Werlinich Asset Management, LLC

LinkedIn       Facebook       Twitter       Blog

December 14, 2017

Santa Claus Is Coming To Town

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

Current Market Analysis

The #SantaClausRally is in full swing right now. The broad market averages, domestically and around the world, are at, or near, record levels. Investors have enjoyed solid gains this year, as long as they remained invested. It appears that Washington will likely figure out a way to avert a government shutdown and pass some form of tax legislation that will include a large cut in corporate taxes. The Federal Reserve has well telegraphed, and implemented, its plan to slowly increase rates and decrease its balance sheet. Political tensions around the globe, at least for now, are relatively quiescent. So as we head toward 2018, the bullish case for the stock market remains intact.

As we look at the chart of the #DJIA for the year, we see a very bullish primary trend that has set record after record, as well as a #DowTheory bullish indicator that occurred just days ago when the Industrial and Transportation averages achieved new highs at the same time. The current price remains well above both the 50-day and 200-day moving averages, with interim support around 23,250. Although I expect the year to finish strongly, I wouldn't be surprised to see some profit-taking in January. And I'm building a little bit of cash to take advantage of any good buying opportunities that might come to pass. 

I have been pounding the table all year predicting that the Dow Jones Transportation Average was bound to move higher. And again, just last month, I wrote that "this could be a good buying opportunity." Within days of typing those words the index exploded to record levels. I hope you jumped on this train before it left the station.

Every time that the Dow Jones Utility Average dipped this year, it proved to be a great buying opportunity, as you can see below. This index is comprised of high-yielding stocks that would presumably lose some of their appeal should "less risky" bond yields rise enough to prove competitive with "more risky" high dividend yielding stocks. While this risk is valid, the gap between treasury yields and utility stock payouts averaging between 3% and 4% is still wide enough to maintain their appeal. If the index were to fall close to support around 720, I would be a buyer. 

Key Economic Statistics

  • According to the Department of Labor, the figure for seasonally-adjusted initial jobless claims for the week ended December 2 was 236,000, a slight drop from last month. The four-week average of 241,500 is a tick higher than last month.
  • The non-farm payroll employment report in November was strong for the second straight month, as 228,000 jobs were gained in the month, and 3,000 net jobs were added in the prior two months. The household survey reported that the unemployment rate held firm at 4.1%, while the labor force was steady at 62.7. Average hourly wages for blue collar workers inched up to $22.24 while the average work week held steady at 33.7 hours.
  • About 6.6 million workers were counted as unemployed, while 1.5 million people remained unemployed longer than 27 weeks. The seasonally adjusted number of people who could only find part-time work held at 4.8 million while the number of marginally attached workers remained at 1.5 million. The number of people holding multiple jobs rose to 7.59 million. All of this resulted in the U-6 "underemployment" moving up to 8.0%. Barring a massive change of heart, the Fed will certainly increase their lending rate by 0.25% at their December meeting.
  • The Congressional Budget Office (CBO) reported that on a net present value basis, the nation's budget deficit was $134 billion in November, resulting in a deficit of $134 billion for the first two months of fiscal 2018, $15 billion more than the shortfall recorded during the same period last 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, 685,000 new homes were sold in October, a 6.2% increase from September, and 18.7% higher than a year ago. The number of homes for sale represented an estimated 4.9 months of inventory at the current rate of sales. The median sales price was $312,800, down slightly from the prior month, and about $4,500 lower than the 12-month moving average price of $317,342.
  • The National Association of Realtors reported that 5.48 million existing homes were sold in October, up fractionally from the prior month, and down slightly from a year ago. The number of number of homes for sale represented an estimate of only 3.9 months of inventory at the current rate of sales. The median price was $247,000, essentially the same as last month, and just slightly above the rising 12-month moving average price of $243,867.
  • The Conference Board reported that its index of Leading Economic Indicators (LEI) rose 1.2% in September, following a paltry gain of 0.1% in September. "The US LEI increased sharply in October, as the impact of the hurricanes dissipated," said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board. "The growth of the LEI, coupled with widespread strengths among its components, suggests that solid growth in the US economy will continue through the holiday season and into the new year."
  • According to the "second" estimate by the Bureau of Economic Analysis, GDP increased at an annualized rate of 3.3% in Q3 2017, higher than the advance estimate of 3.0%. This compares favorably with 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 129.5 in November from 126.2 (revised) in October. "Consumer confidence increased for a fifth consecutive month and remains at a 17-year high (Nov. 2000, 132.6)," said Lynn Franco, Director of Economic Indicators at The Conference Board. "Consumers' assessment of current conditions improved moderately, while their expectations regarding the short-term outlook improved more so, driven primarily by optimism of further improvements in the labor market. Consumers are entering the holiday season in very high spirits and foresee the economy expanding at a healthy pace into the early months of 2018."

