Financial Review

Gravy Exuberance

…..Nasdaq record high. Goldman’s rational exuberance. Fed minutes and the mystery of low inflation. Cap goods orders drop. Consumer sentiment slips. Uber’s very bad breach. Google is watching you. Thanksgiving tidbits.

Financial Review by Sinclair Noe for 11-22-2017

 

DOW – 64 = 23,526
SPX – 1 = 2597
NAS + 4 = 6867 (record)
RUT – 2 = 1516
10 Y – .04 = 2.32%
OIL + 1.17 = 58.00
GOLD + 11.50 = 1292.50

 

The Nasdaq eked out a small gain to close at a record high. I suggest you celebrate with turkey and pie. The other major indices closed lower, after hitting records yesterday. Trading volume was very light, which is not surprising given it’s a holiday tomorrow. Stock markets typically rally right around Thanksgiving – maybe it’s the holiday spirit – but if you are looking for guidance into market trends, you won’t find it today.

 

That didn’t stop Goldman Sachs from offering up their forecast. Goldman analysts say, “The current equity market valuation is certainly stretched in historical terms but it does not appear unreasonable based on the high level of corporate profitability.”  They think the market will experience “rational exuberance” over the next three years, with prices and valuations all supported by earnings growth. Their target for the S&P 500 at the end of 2018 is 2,850—or about a 10% rise from current levels. That doesn’t sound like rational exuberance to me. They expect the index to rise to 3,000 by the end of 2019 and 3,100 by the end of 2020.

 

The only thing that threatens the low-volatility regime is the failure to pass the tax bill. “If tax reform fails, S&P 500 will fall near-term by 5% to 2450,” Goldman said. Earnings growth estimates, which Goldman raised, are predicated on the passing of the tax cut bill, higher GDP growth and higher oil prices. Growth will continue to outperform value in 2018, according to Goldman. But not all growth is the same. Companies that will benefit the most are the ones with secular growth story—not overly expensive and can see their revenues rise by 10%. Companies that are consistently investing in capital expenditure and R&D as well as those that are targets of potential merger and acquisition will see the highest returns.

 

To the little voice in your head screaming about the CAPE ratios and stretched valuations, Goldman has this to say: “The current equity market valuation is certainly stretched in historical terms but it does not appear unreasonable based on the high level of corporate profitability. The return on equity (ROE) of the S&P 500 equals 15.4%, which typically corresponds with a price/book multiple of roughly 3x. The index currently trades at a modest premium of 3.3x.”

 

So, we’ve got secularly higher profit margins, improving GDP, and perhaps some higher energy prices and a little tax reform cherry to top it off, all of which makes sticking it out in stocks perfectly rational, if slightly exuberant. The challenge, of course, is knowing when that exuberance turns to the dark side.

 

Amidst all the noise and news, there are still a few truisms in the market. For example – Don’t fight the Fed. Today, the Fed released minutes of their Oct. 31-Nov. 1 FOMC policy meeting. The takeaway is that the Fed is going to raise interest rates, again – almost certainly at the December meeting in about 3 weeks. Policymakers generally agreed the economy was poised for strong growth. Several Fed officials also saw improved chances that the Congress would pass significant tax cuts that would boost business investment. Several Fed officials warned of the potential for bubbles, “in light of elevated asset valuations and low financial market volatility, several participants expressed concerns about a potential buildup of financial imbalances.” And generally, the FOMC policymakers still haven’t figured out why inflation remains stubbornly low. While some policymakers said they still needed to see more data before deciding the timing of a rate hike, many of the officials said the jobless rate appeared to be too low for inflation to remain at its current weak level. The central bank has increased rates four times in a tightening cycle that began in late 2015. The Fed currently predicts one more rate rise this year and three more hikes in 2018. Policymakers confirmed the idea of incremental rate increases, although in the next few months there will be a new crop of policymakers at the Fed; including a new chair, Jerome Powell, taking over from Janet Yellen. In a speech last night, Yellen said that persistently low inflation might not be transitory. Yellen and her colleagues have previously expressed surprise at an inflation rate that has continued to undershoot the Fed’s official 2% target for much of the economic recovery — a trend that suggests the labor market is not fully healed despite a historically low 4.1% jobless rate. Another sign of trouble: Wages are not rising for most Americans, leading to a loss of purchasing power despite low reported inflation readings.

