Happy Holidays!

First let me wish all of you a happy holiday season and best wishes for a prosperous 2017!

Wednesday I posted the Long Term Update for December, so if you follow them keep scrolling down after you finish today’s update.

I’ll be on the road a bit next weekend, so the post will go up on New Year’s Day or Monday the 2nd.

Updating each Saturday, normally.  The monthly “Long Term” update will be on a Wednesday soon after the 15th of each month.

Economy:

Existing Home Sales rose a surprise 0.7 percent to a 5.610 million annualized rate which is a cycle high, well ahead of October’s 5.570 million which is the second highest of the cycle.  New home sales jumped 5.2 percent in November to a 592,000 annualized rate that is the second strongest of the recovery.  The third-quarter GDP lived up to its early expectations, rising with each new revision to an inflation-adjusted 3.5 percent annualized rate for the best showing in two years.  Initial jobless claims rose 21,000 in the December 17 week to a much higher-than-expected level of 275,000.  Corporate profits rose 4.3 percent year-on-year in the third quarter vs a prior estimate of 5.2 percent.  Weakness in building permits and factory indications offset gains in the rate spread, jobless claims, and stock prices to keep the index of leading economic indicators unchanged in November.  Consumer sentiment (U of Michigan) ends December at 98.2, up 2 tenths from mid-month for a new cycle high.

All of the indicators are positive except initial jobless claims.  Earlier this year we saw some wild swing in month to month numbers, but when you averaged the two months, I’m thinking June and July, you were basically in line.  Let’s see what happens in Jan.  But the economy is in good shape.

Geo-Political:

I searched for current articles on China and Europe, but there is no real new news.  All of the major economies are in slow growth mode.  Europe announced they will taper their QE more slowly than they had previously stated, indicating lingering weakness, but that is a couple of weeks old.

There is a little concern over Trump’s talk of imposing a 5% tariff on imports and the possibility of trade wars, particularly with China.  Some say this is just a threat Trump would throw out to bring the Chinese to the negotiating table, and that he would not really do it.  I am sure the Chinese have read his book “The Art of the Deal” and understand his negotiating tactics, and they have cut a few deals over the years themselves, so I am doubtful that this will achieve much for the US.  It gives the talking heads something to talk about, like Brexit did back in June (does anyone remember Brexit, or has anyone been impacted by Brexit?  No.).

Technical Analysis:

The market is in stall mode this week.  Following its run up since the election, many feel much of the economic good news from Trump’s proposed tax reform and capital repatriation have already been priced in, so what is there to push prices higher in the short run.  The market has backed down 1% from its record high and could stand more correction to bring buyers back in.

The RSI is at 66, backing off a little from overbought (70), see the upper right of the chart.  MACD on the lower right is turning down and two daily histograms have slipped below zero showing declining momentum.  It’s not a good entry point and I’ve been taking some profits.  The week between Christmas and New Year is a low volume week and usually not indicative of anything as most traders are on vacation.  We’ll have to wait until after Jan. 2 for true price action.

2016-12-23-sp

If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post!

Rich Comeau, Rich Investing

Long Term December 2016

Once a month, on a Wednesday around mid-month (15th or the next week), I will put up a long term view of the market.  This is provided for investors who don’t want to trade secondary swings in the market, but would like to exit the stock market when a bear market begins, or enter the market when a new bull market begins (change in the primary trend).  In the blog, they will always have a title called “Long Term (month) (year)”, so you can use your browser “Find” function and easily find them.

Economics:

GDP – The second revision of GDP for the third quarter showed the economy grew 3.2%, a good number.  Not to get too excited about it, GDP is very seasonal.  It is usually weakest in Q1, better in Q2, and best in Q3 and Q4.  The harsh winters up north suppress economic activity every year in Q1 since people do not get out and car shop or look for a new home during blizzards.  Given weaker activity earlier this year, we will probably be looking at another 2% year for GDP growth.

