December 14, 2015

As of the close of business Friday, the Dow Jones Industrial Average stood at 17,265, which is essentially the same as when I wrote to you each of the last two months. That belies the big moves, up and down, that have happened in the interim (as you can see below). Last week was pretty poor, with the #DJIA falling by 582 points thanks in part (again) to questions about upcoming Fed moves and plunging oil prices. I'm really sounding like a broken record. I hope I'll be able to write about something different next year.

The carnage last week erased the minuscule gains for the year and reduced the #DJIA to a loss of 3.1% for the year. By itself, that isn't the end of the world. Given all of the uncertainty this year, and the correction in August, finishing the year down "only" 3% would almost feel like a victory.

Looking at the chart of the #DJIA we can see the almost identical rise and fall in each of the last two months. As a result, the index is again testing support at around 17,100. It would be very constructive for the overall market if support held and the index moved higher before year-end.

After showing some signs of life over the past few months, the Transportation Index has rolled over and headed lower, testing support around 7,450. This is bad news and portends larger troubles for our economy. I can't sugarcoat it; this really has me worried for the short-term health of the market.

The Dow Jones Utility Average has been churning in a range between 610 and 540 almost all year as the utility sector continues to battle the specter of looming interest rate increases. Here too the price has fallen below the moving averages and is ready to test support. This is another ugly chart.

For the past six months the yield on the 10-year treasury bond has continued to flit between 2.0% and 2.5%. Interestingly, for all the sturm and drang, the yield is essentially unchanged for the year. It's hard to make a case for it being appreciably different for the next few months.

Last Month's Results

After a powerful rally in October, the gains in November were relatively tepid, unless you owned large-cap growth stocks like Alphabet, Netflix, Facebook or Amazon.com. Going in to the final month of the year, it appeared that the broad market averages would be able to finish in the black, albeit modestly. That was before the market plunged last week, leaving its year-end fate in doubt. It's been very tough to make money in equities this year as only a narrow slice of the market has been able to record significant gains while the rest have wallowed in mediocrity, or worse. With two weeks left in the year, it appears that the price of oil, and a big decision by the Fed, will determine whether the market ends the year in the black or the red. 