Trends To Watch

Is the carnage in the dollar index finally over? Can the expectation of more rate hikes help propel the dollar to greater heights? Or will the specter of increased budget deficits, thanks to the proposed tax legislation, doom the dollar to further depths of despair? Stay tuned; the answers will be revealed next year. 

Very quietly, the yield on the 10-year Treasury bond has moved steadily higher over the past three and a half months, likely reflecting the consensus acceptance of the just announced Fed rate increase. If that's true, we should expect further yield increases, and price declines, as the Fed is likely to continue hiking rates next year. Watch out for losses in your bond portfolios in your December statements, and throughout next year.  

Don't look now, but the the price of a barrel of West Texas Crude has rallied to its highest level of the year and looks to break through resistance at $60 for the first time since the end of 2015, when it was halfway through its sickening plunge from $112/barrel in mid-2013 to below $30/barrel in January 2016. Last month I wrote that"I think we'll see $50 before $60." That prediction may prove to be wrong, but I'm still not sold on the long-term strength of this rally. 

The price of gold has spent the last three months below interim resistance at $1,300, and this month it is falling quickly. Indeed, $1,200 is not out of the question. Last month I wrote that "I would expect the price of gold return to the mid-$1,200s." That forecast has already come to pass. I'm now wondering if we'll see a test of the low of $1,125 sometime early next year. 

The Nasdaq Composite, led by the FAANNG stocks (Facebook, Apple, Amazon, Netflix, Nvidia and Google), continues its mercurial ascent to the heavens. Some Market Mavens decry the rally and warn of it's imminent collapse, for no other reasons other than the trade has "gotten too expensive". While it is true that some of these stocks are trading at relatively high multiples, they all are growing faster than the market as a whole. As long as they continue to do so, there is no reason to sell this sector, or the leaders.

The index representing the financial sector is on fire right now, thanks to the continued rollback of regulations, and to the expectations of future rate increases. Three times this year, noted by the red arrows below, I predicted that the index would likely be moving higher. If you bought, and held, you've done very nicely.  

In September 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." If you bought on that recommendation you'd be up around 20% as the index soared to new heights. If the Republicans pass tax legislation that limits mortgage deductibility and the ability to deduct state property taxes, this index could drop quickly, and precipitously, so be vigilant. 

I've added a new chart this month, showing the trading in an index of 87 leading retail stocks. Given all the sturm and drang about the "death of retail", thanks to, you might think anyone investing in this sector would have incurred massive losses. But as you can see, that's simply not the case. I admit, with one exception, I have ignored this sector, and still think the greater risk is to the downside. That being said, the Global Consumer appears to be alive and well, and spending copious amounts of money. Until that stops, the sector should continue to do well.

This chart has been a wonderful contra-indicator for most of the year. Only at the beginning and ends of the year did the bullish indicator move to lofty heights. Abut half the year the index was either near, or below, the midpoint of its trading range. And yet, in the face of this relatively low level of bullishness, the market continued to soar to ever higher levels. I expect Santa to put further gains in the stockings of investors. 

What I'm Thinking and Doing

There was a tectonic shift in the American political landscape last night as Alabama voters, to the surprise of most observers, did the right thing and voted to NOT elect an accused pedophile to the Senate, marking the first time the red state has elected a Democrat to national office in twenty years. Women, blacks, and young people went out and did what was necessary. That is the same formula that elected Democrats in Virginia last month, and is the probably blueprint for the Democrats to reclaim the Congressional majority a year from now. As horrible it has been to have Trump in the White House, with his merry band of white supremacist goons, anti-environment nut-jobs, and homophobic bible-thumpers, the silver lining is that a huge, rainbow-colored coalition of people, led by women, is rising up to oppose this tide of hated and ignorance. I think Trump, Bannon, DeVos, Pruitt and Sessions will all be quickly consigned to the scrap heap of history; and not a moment too soon.

