Werlinich Asset Management, LLC

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November 14, 2016

We Got Trumped

Current Market Analysis
Last Month's Results
Statistics to Watch
Trends To Watch
What I'm Thinking and Doing
News and Notes

Current Market Analysis

At least it's over. America, and perhaps the world, has been Trumped. And that's all I plan to say about it. There's no point in looking back; it's time to look forward. And to try and divine what a Trump presidency might mean for the stock market and the economy. So starting this month, that's what I'm going to do. I wasn't planning on writing another newsletter this year, but I felt that so much has happened, I should communicate one more time with my readers. 

Amazingly, although the Dow Futures were down almost 850 points as it grew more apparent that Trump would emerge victorious, the market turned around the next day and finished more than 200 points higher. The gains continued over the next two days, helping the broad market averages set new record highs. Indeed, the 959.38 points added by the Dow Jones Industrial Average for the week was the best weekly performance in over five years, and powered the #DJIA to a record closing price of 18,847.66, surpassing the prior record of 18,636.05 on August 15. The S&P500 remains only 25.70 points below it's closing high from August 15. Overall, the broad market looks to be in pretty good shape. 

I've been saying since January that I felt the stock market would enjoy modest gains this year, and it's looking more and more like that's exactly what will happen. If the market can survive, and even thrive, after Donald Trump won the election, then it seems as though only the Fed stands in the way of the market finishing the year in the black. The Fed have been telegraphing a 25 basis point increase for months, so if they go through with it, the market should absorb the news fairly well. At least that's the theory. We'll see what happens next month. 

Looking at the chart of the #DJIA, we see the gradual decline in August, September and October, followed by a steeper drop heading into election week, Then we see the violent surge higher, taking the index right through resistance to a new record high. I suggested last month that we would "remain in this channel until after the election. If Clinton wins, we could see a bounce to a new high. Should Trump prevail, we'll likely tumble below interim support at 18,000 and possible test major support around 15,750." I was right about staying in the channel, but completely wrong (fortunately) about what would happen should Trump prevail. 

The chart of the Dow Jones Transportation Average, continues to look better and better, as the prospects for an improved economy grow brighter. President-Elect Trump pledged huge tax cuts and a massive improvement to our infrastructure, both of which bode well (at least initially) for economic growth. The index blasted through an important resistance level around 8,250, and has attained a new 18-month high. The record high, set in late 2014, is not so far away. Should this index continue to move higher, it would be a strong indication of good things to come for the market and the overall economy.

As you can see below, the Dow Jones Utility Average is not looking so good. To be honest, I'm not sure why things turned bad in July, other than the possibility of the rate increase that is forecast for the end of the year. Even so, a 25 basis point rate increase should not crater this sector, which thrives when dividend yields are relatively higher than the yields on "risk-free" government bonds. As rates rise, the difference between the two payouts shrink, decreasing the appeal of utility stocks. If support around 610 is violated, it may be a signal to reduce exposure to this sector. 

After falling to 1.33% in July, which was the lowest rate in recorded history, the yield on the 10-year treasury bond moved steadily higher for three month. Then last week it exploded higher, reaching the highest level since January. The Treasury yield is now just over 2.1%, and moving higher still. I think rates are moving higher on the assumption of a December rate increase, a stronger dollar (see below) and a rotation from bonds to equities. The question is, "how high can they go?" I don't think we'll see 3% any time soon, but time will tell.

Last Month's Results

Even though equities are still solidly in the black for the year, the broad market averages were actually down slightly for three months in a row. I was completely wrong about who would win the election, and equally wrong about what would happen if Trump won. While US government bonds continued to produce positive results (not so much the last few weeks, during which the losses are building up), they were still outperformed by most of the broad domestic averages, and value continues to beat growth. Now we just wait to see what happens with the Fed in December.