 

New orders for U.S.-made capital goods fell in October after three straight months of gains. The Commerce Department said orders for non-defense capital goods excluding aircraft, a closely watched proxy for business spending plans, declined 0.5 percent last month. That was the biggest drop since September 2016 and followed an upwardly revised 2.1 percent increase in September. Strong business spending on equipment is helping to boost manufacturing, which accounts for about 12 percent of the U.S. economy. Last month, there were increases in orders for machinery, electrical equipment, appliances and components, primary metals and computers and electronic products.

 

In a separate report, the Labor Department said initial claims for state unemployment benefits declined 13,000 to a seasonally adjusted 239,000 for the week ended Nov. 18.

 

The University of Michigan said its consumer sentiment index in November fell to a reading of 98.5 from October’s 100.7. That’s a little bit above the preliminary reading of 97.8 for November and still the second-best reading in 13 years. Assessments both of current and future conditions fell during the month. Still, sentiment is high and that bodes well for the holiday shopping season.

 

Uber says it covered up a breach that exposed data on millions of customers and drivers. In late 2016, Uber paid hackers $100,000 to destroy data on more than 57 million customers and drivers stolen from the company and decided not to report the matter to victims or authorities. While the legal implications of Uber’s cover-up are still being examined, The New York Times said Uber might have violated the Federal Trade Commission’s stipulation that companies disclose data breaches and reveal any evidence of a cybersecurity compromise. Uber might have also violated California’s breach-disclosure laws and lying to the FTC while under investigation. Investigations are being launched in the US, including several state attorneys general, plus in the UK, Australia, and the Philippines. The stolen information included names, email addresses and phone numbers of 57 million Uber users around the world, and the names and license numbers of 600,000 U.S. drivers.

 

Many people realize that smartphones track their locations. But what if you actively turn off location services, haven’t used any apps, and haven’t even inserted a carrier SIM card? Even if you take all of precautions and opt out of almost everything, phones running Android software gather data about your location and send it back to Google when they’re connected to the internet, a Quartz investigation has revealed. Since the beginning of 2017, Android phones have been collecting the addresses of nearby cellular towers—even when location services are disabled—and sending that data back to Google. The result is that Google, the unit of Alphabet behind Android, has access to data about individuals’ locations and their movements that go far beyond a reasonable consumer expectation of privacy. The location-sharing practice does not appear to be limited to any particular type of Android phone or tablet. While Google says it doesn’t use the location data it collects using this service, its does allow advertisers to target consumers using location data, an approach that has obvious commercial value. The company can tell using precise location tracking, for example, whether an individual with an Android phone or running Google apps has set foot in a specific store, and use that to target the advertising a user subsequently sees.

 

The turkey on your Thanksgiving table this week probably won’t look anything like it would have decades ago. Today’s turkeys are a lot bigger — more than double the size — and faster-growing than the birds our parents or grandparents ate. In 1967, the typical Thanksgiving turkey tipped the scales at 16.7 pounds. By 2015, they weighed in at 30.2 pounds.

 

And it’s not just turkeys that weigh more. Research has found that people, on average, gain about 1 pound during the holidays. Although, that can add up over the years. Average cost of a Thanksgiving meal for 10 people, according to an American Farm Bureau survey. That’s about 75 cents cheaper than last year and the lowest price since 2013.

 

Tonight is a big night for bars, second only to New Year’s Eve. It’s easy to understand why. The majority of Americans have the day off on Thanksgiving. Many return to their hometowns to visit families – and for college students it’s often the first time they’re back in town since leaving for campus. Temptation is high. Be careful on the roadways tonight.

 

Google tracked searches and found that the most searched for item on the day before Thanksgiving is for ham shops. By Thursday evening, the top search changes to “outlet malls”. It’s estimated we will spend about $6.6 billion online next Monday as part of Cyber Monday, up 16.5 percent from last year. The period from Thanksgiving through Monday is expected to generate nearly $20 billion in online sales.

 

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