Sunday Morning Coffee

First up I wanted to expand on one of my Tweets from yesterday.

Barrons says "piling into financials" could be dangerous. Clearly a lottery ticket bounce has come for some, but real leadershp is a bad bet

Those aren't typos, with only 140 characters available per Tweet I'm learning that sometimes you need to economize on certain letters.

Anywho one thing that I always keep an eye on is sector weightings within the S&P 500. When a sector gets too big I view that as a warning sign. I am aware of two times where a sector grew to about 30%; one was energy in the early 1980s and the other was tech at the start of this decade. Energy stocks were in a bubble of sorts and contracted to mid single-digit percentages of the S&P 500 and stayed there until a few years ago before getting up to about 17% when crude went to $147 last summer.

Financials grew to a little over 20% at their peak from a norm of the mid teens. A 20% weight is a flashing light as opposed to a red flag if that makes sense but the 20% weight was what first got me to underweight financials quite a few years ago. Here is a blog post from 2004 which is the oldest one I can find with this detail. That was before the yield curve actually inverted but a sector that takes up more room than what is normal is something to follow closely and in this case where the sector in question was greater than 20% I went underweight.

Almost 30 years after the energy bubble and the sector only got back to about half of its peak weight, and even then only for a short time. Tech is a little over half its peak weight nine years later (and I would submit that is attributable to the implosion in the financial sector). Financials are now 12% of the index down from a peak of what I specifically recall as being 22% and my hunch is that once that lottery ticket bounce exhausts it will be a long time before the sector does something meaningful--individual stock could be a different story and I think certain foreign banks will come back because they avoided the types of behaviors that brought down US financials.

The picture above is from a local highway project taken Friday night and as many vehicles as there are in the picture it doesn't even capture the entire fleet. You may or may not have a big project happening near you but I think the picture serves as a good reminder. Whatever the final tallies will be for the size of the GDP contraction, the numbers for unemployment, output or various ISM numbers things are still happening. They are happening a little slower and less frequently right now but in the picture is a lot of Caterpillar vehicles (CAT is a client holding). They had to be bought at some point and we know there will be other projects all over the country and many other places in the world and some of them will need new vehicles.

Things have slowed down and may slow further but economic activity is not disappearing altogether. It can be easy to forget this when a stock goes down a lot but most companies are still selling things to their customers.

The second picture is an espresso maker that was featured in Barron's for $2400. The $2400 does not include the expense of going to Germany for two weeks to learn how to use it. A little humor attempt.

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