It's time once again for the Sunday wrap and bonuses. It's been a busy week, 10 positives and 7 negatives this time. Two very cool bonuses this time, one is from today's Ritholtz Washington Post column with advice on how to prepare for the coming tumult (as if what we've been experiencing for the past several years has not qualified as "tumult.") Pay particular attention to the wisdom he imparts in the final paragraph, "I am not making a forecast that a crash is going to occur. My best guess is that we are somewhere in the fifth or sixth inning of a long secular bull market that could last for 10 to 15 years. Perhaps it's only the third inning - it's June, and the New York Mets have a winning record. That should tell you that anything can happen."
Bonus #2 is a very instructive 13 minute video by celebrated market guru Peter Bernstein about the nature of managing risk, something to which we are all very devoted. Hope everyone had a great weekend.

Succinct Summation of Week’s Events for 6/5/15

by Peter Boockvar - June 5th, 2015, 4:00pm

Positives:

1) Job growth in May was well above expected at 280k (estimate of 226k); prior two months saw a combined upward revision of 32k. Unemployment ticked up one tenth to 5.5% because of a 397k increase in the labor force relative to the household survey gain of 272k. Participation rate was up one tenth to 62.9%.

2) Wages rose by .3% m/o/m and 2.3% y/o/y. That y/o/y gain matches the most since 2009. The payroll 6 month average is 236k vs the 260k average in 2014 as the May gain made up from only modest job gains in January, March and April. US Initial jobless claims totaled 276k, 2k less than expected but last week was revised up by 2k to 284k.

3) Autodata said 17.79mm cars/trucks were sold on a SAAR basis in May, well more than expectations of 17.3mm. It’s the best pace since 2005.

4) The ISM manufacturing index for May rose to 52.8 from 51.5, above estimates of 52.0. It is off the lowest level since May ‘13. ISM said, “Comments from the panel carry a positive tone in terms of an improving economy, increasing demand, and improving flow of goods through the West Coast ports.”

5) Post-port strike, April trade deficit was $40.9b, about $3b narrower than expected. Exports rose for a 2nd straight month after 4 months of declines. Imports fell by 3.3% after a sharp 6.5% rise in March which followed port strike related declines in January and February. This will lift Q2 GDP estimates by a few tenths all else equal.

6) PCE inflation figure for April was flat and up just .1% at the core rate, both one tenth less than expected. The y/o/y gain for the headline number was up .1% and up 1.2% at the core rate.

7) Personal income rose .4% m/o/m in April, one tenth more than expected. Private sector wage and salaries were up by .2% m/o/m and a pretty good 4.6% y/o/y.

8) Eurozone services PMI for May was 53.8, better than the initial print of 53.3 but down from 54.1 in April and vs 54.2 in March. Unemployment rate in April for the region fell to 11.1%, a level last seen in March ’12.

9) The final look at Eurozone May manufacturing PMI was 52.2 vs 52 in April and 52.2 in March and matches the best since May.

10) The European Markit Retail PMI rose back above 50 for the first time since June 2014 at 51.4 vs 49.5 in April.

Negatives:

1) May ISM services index fell to 55.7 from 57.8. It’s below the estimate of 57 and is at the lowest level since April 2014.

2) MBA said refi applications fell 11.5% w/o/w to the lowest level in 5 months as the recent uptick in mortgage rates has had an immediate impact on the desire to refi. Refi’s are now down 1.2% y/o/y. Mortgage applications to buy a home fell 3% w/o/w to the lowest since late March but are still up 14.5% y/o/y.

3) Global bond bubble has some more air come out in a messy week. Investors are saying no mas to taking an enormous amount of capital risk for very little reward in fixed income as central bank interest rate suppression has reached its limit. The US Treasury market in particular is calling out the Fed. Are they listening?

4) Personal spending in April was flat m/o/m, two tenths light vs expectations.

5) April factory orders report saw Core capital spending (non defense capital goods ex aircraft) revised down to a drop of .3% vs the initial print of up 1%. The y/o/y drop is now 2.6% vs down .6% first reported.

6) Q1 productivity was revised down to an annualized decline of 3.1% from -1.9% and with this, unit labor costs rose 6.7% from 5% initially reported for Q1. On a y/o/y basis, productivity in Q1 was up just .3%.

7) Euro zone CPI for May rose .3% y/o/y headline, one tenth more than expected and the most since November. The core rate (ex food, energy and alcohol) was higher by .9% y/o/y, two tenths above the estimate and that is the quickest pace since August and was driven by a 1.3% rise in services inflation that matches the fastest pace since May 2014. The ECB would put this in the positive category but I believe higher inflation would stall growth.

BONUS #1:

Markets Are Up, So Prepare For the Next Storm

by Barry Ritholtz - June 7th, 2015, 9:30am

“The time to repair the roof is when the sun is shining.” — John F. Kennedy

Markets across the country have hit new all-time highs. The Nasdaq composite index, Dow Jones industrial average and Standard and Poor’s 500 stock index all hit prices in May that they never attained before. Markets in Japan, Europe and China have also reached multi-year highs.

The contrarian in me looks at all of these new highs and thinks, “Now is the time to start planning for when markets are less accommodating, more volatile — and for when something eventually goes wrong.”

Portfolios that are long on global equities are enjoying all of this sunshine. With gains across the board, indeed, many portfolios are reaching their highest net asset value in years. To quote President Kennedy, now is the time to “repair the roof.”

Before you get out your poison pens, this is decidedly not a market call. As I have made clear repeatedly in the past few years, I remain constructive on global equities. But the truth is that we cannot control markets nor predict exactly when, where and how things go astray. What we can do — right now — is get ourselves prepared for stormy weather.