Year Quarter GDP %
     
2016 Q3 3.2
     

 

Fed interest rates – The Fed hiked short term interest rates by a quarter of a point on Dec. 14, to the range of .5 – .75%, which I call .6% in the table below.  I’ll keep the data in the table for a while so we can track what is going on.  You can see all of the rates have moved up, which they should, given the strength in the economy and unemployment under 5%.  The bad news is that rates are moving up, and the good news is that it is for a good reason, the strong economy, and rates are still historically in the low range and should not present a barrier to business expansion.  On balance this is good.

Date Fed Funds Rate 5 Year Treasury 10 Year Treasury 30 Year Treasury
         
         
Dec 21, 2016 .6 2.0 2.6 3.1
Nov 15, 2016 .4 1.6 2.2 3.0

 

Valuation:

PE on S&P 500 – The current 12 month trailing GAAP PE on the S&P 500 is 25.4, up from 24.2 last month.  This is moderately overvalued relative to my trimmed 30 year average of 19.  The lower the interest rate which represents a safe return, the higher the PE that the market can support.  Rising rates will threaten the valuation unless earnings rise faster than stock prices, to move the PE lower.  In a bull market, stocks can remain overvalued for years, so this is not a sell indicator, but it is a cautionary sign.

S&P earnings – With 98% of S&P companies reported, earnings are 4.3% higher than Q3 2015.  Q3’s earnings will be the highest since Q3 of 2014.  Q2’s earnings were also higher than Q2 2015, so now with 2 consecutive quarters of earnings higher than the year prior quarter, it appears the earnings recession has ended.  That is good news for the market going forward.  With interest rates rising, the dollar has climbed by 5% and that will weigh on multi-national earnings starting in January.

Age of primary move, bull or bear market – The bull market is 7.7 years old, which is a long bull market by historical standards.

Geo-Political:

The global economy is relatively quiet at the moment and most regions show slow steady growth.

Technical:

Technically the S&P continues to run in the bull market channel it has been in for the last 7 years.  This is good news as the market’s price action indicates the long term bull market remains in force.  The RSI (upper right) is at 69, near overbought, but you can see months-long periods where the RSI remains overbought.  MACD (lower right) is turning up showing good market momentum now, with the first histogram above zero in 2 years.  That’s a good sign.

2016-12-21-long-term-sp

Conclusion:

The stock market remains in a bull market technically, and there is nothing in the general economy, in Fed policy, or in the global geo-political realm to overturn that conclusion.

Rich Comeau, Rich Investing

Fed Hiked

Updating each Saturday.  The monthly “Long Term” update will be on a Wednesday soon after the 15th of each month.

Economy:

The retail sales headline for November could manage only a 0.1 percent gain (flat).  High levels of unwanted inventories are not an issue for the year-end economy, based on a 0.2 percent decline in business inventories in October (this is good, since it shows continuous orders from retailers to re-stock shelves, so merchandise is moving).  The CPI rose 0.2 percent in November with the year-on-year rate up 1 tenth to plus 1.7 percent.  Jobless claims continue to run at very low levels, indicating strength in the labor market. Initial claims fell 4,000 in the December 10 week to 254,000 with the 4-week average up 5,250 to a 257,750 level that is in line with November’s trend.  Markit Economics’ manufacturing PMI flash comes in at 54.2 for December; this index has been moving steadily higher from September’s 51.5.

Geo-Political:

The biggest news of the week was the Dec. Fed meeting, where they raised the Fed Funds rate by .25% to the range of .5 – .75%, as expected.  Since this was so anticipated, and the market wanted higher rates given the stage of the recovery, there was no selloff in stocks.  The Fed described the job market as “solid”, consumer spending as “moderate, and business investment as still “soft”.  The Fed forecast calls for 3 more rate hikes in 2017, but they were horribly wrong on the forecast for 2016 when they anticipated 4 hikes and only gave one (in the last month of the year).

