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    August 27, 2015

    The typical Dow stock now trades for 15.5x this year’s earnings and 14.0x next year. Not cheap, but no longer the 18x earnings we had with the Dow at +18,000. Dividend yields – and every Dow company has a quarterly payout – are 2.3% on the average versus 2.13% for the 10 Year Treasury. Bottom line: market action tells you the next 1,000 points on the Dow may well be lower, but at that point we’re getting to levels where the fundamentals show compelling value.”
    Source: Convergex, August 25, 2015, 9 PM.

    Panic is an emotion. And in its raw form it triggers irrational behavior. Indicators of panic are visible in this last few day’s market action. When we hear clients say “Sell all,” we know panic is at work. We use their impulse as an indicator.

    Last night we hosted a dinner with 18 folks who follow financial markets and world events. This gathering immediately followed the live broadcast by Bloomberg Radio from our Sarasota offices. We were celebrating our new book, Adventures in Muniland. But the conversation at dinner last night was about many things, including the US stock market and the Fed.

    We dined and talked. We agreed to follow Chatham House Rules, so the identities of the 18 women and men are kept private, but the views and takeaways of the group may be shared.

    Those views are mixed. Some say the Fed will hike in September. Others say December. A few say 2016. Nearly all say the message from the Fed is confusing.

    When it comes to the US stock market, few expect it to move higher in the next two days. After the coming Fed weekend meeting, the viewpoints about outlook are diverse. A lot depends on the Fed’s message or lack of message.  Vice-Chair Stanley Fischer is on a panel to discuss inflation.  He was listed on that panel by original design and when the lineup of that panel was still a secret.  Before the public release, market agents saw a lack of direction coming as Chair Yellen had announced she was not attending.  Then the Fed released information that Stanley Fischer would be attending.  What had not been known is that Fischer was a panelist by planning.  This was not a last minute attempt to add a speaker for the purpose of gaining clarity.  So we do not know what Fischer will say and if he will use this panelist spot to diminish the obfuscation coming from the Fed’s current message.  Tune in on Saturday.

    While the Fed is adding to confusion and raising risk premia, one thing is clearer. Panicky investors are hurting themselves, unless we are on the verge of a serious recession. Most of our dinner guests agreed that recession is unlikely. We, at Cumberland, are in that majority. No recession is the baseline assumption.
    Last night we were divided about the target for Federal Funds at the END of 2016. Some think it will be above 1%.  The majority think it will be below 1%. Three say it will be right at 1%.

    In sum, the group feels that panic is dangerous to investors’ health here. And the group sees signs of panic, as do we. But in our managed accounts we refuse to succumb. We are in a rocky period, no doubt. Uncertainty is high; that is agreed. But panic is uncalled for.

    We expect the Fed to hike one time and do it this year.  By the end of this year we expect the stock market to be higher. By the end of this decade we expect it to be much higher. We agree with the math articulated by Convergex in their nightly letter.  The issue is not about whether or not to enter into expanded stock market holdings.  The only issue is when to do it and at what level.  Convergex has offered some food for thought with a little math in their nightly missive.

    About The Author

    Images: Flickr (licence details)

    About the Author

    David R. Kotok cofounded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. He holds a B.S. in economics from The Wharton School of the University of Pennsylvania, an M.S. in organizational dynamics from The School of Arts and Sciences at the University of Pennsylvania, and a masters in philosophy from the University of Pennsylvania.

    Mr. Kotok’s articles and financial market commentary have appeared in The New York Times, The Wall Street Journal, Barron’s, and other publications. He is a participant in Bloomberg radio programs.  He is a frequent contributor to CNBC programs, including Morning Call, Power Lunch, Kudlow & Company, Squawk on the Street, Squawk Box Asia, and Worldwide Exchange. He co-authored the book Invest in Europe Now!

    Mr. Kotok currently serves as a Director and Program Chairman of the Global Interdependence Center (GIC) (www.interdependence.org), whose mission is to encourage the expansion of global dialogue and free trade in order to improve cooperation and understanding among nation states, with the goal of reducing international conflicts and improving worldwide living standards. Mr. Kotok chairs its Central Banking Series, and organized a five-continent dialogue held in Philadelphia, Paris, Zambia (Livingstone), Hanoi, Singapore, Prague, Capetown, Shanghai, Hong Kong, Rome, Milan, Tallinn, and Santiago, Chile. He has received the Global Citizen Award from GIC for his efforts.

    Mr. Kotok is a member of the National Business Economics Issues Council (NBEIC), the National Association for Business Economics (NABE), serves on the Research Advisory Board of BCA Research, and is also a member of the Philadelphia Council for Business Economics (PCBE).

    Mr. Kotok has served as a Commissioner of the Delaware River Port Authority (DRPA) and on the Treasury Transition Teams for New Jersey Governors Kean and Whitman. He has also served as a board member of the New Jersey Economic Development Authority and as Chairman of the New Jersey Casino Reinvestment Development Authority.

    Mr. Kotok hosts an annual Maine fishing trip, where, it is rumored, most of the nation’s important financial and economic decisions are actually made.


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