Name of Index





S&P 500




Large-cap stocks

Dow Jones Industrial Average




Large-cap stocks

NASDAQ Composite




Large-cap tech stocks

Russell 1000 Growth




Large-cap growth stocks

Russell 1000 Value




Large-cap value stocks

Russell 2000 Growth




Small-cap growth stocks

Russell 2000 Value




Small-cap value stocks





Europe, Australia, Far East

Barclays Aggregate




US government bonds

Barclays High Yield




High-yield corporate bonds

* Returns include the reinvestment of dividends

Statistics To Watch

  • According to the Department of Labor, the figure for seasonally-adjusted initial jobless claims for the week ended November 5 was 254,000, a drop from the prior week, and about the same as the prior month's figure. The four-week average of 259,750 was about the same as the tally from last month. The number of jobless claims continues gradually decline. About 2.04 million people continue to collect unemployment insurance, which is the lowest level since July 2000.
  • The non-farm payroll employment report in October was slightly below expectations, as 161,000 jobs were gained in the month, while 44,000 net jobs were added in the prior two months. The household survey reported that the unemployment rate remained at 4.9%. The labor force participation is 62.8, where it's been for most of the year. Average hourly wages for blue collar workers rose to a new high of $21.72 while the average work week remained at 33.6 hours for eight of the last nine months.
  • 7.8 million workers were still counted as unemployed, and 2.0 million people remained unemployed longer than 27 weeks. The seasonally adjusted number of people who could only find part-time work dipped to 5.9 million while the number of marginally attached workers held at 1.7 million. The number of people holding multiple jobs has increased to 8.05 million. All of this means the comprehensive U-6 "underemployment" rate fell to 9.5%. Our economy remains close to "full employment".
  • The Congressional Budget Office (CBO) estimated that on a net present value basis, the Treasury reported a budget deficit of $587 billion in fiscal 2016, $148 billion more than the last fiscal year. The deficit, as a percentage of GDP, grew from 2.5% to 3.2%. The deficit in October was $46 billion, far lower than the prior year, thanks entirely to the difference in the timing of payments year-over-year.
  • The Census Bureau reported that privately owned housing starts fell 9.0% to 1,0147,000 in September, down for the second straight month, and was 11.9% lower than a year ago. New building permits were rose 6.2% from the prior month and were up 2.2% from the year before.
  • The Census Bureau reported that on a seasonally adjusted annualized basis 593,000 new homes were sold in September, up 3.1% from August, and 29.8% from a year ago. The estimate of the number of homes for sale was 235,000, representing a slim 4.8 months of inventory at the current rate of sales. The median sales price was $313,500, near the highest total of the year, and well above the 12-month moving average price of $305,850.
  • The National Association of Realtors reported that over 5.4 million existing homes were sold in September, up 3.2% from the prior month, and roughly flat from a year ago. The estimate of the number of homes for sale was 2.04 million, representing a tiny 4.5 months of inventory at the current rate of sales. The median price was $234,200, up 5.6% from last year, and about $5,000 above the rising 12-month moving average price. Overall, the housing picture looks solid if unspectacular.
  • According to the Institute for Supply Management (ISM), economic activity in the manufacturing sector expanded again in October, rising from 51.5 to 51.9. The ISM index of non-manufacturing activity was 54.8, down from 57.1, which still signaled growth in the service sector for 81 consecutive months.
  • The Conference Board reported that its index of Leading Economic Indicators (LEI) increased 0.2% in September, following a decline of 0.2% in August. "The U.S. LEI increased in September, reversing its August decline, which together with the pickup in the six-month growth rate suggests that the economy should continue expanding at a moderate pace through early 2017," said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board. "Housing permits, unemployment insurance claims, and the interest rate spread were the main components lifting the index in September. Overall, the strengths among the leading indicators are outweighing modest weaknesses in stock prices and the average workweek."
  • According to the "advance" estimate by the Bureau of Economic Analysis, GDP increased at an annual rate of 2.9% in Q3 2016. This compares favorably with 1.4% in Q2, 0.8% in Q1 and 1.4% in Q4 2015. It even managed to surpass the 2.0% achieved in Q3 2015. This report, will help give the Fed cover to increase its lending rate by 0.25% in December.
  • According to the BLS, the seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) increased by 0.3% in September, after an 0.2% increase in August. The index for all items less food and energy increased by only 0.1% in the month. Over the last 12 months, the all items index rose a modest 1.5%. No matter what the Fed does or wants, inflation remains below their 2.0% target.
  • The Conference Board's Consumer Confidence Index decreased to 98.6 in October from 103.5 in September. Consumer confidence retreated in October, after back-to-back monthly gains," said Lynn Franco, Director of Economic Indicators at The Conference Board. "Consumers' assessment of current business and employment conditions softened, while optimism regarding the short-term outlook retreated somewhat. However, consumers’ expectations regarding their income prospects in the coming months were relatively unchanged. Overall, sentiment is that the economy will continue to expand in the near-term, but at a moderate pace."

