Yesterday the rhetoric between the US and North Korea escalated further with President Trump saying the US would "totally destroy North Korea" if forced to defend itself or its allies. He said that while the US "has strength and patience," its options would soon run out. This follows the president's comments from August 9th when he said "North Korea best not make any more threats to the United States. They will be met with fire and fury like the world has never seen ... he has been very threatening beyond a normal state. They will be met with fire, fury and frankly power the likes of which this world has never seen before." So far the markets have shrugged it all off, but can Kim Jong-un sink this long running bull market?
Yesterday the S&P 500 closed at a record high so it is unsurprising that you see headlines asking if the market is overvalued or is this a bubble? Many pundits are calling this stock market a bubble and predicting doom. In Bank of America Merrill Lynch's April fund manager survey of global investors, a record 83 percent of fund managers said that U.S. stocks are overvalued. In July, Goldman Sachs research highlighted "elevated valuation on almost every metric" in its weekly report on markets.
Today almost all of the headlines are about Apple's iPhone launch and that is well deserved. I've been a iPhone user myself for 10 years and am excited for the new phone (but not the rumored $1000 price tag). Since the iPhone news will be covered by a million different sites, let's look at the other side of the globe where China is a very different market and one changing at breakneck pace. Did you know that last year, Chinese consumers spent $5.5 trillion (yes Trillion) through mobile payment platforms? To put that in perspective that's about 50 times more than their American counterparts where Apple pay just hasn't caught on. So why is China succeeding where Apple is not? Let's take a look at China's mobile payment market.
US consumer confidence rose for the 4th straight month and posted its second highest reading in the last 16 years. The Conference Board said its consumer confidence index increased to a reading of 122.9 in August which was above expectations. US consumers remain upbeat thanks to the strong stock market, rising real estate prices and a tight labor market. Consumers have thus far shaken off the news of violence in Charlottesville and the increasing tensions between North Korea and the US. While war is always a risk to markets, we believe that cooler heads will prevail. Tougher sanctions will likely be the next step against North Korea unless they do something really crazy. Keep in mind that North Korea is so puny that it is almost laughable. It is like boxer Floyd Merriweather showing up to your house for a fight. For comparison, in one day, the US makes up over 2x the size of North Korea's annual GDP.
As a dedicated reader to our blog, you may have noticed that our blogging pace has slowed this summer much like the stock market. I guess you can say we are both stuck in neutral. Well we are still grinding away but have been busy with conferences and now I am on a much needed holiday to recharge and enjoy some shave ice. Don't worry I will back blogging with more regularity next week. As for the stock market, the sell in May philosophy has worked well again this year. While seasonality doesn't occur exactly the same every year, there definitely are seasonal trends that prevail in the stock market. This year, the S&P 500 has been stuck in a sideways move since June and volatility has picked up a bit as well.
Since last summer, I have written several blog posts on positive earnings from the S&P 500 constituents. We view accelerating earnings growth as a key driver of stock prices moving forward. Schwab's Chief Global Investment Strategist Jeffrey Kleintop just wrote a very compelling post called "Earnings may be about to do something they've never done before." Thanks to global growth picking up across virtually all regions, global earnings (measured by the MSCI All Country World Index) are expected to reach new heights in the near future. This is also bullish for the S&P 500 which generates roughly 44% of its revenues from outside the US.
Despite the weekly doomsday headlines (this week is from filmmaker Michael Moore - we do not recommend taking investment advice from fimmakers, ever), Billionaire hedge fund manager David Tepper called comparisons of today's market with the tech bubble of 1999 'ridiculous' and we wholeheartedly agree. Tepper who runs Appaloosa Management says that the market run doesn't translate into over the top valuations in equities.
Thanks to Uncle David for forwarding a CNBC article on how famed hedge fund manager Stan Druckenmiller raised his stakes in Chinese companies in the last quarter. According to recent 13-F filings, his firm Duquesne Capital bought Chinese consumer and tech stocks in the second quarter.
Last Friday on CNBC, former Fed Chairman Alan Greenspan said that it's fair to characterize the current bond bubble as an "irrational exuberance" type of forecast. He did hedge the statement by saying that he has "no time frame on the forecast." Also note that he started making this bond bubble call in 2015.
Berkshire Hathaway is close to a milestone that Warren Buffett doesn't want to achieve. On Friday, the company reported that it held $99.7 billion in cash at the end of the second quarter. Thanks to a collection of businesses that generate lots of cash, Berkshire's cash has been growing steadily in recent years. Because the company doesn't pay a dividend and rarely buys back its own stock, Buffett is on the hook to find ways to invest those funds. The huge cash hoard shouldn't be taken as a pure bearish signal. Remember he didn't sell assets to raise cash. In fact, he would love to spend some and he said "I hate cash" earlier this year. However, he is having trouble getting the right company at the right price.
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