Positive news from the services sector today. From Business
Insider, “Two indicators on the US
service sector released Monday showed strong new-business orders and
hiring in November.
The Institute of
Supply Management's purchasing manager's index (PMI) — based on a survey of
executives — jumped to 57.2. It was the highest level since October 2015
and more than the forecast for 55.5.”
“The employment index
spiked to 58.2 from 53.1, indicating that hiring increased at a much faster
rate during November. “
“Markit Economics' PMI
was 54.6 (54.8 forecast.) Service providers recorded the fastest pace of
new-work growth in a year.
Some companies told
Markit that their clients were more willing to spend post-election, as a
lot of the uncertainty had lifted.
Service providers told
Markit that they hired more workers in November, although the pace of job
creation was weaker than the post-recession average rate. They remained
optimistic about the economy's growth prospects over the next year.”
From Calculated
Risk, “This represents continued
growth in the non-manufacturing sector at a faster rate. This is the 12-month
high, and the highest reading since the 58.3 registered in October of 2015. The
Non-Manufacturing Business Activity Index increased to 61.7 percent, 4
percentage points higher than the October reading of 57.7 percent, reflecting
growth for the 88th consecutive month, at a faster rate in November. The New
Orders Index registered 57 percent, 0.7 percentage point lower than the reading
of 57.7 percent in October. The Employment Index increased 5.1 percentage
points in November to 58.2 percent from the October reading of 53.1 percent.
The Prices Index decreased 0.3 percentage point from the October reading of
56.6 percent to 56.3 percent, indicating prices increased in November for the
eighth consecutive month at a slightly slower rate. According to the NMI®, 14
non-manufacturing industries reported growth in November. The Non-Manufacturing
sector rebounded after a slight cooling-off in October. The majority of
respondents' comments are positive about business conditions and the direction
of the overall economy."”
Citigroup US Economic Surprise indicator has been spiking
higher.
It appears much of
the Trump Euphoria is starting to show up in the economic numbers.
Sentiment has also improved quite a bit. Post-election,
respondents to the AAII Investment Survey have gotten bullish on equities suddenly.
The Bull/Bear ratio has spiked.
Cam Hui from Humble
Student of the Markets pointed out the NYSE McClellan Summation Index is
far from overbought levels.
He also notes the seasonally strong period of stock
performance right around this time of year.
Based on market activity it would appear a rotation has occurred
into cyclical value stocks.
·
Well
defined sector rotation at the moment
·
Avoid
Utilities, Staples and Health Care as they push deeper into the lagging
quadrant
·
Watch
Technology as it rotates inside the weakening quadrant
·
Financials
are still leading, but relative trend is getting mature
·
Energy and
Industrials inside leading quadrant offer potential
·
Prefer
Materials over Discretionary inside the improving quadrant”
From IBD, “After two straight closes below the 50-day
moving average, the Nasdaq popped 1%. Volume on the Nasdaq fell slightly from
Friday's level, but it was still a solid showing for the tech index, which
still carries a high distribution day count. IBD's market outlook was lowered a
notch last week to "uptrend under pressure" when the Nasdaq fell
below the 50-day line Thursday in heavy volume. The same day, the Philadelphia
semiconductor index paid a visit to its 50-day line but closed just above it.
It bounced off the line Friday and extended gains Monday. The message? Don't
declare the chip sector dead just yet.”
From Stockcharts.com,
“About two weeks ago the market blew
through a line of resistance drawn across the previous all-time highs in
August. Last week a new, all-time high was made, then the market
met technical expectations -- it pulled back toward the point of
breakout. So far, so good, but there are some problems.
First, the PMO topped.
It is a shallow top that can easily be reversed by positive price action this
week, but for now it is a negative.
Second, longer-term
indicators are showing rather sharp negative divergences, and their
readings are substantially lower than we might expect with the market making
new, all-time price highs. For example, the Percent Buy Index (PBI) shows that
only 63% of S&P 500 stocks are on Price Momentum Model (PMM) BUY signals.
The other two indicators show a similar lack of participation. The flip side is that there is still plenty
of room for the indicators to move higher.”