Trends To Watch

The dollar index looks to be forming a jagged, yet quite discernable "V" pattern. It began the year around 100, fell to around 92 at the end of May, and has returned (as I write this) to 100 here in mid-November. Normally a strong dollar would mean a weak stock market, but that has not yet been the case. Eventually, this strength in the currency will impact the earnings of our big multinational corporations.

After twice this year failing to move above resistance at $52, the price of West Texas Crude is rolling over and heading lower again. This could be happening partially because of the strength in the dollar, and partially on concern that OPEC may not, as expected, but in some production curbs. Also, if a Trump presidency allows further pipelines from Canada, and more drilling in general, both of which could increase domestic supply, it could result in even lower prices going forward. 

The price of gold is getting clobbered since the election. As with oil, a stronger dollar diminishes the relative value of gold. Also, as it appears, at least for now, that Armageddon has not occurred since Trump's victory, some of the reason for owning gold is waning. And finally, higher interest rates may also lessen the desire to hold gold, which does not pay any interest. 

The chart of the Nasdaq Composite paints a rosy picture. Except for a couple of brief swoons in the summer, this index has moved inexorably higher for the past eight months. Until election day. You can see it here, but tech stocks have been getting creamed in the past week as investors are worried about retribution by President-elect Trump for Silicon Valley's support of Hillary Clinton, and because of possible trade wars hurting these large, multinational business. Alphabet (GOOGL), Amazon (AMZN) and Apple (AAPL) in particular are bearing the brunt of the selling. As a result, I think there will be a very interesting buying opportunity in those names sometime soon. 

The financial sector appears to be another beneficiary of the Trump victory as the thinking goes that he will repeal Dodd-Frank, and perhaps other regulations, thereby releasing banks from some of their regulatory shackles. In addition, higher interest rates means higher lending margins, which will goose earnings. As you can see, the index has surged to a new high, rewarding patient investors. I told you last month that "my financial stocks are long-term holdings and I'm not selling anything" ; that has proven to be a good call. 

I'm not sure what impact Trump may have on the housing sector. Rising rates could be a bit of a drag on the sector longer term. More immediately though, if people think rates are moving higher, there could be a short-term spike in transactions as a buyers try to close before rates move up appreciably. So looking ahead, I would expect the index to remain in the trading range outlined between the dotted green and the solid red. 

Given all the pronouncements of treaties (like NAFTA and TPP) being ripped up, and possible trade wars, I would continue to stay away from the index for developed international markets. Even if none of that comes to pass, thanks to negative interest rates and low (or no) economic growth, it's hard to make a case for any real gains in these markets in the near future.

The NYSE Bullish sentiment index has traded in a fairly narrow range for the better part of the last nine months. It's interesting to note that after briefly falling through support earlier this month, the price is just now moving higher. This suggests that the current rally probably has further to go. 

After dropping to absurdly low levels over the summer, the price of the volatility index, or the VIX, got busy again starting in September. Volatility moved even higher last week, peaking around Election Day. And yet even with the surprise result, the index did not break through resistance at 24. And now, only a few days after the election, the VIX has dropped almost 40%, back to the balance section of the trading range. Just amazing. 

What I'm Thinking and Doing

In order to give you some clarity on what I'm thinking today, I'm going to provide an excerpt of an email I sent to my clients last week, the day after the election.

"Well, this isn’t the letter I thought I’d be writing today. There’s no secret as to where I sit on the political spectrum. Like many of you, I’m upset and disheartened by the results of the election. I clearly got that one wrong, as I felt strongly that Hillary, and common sense, would prevail. That being said, I also believed that a Trump victory would result in stock market carnage, and so far, that too has proved to be wrong.