China:

The yield on long term US Treasuries have risen dramatically since our election, with the 10 year moving up from 1.4% interest in July to 2.6% now.  Some of this is due to expectations of Fed rate hikes based on the recovering economy, some is based on inflation expectations coming from Trump’s proposed trillion-dollar infrastructure spending combined with his proposed tax cuts (that would explode the federal deficit again), and some of it comes from our two major foreign holders of US Treasuries selling them off, notably China (and to a lesser extent Japan).  As these large holders become sellers and the supply of bonds for sale rises, the price of the bonds will be decreased (put “on sale”) which will increase the yield on the bonds to make them more attractive to investors.

China’s sales of US Treasuries is not simply because they think they are now a bad investment and destined to fall in value (they may think that), but because they also are trying to prop up their own economy as it transitions from an export economy to a domestic consumer-led economy.  That transition is not quick nor easy and when it shows signs of stalling, the government steps in to provide a boost.  China has been selling off their currency reserves to fund that spending, basically spending their rainy day fund.  While Trump is calling China currency manipulators and saying they have kept their currency artificially low in order to win business (and in the past they did do that), currently they are stimulating their economy and intervening in the currency markets to buy yuan to try and prevent the yuan from dropping too fast.  But, selling off some of their bond holdings does put downward pressure on US Treasuries prices, and upward pressure on their yield, which we see.

“December 15, 2016 – China’s holdings of U.S. Treasuries declined to the lowest in more than six years as the world’s second-largest economy uses its currency reserves to support the yuan. Japan overtook China as America’s top foreign creditor, as its holdings edged down at a slower pace.

A monthly Treasury Department report showed China held $1.12 trillion in U.S. government bonds, notes and bills in October, down $41.3 billion from the prior month and the lowest investment since July 2010. The portfolio of Japan decreased for third month, falling by $4.5 billion to $1.13 trillion, according to the data. Collectively, the two nations account for about 37 percent of America’s foreign debt holdings.”

https://www.bloomberg.com/news/articles/2016-12-15/japan-overtakes-china-as-largest-holder-of-u-s-treasuries

Second good article:

“Dec. 6, 2016

Beijing burned through $69 billion in November as its currency came under pressure following Donald Trump’s victory in the U.S. presidential election.

China’s foreign currency war chest fell below $3.1 trillion, the lowest level since March 2011, according to official data released Wednesday.

The depleted reserves provide further evidence that Trump is mistaken when he claims China has been keeping its currency, the yuan, artificially low to make exports more competitive. Economists say that was probably true in the past, but the yuan strengthened significantly between 2005 and 2014.

More recently, China has in fact been spending hundreds of billions of dollars to buy its own currency and stop it falling too rapidly.

The Chinese economy has been slowing in recent years after decades of breakneck growth, and huge sums of money have been flowing out of the country, putting pressure on the yuan.

Sharp drops in the currency in August 2015 and January 2016 set off panic in global markets.

When money leaves China, it means people are selling yuan for dollars, euros and other currencies. China appears to be trying to balance that by drawing on its reserves of foreign currencies. It’s a strategy many countries use, but it can drain “rainy day” reserve funds.

The big decline in China’s cash stockpile last month shows that the central bank “had to step up intervention in the face of a surging U.S. dollar and more rapid capital outflows,” said Capital Economics in a note.”

http://money.cnn.com/2016/12/07/investing/china-foreign-exchange-reserves-yuan-trump/

 

Technical Analysis:

It was a “do nothing” week, as the market waited on the Fed meeting to conclude on Wed., although everyone thought they knew the Fed would raise a quarter point and they were right.

The market has moved up 8% in six weeks, based only on hopes of what the Trump tax cuts and infrastructure spending mean to the economy.  It is all speculation, and depending on what congress passes, it could take 12-18 months for any of it to show up in earnings.  The market is overvalued on a long term PE basis, overbought short term, and moving forward forcefully on hope for the future.  I don’t like this, so I am out mostly, just buying an occasional fallen angel and waiting for a better opportunity to get in.  I took a short term profit on AMGN, and put in a lowball buy order to buy it back on a pullback.