Based on current
readings of their “sell side indicator”, Bank of America/Merrill Lynch (BOAML)
recently wrote in a research note to clients:
“Historically, when
our indicator has been this low or lower, total returns over the subsequent 12
months have been positive 97% of the time, with median 12-month returns of
+25%,”
Recommended Stock
Allocations Remain Low
The BOAML indicator is
based on the recommended stock allocations inside portfolios. A typical
benchmark equity allocation is 60%-65% of a portfolio. Presently, the
recommended allocation is significantly below that range, coming in at 51%. If
the recommendations moved back to the historical mean, as they typically do,
money would continue to flow out of bonds and into stocks. More information
about the BOAML signal can be found on Yahoo Finance.”
Interesting Articles
regarding Trumponomics.
Can
Trumponomics Fix What’s Broken? – Lance Roberts. He writes, “As you can imagine, I received quite
a few comments from readers suggesting that each percentage of tax cuts
will lead to surging corporate earnings and economic growth. This was a point
made by Bob Pisani recently on CNBC:
“The current 2017
estimate for the entire S&P 500 is roughly $131 per share. Thompson
estimates that every 1 percentage point reduction in the corporate tax rate
could ‘hypothetically’ add $1.31 to 2017 earnings.
So do the math: If
there is a full 20 percentage point reduction in the tax rate (from 35 percent
to 15 percent), that’s $1.31 x 20 = $26.20.
That implies an
increase in earnings of close to 20 percent, or $157.”
Fair enough.
I don’t entirely
disagree considering my recent prognostication of the S&P melting up to
2400 in the next few months.”
But he goes on to note that the Regan tax cuts didn’t have
such an impact on corporate earnings.
“Importantly, as has
been stated, the proposed tax cut by President-elect Trump will be the largest
since Ronald Reagan. However, in order to make valid assumptions on the
potential impact of the tax cut on the economy, earnings and the markets, we
need to review the differences between the Reagan and Trump eras. My colleague,
Michael Lebowitz, recently penned the following on this exact issue.
“Many investors are
suddenly comparing Trump’s economic policy proposals to those of Ronald Reagan.
For those that deem that bullish, we remind you that the economic environment
and potential growth of 1982 was vastly different than it is today.
Consider the following table:”
“The differences
between today’s economic and market environment could not be starker. The
tailwinds provided by initial deregulation, consumer leveraging and declining
interest rates and inflation provided huge tailwinds for corporate
profitability growth.
As Michael points out,
those tailwinds are now headwinds.
However, while
Thompson’s have pulled a rather exuberant level of impact ($1.31 in earnings
per 1% of tax rate reduction) a look back at the Reagan era suggests a
different outcome.
The chart below shows
the impact of the two rate reductions on the S&P 500 (real price) and the
annualized rate of change in asset prices.”
“The next chart shows
the actual impact to corporate earnings on an annualized basis.”
“In both cases, the
effect was far more muted than what is currently being estimated by Wall Street
analysts currently.
Furthermore, as I
noted in this past weekend’s missive, given the primary expansion of the
financial markets has been driven by monetary policy and artificially low
interest rates, any benefit provided to earnings growth from lower taxes will
be mitigated by reductions from changes in monetary policy. “
Want
to Rev Up the Economy? Don’t Worry About the Trade Deficit – New York Times
“The economic policy
of President-elect Donald J. Trump is still a work in progress. But if campaign
rhetoric is a reliable guide, reorienting trade policy may become one of the
main goals of the new administration… A major theme of the report is concern
about the trade deficit. In recent years, American imports have exceeded
exports by about $500 billion a year. Mr. Navarro and Mr. Ross argue that if
better policies eliminated this “trade deficit drag,” gross domestic product
would be higher and more people would be employed.”
“That conclusion is
correct, but only in a superficial sense. Gross domestic product is, by
definition, the sum of consumption spending, investment spending, government
purchases and the net exports of goods and services. If net exports rose from
their current negative value to zero, and the other three components stayed the
same, domestic production would increase and, consequently, so should
employment.
But a fuller look at
the macroeconomic effects of trade deficits suggests that things aren’t so
simple.”
“The most important
lesson about trade deficits is that they have a flip side. When the United
States buys goods and services from other nations, the money Americans send
abroad generally comes back in one way or another. One possibility is that
foreigners use it to buy things we produce, and we have balanced trade. The
other possibility, which is relevant when we have trade deficits, is that
foreigners spend on capital assets in the United States, such as stocks, bonds
and direct investments in plants, equipment and real estate.
