"Competing at the highest level is not about winning. It's about preparation, courage, understanding and nurturing your people, and heart. Winning is the result." -- Joe Torre
As we head out of the shortened week just past and into what is considered by business to be the holiday season, we must now take stock of where we are and where we expect to go as 2017 begins to fade. From a markets perspective, although equities have pushed ever higher, there are still stark positives that cannot be ignored. Simply, we currently exist in a world where eight of the 10 largest economies are growing simultaneously. Almost nothing tops that fact for significance.
One may argue that central banks have "artificially" set this environment up. One might also argue that valuations are stretched. These points may or may not be valid, the fact remains that understanding the environment and its causation has little to do with succeeding, in the present. No one who spends years unsuccessfully calling for massive corrections gets to claim victory on the day the correction finally happens. However, those who think they understand, yet adapt to forces beyond their control will claim successive victories along their path, even while dealing with occasional fallen trees that block that road.
Let's not forget, gang, that although the Federal Reserve is at this present time reducing its balance sheet while trying to raise the fed funds rate, that interest rates remain too low to significantly draw investment away from the equity market. The day that this fundamentally changes may come -- in fact, it could come within the next 12 months. Then again, it may not. We will adapt either way. One thing we will not do is worry about it. We will get more news regarding consumer inflation and the future of corporate tax rates this week.
Facing Market Negatives
So, valuations appear extended as compares to historical norms? Both the S&P 500 and Dow Jones Industrials are trading at a broad 19 times the next 12 months' earnings. A bit high? Yes. Crazy high? No. This is without firms, and analysts pricing in an improved picture for corporate tax rates. Both the House and Senate plans, while not apparently doing so much for the average Jane or Joe, do include better conditions for corporates. Likely we see one plan, the other or some hybrid of the two passed in 2017? Maybe not. Likely that something is rushed through in early 2018? Very.
The yield curve is the flattest that we have seen in a dog's age. This morning, I see the spread between the 10-year and the two-years U.S. Treasuries trading at 0.585 percentage points. Bear in mind that the leadership at the Fed is changing hands. Janet Yellen may speak on the state of the economy this Wednesday. Far more focused-upon will be the Senate confirmation hearing for Jay Powell that beings on Tuesday. Central bank behavior is no doubt supporting the short end of that curve. Will a Fed Chair selected by this president maintain a posture that includes three to four rate hikes in 2018, without evidence of increased pace of consumer inflation? Core November PCE is due this Thursday. October printed at a still paltry 1.4% year over year.
Do we need to worry about a government shutdown in two weeks? Markets might wiggle. I still feel that as always, something stop-gap will be passed after more is made of this event than need be. The real spending bill for 2018 that ties into tax reform, and for political reasons, probably immigration as well as health care -- that one, we may have to worry about.
The death of corporate buybacks. While I do not see higher than normal valuations as particularly alarming, if making decisions for a large corporation, would I buy back shares in the public marketplace at these levels? It would be easy to second guess such a decision. Borrowing in order to reduce share count could be unwise in a potentially rising rate environment. Much smarter, and safer politically, to target spending in areas that target productivity, like research and development, or target growth, like mergers and acquisitions.
It seems like only last week that we spoke of Bitcoin crashing through the $8000 level to the upside. Well, it was only last week. Last night, Bitcoin screamed past $9000, and even traded as high as $9700 in early Monday morning trade. There is no doubt that the prospects of derivative products trading at the CBOE, and the CME have investors salivating at the idea of organized institutional money that at least initially will primarily flow in one direction.
The price of one token now seems destined for $10,000, and Bitcoin's entire market cap appears likely to pass $160 billion, even if there is some profit taking done today. As with stocks, I don't like to chase. Still, it would not have been so bad to chase Bitcoin a week or two ago, now, wouldn't it have been?
That said, I still will have trouble laying out $10,000 of my hard -earned money that most investors who are long have gotten themselves in that position due to sheer speculative optimism. You are not wrong. I am just not with you until there is that regulated product that trades on a regulated exchange.
