Stocks Teeter, But Do Not Fall
Thinking and Doing
After taking a little breather in late August -
September, thanks largely to North Korea and Hurricanes Harvey, Irma
and Maria, stocks resumed their ascent through the end of October.
Over the past week, stocks have teetered a bit thanks to the
uncertainty surrounding the debate on tax reform. Corporate earnings continue to
be strong, the Fed has signaled the next rate hike and the economy
looks to be on good footing. Barring a collapse of those negotiations, and a
shutdown of the federal government in December, there's no reason to
think that the bull market won't continue at least through the end of
As we look at the chart of the #DJIA so far this
year, we continue to see a very
bullish primary trend leading to a record high earlier this month. The
current price is well above both the
50-day and 200-day
moving averages, with interim support around
22,250. Unless Washington DC figures out how to screw things up, which
is a very strong possibility, stocks should finish the year strongly.
If they do blow things up, it could provide a very good buying
After making a new record high in October, the
Transportation Average rolled over and fell 7.0% over the next month,
almost mirroring the results of the prior rise and fall. I would prefer
more strength in this sector to validate the gains of the broader
market. Still, this could be a good buying opportunity.
The Dow Jones
Average has advanced almost 20% this year, not bad for a collection of
stocks meant for "widows and orphans". Historically low
interest rates continue to benefit this
rate-sensitive sector and there is no reason to get off this train
yet., even knowing that rates are likely going up next month.
to the Department of Labor, the
figure for seasonally-adjusted initial jobless claims for the week
ended November 11 was 249,000, a large drop from two months ago. The
four-week average of 237,750 is down about 25,000 from that same point
two months ago.
non-farm payroll employment report in October
was strong, as 261,000 jobs were gained in the month,
and 90,000 net jobs were added in the
prior two months. The household survey reported that the unemployment
rate edged down to 4.1%, while the labor force
participation rate fell to 62.7. Average hourly wages
for blue collar workers dipped to $22.22 while the average
work week held steady at 33.7 hours.
6.5 million workers were counted as
unemployed, down substantially from two months ago, while 1.6 million
unemployed longer than 27 weeks. The seasonally
adjusted number of people who could only find part-time work
4.8 million while the number of marginally attached workers
remained at 1.5 million. The number of people holding
jobs rose to 7.41 million. All of this resulted
in the U-6 "underemployment" rate falling to a new low of 7.9%. This
report helps to give the Fed a clear path to raising their lending rate
in their December meeting.
Congressional Budget Office (CBO) reported that on a net
basis, the nation's budget surplus was $8 billion in September, which
resulted in a deficit of
$668 billion for fiscal 2017, $82 billion more than the
shortfall recorded during the
same period last year. The CBO further reported a deficit of $62
billion in October, $17 billion more than the prior year.
Census Bureau reported that privately owned housing starts
increased 13.7% in October to 1,290,000, which is down 2.9% from a
year ago, but still the highest number of the year. I imagine a lot of
new homes will have to be build after the various storms in August and
Census Bureau reported that on a seasonally adjusted annualized
basis, 667,000 new homes were sold in September,
a huge increase of 18.9% from August, and 17.0% lower than a year ago.
The estimate of
the number of homes for sale was 279,000, representing 5.0
months of inventory at the current rate of sales. The median sales
price was $319,700, up slightly from the revised figure from
the prior month, and about $4,000 more than the 12-month moving
average price of $315,408.
National Association of Realtors reported that 5.39 million existing
homes were sold in September, up fractionally from the
prior month, and down 1.5% from a year
ago. The estimate of the number of homes for sale was 1.9 million,
representing only 4.2 months of inventory at the current
rate of sales. The median price was $245,100, lower than the prior
month, but still slightly above
the rising 12-month moving average price of $242,583.
Conference Board reported that its index of Leading Economic
Indicators (LEI) fell 0.2% in September, following a gain of
0.4% in August. "The
US LEI declined slightly in September for the first time in the last
twelve months, partly a result of the temporary impact of the recent
hurricanes," said Ataman Ozyildirim, Director of Business Cycles and
Growth Research at The Conference Board. "The source of weakness was
concentrated in labor markets and residential construction, while the
majority of the LEI components continued to contribute positively.
Despite September’s decline, the trend in the US LEI remains consistent
with continuing solid growth in the US economy for the second half of
to the "advance" estimate by the Bureau of Economic Analysis,
GDP increased at an annualized rate of 3.0% in Q3 2017. This is down
fractionally from the 3.1% reported in Q1, but up
substantially from the modest 1.4% growth in Q1
and the 2.1% from Q4 2016. Still, it's a
little below the 3.5% from Q3 2016. Like the
employment figures, I expect this will give the Fed cover to raise
their lending rate in December.
to the BLS, the seasonally adjusted Consumer Price Index for all Urban
Consumers (CPI-U) rose 0.1% in October, after a strong 0.5% jump
Over the last twelve months, the index rose 2.0%, right on
the 2.0% goal sought by the Fed.