In practice, these
capital inflows from abroad have been large. Net foreign ownership of American
capital assets has risen to about $8 trillion from $2.5 trillion at the end of
2010. American companies moving production overseas get a lot of attention, but
this data shows that capital has, over all, moved in the opposite direction.”
“The trade deficit is
inextricably linked to this capital inflow. When foreigners decide to move
their assets into the United States, they have to convert their local
currencies into American dollars. As they supply foreign currency and demand
dollars in the markets for currency exchange, they cause the dollar to
appreciate. A stronger dollar makes American exports more expensive and imports
cheaper, which in turn pushes the trade balance toward deficit.
From this perspective,
many of the policies proposed by Mr. Trump will increase the trade deficit
rather than reduce it. He has proposed scaling back both burdensome business
regulations and taxes on corporate and other business income. His tax cuts and infrastructure
spending will most likely increase the government’s budget deficit, which tends
to increase interest rates. These changes should attract even more
international capital into the United States, leading to an even stronger
dollar and larger trade deficits.”
“But what about those
tariffs that Mr. Trump sometimes threatens to impose on foreign countries? They
would certainly curtail the amount of international trade, but they are
unlikely to have a large impact on the trade deficit.
When American consumers
facing higher import prices from tariffs stop buying certain products from
abroad, they will supply fewer dollars in foreign-exchange markets. The smaller
supply of dollars will drive the value of the dollar further upward. This
dollar appreciation offsets some of the effects of the tariff on imports, and
it makes American exports less competitive in world markets.
But it doesn’t matter
much, anyway, because in reality, trade deficits are not a threat to robust
growth and full employment. The United States had a large trade deficit in
2009, when the unemployment rate reached 10 percent, but it had an even larger
trade deficit in 2006, when the unemployment rate fell to 4.4 percent.
Rather than reflecting
the failure of American economic policy, the trade deficit may be better viewed
as a sign of success. The relative vibrancy and safety of the American economy
is why so many investors around the world want to move their assets here. (And
similarly, it is why so many workers want to immigrate here.)”
“President-elect
Donald Trump and his emerging team are confident their proposed tax cuts and
regulatory rollbacks will spark a dramatic upswing in economic growth. Two
forces will make that tough: an aging population and stagnant productivity.”
“As a result, the
nonpartisan Congressional Budget Office predicts roughly 2% annual growth for
gross domestic product pretty much as far as the eye can see.”
“Economists agree that
tax cuts and infrastructure spending could give the U.S. a boost especially in
the short term. But doubt runs deep on both the left and the right that Mr.
Trump can hot his ambitious target for long term growth”
“But over the long
run, an economy’s potential growth rate all comes down to how much people are
working and how productive they are. Deceleration in labor-force growth as the
baby-boom generation begins to retire and workforce participation declines,
plus a marked slowdown in productivity gains since the IT-fueled boom of the
late 1990’s and early 2000’s, help explain the tepid recent growth trend and
have prompted professional forecasters to lower their expectations for growth.”
“Achieving
consistently stronger GDP growth would require some combination of expanding
the workforce and boosting productivity growth – daunting tasks, especially on
the demographic front.”
Average
Maturity of US Debt at 2nd Highest Level Since 1980 – Gavekal Capital
“The recent backup in
yields is happening at an unfortunate time. In nominal terms, debt held by
the public is at an an all-time high (approximately $14.3 trillion). As a % of
GDP, debt held by the public is at the highest level going all the way back to
1962 (76.6%). The estimated term premium for 6-year government bonds (or a
close approximation for the 70 month average maturity length of government
bonds) has also increased from -70 bps on 7/8/2016 to 4 bps as of Friday. Toss
in the fact that the average maturity of treasury debt has increased from 49
months on 12/31/2008 to 70 months as of 9/30/2016 and this all adds up to a situation
where it is becoming much more expensive for the US government to finance its
budget deficit. This is worrisome with the prospect of larger US deficits on
the horizon.”
FED'S
EVANS: 'We are on the cusp of a period of rising interest rates' – Business
Insider
“"We are on the
cusp of a period of rising interest rates," Evans told reporters after a
speech in Chicago.
The yield on the
benchmark 10-year Treasury note, which has risen to about 2.4 percent from
below 2 percent before President-elect Donald Trump's surprise Nov. 8 victory,
suggests markets are pricing in somewhat higher U.S. inflation, Evans said.
