the bond market remains unconvinced. The Fed can also influence rates with QE and the current program is on track to conclude later this year. What we have seen in 2014 is a bond market ready to drive up the prices of bonds without The Fed's participation.

On Wednesday, the day after the stock market followed through on its current rally attempt, bond prices shot higher. The Pimco Zero 20+ Coupon Bond Fund (ZROZ) jumped up 2.54% and The Vanguard Extended Duration Bond Fund (EDV) rose 1.85%. The iShares Barclays Aggregate Bond Fund (AGG) hit a new all-time high and the iShares Core Long-Term US Bond Fund (ILTB) is up 12.1% YTD! Bonds have been one of the best performing asset classes so far in 2014, which may be telling us not all is well with the U.S. economy.

With stocks wavering most of the year, it's not surprising bonds have rallied. But these numbers appear too strong for an economy about to shift into a higher gear, especially after stocks are starting to show some strength.

Tuesday, the stock market followed through on the rally it has been trying to get started since stocks sold off in March and April. If stocks are about to start another leg up, why are investors continuing to chase bonds when interest rates are already puny? Outside of a known long-term cash outflow commitment (think insurance contracts or pension commitments that are not adjusted for inflation), what type of investor would be willing to accept a long-term bond yield around 3.25% with duration risk in the high teens? The answer -- an investor that believes the economy is going to contract and potentailly lead to some deflation.

On the surface, it may be hard to acknowledge the threat of deflation during a time where the S&P 500 has rallied 180% from 2009 lows (40% higher than 2007 highs), but that may be exactly what the bond market is signaling.

Wednesday's bond buying was attributed to money leaving Europe because of rate adjustments down by the ECB to ward off, you guessed it, deflation. The bond market does not believe the improvement in economic numbers, after the winter weather setback, will be maintained. As a matter of fact, it may be telling us the U.S. economy is more likely to contract during the balance of year. Only time will tell if the U.S. economy can escape the black hole of debt expansion. In the meantime, it looks like I may need to change my outlook for stocks in 2014, because if deflation materializes, it will not be kind to the stock market.

Market Update - Balance of 2014 looks to be constructive for stocks
27 May 14 09:00 AM | Brian Dightman

The Memorial Day Holiday is a great weekend for reflection.  In between the special events and family gatherings it always seems as though there are a few extra quiet moments for thought about the future.  The timing of this holiday is also only one month short of the mid-point in the year so it's also an interesting time to check on investment markets and the factors that drive them:  Interest Rates, Economy, & Earnings.

Interest Rates

Interest rates remain very accommodative in the U.S. and are likely to remain so through the middle of 2015.  Whether that is enough to keep the market rally alive remains to be seen.  Even talk of rates rising a year out can give pause to the market and is one of the primary risks to this rally.  We have seen The Fed successfully implement a QE extraction program so maybe they can manage the interest rate dynamic equally well.


The U.S. economy still lacks momentum and remains jittery but overall continues to improve.   After weakness attributed primarily to winter weather, month-over-month growth has continued in the big four indicators:

  • Industrial Production
  • Real Income
  • Employment
  • Real Sales

Growth has accelerated in February and March especially in terms of Industrial Production and Real Sales.  If this pattern continues pressure to raise interest rates will mount. The Fed wants to see the economy grow a bit faster than the current rate, especially in labor metrics, but not to fast.  Some observers point out pent up demand from the impact of cold weather this winter has driven the recent spikes up and once demand is met monthly growth will fall back to the 0.1-0.3% rate that has made up much of this recovery.  As we move further into the summer we should have a better idea of the momentum behind recent economic acceleration.


490 companies of the have reported 1st quarter earnings as of May 23rd.  74% reported earnings above the mean estimate and 53% reported sales above the mean estimate.  For Q2 79 companies have issued negative EPS guidance and 26 companies issued positive EPS guidance.  The current 12-month forward P/E ratio is 15.3, above both the 5-year average (13.2) and 10-year average (13.8).

If we take a look at the actual and estimated earnings for the S&P 500 it becomes clear earnings growth is expected to pick up throughout 2014 when compared to 2013.  At this point analysts are expecting earnings to increase by $1.18 or 4.24% in Q2 and continue growing at 4-5% in Q3 and Q4.  Continued improvement in the U.S. economy will be an important component to realizing these numbers.