* Return numbers 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 December 5 was 282,000, 13,000 higher than the prior week, and about 6,000 higher than the prior month's figure. The four-week average of 270,750 was slightly higher than the tally from a month ago. About 2.24 million people continue to collect unemployment insurance, about 73,000 more than last month. 
• After a big surprise to the upside in October, the non-farm payroll employment report in November was roughly in line with expectations as 211,000 jobs were gained in the month, while revisions added back 36,000 jobs to the September and October totals. The household survey reported that the unemployment rate held steady at 5.0% while the labor force participation rate managed to tick up to 62.5. Average hourly wages for blue collar workers inched up to a new high of $21.19 while the average work week remained at 33.7 hours.
• 7.9 million workers were still being 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 rose to 6.0 million while the number of marginally attached workers fell to 1.7 million. The number of people holding multiple jobs dipped slightly to 7.5 million. All of this helped the comprehensive U-6 "underemployment" rate tick higher to 9.9%. This relatively good report wakes it more likely that the Fed will begin raising rates in December.
• The Congressional Budget Office (CBO) estimated that on a net present value basis, the Treasury reported a budget deficit of $64 billion in November, about $7 billion more than the shortfall recorded in the same period last year. This leaves the two month deficit at $201 billion, $22 billion more than last year.
• The National Association of Homebuilders/Wells Fargo Confidence Index fell three points to 62 in November, the second highest level of the year. "The November report is pullback from an unusually high October, and is more in line with the consistent, modest growth that we have seen throughout the year," said NAHB Chief Economist David Crowe. "A firming economy, continued job creation and affordable mortgage rates should keep housing on an upward trajectory as we approach 2016."
• The Census Bureau reported that privately owned housing starts were 11.0% lower in October, after a sharp increase in September, falling to an adjusted annual rate of 1,060,000 units, which was 1.8% lower than a year ago. New building permits managed to rise 4.1% from the prior month and were 2.7% higher than the year before. Like many of these statistics, this is a mixed message.
• The Census Bureau reported that on a seasonally adjusted annualized basis 495,000 new homes were sold in October, up a solid 10.7% from a revised lower figure in September, and 4.9% from a year ago. The estimate of the number of homes for sale was 226,000, representing 5.5 months of inventory at the current rate of sales. The median sales price was $281,500, leaving it well below the 12-month moving average price of $294,433.
• The National Association of Realtors reported that on a seasonally adjusted annualized basis, 5.36 million existing homes were sold in October, a decrease of 190,000, or 3.4%, from September, but was still 3.9% higher than a year ago. The estimate of homes for sale is 2.14 million, which represents 4.8 months of inventory at the current rate of sales. The average selling price was $219,600, off the high levels recorded in June and slightly above the rising 12-month average of $217,608. Overall, the housing market appears to be in decent shape.
• According to the Institute for Supply Management (ISM), economic activity in the manufacturing sector contracted in November for the first time in 36 months, falling to 48.6. This marked five consecutive monthly drops. The ISM index of non-manufacturing activity also slowed, falling to 55.9, but still signaled growth in the service sector for 70 consecutive months. None of this suggests anything but a very sluggish economy.
• The Conference Board reported that its index of Leading Economic Indicators (LEI) increased 0.6% in October, following a modest decline of 0.1% in September, the first drop of the year. "The U.S. LEI rose sharply in October, with the yield spread, stock prices, and building permits driving the increase," said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board. "Despite lackluster third quarter growth, the economic outlook now appears to be improving. While the U.S. LEI’s six-month growth rate has moderated, the U.S. economy remains on track for continued expansion heading into 2016."
• According to the "second" estimate by the Bureau of Economic Analysis, GDP increased at an annual rate of 2.1% in Q3 2015, up from only 1.5% in the initial estimate, but down sharply from the 3.9% rate reported in Q2. This was still better than the decrease of 0.2% in Q1, but below the 2.2% increase in Q4 2014. And it remains well below the 5.0% and 4.6% growth rates in Q3 and Q2 2014, respectively. Clearly this is not the strong growth that anyone is hoping for, but it may be just enough to allow the Fed to nudge rates a bit higher next week..
• According to the BLS, the seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) increased 0.2% in October, after falling 0.2% last month. If you strip out food and energy, CPI rose the same 0.2%. Since February the CPI has moved in a tight range between -0.2% and 0.2%.
• The Conference Board's Consumer Confidence Index dropped again in November to 90.4. "Consumer confidence retreated in November, following a moderate decrease in October," said Lynn Franco, Director of Economic Indicators at The Conference Board. "The decline was mainly due to a less favorable view of the job market. Consumers' appraisal of current business conditions, on the other hand, was mixed. Fewer consumers said conditions had improved, while the proportion saying conditions had deteriorated also declined. Heading into 2016, consumers are cautious about the labor market and expect little change in business conditions."

Trends To Watch

The dollar index has been on a wild ride this year. A few weeks ago it failed, for a third time this year, to completely pierce resistance around 100. It quickly fell back to interim support around 97.5. A weaker dollar would be a boon to commodities, the energy sector and most of the multi-national corporations that pay for wages and materials in dollars but accept payment in other, weaker, currencies. 

The chart of West Texas Crude has gone from plain ugly to almost catastrophic as the price has fallen below major support at $37.50. Things haven't been this bad in the energy sector since the depths of the financial crisis, when a barrel of oil briefly sold for around $33.50. Bankruptcies are on the rise, layoffs are multiplying and dividends are being slashed. And as bad as things are here, it's worse for many of the major oil producing countries around the world. Until we hear about production being slashed around the globe things are not likely to improve any time soon.

This chart isn't going to make the gold bugs very happy. The price of gold has been in decline for the entire year. Each rally ends in a lower high, and every subsequent drop results in a lower low. That is simply bad. As you can see, the current price is well being both moving averages and seems to be headed even lower. Stay away!

There simply isn't anything to say about how horrible this chart is. As I've been saying all year, the desultory picture shown here is a neon sign trumpeting major troubles in our economy.

The price action for the Nasdaq Composite looks eerily similar to the #DJIA, which is unusual as the two indices have little in common. Still, it would be very constructive for future action for the index to remain above support at 4,900.

The financial sector continues to be one of the few areas of the market that is holding up pretty well, even though it rolled over, like everything else, last week.