Technically, RSI (Relative Strength Index) is overbought at 69 (upper right) and MACD is elevated at 25 with the histograms (little gray rectangles down on the zero line) shrinking, showing slowing momentum.  This is not a good entry point.

2016-12-17-sp

Looking back a couple of weeks to early Dec., the histograms began to shrink and looked like they may roll over and head down, but they did not, they turned back up.  In the market, anything can happen on any given day.  But over the longer term, things that the economic laws say should happen, they will happen.  We just don’t know WHEN they will happen.  Their occurrence can be postponed by government events, but I don’t think economic laws can be postponed forever.

If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post!

Rich Comeau, Rich Investing

Market takeoff, again

Updating each Saturday.  The monthly “Long Term” update will be on a Wednesday soon after the 15th of each month.

Economy:

In another sign of strength for the economy, the ISM non-manufacturing index jumped 2.4 points in November to a 57.2 reading that tops Econoday’s high-end forecast.  October was a very strong month for the factory sector as durable goods orders rose 2.7 percent.  Initial jobless claims came in at 258,000 for the week of Dec. 3, down 10,000 from the prior week, near multi-year lows.  Post-election confidence continues to build, lifting consumer sentiment (U. of Michigan) by more than 4 points to a 98.0 level that hits the very outside of the Econoday range and is 1 tenth away from the index’s recovery peak hit last year.

The economic signs are all strong, and it should be no surprise if the Fed raises the Fed Funds rate by .25% on Wed.  What may be interesting is what the Fed indicates (if anything) about how many hikes we would see in 2017.  Last year they led us to expect multiple more hikes this year, but it did not happen.  Most analysts are expecting 2 or 3 more hikes in 2017.  A wildcard could be that the Fed hikes by a half-percent instead of a quarter, if they think they are behind the curve.

The first question is what will Fed policy be, and the next question will be what is the market reaction to the Fed policy.  Last year we had a major correction in Jan./Feb. after the first rate hike in a decade, due to the signal that the direction of rates had changed.  I don’t expect such a big correction this time, since we already know the direction has changed.  We could get a temporary correction.

Geo-Political:

EUROPE:

The ECB extends its bond buying QE program, but tapers it to a lower level of purchases.

Markets soar as ECB extends QE programme until December 2017

European Central Bank says it will conduct an extra nine months of quantitative easing, but cuts bond purchases from €80bn to €60bn per month.”

https://www.theguardian.com/business/live/2016/dec/08/ecb-stimulus-qe-draghi-italy-bank-rescue-business-live

CHINA:

“2016-12-09 BEIJING – Analysts from around the world hail a strong rebound of China’s trade data in November, as both domestic and global demands show signs of recovering.

Stripping out the impact of yuan depreciation, exports in US dollar terms edged up 0.1 percent year-on-year in November, according to data released Thursday by the General Administration of Customs. The latest export figure represented the first increase in nine months following a 7.3 percent contraction in October.

Meanwhile, November imports grew by 6.7 percent year-on-year, the fastest pace in more than two years following a 1.4 percent decline in October, customs data showed.

“Better-than-expected trade data out of China today reflects both an uptick in global demand as well as the continued strength of domestic economy,” wrote Julian Evans-Pritchard, China economist at Singapore-based Capital Economics, in a note.

The upbeat data “adds to signs of a modest industrial recovery in the world’s largest economies even as China and other Asian exporters brace for a potential trade war once protectionist US President-elect Donald Trump takes office,” Reuters reported.

Moreover, analysts pointed out that the recent depreciation of the Chinese yuan also contributed to the rebound.”

http://www.chinadaily.com.cn/business/2016-12/09/content_27625624.htm

 

International events were favorable this week.  However, from the China article, I fail to see how a miniscule .1% gain in China exports is viewed favorably, when it follows a massive 7.3% decline the month before?