The surprising fact is that the market is trading between flat and modest gains so far this morning [11/9]. So at least for today, the 5-10% loss I was expecting has not materialized. So what does this mean for us (financially, not morally or socially)?
    1. The pharmaceutical and biotech sectors are soaring, as they had been sinking on fears that Hillary would have imposed draconian price controls. This helps us.
    2. The defense sector is soaring, for a number of possible reasons. This helps us.
    3. Our two key railroad holdings are up, presumably on expectations of infrastructure spending and greater economic growth. This helps us.
    4. Tech is down big, along with consumer staples, food and beverage, thanks to the possibility of Trump instigated trade wars hurting the large multi-national companies. This hurts us.
    5. REITs and utilities are down today as rates increased, I suppose on the thinking that we’ll have a more hawkish monetary policy. This hurts us.
    6. Energy is neutral; longer term this sector could benefit from less price controls. That would help us.
    7. Large cap industrial stocks are up thanks to the infrastructure play I mentioned earlier. This helps us.
    8. The finance sector is broadly up, especially the banks, as higher interest rates would goose earnings. This helps us.

So where does this leave us? On balance, we’re probably neutral for now. Looking ahead, it’s really hard to tell. The biggest question is trade. Will he really attempt to abrogate NAFTA? Will he rip up other trade deals? Will he start a trade war? Or was all of his bluster simply campaign rhetoric to garner votes (it worked)? Only time will tell.

So for now, I may make some modest tweaks between now and the end of the year, but I’m unlikely to make any substantive changes. As always, if you have any questions about your specific situation, please feel free to contact me at your convenience. And as usual, I thank you very much for your continued faith and support."

I think that letter pretty well covers what I'm thinking. As for what I"m doing, I'm going through all of my holdings, trying to identify and individual securities, or sectors, that may be fundamentally disadvantaged by a Trump Presidency. Or any holdings that have fallen to "mental stop" levels. I'll spend the next six weeks sifting through everything and making decisions as to what, if any, holdings should be sold. For now, I'm sitting tight. 

I've worked hard over the past five or six years to cull my smallest and weakest positions. On October 31, 2011, I held 156 total securities through WAM. Today, I hold only 99. Some of that occurred through client attrition, but most of it was a conscious decision on my part to focus my holdings on my best ideas. I expect this basic trend to continue into next year. For the most part, except for two busy weeks during broad market declines, this has been a pretty quiet trading year for me, and I don't expect that to change between now and the end of the year. 

News and Notes

There is little new to report on the home front since last month. The kids are all working diligently at school. Nola is starting to think about life after college. Lily is looking for summer intern programs. Ezra is prepping for the SATs. The good news is that the family will be all together next weekend for Thanksgiving, then again next month for Christmas vacations. It'll be good to have the girls back home. 

Today is special as Kathiryn and I celebrate our second wedding anniversary. It really is hard to believe that we've only been married for two years. While we've been together for a little over five years, the time has really flown by. I am beyond blessed to have such a spectacular woman in my life. She has made everything brighter and more beautiful for me. In every sense of the word, and in every possible way, she is my ideal partner and I cannot be happier to have married her two years ago. I love you Babe!

Finally, many of you know of my deep commitment to philanthropic causes. You also may know that I am a very active member of the Board of Directors of the Food Bank for Westchester. For the next six weeks, thanks to a very generous offer by the Bank of America, donations made through their website, under the auspices of Feeding America, can be TRIPLED!! Any single donation, up to a maximum of $1,000, will become $3,000, up to a total of $75,000. All you have to do it go to, fill in a dollar amount, put in the zip code "10523", then click "your local food bank", and the Food Bank for Westchester will receive the proceeds. If you give a gift of $100, we will receive $300, which means we'll be able to buy $1,200 worth of food to help feed our hungry neighbors, who total about 200,000! So thank you in advance for your consideration and your generosity.

That's it for now. I look forward to communicating with all of you via twitter, my blog and this newsletter throughout the rest of the year. I wish all of you a very Happy Thanksgiving. Maybe you can donate a turkey to a local soup kitchen or food pantry, or go serve a meal one night. It's an experience you'll never forget. 

Best regards,

Greg Werlinich

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