Whoa. Black Friday internet sales tiptoed past the $5.0 billion mark, up a rough 17% from 2016. On top of that, expectations are for more than a $6.5 billion online shopping spree on Cyber Monday, which is today. Still, the brick-and-mortar gang seemed to be relatively happy this weekend. Most have learned to better manage their inventories, which in a Utopian world will lead to more full-price selling and less severe discounting as the holiday season wears on. The physical shopper who leaves the task undone until the bitter end, will also have one last Saturday and Sunday this year prior to the big day that falls on a Monday.
Those last two days, if prior years are any guide, will come at a point where shoppers will shy away from relying upon delivery, and retail chains that have properly managed that inventory will shine. Some items to consider: according to the international Council of Shopping Centers, 87% of those who shopped on Thanksgiving/Black Friday did so online as well as in-person, and 69% of those who ordered something online for in-store pick-up also bought something else while in the store.
How does this play out? Obviously, Amazon (AMZN) is taking the lion's share of the online market. You guys already know that I am a big fan of both Walmart (WMT) and Kohl's (KSS) , each for the way that they have differentiated themselves in the way that they have developed their relationship with the bully on the block. Btw, I still have to buy back some of that WMT. Thanks for reminding me.
WTI Crude may be off the pace early this morning, but there is no denying the recent trend. What's up there? It's easy to see, at least to me, a biased energy fan. We've already discussed the congruent growth among world economies. Global GDP could print at 4% for the year. With increased growth comes increased demand for energy, whether you like it or not. And fossil fuel is still how most of the planet will attack this problem. The Saudi crackdown is another issue. Need a little geopolitical risk premium added into forward-looking oil prices? Throw some drastic change and a touch of instability at what is probably the most important member of the OPEC/non-OPEC coalition.
Oh, that said, OPEC, Russia, and the gang will meet later this week in Vienna. Expectations are for an extension of the existing production freeze beyond that deal's current March 2018 expiration. Inventories across the developed world are lower. They have managed to get market prices above the higher end of the range. For WTI, $58 becomes crucial. How will the U.S. shale crowd respond?
Did You See That?
Last night, one of my favorite tech stocks, Action Alerts PLUS charity portfolio name Nvidia (NVDA) , and one of my not-so-favorite long-term investments General Electric (GE) got together. The deal announced extends the 10-year partnership already in place between NVDA and GE Healthcare. The focus here is on the NVDA chip powered Revolution Frontier CT System that will now allow GE's imaging devices to double their speed. There are 500,000 such devices in operation globally.
Let's not forget that GE Healthcare is where CEO John Flannery rose to corporate prominence. The mission here is to bring artificial intelligence and new tools to hospitals that will improve user-end patient care. Does this move the needle for either firm? Well, it sure beats a sharp stick in the eye.
Chart of the Day: 10yr/2yr US Treasury Yield Curve
As you can see illustrated by this chart, the erosion of the yield curve since 2013 has happened in almost slow motion -- far different from the sudden crash seen in this space from 2004 into 2005. Keep in mind that equity markets really did not melt down until 2008/2009, despite the violence seen in treasury markets that occurred well ahead of that horrific action.
My thought is that we are still a long way from having to worry about an inversion of this curve, and that a Jerome Powell-led central bank would refrain from pushing the fed funds rate long before the two yields come close to colliding. The trajectory of the curve suggests time to think before this happens.
If that should change and the slope of the curve become negative far more quickly than I expect, history suggests one would still have some time to adjust one's equity portfolio accordingly.
Worry level? 6 out of 10, with the right reserved to change my mind.
Sarge's Trading Levels
These are my levels to watch today for where I think that the S&P 500, and the Russell 2000 might either pause or turn.
SPX: 2616, 2610, 2604, 2596, 2590, 2584
RUT: 1537, 1529, 1522, 1516, 1511, 1501