In other important news today, the Federal Reserve, as expected, increased their lending rate by 0.25%, to a new range of 1.25% - 1.50%. The forecast is for three, or potentially four, more rate hikes next year. All of this is "baked in the cake", and therefore received a shrug from stock traders. It is a testament to the strength of this rally that stocks continue to move higher while the Fed slowly ends their easy money policy.

With only two weeks left in the year I see no reason for the market to do anything untoward, unless of course the Republicans botch their effort to draft and approve new tax legislation. The House and Senate are currently attempting to reconcile their competing plans, and although there is only a razor-thin margin of error to get this passed, as it's unlikely there will be one Democrat to support this bloated nightmare, it does appear that it will get done. Let me say that I totally support the idea of tax reform but this mess doesn't do the job. Granted, I'm biased because almost every aspect of this mess will negatively impact me, causing my taxes to go up dramatically. Even worse is that bi-partisan estimates suggest that this legislation, if passed as currently contemplated, could add more than $1 trillion to our already unsustainable deficit over the next decade or so. The fact that the Republicans plan to ram this down our collective throats without so much as one public debate or any reasonable scrutiny, is a joke. The problem is that if something doesn't pass, regardless of how bad it is, then the stock market will likely crater. That makes this a lose, lose proposition for the long run. In the short-term though, the stock market sprints to new record levels on the wings of the inevitable corporate tax cut. So for now, we just sit back and enjoy the ride.

I have been consistently bullish on the market this year, and that faith has been amply rewarded. Each month I have urged my readers to remain invested, through thick and thin, and avoid making any rash decisions that might imperil their investment plan. Broadly speaking, I have suggested some moments to buy and others to hold, but not once did I urge you to sell. I also recommended some sectors to invest in and others to avoid. All told, if you followed my advice, you should have banked some impressive profits this year. 

Finally, with respect to my portfolios, my only purchase of any consequence was to add to one international technology holding. On the flip side, I liquidated one under-performing small-cap tech stock, sold over half my position in another, and pieces of two others, all to realize stock losses that could be used to reduce gains taken on the sale of other securities earlier in the year. Looking ahead, I'm thrilled with the overall performance of my portfolios this year, and I anticipate further positive action next year. 

News and Notes

I'm going to keep the personal notes short this month as there is really nothing new to report on the home front. All the kids are well. Naima is looking forward to her first trip back to St. Maarten since the storm. Her mother can't wait to see her! Kathiryn and I are looking forward to a few weeks in the sun over the holidays. 

It's hard to believe that 2017 is rapidly drawing to a close, and what a year it's been, both good and bad. It has been a brutal year for our planet, and Mother Nature is clearly pissed! It's been an equally horrific year for American politics, but as I said earlier, I think we will get some very healthy growth after the political brushfire passes. It has also been a tough year for me physically as I've suffered with the aftermath of my shoulder surgery, and the nerve damage that followed. The good news is that I feel as though I'm on the mend and I hope to be back in the water soon. 

In many other respects, it's been a wonderful year. My family has flourished, and grown. We continued to foster kittens (we're up to 55 now over the past three years) and we have added some foster dogs to the mix as well. We have made some wonderful new friends. Kathiryn, and her band Merlin, has developed a very nice local following. I'd be remiss if I didn't note the strong gains in the stock market.

I can't end the letter without expressing my deepest sympathies to anyone affected by the tragic wildfires raging throughout California right now. I hope Mother Nature, and all the brave first responders, are able to get this inferno under control as soon as possible and minimize the already horrific property losses.

That's it for this month, and this year. I want to wish you and your loved ones a very Happy Hannukah, a Merry Christmas and an especially happy, healthy and prosperous New Year. I look forward to communicating with you again next year. If you have any questions, please don't hesitate to contact me.

Best regards,

Greg Werlinich

"News and Views", Copyright, Werlinich Asset Management, LLC and All Rights Reserved.