Tom Essaye on “The Bell” Podcast with Dan Wiener and Adam Johnson

I was a guest on Adam Johnson’s podcast “The Bell” last week. We talk auto sales, free tuition, and a lot more.

We were also joined by Dan Wiener, editor of the The Independent Adviser for Vanguard Investors, who shares his 5 favorite funds and most “liquid” investment.

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Last Week and This Week in Economics, April 10, 2017

Last Week in Economics – 4.3.17

Signs of a slight loss of economic momentum continued last week, and while on an absolute level growth remains “fine,” stocks need consistently better data to off-set lack of action in Washington, and that’s simply not happening right now. As a result, stocks are “stuck” at the current levels and downside pressures are building.

Looking at the notable data releases last week, the jobs report was the headliner and it was “Too Cold” according to our preview. March job adds were 98k vs. (E) 175k while wages grew just 0.2% vs. (E) 0.3%. But, the unemployment rate dropped to 4.5%, which tempered the negative fallout and helped stocks shrug off the soft data.

The other two important numbers from last week were mixed. March ISM Manufacturing PMI slightly beat estimates at 57.2 vs. (E) 57.1. However, it declined from the February 57.7. Additionally, new orders, the leading indicator in the report, dipped to 64.5 vs. (E) 65.1.

March Non-Manufacturing PMI missed estimates at 55.2 vs. (E) 57.0, surprisingly hitting a five-month low. New Orders also dropped to 58.9 from 61.2 and employment plunged to a seven-month low at 51.6.

Looking at these PMIs, they’re a great reflection of the current economic data/market dynamic. On an absolute level, the data is strong (remember any-thing above 50 is expansion). But, incrementally we are not seeing improvement, and as such these data points are not helping power stocks higher like they were in Jan/Feb.

Finally, the most disappointing economic data point from last week was March auto sales, which dropped to 16.6M (seasonally adjusted annual rate, or saar) vs. (E) 17.4M saar. That number weighed on stocks last Monday, as worries about the car market and industry continue to quietly grow.

Turning to the Fed, there was a hawkish surprise in the FOMC Minutes last week, as they revealed the Fed may begin to decrease its balance sheet (i.e. buy less mortgage-back securities and Treasuries) later in 2017. Markets reacted hawkishly when this news hit on Wednesday (dollar up, bond yields up, stocks down) as this was a legitimate surprise (no one expected the balance sheet to start to shrink until 2018).

This is a potentially significant event, and it’s something we’re going to be detailing more this week, as any balance sheet reduction will increase upward pressure on bond yields. As we said last week, this was the first true surprise of 2017.

This Week in Economics – 4.10.17

As is usually the case following a jobs report week, the economic calendar is pretty sparse, with the three key reports all coming Friday (which is Good Friday, and markets will be closed).

March retail sales and March CPI will be released Friday morning. Retail sales is important because it’s the first opportunity for “hard” March data to move higher and meet surging sentiment indicators. A beat by retail sales would be a positive for the market and imply actual economic activity is starting to close the gap on sentiment surveys.

CPI is important because of the reflation trade. The market is pricing in rising inflation and better growth, so this CPI number needs to be Goldilocks. It has to be strong enough to show that inflation is consistent, but at the same time it can’t surge so much that it makes the Fed hawkish (an unlikely scenario).

Bottom line, if Retail Sales and CPI can show 1) Better growth and 2) Steady but not accelerating inflation, it’ll help offset the recent mild data disappointments and be a net positive for stocks.

Jobs Report Preview, April 6, 2017

For the second month in a row the major issue for tomorrow’s jobs report is simple: Will it cause the Fed to consider more than three rate hikes in 2017? If the answer is “yes,” then that’s a headwind on stocks. If the answer is “no,” then stocks should comfortably maintain the current 2300-2400 trading range.

So, tomorrow’s jobs report is once again potentially the most important jobs number in years, as it has the ability to fundamentally alter the market’s perception of just how “gradual” the Fed will be in hiking rates.

“Too Hot” Scenario (Potential for More than Three Rate Hikes in 2017)

  • >250k Job Adds, < 4.6% Unemployment, > 2.9% YOY wage increase. A number this hot would likely ignite the debate about whether the Fed will hike more than three times this year (or more than 75 basis points if the Fed hikes 50 in one meeting). Likely Market Reaction: Withheld for subscribers. Unlock by signing up for your free trial:

“Just Right” Scenario (A June Rate Hike Becomes More Expected, But the Total Number of Expected Hikes Stays at Three)

  • 125k–250k Job Adds, > 4.7% Unemployment Rate, 2.5%-2.8% YOY wage increase. This is the best-case scenario for stocks, as it would imply still-stable job growth, but not materially increase the chances for more than three rate hikes in 2017. Likely Market Reaction:Withheld for subscribers. Unlock by signing up for your free trial:

