NEWS AND VIEWS
Werlinich Asset Management, LLC
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greg@waminvest.com
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April 17, 2017


The Bloom May Be Off The Rose

Current Market Analysis
Key Economic Statistics
Trends To Watch
What I'm Thinking and Doing
News and Notes



Current Market Analysis

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 its citizens. 

Unfortunately, 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 St. adage: "Don't Fight The Tape". Basically, that means keep riding the trend, until it 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 opportunity. 

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

  • According 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.
  • The 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 past year.
  • 7.2 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.
  • The 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 blamed largely on a increase in outlays.
  • The 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.
  • The 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.
  • The 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.
  • According 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.
  • The 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.
  • According 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 few months.
  • According 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 increases.
  • The 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."

Trends To Watch

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 short-term.

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.

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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. 

The index representing the developed international 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. 

The 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. 

The VIX 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 something 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 future.



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 there?

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.

Best regards,


Greg Werlinich
President


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