As I have discussed previously, you should have a fully developed financial plan. For those of you who do not, now is the time do so. No lectures — just get it done. Without a considered, comprehensive plan in place, the rest of today’s discussion is meaningless.

What follows is the advice I give regardless of how much or how little your net worth may be. This is simply good, prudent planning.

Clean up your finances. With the economy humming and wages rising, now is the time to start setting aside some cash in a rainy-day fund. The rule of thumb is to have three to six months of expenses set aside in case of a drop in income. As we saw from 2007 to 2009, business will slow and sometimes disappear altogether. Some people will lose their jobs, and some companies will go bankrupt. Setting aside funds to ride out a temporary downturn is a great luxury that is obtainable with a bit of saving and planning.

Restructure your debt. When it comes to borrowed money, I suggest deploying the three R’s – reorganize, retire and refinance.

First, reorganize. Many folks have all manner of multiple saving and checking accounts, orphaned 401(k)’s, IRAs, lots of credit cards and brokerage accounts. Consolidate these into your favorites, reducing your monthly administrative time and costs. I put all of my personal expenses on a single credit card (with an excellent rewards program) and all of our business expenses on the firm’s charge card, with both balances paid in full each month.

Second, retire all of the unnecessary credit that accumulates. This includes extra credit cards, home equity loans, department store cards, gas cards, extended lines of credit and overdraft protection — anything that can be easily retired should be.

Third, refinance your primary residence and any additional properties that have a mortgage. Research whether your present rate is worth reducing. If you have a variable-rate loan, lock it in with a low 30-year fixed rate now. Check your local laws — for example, New York state allows refinancing with the same lender without requiring a new 0.80 percent mortgage-registration tax to be paid.

Make smart decisions about your individual stocks. Some of the stocks you have accumulated over the years may no longer be consistent with your risk tolerance or long-term goals. Decide on what individual holdings no longer make sense to hold, especially now with volatility low and prices high.

Are you willing to hold names that have the potential for increased volatility and big drawdowns (and the associated stress that comes with these higher-risk holdings)? Lose the speculative junk that somehow slipped into your portfolio courtesy of your brother-in-law’s latest hot stock tip.

Some of our clients own low cost-basis stock that carries a large capital-gains tax liability. This is especially true of highly concentrated holdings of company options or inherited stock. You can create a strategy to sell tranches of appreciated stock at predetermined prices and simultaneously offset the capital gains taxes through tax-loss harvesting.

For those of you who have lots of company stock, recognize that you have highly concentrated risk, as both your portfolio and your income depend on the same company. Carefully rethink these sorts of holdings.

Be ready to take advantage of volatility. The problem with market corrections is that they always seem to come along when you are least prepared for them. That is a shame, because they offer wonderful opportunities to create lasting wealth — but only if you have a plan.

The good news? You do. The global asset-allocation model and systematic rebalancing I have been writing about for years was designed to take advantage of periodic disruptions around the world.

You can plan to take further advantage of lower stock prices with fresh capital. How? I suggest adding 10 percent to any equity asset class that drops in price by 20 percent (based on monthly closing prices). If we are lucky enough to see a 30 percent drop, I would add 10 percent more to that class. Note this does not apply to bonds, commodities or hard goods such as art, jewelry or autos.

Envision your emotional state. I began my Wall Street career training under a Marine jungle-combat instructor and a retired Special Forces officer on a trading desk. When these guys told war stories, they were actual war stories.

Of all the things I learned from them, the most important was how they made plans for the emotions of a mission. Prior to any military operation, these professional warriors envision the mission from start to finish. Not just the logistics, tactics and strategies, but also what their emotional state will be: how to deal with adrenaline rush, how overwhelming the noise of the chopper can be or how disorienting it is to be dropped into the ocean in full gear in the middle of the night. They plan what to do when things go awry, how to react to surprises, how to improvise.

Their training and the anticipation of their emotional state allowed them to complete their mission, regardless of what surprises came their way. They knew in advance what could happen and how they would react, and they had a plan for all contingencies.

You also can anticipate and manage your emotional reactions. Think about how you will feel if and when your portfolio’s value falls by 20 percent. Consider how, in the absence of a plan, this might affect your sleep patterns, your ability to concentrate, even your sense of self. If you know what to expect and have a plan in place, you will be better equipped to deal with the moment when it arrives.

The time to think about how you are going to react when markets inevitably run into turmoil is before it happens. The cyclical nature of stocks and bonds means that this is a question not of “if” but of “when.” Anticipating that inevitability is merely prudent, intelligent planning.

I am not making a forecast that a crash is going to occur. My best guess is that we are somewhere in the fifth or sixth inning of a long secular bull market that could last for 10 to 15 years. Perhaps it’s only the third inning — it’s June, and the New York Mets have a winning record. That should tell you that anything can happen.

Although we cannot control the market, we can control what our reactions will be to any subsequent mayhem that the market creates. Now is the time to begin that preparation.

Ritholtz is chief executive of Ritholtz Wealth Management. He is the author of “Bailout Nation” and runs a finance blog, The Big Picture. On Twitter:@Ritholtz.

BONUS #2:

Interview

Peter L. Bernstein on risk

The celebrated author of Against the Gods: The Remarkable Story of Risk explores the history of risk and how it works in real-world markets and in our lives.

January 2008

Risk doesn’t mean danger—it just means not knowing what the future holds. That insight resides at the core of risk management for companies, whether in managing the potential downside of an investment or putting a value on the option of waiting when making irreversible decisions. In this video, Peter L. Bernstein also explains why in the real world the most sophisticated mathematical models can sometimes fail.

Video