Source:  Factset Earnings Insight May 23, 2014


2014 has been an up and down ride for stocks.  You may recall all of the major broad U.S stock indexes ended the month of January with declines which is often a precursor to result for the balance of the year.  Since 1950 the Stock Trader's Almanac reports there have only been 7 "errors" where the full-year results did not follow the results that were generated in January.  2014 is a midterm election year which delivers its own set of statistics.  The -8% decline experienced by the Dow at the end of January may mark the midterm low, which has often been an excellent buying opportunity.  Given the more recent selloff in small/mid-cap aggressive growth stocks there may still be time to take advantage of any rally that helps the year finish with gains.  Markets have been mostly marketing time this spring, moving sideways since early March.

Both the Dow Jones Industrial and S&P 500 have gone on to hit new all-time highs recently.  The Nasdaq and Russell 2000 (small cap) need to play catch up but action last week may indicate stocks are ready to resume another leg up.  Price action was very constructive in the broad market and many market leading stocks started to rally after being under intense selling pressure the last few weeks.  The only element missing was volume which could pick up if more participants get behind the rally attempt.  We could see evidence of this as early as this week.

Despite unrest in some parts of the world, recent election in Europe and the Ukraine are likely to be viewed as positive developments by the market.

If economic growth finally accelerates the Fed is very likely to start moving rates up in mid-2015.  From their current ultra-low level we may only see a moderate impact on stock prices initially.  If economic growth continues to heat up and it is believed The Fed will move rates higher then we could see a more negative impact on the stock market.  This would be the classic manner in which stock market appreciation is dimmed.  The direction of interest rates likely holds the key for the direction of the stock market for the balance of 2014 and the start of 2015.

At this point there is little risk of the economy "over heating" and interest rates spiking unless recent economic momentum continues through the summer and into the fall.  Otherwise it looks like a combination of moderate economic growth could keep concerns about interest rates in check for the balance of 2014 which should be positive for the stock market.

Market Deception & The 2013 Exception
27 January 14 08:05 AM | Brian Dightman

The strong market performance of the S&P 500 (SPY), Nasdaq (QQQ) and Dow Jones Industrial Average (DIA) in 2013 was certainly a welcome surprise. Five years into this rally few expected to see the strongest market returns since 1997. Often it is the early years of a bull market that serve up the best returns. 2009 did not disappoint after the brutal 2008 decline. Subsequent years seemed to follow a pattern of positive but smaller returns until 2012 delivered another strong year only to be followed by the phenomenal returns of 2013. The market is constantly serving up deception and 2013 was no exception.

So what does 2014 have in store?

2013 finished well but the few trading days of the New Year have delivered a less than desirable start. January is going to be an important month to watch, perhaps more so than usual. Market returns from January are often a strong predictor of the outcome for the year.

On page 12 of the 2014 Stock Market Almanac we read, "Every down January on the S&P since 1950, without exception, preceded a new or extended bear market, a flat market, or a 10% correction". Page 42 of this year's issue goes on to catalogue the 24 instances that support their claim, 10 of which were listed as continued bear markets; a condition that cannot materialize in 2014 because the market is clearly in a 5 year uptrend. If the S&P experiences declines this January look for a new bear market, a flat market or a 10% correction to materialize.

You may find the "2014 Look Ahead" column in the January 6th issue of Investor's Business Daily (IBD) somewhat more helpful. Their data back to 1900 suggest only 7 times prior to 2012-2013 has the stock market delivered back-to-back accelerating double digit returns after a down year (The Nasdaq suffered a minor loss in 2011). The article goes on to explain what happened the following year and unfortunately the data is not encouraging. Only 1 year was positive and one year was flat, but 5 years saw declines. More troubling, 4 out of the 5 losses were steep - down 11%, 17%, 18% and 33%. If an ugly market does materialize IBD will quickly bring it to investors' attention in their "Big Picture" column, a daily read for me.

This January, perhaps more than some, it may pay to not only watch market action closely but too be prepared to take action. Given the propensity of this market to deceive I'm prepared for (but not expecting) another banner year in 2014. I will not be surprised if we first experience a brutal correction that convinces many the market is going much lower. That, I believe, is because so often market deception leads to market exceptions, despite all the statistical analysis that might suggest otherwise.

[IBD noted the following regarding the 2014 Look Ahead article I referenced: Data in the article were based on the Dow Jones industrial average for 1900-62, the S&P 500 for 1963-81 and the Nasdaq from 1982 to present.]

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