…..Strong start for trading in the New Year. Technical and fundamental considerations. ISM manufacturing closes 2016 on high note. Construction spending at multi-year high. 115th Congress first order – let the fox guard the chicken coop and then flip flop. Ford folds in the face of bad optics. Samsung S8 might replace your computer. Space X countdown to Sunday. Fewer new drugs last year.
Financial Review by Sinclair Noe for 01-03-2017
DOW + 119 = 19,881
SPX + 19 = 2257
NAS + 45 = 5429
RUT + 8 = 1365
10 Y + .01 = 2.45%
OIL – 1.23 = 52.49
GOLD + 7.30 = 1159.20
Stock markets all over the world opened 2017 with a bang. An upbeat Chinese manufacturing report helped spark a 1% gain for the Shanghai Composite, and Italy’s MIB (+1.7%) pushed an advance in Europe. On Wall Street we started with a 160 point jump at the open, slowly but surely giving back part of the pop. And everyone is wondering whether the year-end breakout will continue.
If you have your S&P 500 chart open you might want to draw some channel lines over the past year; the bottom boundary would be marked by lows set June 27 following the Brexit vote – to November 4 and the US election; the upper boundary is marked by three distinct drives to highs in April, August, and December. We are currently near that upper boundary; meaning we will need to see a break above 2277 for the bulls to keep running. The presumption is that we see a drop back to the lower channel line just above 2100, which has been a strong level of support over the past 2 years. This is not to say we will drop to that level, just that the market is looking at that level, respecting that level.
That’s the technical side of the outlook. On the fundamental side, take another chart of the S&P 500, overlay it on top of the Federal Reserve’s balance sheet and note the similarity. The Fed has a history of causing major market crashes by hiking interest rates. With interest rates near all-time lows in the history of the United States, rates have almost nowhere to go but up. Yellen said they intend to hike three more times in 2017. It would be nearly miraculous if the Fed can raise rates gently and without doing harm. And if the path forward for the economy gets rough, the Federal Reserve has no room to lower interest rates to jump start the economy. Negative rates over in Japan and Germany have not helped resuscitate their economies. The three best decades for stock markets were the 1920s, the 1980s, and the 1990s. The Fed was not able to slow those markets gently, rather the markets crashed. In all other past cases, the Fed had plenty of room to reduce interest rates. The $64,000 question for the bond market might be – when and how will the Federal Reserve adjust its holdings of US Treasuries and mortgage-backed securities. Do they stop reinvesting interest and principal payments or go straight to selling issues?
I really don’t want to sound bearish. Two weeks into 2016 the broadcast and print media were calling for a bear market; once again sounding foolish. I fully expect the S&P to make a run at new highs and the Dow Industrials will make another push to break through 20,000. Still, I am not sanguine at these levels. The only constant is change, and that means 2017 will offer many unexpected surprises and opportunities.
The dollar is flying. The US dollar index trading higher, moving above 103, at its best level since the end of 2002. The euro slipped below 105 and seems like it wants to find parity with the dollar. Yields were screaming higher across Europe, where the UK 10-year is up 9 basis points at 1.33%. Bonds saw heavy selling early with yields across the Treasury curve moving higher, then pared losses throughout the session. Meanwhile, crude oil prices topped $55 a barrel following confirmation that both Kuwait and Oman have lived up to their promises to cut production, but oil prices slipped – maybe because of the strong dollar, maybe because non-OPEC Libya is increasing output, maybe because the oil rig count in the US was up, maybe because of a strong report on manufacturing.
The Institute for Supply Management said its manufacturing index climbed to 54.7% in December from 53.2%. Any number above 50% signals expansion. The overall economy has been growing for 91 consecutive months, and the manufacturing sector hit a 2-year high, finishing the year on a positive note.
Corelogic reports home prices rose 7.1% year over year. On a month-over-month basis, home prices increased by 1.1% in November. Corelogic forecast an increase of 4.7% year-over-year in November 2017. In Arizona, the Home Price Index increased 0.6% for November; up 5.8% in the past 12 months through November, with a forecast of 6.2% growth over the coming year. Still, home prices in Arizona remain 21.4% below peak values.
