The Bloom May Be Off The Rose
Thinking and Doing
Maybe the stock market
isn't so stupid after all. Maybe investors are beginning to realize
that President Trump massively over-promised and is likely to, just as
massively, under-deliver. Let me be clear: while I do not like this
president, or almost anything that he claims to believe, I want him to
be successful because that is in the best interests of this country and
I don't think he will be successful unless he ditches his polarizing
rhetoric and divisive policy statements. It's very unlikely he will not
be able to deliver any real replacement for the Affordable Care Act. And
the capital he wasted in a flawed and rushed attempt will hurt his
ability to pass any meaningful corporate and individual tax reform. The
$1 trillion infrastructure plan was never going to happen, nor is "The
Wall" likely either. And if I'm right, or even close to right, then the
"Trump Rally" is likely to deflate. In fact, we may be watching the
early stages of that deflation right now.
Last month, I suggested that we follow an old Wall
"Don't Fight The Tape". Basically, that means keep riding the trend,
stops. My advice was to just stick with what's been working. I may
have been too optimistic as the tape is turning down. But that doesn't
have to be a bad thing. In the long run, a little dip is actually a
good thing, as it brings valuations back in line and provides patient
investors better buying opportunities. So we'll just have to see how
deep and wide this downturn becomes.
Looking at the chart of
the #DJIA, we a drop of about 3% or so from the March 1 peak. And while
the current price is below the 50-day moving average, it remains well
above the 200-day average and above support around 20,000. RSI looks
pretty oversold, which could set things up for a nice bounce should Q1
corporate earnings come in a little better than expected. So for now,
I'm not worried.
The more economically sensitive Dow Jones
Transportation Average has had steeper drop after
hitting its record high six weeks ago. After rising on the
unrealistic hopes of Trump's $1 trillion infrastructure fantasy, it's
now backing off on the understanding that those wildly optimistic plans
will likely never come to fruition. That being said, the economy is in
pretty good shape, jobs are being created, and people continue to spend
money. So I think this period of weakness could be a nice buying
The Dow Jones Utility
Average continues to be a stealth bull mode The staid index of
"widows and orphans" is within shouting distance of the all-time high
set last summer. The sector
continues to enjoy the low interest rate environment. The next
hurdle will be the forthcoming Fed rate increase, likely sometime in Q2.
Key Economic Statistics
to the Department of Labor, the
figure for seasonally-adjusted initial jobless claims for the week
ended April 8 was 234,000, a number basically in line with the prior
week, and well below the prior month's figure. The four-week
average of 247,250 was roughly the last as this time last month.
non-farm payroll employment report in March was well below expectations
as only 98,000 jobs were gained in the month,
and 38,000 net jobs were subtracted from the
prior two months. The household survey reported that the unemployment
rate dropped to a tiny 4.5%, while the labor force
participation rate remained at 63.0. Average hourly wages for blue
collar workers rose to a new high of $21.90 while the average work
week actually dipped to 33.5 hours, the lowest level in the
million workers were counted as
unemployed, while just 1.7 million people remained
unemployed longer than 27 weeks. The seasonally
adjusted number of people who could only find part-time work rose to
5.6 million while the number of marginally attached workers
dipped to 1.6 million. The number of people holding multiple
jobs rose again to 8.14 million. All of this resulted
in the U-6 "underemployment" rate falling to 8.9%, which is
the lowest level in over a decade.
Congressional Budget Office (CBO) estimated that on a net present value
basis, the nation's budget deficit was $173 billion in February,
resulting in a deficit of $522 billion for the first six months of
fiscal 2017, $63 billion more than the shortfall recorded during the
same period last year. The majority of the increased deficit can be
largely on a increase in outlays.
Census Bureau reported that privately owned housing starts
increased 3.0% in February to 1,288,000, which was up 6.2% from a year
ago. It was also the largest total since late in 2007.
Census Bureau reported that on a seasonally adjusted annualized
basis 592,000 new homes were sold in February, up
6.1% from January, and 12.8% from a year ago. The estimate of the
number of homes for sale was 266,000, representing 5.4
months of inventory at the current rate of sales. The median sales
price was $296,200, the third consecutive monthly drop and the lowest
level in a year, which was almost $15,000 below the 12-month moving
average price of $310,500.