Conference Board's Consumer Confidence Index increased to 125.9 in
from 120.6 (revised) in September. "Consumer
confidence increased to its highest level in almost 17 years (Dec.
2000, 128.6) in October after remaining relatively flat in September,"
said Lynn Franco, Director of Economic Indicators at The Conference
Board. "Consumers' assessment of current conditions improved, boosted
by the job market which had not received such favorable ratings since
the summer of 2001. Consumers were also considerably more upbeat about
the short-term outlook, with the prospect of improving business
conditions as the primary driver. Confidence remains high among
consumers, and their expectations suggest the economy will continue
expanding at a solid pace for the remainder of the year."
Don't look now, but after falling non-stop for nine
months, the dollar index may have finally bottomed and begun to move
higher. The decline in the value of the dollar provided a nice tailwind
to the profits of the large multi-national corporations. Should the
dollar rise too much, that could easily become a headwind. The first
level of resistance is at $95.
After bottoming at around 2.0%, the yield
Treasury bond has moved higher over the past two months, likely
reflecting the upcoming Fed rate increase. Could this finally be the
beginning of a steady increase in rates, or is this simply a blip in
the unnaturally low interest rate environment? Time will tell.
price of a barrel of West Texas Crude rallied about 35% in the four
months after the June
low. It even managed to breach resistance at $55, before peaking around
$58. While I appreciate the rally, I don't believe in its health; I
would not bet on further gains. Indeed, I think we'll see $50 before
After falling just short of the year-old high set
last August, the price of gold fell back through support at $1,300. In
September I would that "should tensions in Korea subside, and Mother
Nature stop sending storms our way, I would expect the price of gold
the mid-$1,200s." That forecast has almost come to pass.
The Nasdaq Composite,
led by the FAANNG stocks (Facebook, Apple, Amazon, Netflix, Nvidia and
continues to be an unstoppable force of nature. The party cannot, and
will not, continue forever; but for now, there is no reason to jump
After breaching resistance around $25.50, the index
representing the financial sector reached a new apex early
this month. The sector has subsequently dipped, but remains above
interim support around $25.75. Last time I wrote that
"the index is more likely to move above resistance than
fall below support." I still think the sector has more gains ahead as
In the last newsletter I wrote that "I think the
decline last month
appears to be nothing more than a buying opportunity. As long as rates
remain near 2%, nothing should stop this rally." That certainly proved
to be correct as the index soared to new heights.
This chart has been a wonderful contra-indicator
this year. Until September, the index continued to fall even as stocks
continued to rise. Since bottoming in August, sentiment has improved,
but it could hardly be considered wildly bullish. As a result, I think
this rally has more legs.
What I'm Thinking and Doing
There are about six weeks left in the year. I
anticipate that the market will finish the year slightly higher than it
is right now. The market anticipates a December rate hike, and it's
highly likely that will happen. Their plan to gradually reduce their
balance sheet seems to be going well so far. The market also expects
Congress to pass a tax bill; that may be a bit more problematic. If
that tax legislation does not come to fruition, we could experience a
solid decline. An even more precipitous drop could happen if Trump and
Congress can't find a way to keep the doors of the government open with
the needed spending bill. I do think that some new tax legislation will
eventually pass Congress, but it's not likely to be in its current
form. Given that, I think we'll have one more buying opportunity ahead.
Since I wrote to you last, I bought an initial
stake in a leading fin tech company, added to a large pharmaceutical
holding and doubled my position in a leading medical equipment
company. At the same time, I eliminated my stake in a leading
prepared food company. Looking towards the end of the year, I am quite
happy with the overall performance of my portfolios this year, and
almost all of my holdings. There are three or four micro-caps
that I will have to make a decision on before Christmas, but they are
relatively small holdings, and they may yet turn around.
News and Notes
I have to take a moment here to brag about my son.
I just found out today that Ezra scored a 1,540 (out of 1,600) on the
SAT's. He also scored a 33 (out of 36) on the ACT. I couldn't be more
proud of him. Now comes the tough part; waiting to hear from colleges.
If anyone out there has a close relationship to either Carnegie Mellon
or Lehigh, please let me know. Any help there would be greatly
appreciated. There is nothing new to report on the girls; they are both
doing well and enjoying life in Washington DC.
As for our "other" daughter, Naima has adjusted
very well to life in the U.S. After two months with us, she is doing
well in school and training hard with her swim team. It's ironic that
after a lifetime of competitive swimming I am now a swim team parent
for the first time. In fact, she's competing in a meet this weekend in
Wilton, CT. Go Marlins!!
Kathiryn and I celebrated our three-year wedding
anniversary this week. We have managed to create a wonderful life
together in the six and a half years since we met. We have
managed to blend work, family, philanthropy and personal time to create
an almost ideal life. I'm truly blessed. I also get to see Kathiryn
perform next weekend, Saturday the 25th, at Armonk House in Armonk, NY.
So if there are any readers in town for the holiday weekend, come out
and join us for a fun night of great music.
That's it for this month. I want to wish you and
your loved ones a very Happy Thanksgiving. 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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