“Too Cold” Scenario (A June Rate Hike Becomes in Doubt)

  • < 125k Job Adds. Given the market’s sensitive reaction to the soft auto sales report earlier this week, a soft jobs number could cause a decent sell-off in equities. As the Washington policy outlook continues to dim, economic data needs to do more heavy lifting to support stocks. So, given the market’s focus on future growth, the bottom line is bad economic data still isn’t good for stocks. Likely Market Reaction:Withheld for subscribers. Unlock by signing up for your free trial:

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Dr. Copper Remains Resilient

Copper futures maintained gains in resilient trade yesterday despite the sharp reversal in stocks and general risk-off money flows. Continued strength in “Dr. Copper” could be signaling a retest of all-time-highs in stocks.


Bond Market Problems (That May Become Stock Market Problems), April 5, 2017

This is an excerpt from today’s Sevens Report—everything you need to know about the markets in your inbox by 7am, in 7 minutes or less.

One of the reasons I watch all asset classes so closely is because I’ve learned that other sectors often will confirm (or not confirm) a move in the stock market. Right now we are getting a pretty notable non-confirmation from the bond market.

Bond market problemsSpecifically, when stocks rally I like to see: 1) Bond yields rising, which reflects investors expecting greater economic growth and inflation (two stock positive events). 2) A steepening yield curve, which also reflects rising inflation expectations and increased demand for money via loans (something that has been sorely missing from this recovery). 3) I like to see “riskier” parts of the bond market, specifically junk bonds, rising (or at least holding flat) as investors show confidence in corporate America by lending money to riskier companies in search of greater yield (it’s an anecdotal risk-on signal).

Throughout Q4 2016, that’s exactly what we got. First, the yield on the 10-year Treasury rose from 1.54% in late September, to 2.40% at year end. Second, the yield curve steepened as the 10’s-2’s spread rose from 0.81% on Sept. 29 to 1.25% on Dec. 30. Finally, junk bonds were broadly flat during that period (although with notable volatility).

Since the start of 2017, the opposite has occurred. The 10 year started at 2.44% but now is sitting at 2.35%. The 10’s-2’s spread has decreased from 1.23% on Jan. 1 to 1.11% on Monday (the low for the year). Finally, junk bonds rallied through March with stocks, but have since given back some of those gains. If JNK (the junk bond ETF) breaks $36.19 that will be the first “lower low” of 2017, and a negative technical signal.

Point being, the bond market is reflecting an outlook that is comprised of slower growth, less inflation, and more general concern—which is almost the exact opposite of what we’re seeing in stocks right now.

To be clear, this non-confirmation isn’t a guaranteed death sentence for a stock rally. Bond markets gave non-confirmation signals consistently in 2015 when Europe was on the verge of deflation because of the flood of European money into Treasuries, which sent bonds higher and yields lower despite a stock rally. But, that’s not happening now.

So, the “gaps” in this environment are growing in size and number. The gap between political expectations and likely reality regarding tax cuts is as wide as it’s even been. The gap between hard and soft economic data continues to widen as sentiment indicators continue to surge. Now, the gap between bond market direction and stock market direction is widening.

Bottom line, the trend in stocks remains higher, but there are cracks appearing in the proverbial ledge stocks are standing on, and we better get some positive catalysts soon, otherwise we are in danger of a real pullback.

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S&P 500 Technical Update

The S&P 500 is currently in a consolidation pattern with key support lying at 2328 while downtrend resistance has moved down to 2367 today.


The S&P 500 has been consolidating the late February/early March sprint to new highs for 5 weeks now. And while the long term trend remains higher, there are a few technical levels worth watching in the near term (see chart for visual on initial levels).

  • Initial, key support lies between 2328 and 2341
  • Longer term, key support is between 2275 and 2300
  • Initial downtrend resistance is sitting at 2367
  • The next medium term, upside target, determined by a measured move is to 2473



Why Are Stocks Falling? Blame Auto Sales (seriously). April 4, 2017

Below is an excerpt from today’s Sevens Report. Cut through the noise and understand what’s truly driving markets, as this new political and economic reality evolves—start your free two-week trial today. 

Economic data was the major influence on markets yesterday, and while most of the focus was on the ISM Manufacturing PMI and the Markit manufacturing PMI, (both of which were in line with expectations), the real market mover was the disappointing auto sales report.

Auto Sales Responsible Auto sales fell to 17.0M saar vs. (E) 17.2M saar, and that number joins a growing chorus of caution signs on the auto industry, including fears about used car pricing and used car debt.