Evans has long been
concerned that inflation, running at about 1.7 percent, is too low. He noted on
Monday that while the U.S. labor market is "kind of tight," wage growth
is weak.
Still, Evans is
optimistic that conditions are ripe for inflation to rise back to the Fed's 2
percent target, especially given the policies that the incoming Trump
administration has "earmarked" for the next few years. Trump has said
he plans to cut taxes and improve U.S. bridges, roads and tunnels.”
“"An
infrastructure plan would be terrific, that would be good," Evans said.
"I think corporate tax rationalization would be a huge improvement."
Speaking to reporters
later, Evans suggested he is not advocating a huge government infrastructure
spending bill, saying, "you don't need explicit stimulus" with the
jobless rate already so low.”
“The Republican
businessman has said his policies would lift annual economic growth to 3
percent or 4 percent, or even more.
Evans, who rotates into a voting spot on the Fed's policy-setting panel
next year, said that though it is possible to boost growth temporarily, keeping
it there would be difficult without expanding the U.S. labor force or boosting
productivity.
Otherwise, Evans said,
it would be a challenge to boost the sustainable U.S. economic growth rate,
which is currently about 1.75 percent.”
Interesting Article on Corporate Buybacks
One
of the biggest forces powering the stock market is stalling – Business Insider
“Companies have
finally hit the limit for buying up their own stock according to
Deutsche Bank.
Buybacks have been the
dominant driver of demand for stocks since 2009, according to HSBC research.
And total activity in 2016 is set to total $450 billion, according to David
Bianco, chief equity strategist at DB.
According to a note
from Bianco, this is roughly the same level as 2014 and 2015.
Additionally, Bianco
estimated that 20% of the S&P 500's earnings per share will come from
buybacks. By shrinking the amount of stock outstanding, earnings are
boosted on a per share basis.
According to
Bianco, certain industries will see a more significant slowdown in buyback
activity than others.
"Strains on
maintaining buybacks (even dividends) will be at Energy, Industrials, and
Materials," said Bianco. "But Healthcare and most of big cap Tech
should be in a very good position to maintain buybacks or even boost them a bit
as [free cash flow] at these sectors is healthy and these companies still very
much have access to bank lines of credit and debt capital markets and low
interest rates."
“The buyback boom may
be in danger for a variety of reasons. Bank lending standards are getting
tougher, the market believes interest rates are going to head higher, and the
debt market may not be as benign as it has been.
On the other hand,
while a variety of factors point to buybacks slowing, the absolute level
of conditions is still accommodative. For instance, tightening from 0% interest
rates to 1% interest isn't as big a deal as going from 5% to 6%, so the
decline in buybacks may be limited.”
Bottom Line: We’re
fully invested post-election and anticipate a strong market through the end of
the year.
Joseph S. Kalinowski, CFA
Twitter: @jskalinowski
Facebook: https://www.facebook.com/JoeKalinowskiCFA/
Blog: http://squaredconcept.blogspot.com/
Web Site: http://www.squaredconcept.net/
No part of this report may be reproduced in any manner
without the expressed written permission of Squared Concept Asset Management,
LLC. Any information presented in this report is for informational
purposes only. All opinions expressed in this report are subject to
change without notice. Squared Concept Asset Management, LLC is a
Registered Investment Advisory and consulting company. These entities may have
had in the past or may have in the present or future long or short positions,
or own options on the companies discussed. In some cases, these positions
may have been established prior to the writing of the particular report.
The above information should not be construed as a
solicitation to buy or sell the securities discussed herein. The publisher
of this report cannot verify the accuracy of this information. The owners
of Squared Concept Asset Management, LLC and its affiliated companies may also
be conducting trades based on the firm’s research ideas. They also may
hold positions contrary to the ideas presented in the research as market
conditions may warrant.
This analysis should not be considered investment advice and
may not be suitable for the readers’ portfolio. This analysis has been written
without consideration to the readers’ risk and return profile nor has the
readers’ liquidity needs, time horizon, tax circumstances or unique preferences
been taken into account. Any purchase or sale activity in any securities or
other instrument should be based upon the readers’ own analysis and conclusions.
Past performance is not indicative of future results.
No comments:
Post a Comment