OPEC is trying to put together a package of production cuts to stabilize and raise the price of oil, which is sitting at $50 a barrel.  The US has become the swing producer and some shale players can make money at $50, so we can prevent a shortage of oil and I don’t think the price will skyrocket from here.  The OPEC players have historically cheated on their commitment to cut production, so the current price may not hold.  The recent rise of oil to $50 has helped the stock market, since the big oil companies are a significant part of the S&P 500.

Technical Analysis:

The correction that started last week was limited to a 1% correction, and the market took off again this week.  Technically the market is overbought short-term, with RSI up at 73 (70 is overbought).  MACD looked like it might roll over last week, but it did not and resumed its climb.  Since the long term bull market continues, this can continue.  Earnings are not here today to support this rally, so I don’t like it. People are buying stocks based on their belief that the policies Trump and congress implement will be very good for business and profits in the future, but those profits will not actually materialize for at least a year.

2016-12-10-sp

I am looking at quality companies that have not enjoyed the huge run-up that the banks have, like large cap tech companies like FB, GOOG.  I sold my AMZN after a quick 8% profit in a couple of weeks, and would like to buy it back in the next correction.  I’m also looking at the oil service companies since they have not run up with the oil companies.  I’m not buying the market with SPY right now.

Drug companies are getting beaten up on Trump’s comment that he would like to do something about high drug prices, so I am looking there for the fall to stop.  I picked up some MYL at a 52-week low with a low ball buy order, have a profit already, and I have a high ball sell order entered so I could be out of it soon.

If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post!

Rich Comeau, Rich Investing

Correction Started

Updating each Saturday.  The monthly “Long Term” update will be on a Wednesday soon after the 15th of each month.

Economy:

The third quarter GDP has gotten a meaningful upgrade; the second estimate is 3 tenths higher than the first, at a plus 3.2 percent annualized rate.  Corporate profits rose 5.2 percent year-on-year in the third quarter.  Consumer confidence (Conference Board) rose sharply following the November 8 election, up 6.3 points to 107.1 for by far the best reading of the cycle, since July 2007.  The ISM manufacturing index for Nov. is up a solid 1.3 points to 53.2.  The Labor Department says there are no special factors behind a steep 17,000 rise in initial jobless claims to a much higher-than-expected 268,000.  It was a good employment report with nonfarm payrolls rising 178,000 in November to just beat out expectations, and the unemployment rate fell .3% to 4.6%.

There are good numbers throughout the reports and nothing should dissuade the Fed from hiking the Fed Funds rate a quarter point on Dec. 14th.  That is the consensus view.

Geo-Political:

There are no major events this week, but in those cases it is good to cycle around looks at Europe, the Middle East, and Asia, and China and Russia in particular.

A quick check on Russia this week.

“November 29, 2016

Tentative signs that Russia could soon exit its recession continued in the final quarter of 2016 after the economy contracted at the slowest pace in Q3 since the slump began nearly two years ago, according to preliminary GDP data. Following sluggishness in domestic demand in the first three quarters, business survey data and industrial production in October signaled a strengthening of economic activity towards the end of the year. Lack of policy support is nevertheless still constraining Russia’s path towards recovery. The Central Bank has decided to keep interest rates on hold, at least until Q1 2017, and the government’s 2017 draft budget set ambitious consolidation targets for the next three years. The government expects to drastically reduce the fiscal deficit by 1% of GDP each year on the back of spending cuts and increased revenues.”