National Association of Realtors reported that 5.48 million existing
homes were sold in February, down 3.7% from the
prior month, and up 5.4% from a year
ago. The estimate of the number of homes for sale was 1.75 million,
representing only 3.8 months of inventory at the current
rate of sales. The median price was $228,400, which is below
the rising 12-month moving average price of $234,575.
to the Institute for Supply Management (ISM), economic
activity in the manufacturing sector expanded in March for
the seventh month in a row, dipping from 57.7 to 57.2. The ISM index of
non- manufacturing activity fell from 57.6 to 55.2, which still
signaled growth in the service sector for 86 consecutive months. The
economy continues to expand at a modest pace.
Conference Board reported that its index of Leading Economic
Indicators (LEI) was increased 0.6% in February, following similar
gains of 0.6% in January and December. "After
six consecutive monthly gains, the U.S. LEI is at its highest level in
over a decade. Widespread gains across a majority of the leading
indicators points to an improving economic outlook for 2017, although
GDP growth is likely to remain moderate," said Ataman Ozyildirim,
Director of Business Cycles and Growth Research at The Conference
Board. "Only housing permits contributed negatively to the LEI in
February, reversing gains over the previous two months.
to the "third" estimate by the Bureau of Economic Analysis,
GDP increased at a modest annualized rate of 2.1% in Q4 2016. This
compares poorly with the 3.5% rate of growth from Q3 but is slightly
better than the 1.4% growth rate in Q2 and 0.8% in
Q1. It is also slightly better than the 1.4% from Q4 2015.
This report will likely allow the Fed to raise rates another 0.25% in a
to the BLS, the seasonally adjusted Consumer Price Index for all Urban
Consumers (CPI-U) increased 0.3% in March, after a puny 0.1% increase
in February. Over the last twelve months, the index rose 2.4%,
continuing the upward trend that began in July 2016. This level is
above the 2.0% target set by the Fed, giving them cover for future rate
Conference Board's Consumer Confidence Index increased to 125.6 in
March from 116.1 (revised) in February. "Consumer
confidence increased sharply in March to its highest level since
December 2000 (Index, 128.6)," said Lynn Franco, Director of Economic
Indicators at The Conference Board. "Consumers’ assessment of current
business and labor market conditions improved considerably. Consumers
also expressed much greater optimism regarding the short-term outlook
for business, jobs and personal income prospects. Thus, consumers feel
current economic conditions have improved over the recent period, and
their renewed optimism suggests the possibility of some upside to the
prospects for economic growth in the coming months."
After hitting a high to end the year,
the dollar index has dropped a bit this year. Surprisingly, after
proclaiming to be a strong dollar advocate, President Trump is now
extolling the virtues of a weaker dollar. This is good for commodity
prices and for the earnings of large, multi-national companies. We will
see if the index remains relatively weak in the face of more Fed
tightening policies to come this year.
After failing four times to pierce strong
resistance at 2.6%, the yield on the 10-year Treasury bond is falling
back towards support at 2.0%. I must admit I'm a bit surprised to see
rates this low again. Still, as I've been writing for the last
few months, I would expect rates to slowly move higher throughout the
year, reaching 3% sometime in the fourth quarter.
After failing earlier this year to pierce
resistance around $55 per barrel, the price of West
Texas Crude fell sharply in March before rebounding in April.
The price of WTIC has again approached the resistance line.
The history of the past year or so has shown this to be a daunting
roadblock. I think there is simply too much production available to
allow the price to rise too much higher.
The rising price of gold is putting my prediction
that there is "a greater chance of it moving below $1,200 than above
$1,300" to the test. The recent US military action in Syria, missile
testing in North Korea, and a general unease around the world, is
ramping up the "fear trade". We could see gold move higher, at least in
The Nasdaq Composite
continues to be the primary engine of growth for the stock market. The
tech-heavy index remains in a major uptrend and is within a whisper of
record levels. I would expect a few months of consolidation before any
meaningful advance can occur.
There is trouble brewing in the
financial sector as you can see by the chart below. After
enjoying massive gains subsequent to the election of Donald Trump, with
his promise of de-regulation and higher interest rates fueling
massive earnings growth, a harsher reality is beginning to set in.
Rates are falling rather than rising. There has been little movement on
the de-regulation front as his administration is bogged down on other
policy fronts. Still, I think this is simply a bump in the road, and
would use further weakness as a buying opportunity.