Construction spending rose to its highest level in 10-1/2 years. The Commerce Department said construction spending increased 0.9 percent to $1.18 trillion, the highest level since April 2006. It was boosted by gains in both private and public sector investment. Spending on private construction projects jumped 1.0 percent in November to its highest level since July 2006 as single-family home building, as well as home renovations, increased. Investment in private nonresidential structures – which include factories, hospitals and roads – rose 0.9 percent after dropping 1.5 percent the prior month. Public construction spending gained 0.8 percent in November to the highest level since March. It was the fourth straight month of increases.
The 115th Congress was sworn in today, and Republicans continue to be in charge of both legislative houses. The House Republican Conference voted Monday night to approve a change to House rules to weaken the independence of the Office of Congressional Ethics and place it under the oversight of the House Ethics Committee – a panel controlled by party leaders. They planned to vote on the measure today – what would have been the first vote of the new Congress – what would have been a textbook definition of bad optics. Not surprisingly, there was broad criticism of the move to gut the independent ethics office, including from President-elect Trump, who tweeted that House Republicans should focus on more important policy, even though he called the ethics watchdog “unfair”.
President-elect Donald Trump took aim at General Motors for making the Chevrolet Cruze sedan in Mexico. Trump slammed GM on Twitter for (quote) “sending Mexican-made model of Chevy Cruze to U.S. car dealers-tax free across border. Make in U.S.A.or pay big border tax!” A month ago GM CEO Mary Barra agreed to join a panel of CEOs who will advise Trump on economic policy. The U.S. auto industry has defended NAFTA as critical to its business model, but Trump has described the deal as venomous to American jobs.
This is not the first time Trump has gone after a carmaker for offshoring jobs. During the final weeks of the presidential campaign, Trump slammed what he called Ford’s “horrible” plans to move all small car production to Mexico within three years. And today Ford said it will cancel production of a $1.6 billion plant in Mexico, and will instead invest $700 million in Flat Rock, Michigan; adding 700 direct new jobs to produce electric and autonomous vehicles, plus the Ford Mustang and Lincoln Continental. Ford had originally planned to build its Ford Focus in San Luis Potosi, Mexico. The company said it will continue to build its Focus at an existing plant in Hermosillo, Mexico. Ford CEO Mark Fields told CNBC that Trump wasn’t the main factor when Ford decided to cancel its plans for a $1.6 billion plant in Mexico, rather the decision not to move was due to market demand. And that may be the case but you can also bet that Ford management is a better judge of bad optics than Washington politicians.
A “technology disruption” Monday evening left thousands of international travelers stuck in US airports for hours on one of the busiest travel days of the year. Don’t blame the airlines. A four-hour outage for U.S. Customs and Border Protection left angry passengers dealing with significant delays from South Florida to Boston to Los Angeles. All affected airports were back up and running by late Monday.
Samsung’s upcoming flagship Galaxy S8 smartphone could give users the ability to plug it into a screen and turn it into a desktop personal computer. The All About Windows Phone blog posted a leaked slide from a presentation showing a Samsung smartphone being connected to a screen with a keyboard and mouse. The slide is titled “Samsung Desktop Experience” and shows a phone powering a screen to create a multi-tasking interface. We might see the new phone in February.
SpaceX is preparing to resume rocket launches next Sunday, using revised operational procedures developed in response to a fiery accident that occurred during routine ground preparations last fall. SpaceX’s blastoff date is subject to results of testing later this week, WSJ reports, but if everything checks out, Iridium Communications will get the first 10 of its next-generation communications satellites into orbit.
Last year turned out to be a disappointing one for new drug approvals with the FDA clearing just 22 new medicines for sale, the lowest number since 2010 and sharply down on 2015’s tally of 45. Several factors led to the decline: Five new drugs that had been scheduled for approval in 2016 ended up winning an early green light at the end of 2015. There was also a decline in drugs being filed for approval and the FDA rejected or delayed more applications in 2016 than in the previous two years.
Many sufferers of type 1 or type 2 diabetes are bracing for changes in insurance coverage of their insulin as prices soar. CVS Caremark will no longer cover the insulin brand Lantus in favor of a new biosimilar version, Basaglar. Biosimilars are considered the generic versions of “biologic” drugs that are based on natural sources. Prices for many insulin brands have increased from about $300 to $500 between January 2013 to October 2016, according to drug discount search company GoodRx.
Retailers are bracing for a fresh wave of store closures at the start of the new year. Macy’s will close 35 to 40 underperforming stores, around 5% of its total locations in 2017.