Welcome To The Un-Official Start Of Summer

Welcome to the unofficial start of summer. Markets typically languish during this period, but since when have times been typical? For the first time in many years, earning estimates for the S & P 500 are rising not falling. Confidence levels are surging and economic activity appears to be accelerating.

Many times I have commented about the narrowness of the markets, a narrowness that is now greatly discussed. Typically, narrowness is associated with waning days of an advancing market. I will argue differently. Today, I believe the narrowness is the result of the massive proliferation of ETFs and technology based trading that benefits only the largest capitalized issues.

I believe breadth will expand if economic activity accelerates. Like many, I desire tax and regulatory change, but just the mere freeze of additional regulations is refreshing, equivalent to how it feels when one stops banging one’s head against the wall… great.

In my view, perhaps one of today’s greatest values is in the energy sector. Bloomberg writes the group trades at its lowest level relative to the S & P 500 in 14 years and represents the lowest capitalization of the S & P 500 in 18 years.

According to the IEA, global demand is now 1 million barrels more per day than supply. What happens if growth accelerates?

As noted last week, consensus has extrapolated the anemic growth rate of the last 10-years into eternity. Many times I have remarked the last ten years is the longest period in history where the economy has not grown at a 3% annual rate in history, crushing the previous record of 4 years from 1930-34.

As noted above, today is everything but “typical.” There are negative real treasury yields across almost the entire curve, an environment normally associated with inflationary growth. Monetary velocity is at 58-year lows and bank excess reserves are at gargantuan levels. Infrastructure spending has been virtually nonexistent during the last ten years, spending required to increased productivity and growth.

I think we are at the cusp of the mirror image of the last 10 years. If the economy accelerates, so does energy demand.

Change is the only constant with only the velocity of change that is different. What are the odds the oil sector will partially reverse today’s undervaluation as compared to the S & P in the next 12 months? Great if my economic outlook materializes.

This week’s economic calendar is robust. There are various manufacturing indices, personal spending and income statistics, housing information and jobs data. All can offer evidence to my view of accelerating growth.

Last night the foreign markets were down. London was down 0.54%, Paris was down 0.83% and Frankfurt was down 0.23%. China was up 0.07%, Japan was down 0.02% and Hang Sang was up 0.24%.