Can Fear and Rhetoric Kill The
Thinking and Doing
After ascending to multiple record highs, the stock
market took a little breather last week, precipitated mostly by the war
of words (only words, for now) between Donald Trump and Kim Jong-un,
both of whom appeared willing to bring their two nations to the brink
of armageddon with fiery rhetoric and threats of annihilation.
Fortunately for the rest of the world, that apocalyptic future is VERY
unlikely, and therefore the broad selloff in equities was equally
without merit. And based on the futures this morning, the market is set
for a nice rebound today. Still, as forward-looking investors, we need
to keep in mind that our president could, at any moment, do or say just
about anything, and that his capriciousness could have a big impact on
the market, positively or negatively.
As we look at the chart of the #DJIA so far this
year, even with the selling last week, we continue to see a very
bullish primary trend. The current price is well above both the
50-day and 200-day
moving averages, and interim support around
21,200. Q2 earnings, on balance, were better than
expected, and early indications suggest that Q3 will be more of the
same. This suggests that, barring any "Black Swan Events", the
rally should continue.
After a long and arduous climb to record heights in
early July, the Dow Jones
Transportation Average subsequently plunged over three weeks to test
support at 9,100. After a brief rally, it fell a second time to
again test the 9,100 level last week. This weakness in the face of
general market strength is worrisome. I would feel much better if this
index were to retrace its steps and rise back to the July highs.
After digesting the Fed rate hike in June, and
testing support around 695 in early July, the Dow Jones
Average surged over the next five weeks to return to match the record
high set in early June. Low interest rates continue to benefit this
rate-sensitive sector. Last month I noted that "the
yield on the 10-year treasury has barely budged (see below), which
suggests that the sector could regain some of those
losses." That is exactly what has come to pass.
to the Department of Labor, the
figure for seasonally-adjusted initial jobless claims for the week
ended August 5 was 244,000, which is roughly in line with the
same range of
figures we've seen all year. The four-week
average of 241,000 is down by about 17,000 from the beginning of the
non-farm payroll employment report in July again exceeded
expectations, as 209,000 jobs were gained in the month,
and an additional 2,000 net jobs were added in the
prior two months. The household survey reported that the unemployment
rate inched back down to 4.3%, while the
participation rate inched up, for the third straight month, to 62.9 as
more people entered the labor
force. Average hourly wages for blue
collar workers rose to a new high of $22.10 while the average work
week held steady at 33.7 hours.
7.0 million workers were counted as
unemployed, while 1.8 million people remained
unemployed longer than 27 weeks. The seasonally
adjusted number of people who could only find part-time work held at
5.3 million while the number of marginally attached workers
crept stayed at 1.6 million. The number of people holding
jobs rose to 7.30 million. All of this resulted
in the U-6 "underemployment" rate holding at 8.6. Once
again, this was a
very solid report, showing that the labor market continues to
make slow and steady
Congressional Budget Office (CBO) estimated that on a net present value
basis, the nation's budget deficit was $45 billion in July,
about $68 billion less than the deficit from a year ago, although
timing helped to reduce the deficit.
This resulted in a deficit of
$568 billion for the first ten months of
fiscal 2017, $56 billion more than the shortfall recorded during the
same period last year.
Census Bureau reported that privately owned housing starts
increased 8.3% in June to 1,215,000, up from the lowest level of the
year, and up 2.1% from a
year ago. A lot more homes will have to be built, and sold, in order to
benefit the new home sale market.
Census Bureau reported that on a seasonally adjusted annualized
basis, 610,000 new homes were sold in
up 0.8% from May, and 9.1% from a year ago. Note that the sales figures
for the last three months were all revised lower. The estimate
the number of homes for sale was 272,000, representing 5.4
months of inventory at the current rate of sales. The median sales
price dropped to $310,800, down from the revised lower number from the
prior month, and
about $2,000 less than the 12-month moving
average price of $312,983.
National Association of Realtors reported that 5.52 million existing
homes were sold in June, down 1.8% from the
prior month, and up 0.7% from a year
ago. The estimate of the number of homes for sale was 1.96 million,
representing only 4.3 months of inventory at the current
rate of sales. The median price was $263,800, which is well above
the rising 12-month moving average price of $239,475. The market for
existing homes continues to be more robust than the one for
Conference Board reported that its index of Leading Economic
Indicators (LEI) increased 0.6% in June, following a gain of
0.2% (revised) in May and 0.2% in April. "The
U.S. LEI rose sharply in June, pointing to continued growth in the U.S.
economy and perhaps even a moderate improvement in GDP growth in the
second half of the year," said Ataman Ozyildirim, Director of Business
Cycles and Growth Research at The Conference Board. "The broad-based
gain in the U.S. LEI was led by a large contribution from housing
permits, which improved after several months of weakness."
to the "advance" estimate by the Bureau of Economic Analysis,
GDP increased at an annualized rate of 2.6% in Q2 2017, up
substantially from the modest 1.4% growth in Q1. This is in
the middle of the 2.1% rate of growth from Q4 2016 and the
3.5% from Q3, but compares well the 1.4%
growth rate in Q2 2016. This figure should help to forestall any Fed
rate increases before December.
to the BLS, the seasonally adjusted Consumer Price Index for all Urban
Consumers (CPI-U) rose 0.1% in July, after being flat June.
Over the last twelve months, the index rose 1.7%, still below the level
sought by the Fed.
Too many poor months like the last six and the Fed will have
to postpone their
next rate hike until sometime next year.
