Goldilocks

The fear and loathing being heaped on the present bull market is making it the most hated bull market in history. As we have opined many times, bull markets do not end in fear. They end in ecstasy. Despite the eight years of bullish engagement of equities, it turns out it was just foreplay; we are just now starting the real action as the business cycle heats up and profits increase. Even though PE ratios are above average, the ridiculously low interest rates must be factored in. One needs to be careful when saying “it’s different this time”, but it really is different when rates are taken into considered. What is not different, however, is the proverbial ‘wall-of-worry’ that the market continues to climb.

It is unlikely that we will get growth rates like we had before 2007. The baby-boom cohort that caused the growth is maturing, leaving the productive work arena, and consuming less, but now that the Fed (and the rest of the central banks) has filled-in the economic hole left behind by the mortgage crisis, there is a base from which to grow at a more moderate and sustainable rate. We can envision an extended ‘Goldilocks’ situation where we get moderate growth in combination with mild inflation which can keep the next recession at bay perhaps for several years.

Goldilocks temperature is what we got from July’s employment report:

Nonfarm payrolls increased by 209k. Over the past three months, job gains have averaged 195,000 per month
June nonfarm payrolls revised to 231k from 222k
July unemployment rate was 4.3%, versus 4.4% in June
July average hourly earnings increased 0.3% after increasing an unrevised 0.2% in June
The average workweek in July was 34.5 hours, versus 34.5 hours in June
The labor force participation rate increased to 62.9% in July from 62.8% in June

Not too hot…not too cold…just right. The second half of the year is likely to be more of the same. The one possible concern we have is the slow growth of wages. It was good to see wages increase somewhat, compared to June, but this needs to continue in order to prop-up the retail consumer that has been lagging all year. With the economy at what is essentially full employment, and with corporate profits continuing to increase, wage growth should continue to accelerate.

An increase in wage growth is likely to increase inflation and allow the Fed to raise interest rates, but rising interest rates is normal during bull markets (chart below).

The hated bull continues to defy the skeptics.

Equities

This week’s AAII investor sentiment report had a shift of 7.8% and 1.7% from neutral to bearish and bullish, respectively. We remind subscribers that market tops occur when bullish sentiment is above 50%, and bearish sentiment is below 30% (chart below).

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Tesla

We exited our TSLA options at a +40% profit (in three weeks)

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OIL

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Gold
We have always maintained that gold is a follower, not a leader. The dollar, Treasury rates, the USD/JPY pair, and inflation are the drivers of gold. Even though the Fed has started to push rates higher, Treasury rates at the longer-ends (which the Fed cannot control) and the dollar have not been believers of the Fed; the 10-year and 30-year T-rates have dropped, and the dollar has undone the entire 2016 May-to-December rally. The Goldilocks NFP numbers (discussed above) have, for now, saved the dollar from going over the edge (92 on the index). We need to see follow-through in the dollar, and a close below $1250 for gold, before we take $1300 off the table (chart below).

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Inflation is still in a down trend, as measured by TIP, although it had started to look like it might breakout to the upside before Friday’s NFP numbers brought it and gold back down to its trend-line (chart below).

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As of last Tuesday, the commitment of futures traders shows that the large speculators (who tend to be wrong most often) increased their net long position, while the commercial and swap traders (who tend to know the market the best) increased their selling (chart below). This supports our view that gold is still under pressure.