http://www.focus-economics.com/countries/russia

The Russian economy is still shrinking, although slower than it did previously.  In the face of this, the government will not reduce interest rates, will reduce spending, and raise taxes!  This is the opposite of what everyone else in the world did to fight recession after the financial crisis; they cut interest rates, cut taxes to stimulate consumer spending and most increased government spending as a form of stimulus to keep the recession from turning into a depression.  So, why is Russia acting this way, anti-Keynesian?  No, I think the answer is they have isolated themselves due to their bad behavior in Ukraine and nobody wants to help them.  The IMF will not loan them any money, nor will European banks.  They could just print money for stimulus like the US did, but with the other international economies recovering, the value of the ruble would fall significantly if Russia went in the opposite direction, and that would be inflationary on anything they import.  The Russian economy is totally based on oil, and with the price of oil recovering from $30 a barrel a year ago to $50 as we speak, this accounts for the improvement in the rate of decline of the Russian economy.  Russia will have to go it alone on their recovery, and with limited options, it will be a very slow recovery for them, and largely dependent on the price of oil.

There is a vote in Italy on constitutional reform and based on the outcome we could see a little turbulence on Monday, but it won’t have a big lasting effect on our market.  It could set Italy up for a later vote to exit the EU like England is doing, and if the EU dissolved that would have a long term effect.

Technical Analysis:

The technical position of the market weakened this week and I took a bit of profit off the table, selling the Amazon I bought in the tech rout post-election.  I also sold the IVV since the market had come too far too fast, totally on emotion in my opinion.

I’ve circled on the chart why I’m concerned, since RSI on the top right went to overbought (70) then started to back down, and MACD on the bottom right looks like it wants to roll over and go into decline also.  Bond yields are rising and that will eventually cool the economy, the market if overvalued on a PE basis, and the rally was based on an emotional response to the election instead of because earnings were so good.  The Fed will raise on 12/14, and the market will probably be nervous going into that, but could rally on a sign the Fed thinks the economy is strong enough to take the rate increase.

The good news is that the big indices all set new all-time highs recently.  That is the best indication that the overall bull market is still in effect, it is just my thinking that short term we are correcting.  That also tells me we should buy this dip, because the bull market remains in effect.  I have a low ball bid for AMZN and on weakness it looks like they have to come meet my price sometime, down at $700.  If the correction ends and AMZN never gets that low, when I review my buy orders I can make a decision to pay the market price if AMZN has reversed its slide and is heading up.  Sometimes my low ball buy orders hit and I buy stocks at very attractive prices, and if not I am using them as a reminder of what I want to do, depending on the price.

2016-12-03-sp

I don’t talk about bonds very much, but looking at TLT, the long term treasury bond ETF, it is down about 15% from its July high of 142.  With long term treasury bonds yielding 3%, you might have lost you last 5 years of income.  I have steered clear of bonds for the last 5 years because of this.  If you timed that market correctly and made your 3% a year, captured all of the capital gain and exited last summer at the peak, my hat is off to you.  A danger in this is in “balanced funds”, mutual funds that hold a mix of stocks and bonds, you usually don’t know what their mix of stocks vs. bonds is, and the bond component can be bringing down your total return on the fund.  I’ve avoided balanced funds for that reason, I did not want to try and time the bond market as well as the stock market.  I kept my focus on the stock market as I just felt bond yields were not attractive enough, they did not represent good values to buy.  Demonstrated by this quick 15% collapse, I knew I’d be right, I just didn’t know when I would.  I think bond values will remain in a bear market for some time, with intermittent corrections to the upside, but I remain out of bonds.

Here’s a bit of news on it:

“September 25, 2016

They’ve long been one of the most reliable sources of demand for U.S. government debt.

But these days, foreign central banks have become yet another worry for investors in the world’s most important bond market.

Holders like China and Japan have culled their stakes in Treasuries for three consecutive quarters, the most sustained pullback on record, based on the Federal Reserve’s official custodial holdings. The decline has accelerated in the past three months, coinciding with the recent backup in U.S. bond yields.”

https://www.bloomberg.com/news/articles/2016-09-25/u-s-bond-market-s-biggest-buyers-are-selling-like-never-before

 

If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post!

Rich Comeau, Rich Investing