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November 17, 2017

Stocks Teeter, But Do Not Fall

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

Current Market Analysis

After taking a little breather in late August - early 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 the year.  

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 opportunity.  

After making a new record high in October, the Dow Jones 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 Utility 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. 

Key Economic Statistics

  • According 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.
  • The 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.
  • About 6.5 million workers were counted as unemployed, down substantially from two months ago, while 1.6 million people remained unemployed longer than 27 weeks. The seasonally adjusted number of people who could only find part-time work fell to 4.8 million while the number of marginally attached workers remained at 1.5 million. The number of people holding multiple 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.
  • The Congressional Budget Office (CBO) reported that on a net present value 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. 
  • The 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 September. 
  • The 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.
  • The 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.
  • The 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 the year."
  • According 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. 
  • According 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 in September. Over the last twelve months, the index rose 2.0%, right on the 2.0% goal sought by the Fed. 
  • The Conference Board's Consumer Confidence Index increased to 125.9 in October 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."

Trends To Watch

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 on the 10-year 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. 

The 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 $60. .

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 return to 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 Google), 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 ship. 

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 rates rise. 

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.

Best regards,

Greg Werlinich

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