Conference Board's Consumer Confidence Index increased to 121.1 in July
from 117.3 (revised) in June. "Consumer
confidence increased in July following a marginal decline in June,"
said Lynn Franco, Director of Economic Indicators at The Conference
Board. "Overall, consumers foresee the current economic expansion
continuing well into the second half of this year."
This has really been one of the key stories of the
year. The value of the dollar
index has been in a steady decline for the past seven months,
falling against almost all other currencies, as it descends to a
15-month low. This has had a very salubrious effect on the bottom lines
of our large, multi-national companies and our tourism industry, as it
has become less expensive for foreign visitors to spend their money
While the yield on the 10-year
Treasury bond has traded
between 2.1% and 2.6% for the past nine months, you will notice that,
in general, the primary tend is downward (see channel in blue). If this
trend were to continue, the yield would likely break support at 2.1%.
This would result in a very flat yield curve, which would suggest a
forthcoming recession. So we will continue to keep a careful watch on
For all of 2017, the
price of a barrel of West Texas Crude has made lower highs and lower
lows as it seeks to find a consistent price (see purple channel).
Unless you're trading oil futures, this is a pretty bearish picture,
accurately representing the fundamentals of current supply and demand.
As a result, I continue to be underweight relative to my historical
exposure to this sector.
All of the saber-rattling last week about who would
bomb whom, with all the the attendant repercussions, sent the
price of gold higher, pushing it to a strong resistance level
at $1,300. Should tensions subside, which I think they will, then one
would expect the price of gold return to the mid-$1,200s.
The Nasdaq Composite,
led by the FAANG stocks (Facebook, Apple, Amazon, Netflix and Google),
is taking a bit of a breather, as you can see below. The current price
is just below the 50-day moving average, but still well above the
200-day. This doesn't concern me at all, as there have been a few
similar declines along the way so far this year without damaging the
general upward trend. I believe this will be more of the same.
Trading in the financial sector continues
range-bound, as you can see below, after
failing twice to breach resistance around 25.20 or support
around $22.65. Notwithstanding the recent decline, I still believe that
we'll see the index move above resistance around $25.25 before
falling below support.
Sticky low interest rates continue to
benefit the tight housing market. I think the decline last week was
nothing more than the baby being thrown out with the bathwater. And
even though the price of the index fell below the 50-day moving
average, I see no reason why the index can't continue to move higher.
I love this chart. The NYSE Bullish
sentiment index is surprisingly downtrodden considering how well stocks
have been performing this year. One
would expect greater levels of bullishness
since the market continues to surge to new record levels.
This lack of bullish sentiment is, as a contrary indicator,
What I'm Thinking and Doing
The market dipped a bit last week as investors
reacted negatively to the bellicose tone set by President Trump with
regards to North Korea. All of a sudden, there is concern that Trump
could instigate a nuclear war with Kim Jong Un. I'm sure saner heads
will ultimately prevail upon both of these crazy leaders that
compromises must be made by both sides in order to forestall a
cataclysmic event. Still, it could be a rough few weeks, or months,
before the rhetoric gets toned down. In the meantime, we could see
greater volatility on a day-to-day basis than we've witnessed all
The talking heads on CNBC, and other channels, keep
trying to forecast the next move by Janet Yellin and the Federal
Reserve. In my humble opinion, I think there is no chance that they
will hike rates again at their September meeting, and there is probably
only a 25-30% chance that their raise in December. Bottom line, there
simply is no real indication that inflation has kicked in, nor is it
likely that it will kick in over the next few months. And without
inflation, there is little reason to increase rates. Indeed, should
they raise rates too quickly, they risk squashing the tepid growth that
we have. So my bet is they won't increase rates again until next year,
at the earliest.
After a very busy few months, during which I made
several large, strategic trades in order to adjust my sector
allocations, it's been much more quiet since I last wrote to you. My
one purchase of any consequence was to add to an existing position in a
key technology company with a large stake in the mobile telephony and
automotive markets. Otherwise, just made a few small tweaks to specific
portfolios. Overall, it's been a good year for WAM's clients and I'm
hoping to keep it up through the end of the year.
News and Notes
The gang is almost back together. Nola returned home last week after two very hard months doing carpentry for the Williamstown Theater Company in Massachusetts. After two quick days of rest, she headed into NYC where she was the scenic designer for a small, original production called "Resistance" on the Lower East Side. The show wrapped on Sunday, which means that Nola gets to rest for two weeks before moving to Washington DC, where she will begin a one year fellowship program with Arena Stage. Lily returned home last weekend after spending the summer learning a ton as an associate in the Public Policy & Media Relations department at the American Society for Cell Biology in DC. She will get to enjoy three weeks home before returning to GW for her sophomore year. Ezra got home yesterday after spending two weeks hiking in and around the French Alps. He'll then have just over three weeks to chill before starting his senior year of high school. It will be very nice to have all three home, at the same time, for a couple of weeks.
As for me, I'm still trying
to rehab from shoulder
surgery in June while also dealing with the repercussions of developing
a somewhat rare neurological disorder called Parsonage Turner Syndrome.
On top of that, my back went out again over the weekend. I'm clearly
testing the theory that whatever doesn't kill you makes you stronger.
This hasn't exactly been the carefree and fun summer I was hoping for.
Kathiryn recently wrapped up a very busy period at
work and is looking forward to a little downtime before things ramp
back up in September. Between now and Labor Day, she and I are looking forward to
a few of her gigs, a Broadway show, a wedding and some time with
friends. We may even sneak out and head to a beach one day.
That's it for this month. I look forward to
communicating with you again next month. If you have
any questions, please don't hesitate to contact me.
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