After a late November rally fizzled, the price of the housing index has returned to its primary trading range (purple dotted lines). Will housing hold up if the Fed tights by 0.25%? I think it should.

The index for developed international markets has remained in the bottom part of its trading range for the past five months. Given how little global economic growth is in evidence right now, it's hard to make a case that this index will move much higher any time soon.

I'm tired of writing about the Shanghai Index. I don't trust anything about the stock markets in China. Therefore this will be the last time I'll show this chart. I'd leave China to the real professionals with boots on the ground over there. For the rest of us, it's probably best to stay away.

After forming a double bottom from late August through September, NYSE Bullish sentiment index surged higher in October before taking a breather in November and falling in December with the rest of the market. The rally I anticipated came to fruition, but it was far too short lived. It's hard to decipher what's coming next.

The price of the volatility index, the VIX, is moving back up towards the "fear" zone. If you gathered the courage to buy in August, you likely did very well. And while I often enjoy a good buying opportunity, I'm hoping that we don't have another correction coming up in our immediate future.

For months I've been predicting a year-end rally. And with just over two weeks left in the year, that forecast is looking less and less likely, although I suppose anything can happen. I also predicted, going back to last January, that the Fed was unlikely to raise rates this year, and if they do, it will just be one increase. I can make the case for the Fed to go either way on Wednesday, but as I've said before, I hope they do raise rates 25 basis points and get it over with. Then they should say that they expect to leave the rate alone until there is clear evidence of economic growth. That certainty would likely send the market higher and quiet all of the useless, and almost daily, speculation of when will the rate increase finally happen.

I've also been thinking a lot about the upcoming presidential election. As a disclaimer, I am a registered Democrat. That being said, I am disgusted by the whole process so far. The money being raised to fund these bloated and blathering campaigns is truly repugnant. Tens of billions (perhaps hundreds of billions) of dollars will be wasted rather than be put to much better use. Just think how many jobs would be created and how much progress could be made if that $100 billion were instead spent on our crumbling infrastructure, medical research or education, not to mention the hundreds of deserving charities that are starving for funding. Instead, that money will be spent convincing the masses to vote for one or another completely undeserving sycophant. If someone like Donald Trump, or Ben Carson or Ted Cruz is the Republican nominee, I'll be packing my bags. We cannot allow our government to be run by the church (or by idiotic egomaniacs). That should frighten the crap out of any reasonable minded citizen. Our country is supposed to have a separation between church and state. Ted Cruz and the rest of the religious zealots currently barnstorming the country would like to eliminate that separation. I don't want god, or God, running this country. Let Cruz and the rest of the preachers spin their sermons in church, not the White House. And the less I say about the hairpiece with foot in mouth disease the better. 

As for the stock market, as I've said before, I've completed almost all of the anticipated trades for the year on behalf of my clients. Barring anything unforeseen events happening in the market over the next two weeks, I'll be pleased to begin 2016 with my portfolios as they are currently constituted. I did eliminate three or four small, underperforming positions over the past month, adding a bit of cash to our holdings. It's possible I'll sell one or two more things before the end of the year if they drop in price too much more. That being said, I'm very comfortable with my current holdings and I believe my clients are well positioned for whatever the market will throw at us in 2016.

News and Notes

It's hard to believe another year is coming to a close; and what a year it's been. I recently celebrated one year of marriage to my incredible wife Kathiryn. She and I have enjoyed a few great vacations, lots of time with our great circle of friends as well as more time and energy invested in our philanthropic pursuits. And as good as 2015 has been for us, we're looking forward to an even better 2016.

We're looking forward to having Nola return from college this weekend, just in time to celebrate her 20th birthday before she heads off to Thailand to spend a week with one of her good friends. Lily is keeping her fingers crossed about an early decision coming in this week from one of her top college choices. Then she heads to Colorado at the end of the month to visit a good friend for a few days. And Ezra is looking forward (as am I) to the return of Star Wars this weekend. After we learn the fate of Han Solo, Kathiryn and I take Ezra out to Steamboat Springs for a few days of skiing with my mother. May the Force be with all of us.

So that's it for 2015. Please accept my warm wishes for a very happy holiday season and a healthy and prosperous New Year. 

Best regards,

Greg Werlinich
President

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