Incredible Week

What an incredible week in financial markets. I think the Movement in the VIX (measure of volatility) puts everything in perspective. On January 2, 2014 the VIX hit a high at 14.59 in the trading day. On Wednesday October 15, 2014 the VIX hit a high of 31.06. To put things mildly, volatility has picked up. But, volatility Is just that, volatility. This pullback has brought down valuations and increased yields on many stocks. The fundamentals are in the market. Although the buy on the dip mentality was a great strategy for the first 9 months of 2014, it might not be the best for the end of the year. We are seeing massive 300 point rallies in the Dow daily. Of course it is difficult to time the market, but be extremely careful when entering. I would advise buying in multiple orders over the course of a couple weeks in order to get a more realistic cost basis.

In terms of fundamentals, we are seeing somewhat of a reversal in the difference between the real and the financial economy. The table below summarizes:

This week gave some really interesting and mixed earnings. A few notes on the table. Netflix did lower guidance and got guillotined for it. Google did take a hit as well. Bank of America would like to say they have put the past behind them and Goldman absolutely destroyed earnings but did have several accounting revisions to go alone with negative quarter over quarter investment banking growth. But, the real economy revealed to me the strength of the US economy. When companies like Honeywell, GE and United Rentals are making money, the market has to react positively. An interesting Earnings release to me was Dominos who beat earnings. I have them in the real economy because food is a necessity yet it could still be considered discretionary so take with that what you will. The mix of financial earnings sheds light on the industry. Regulation has fundamentally changed the face for many of these banks. In the meantime as people continue to refinance like crazy, I am bullish on SunTrust, WellsFargo, and PNC.

The Fed is still a topic of major concern. Instead of talking about the stimulus discussion I would like to point out Yellen’s comments on economic inequality in the United States. This story came out on Friday so the market hasn’t had too much time to react. But, I believe that this is a fantastic sign from the FED. It is clear that Ms. Yellen understands the difference between the real and the financial economy. While the financial economy has recovered, it is clear the real economy hasn’t and Ms. Yellen believes the same. Highlights from her comments include the following:

• The past several decades have seen the most sustained rise in inequality since the 19th century after more than 40 years of narrowing inequality following the Great Depression," she said. "By some estimates, income and wealth inequality are near their highest levels in the past hundred years, much higher than the average during that time span and probably higher than for much of American history before then."

• The wealthiest 5 percent still hold two-thirds of all assets, and that while there have been significant gains at the top of the spectrum, things have been stagnant for the majority."I think it is appropriate to ask whether this trend is compatible with values rooted in our nation's history, among them the high value Americans have traditionally placed on equality of opportunity." The Fed chief said that wide wealth disparities can make it harder for the poor to move up the income ladder, and also warned of the burden of student loan debt, which quadrupled between 2004 and 2014.

• On Friday, Yellen said "some degree of inequality" is natural and indeed "arguably contributes to economic growth, because it creates incentives to work hard, get an education, save, invest, and undertake risk.” However, that same inequality can limit access to economic resources for those lower on the ladder, "thereby perpetuating a trend of increasing inequality."

Fundamentally, regardless of political ideology, if you are not at a bare minimum paying attention to inequality in the US, you are out of your mind. Yellen’s realistic and frank view on such a pressing issue is extremely refreshing to me. If the FED really wants to make a splash, it should begin to buy student loan portfolios instead of the mortage-backed securities in QE1 and QE3. Relieving students of even a fraction of student debt will immediately stimulate growth because young people want to spend money. Young people want to buy houses and cars, to have kids, buy clothes, and do the things most people liked to do when they were young professionals. Now that we have an entire generation crippled by student loan debt, who is going to buy the next round of houses and stimulate the economy? Follow “this link” for her entire speech as well as very interesting statistics.

On a side note, follow “this link” for a great article about a leveraged ETF betting against treasuries. Most people will read this and hope they didn’t have exposure. But, is now finally the time to buy?

Earnings Announcements

Monday: Apple, Chipotle, IBM, Rent-A-Center, Texas Instruments, and Halliburton.

Tuesday: Coca Cola, Ethan Allen, Harley Davidson, Interactive Brokers, Kimberly-Clark, Lockheed 
Martin, McDonalds, Mercantile Bank, Sonic Corporation, Verizon Communications, and Yahoo.

Wednesday: Abbott Labs, Allegiant Travel, Cheese Cake, Citrix Systems, DOW Chemicals, Evercore Partners, Ingersoll-Rand, and Xerox.

Thursday: 3M, Alliance Bernstein, Amazon, American Airline, Cabela’s, Catepillar, Dunkin Brands, Dr Pepper Snapple, Jet Blue, Nucor, and United Continental.

Friday: Abbvie, Colgate-Palmolive, P&G, State Street, United Parcel Service, and Wyndham Worldwide.