Market Update
(all values as of 03.29.2024)

Stock Indices:

Dow Jones 39,807
S&P 500 5,254
Nasdaq 16,379

Bond Sector Yields:

2 Yr Treasury 4.59%
10 Yr Treasury 4.20%
10 Yr Municipal 2.52%
High Yield 7.44%

Commodity Prices:

Gold 2,254
Silver 25.10
Oil (WTI) 83.12


Dollar / Euro 1.08
Dollar / Pound 1.26
Yen / Dollar 151.35
Canadian /Dollar 0.73

January Themes

The new year begins with a couple themes which started to surface in late December. The first theme is a return to outperformance by three groups, which had a rough H2, 2016. Biotech, sovereign bonds and precious metals miners suffered from a combination of regulatory uncertainty (health care & biotechs), fears of inflation-faster growth (bonds) and a strong Dollar/higher rates (precious metals). All three themes saw accelerated selling in to year-end, but now tax related selling should be behind these names and with portfolio positioning more favorable, sharp bounces in each sector would not surprise in January. IBB, the NASDAQ Biotech Index fell 22% last year. New drug approvals in the U.S. fell to a 6-year low last year, just twenty-two novel drugs gained approval from the FDA. As the product pipeline for the health care sector, biotechs stand to benefit from a new administration, which may be more favorably inclined to speed up the approval process.

An overhaul of the Affordable Care Act may be the spark which ignites the broader health sector. Biotechs have traded sideways for many months and on a longer term perspective are off 33% since the Q2, 2015 high. You don’t find many major equity sectors with a track record like that. Long-term sovereign bond yields have been rising across the world, but one of the anomalies has been the German 2-year yields which is near historic lows and are soundly negative at -81 bps. Short-term German rates fell which the rest of the yield curve rose, a development which suggests the Kondratieff Winter remains alive in Europe and potentially subject to more monetary stimulus from the ECB. This would surprise the markets and likely lead to a lower Euro. It would also put further wind at the back of European stocks, which are one of my votes for a potential upside surprise in 2017, at least early in the year. The risk of a French election upset remains, but I am starting to think it is in Germany where the pivot point lies and if the security situation does not improve there, Chancellor Merkel is a short. Will she resign before the elections?

Back to sovereign bonds. I am not saying the sell-off in government bonds, which is the major trend, has changed. I am saying that in Europe and the U.S., it may have run a little ahead of itself, so a rally in debt markets would not surprise. On the U.S. 10-year, a retreat to 2.20% would be where sellers should show up again.  Economic data in the U.S. is very strong in some areas, i.e. small business hiring, but other indicators are close to levels, which have presaged past recessions. Stay tuned, the U.S. economy is near an inflection point with deregulation and tax cuts coming and a time lag to both, something markets will have to deal with. Are investor expectations for U.S. stocks too aggressive now?

Finally the precious metals names started their second leg in a bull market, during the last week of December. Even a modest bond rally and a Dollar which moves sideways, should be enough to launch these stocks. As inflation pressures build, should economies accelerate, or bonds rally should an economic miss occur, the precious metals seem to be in a good location. Some names corrected 50%-61% from their highs of mid-August, so for Fibonacci fans, the numbers are there.



That January Indicator And Market Cycles – U.S. Stocks

It has been our custom over the years to pay special attention to the first five days of price action in the U.S. market, as well as the first month’s results. The data on the predictive nature of the first five days of trading and January’s results are pretty compelling. Using 1973 as the starting point for the S&P 500, we find that in only six cases when the S&P was up during the first five days, did the market end lower for the entire year. Those years were 1973, 1990, 1994, 2002, 2011 and 2015. So when stocks start strong, they end strong.

Even more interesting are the return patterns for the market following a positive January performance. Again, starting with the 1973 market, which began well and ended with a 17% loss, the record is only twice have stocks risen in January, only to end the year down. Those years were 1994 (-1.5%) and 2011 (-0.1%). So as January goes, particularly if January sees the S&P rise, so goes the year.

Geo-Politics in 2017

Our internal stock market model is giving a negative short term reading for the first time in months. What is driving a negative turn in the model is the markets overbought condition, sentiment which is quite bullish, rising interest rates, rich valuations and an extreme reading in the put: call ratio. Bear in mind this is a short-term signal. However, the long-term model has also turned mildly negative. Caution is now warranted.