The sticky low interest rates will continue to
benefit the housing market, which remains very tight. As you were able
to see from the statistics presented above, housing starts, as
well as new and
existing home sales, all continue to grow, giving this sector
further room to grow.
representing the developed
markets has performed much better than I would have expected, given all
the political and social unrest pervading much of Europe. I guess the
relatively stable Far East is helping things out.
NYSE Bullish sentiment index has dropped considerably over the past six
week, concurrent with the malaise in the overall stock market. I think
this is a good thing, setting us up for the next rally.
has managed to rise out of the absurdly complacent range into the more
balanced area. Last month I wrote that "we're clearly due to have
happen that will again stir volatility. And that doesn't mean a crash
is imminent. It just means that we're likely to experience greater
price swings, up and down, sometime in the coming months." This is
exactly what has come to pass. And I think that this too is bullish for the
What I'm Thinking and Doing
It's a confusing time in the US, and the world,
right now. The first stab at healthcare reform by the Trump
administration failed, but it doesn't seem to have completely gone away.
Tax reform is now being discussed, but it doesn't seem to have any
momentum. Immigration policies are a mess. The wall is . . . well I
have no idea what the status of the wall is. The Fed looks to increase
rates further this year and prepare the country for a time, probably
next year, when it will begin to shrink is massive (over $4
trillion!!!) balance sheet. Trump's inner circle seems to be a
revolving door, with his son-in-law Jared Kushner seeming to have the
upper hand these days. We'll see who's in charge by this time next
month. North Korea is firing test missiles, and we're dropping MOAB's
on Syria. Turkey seems to be moving towards authoritarian rule and
Russia did, or did not, tamper with our elections and did, or did not,
conspire with Trump allies before the election. And this is
all just the tip of the iceberg. I just don't want anyone to feel like
things are spinning out of control or that they should simply give up,
because I don't feel that way.
So what's a rational investor to do in the face of
all this uncertainty? Breathe deeply, be patient and follow your
financial and investment plan. Don't jump on any "hot" fads. Watch your
trailing stops. Be willing to cut losses quickly but let winners run.
Look for clear investable themes. And whatever happens; DON'T PANIC.
It was a very quiet quarter for my
business. My only new positions were two micro-cap tech stocks that I
bought for very few people. Otherwise, decided to wait for a meaningful
dip in the market before I put
any new cash to work. It takes patience to sit on the sidelines,
effectively doing nothing, while the market continues to rise. But
that's how you avoid the trap of buying at market peaks. I did
sell two ETF's that had
dropped 10% from their highs. Those trades were part of my philosophy
to cut losers quickly while letting my winners ride. Disciple is one of
the best traits of a successful investor.
News and Notes
I want to thank the dozens of you who made it to Saltaire and
Armonk house last month to party with Kathiryn and her band, Merlin.
The crowds were raucous and the band continues to get better and better. The
good news is that Merlin will be back at Saltaire in Port Chester on
May 13, so I hope to see many of you on the dance floor. If If you want
more information, either check out their Facebook page or email me for
the details. If you want, just let me know and I'll add you to the
distribution list for all announcements of upcoming gigs.
It's hard to believe, but Nola is graduating college next month with
a Bachelor of Arts in Theater!! It seems like only yesterday that we dropped her off at Wesleyan. Now
she's applying for jobs in set design and stage management in the
theater industry. I'm so proud of her and excited for her future. Lily is set to finish
her Freshman year at GW where she is taking courses towards a major in
political communications and a minor in history. She has been working for
Congresswoman Nita Lowey this year and is actively seeking internships in the DC area
this summer. And Ezra has decided to forgo employment this summer in
lieu of traveling the world. He'll spend a month doing incredible
things in Iceland and around the French alps. Who's got it better than him? I want his
summer. Finally, Kathiryn and I still have an adorable and loving
little kitten who wants a loving family to adopt her. Any takers out
That's it for this month. I'm so happy that winter
is behind us and that warm weather has arrived. I love looking outside
at the flowers in bloom.
I look forward to communicating with you again next month. If you have
any questions, please don't hesitate to contact me.
and Views", Copyright, Werlinich Asset Management, LLC and
www.waminvest.com. All Rights Reserved.