Bottom line, auto sales aren’t as popular as the ISM Manufacturing PMI, but the auto industry in the US is massive and very cyclical, and if we are starting to see the beginnings of a pullback in the auto industry that’s not a good sign for the broader economy. That’s why the disappointing auto sales number hit stocks so hard yesterday, even in the face of in-line manufacturing PMIs.

Bigger picture, the “gap” between soft and hard economic data continued to widen yesterday, as the soft PMI survey data was strong while the hard March auto sales data was disappointing. That gap between sentiment/survey data and actual hard economic numbers must be closed sooner rather than later, and it’s a growing risk to stocks.

ISM Manufacturing Index

• The Index fell to 57.2 vs. (E) 57.1


The trend in the manufacturing sector of the economy remains healthy according to the latest release from the ISM. The March ISM Manufacturing Index did edge back for the first time since August, slipping from 57.7 to 57.2 month over month, but the headline was still narrowly ahead of estimates (57.1).

The details of the report were solid as New Orders remained notably strong at 64.5. That was a slight pullback from February’s reading of 65.1; however, it was the second-largest reading in more than three years (after February). New export orders also were at a three-year-plus high of 59.0 while Employment jumped 4.7 points to 58.0, the highest level in almost six years. Rounding out the report’s internals, Prices Paid rose to 70.5, the highest reading since May 2011, underscoring a potential uptick in inflation in the US.

Bottom line, the ISM release showed some slight moderation month over month, but the general trend remains strong which is a positive (although again, this surging survey data needs to start being confirmed by hard economic numbers).

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10 Year Note Yield Approaches 2.30%

The 10-Yr. Note Yield has given back all of the post-Fed-hike gains from early March and is again threatening to break back down below the 2.30% level as “soft data” remains strong but “hard data” continues to disappoint.


Last Week and This Week in Economics, April 3, 2017

“Last Week and This Week in Economics”—an excerpt from today’s Sevens Report: everything you need to know about the markets in your inbox by 7am, in 7 minutes or less.

Last Week

Sevens Report - April 3, 2017 - This Week and Last WeekEconomic data was sparse again last week, but what data did come beat expectations (although it didn’t do a lot to bridge the gap between survey-based indicators and hard economic data). Still, the numbers did continue to be enough to offset growing Washington noise.

Consumer confidence was the highlight of the week, and it blew away expectations. The number rose to the highest level since summer 2001, coming in at 125.6 vs. (E) 113.8. While a strong number, that is another sentiment survey, and these soaring sentiment surveys need to start reflecting in the hard data starting in Q2 (remember, Q1 GDP is still expected to be around 1%).

The other notable number last week was Pending Home Sales, which also beat estimates, rising 5.5% vs. (E) 2.5%. The biggest takeaway from the March housing data is that it appears higher mortgage rates are not hurting the residential housing market, and that’s an important but underappreciated tailwind on the economy, generally speaking. Going forward, a stable housing market remains critical if there’s any hope to seeing a material economic acceleration.

Bottom line, the last two weeks have been light on economic data, but what numbers we’ve got have generally been good, and as a broad statement the economic data has continued to offset lack of progress in Washington… but that trend will be put to the test this week.

This Week

After two quiet weeks of economic releases, we more than make up for it this week, as the three most-important economic releases of the month all come over the next five days. From a broader context standpoint, with Washington stuck in neutral and hopes of big tax reform fading, economic data needs to stay firm to support stocks. If the data disappoints this week, don’t be surprised if we test last week’s lows.

The most important release this week is Friday’s jobs report. We will do our typical “Jobs Report Preview” later this week, but again it’s important this number is Goldilocks, in that it’s strong enough to support the market, but not so strong that it makes a May rate hike more likely.

The next most-important release this week is the global manufacturing PMIs (out today). The European and Asian numbers have already been released, and focus now turns to the March ISM Manufacturing PMI at 10 a.m. today. This number is taking on a bit more significance due to the disappointment of the flash manufacturing PMI of two weeks ago. It hit a surprise six-month low, so markets will want to see the ISM Manufacturing PMI refute that reading.

The manufacturing PMI is followed by the global manufacturing PMIs out Tuesday night/Wednesday morning. Those reports will again potentially confirm the uptick in global growth, and especially in Europe, where numbers have been strong lately. Domestically, it’s the same story. Economic data needs to support this market in the face of disappointment from Washington. Failure to do that puts this rally at risk.

The only other notable event this week will be the ECB minutes. If the minutes read hawkish, that could put a temporary headwind on HEDJ and long Europe positions. But a dip will likely be a buying opportunity in HEDJ.

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Near Term Trend in the Dollar Favors the Bears

While the post-election breakout in the dollar was a long term bullish development, a lot of that move is being retraced and the current trend favors the bears for the medium term.