A November Barron’s article said the war in Syria would be over by year-end. On December 30, a cease-fire was agreed to by Syria-Russia-Turkey. On December 31, the UN Security Council unanimously approved a resolution supporting the initiative, as well as supporting peace talks soon in Kazakhstan. The realignment of the Mideast has begun. Note that the U.S. was sidelined in this deal, yet went along with it in the Security Council. I think this was the idea and as this conflict recedes into the background, so will mentions of ISIS.

Turkey becomes a new focal point for geo-political risk in 2017, as does North Korea. As to the impact of the Syrian war ending on the oil markets, I believe it is negligible. However, it is in the Saudi’s interest to do additional oil supply deals, to enforce production limits and generally badger the price of oil higher between now and the date of the Aramco sell-off in 2018. Without a recession in the West and/or China, dips in the oil price should be considered opportunities.

There is much to consider concerning political risks in Europe as elections approach. For today, let me just say that it is in Russia’s interest to see NATO and the EU break-up. If Washington thinks Russia hacked the US elections, Berlin and Paris must be prepared for the same treatment. Moscow is actively working in Brussels, it would like to expand Russia’s borders to the West and while I expect Putin to give President- elect Trump something in the early going, after the honeymoon it will not be easy. Having said that, for the adventurous, the Russian Ruble and MICEX (+24%) had very good years in 2016 and look set for another year of outperformance.

Bloomberg Data

Bloomberg News. NI Russia

Lederer, Edith M. “UN Security Council to Vote on Syria Cease-Fire Agreement” BN 31 December 2016


Trump Tax Policy – Dollar

A significant near term risk to the economy, are the tax plans which are already written into the “Better Way” reform program. This package of tax reforms is the product of work done by Republican House members, Paul Ryan and input from Trump administration officials.

Bear in mind that the Trump administration is proposing a 15% corporate tax rate. For large companies which operate globally and pay little tax, this change may not mean much. But for S corps and small businesses organized as C corps, this could be one of the biggest, most beneficial changes in the U.S. tax system, since the 1920s. Essentially what is being discussed, is taxing U.S. imports at the corporate rate, in this case 15%. This would amount to a tariff, but one that is far less than the Chinese or Japanese seem to fear, something in the range of a 45% tariff. It would raise the price of imports (so inflationary) and give domestic manufacturers a more competitive price for their products. The other side of the trade is U.S. exports would be exempt from any type of taxation.

For the USD, a tax policy of this type could represent a sea change in capital flows. Dollar/Yen is already forecasting an important shift in capital, as is the Chinese Yuan. For 2017, we have a target of 8 on Dollar Yuan and 125 on Dollar/Yen with the risk of an overshoot for both currencies. Given the 10-year Treasury now has a 250 bp carry of 10-year JGBs and a 225 bp advantage over 10-year German Bunds, liquid capital has an incentive to buy Dollars. Trade flows also have an incentive, if countries which export into the U.S. are to begin paying tax at the U.S. border.

Commodities A Go-Go

The comment I made last week about commodities cycling up, gets quite a bit of attention here in Asia, especially since the consensus here is the USD goes higher. Out own work suggests the USD is indeed headed for more strength, though King Dollar may well take a breather after rising for 8 months. Normally the Dollar cycle we look at last about eighteen months, so another year of Dollar strength seems likely, but it does not have to be a straight up move. What troubles most readers is how commodities can rise at the same time the Dollar rises?

If King Dollar really does develop over the next year, downside in the Euro, Yuan and Yen must be substantial. For investors in Europe, Japan and China, inflation will rise and it makes a lot of sense to buy commodities now, especially commodities which represent basic needs. Grains, base metals and energy are all needs. Precious metals have already started the second leg of their bull market. The other driver for commodities is an ongoing recovery in the major economies. PMI’s are rising in Europe, business optimism is growing in the U.S. and China’s economy should grow at about 6.5% this year. Recovery in the oil producing economies of the Middle East, in Canada and Brazil are likely. Commodities as an asset class have pretty much gone off the buy list among institutions, yet repeal of the Volcker rule, which I believe is coming, will bring the banks back into the prop game. Commodities may well gain a new class of buyers, which have been missing for several years.