Financial Review

Thin Air

…..Black Friday sales dip, except guns. Cyber Monday should be big. OPEC meets Wednesday. Singapore for entrepreneurs. Samsung split? Time for sale? Wells Fargo fights because there is a clause calling for mediation on the bogus accounts they fraudulently opened. Hack the Muni. You did not win the Powerball, so we look at the good news and the bad news in the stock market.

Financial Review by Sinclair Noe for 11-28-2016

DOW – 54 = 19,097
SPX – 11 = 2201
NAS – 30 = 5368
RUT – 17 = 1329
10 Y – .05 = 2.32%
OIL + .84 = 46.90
GOLD + 9.90 = 1194.80
The Dow and the Nasdaq both rose 1.5% last week, while the S&P gained 1.4%. The Russell outpaced them all, jumping 2.3%. The Russell 2000 index of small cap stocks extended its winning streak to 15-straight sessions, something that hasn’t happened since February 1996 before ending the streak today.


Black Friday sales were down. Brick-and-mortar retail sales fell 5% year-over-year for Thanksgiving Day and Black Friday as online spending broke $3 billion for the first time.  Black Friday was a record-breaking day for gun background checks in America. The FBI processed 185,713 background checks for buyers through its National Instant Criminal Background CheckSystem (NICS.) That was nearly 400 more transactions than the bureau processed on Black Friday 2015. More than 122 million – that’s how many people are planning to flock online to score Cyber Monday deals, according to a survey from the National Retail Federation. A huge number and an all-time high, sure, but it’s only slightly more than last year’s NRF figure.


Tensions are growing among OPEC members. The oil cartel’s meeting is scheduled for Wednesday, and there are growing doubts as to whether members and nonmembers can agree to a production cut. In September, OPEC, which accounts for a third of global oil production, agreed to cap output at around 32.5-33.0 million barrels per day versus the current 33.6 million bpd. The meeting on Nov. 30 was expected to rubber-stamp that deal, but doubts emerged as OPEC’s No.2 and 3 producers, Iraq and Iran, expressed reservations about the mechanics of output reductions and Saudi Arabia voiced concern about Russia’s willingness to cut.


If OPEC can come up with a deal to cut output, the big winner might be US shale producers. Higher prices could tempt US producers to increase output and encourage them to complete more wells. US oil production was already a factor in OPEC’s decision against cutting output in late 2014, even as prices had plummeted. The group, instead, choose to defend its share of the oil market from non-OPEC producers, particularly the U.S. shale industry.


The US dollar is lower. The US dollar index is down around 101.3 as the greenback loses ground against all of its major peers aside from the British pound.


Singapore is the world’s most entrepreneurial country. That’s according to the Ashish J Thakkar Global Entrepreneurship Index from the Mara Foundation and Opinium. New Zealand, Denmark, Canada, and the UK round out the top five. The US ranked 13th in the survey.


Samsung could split itself in two. The electronics giant is considering a proposal from US activist hedge fund Elliott Management that would split it into a holding vehicle for ownership purposes and an operating company, according to Seoul Economic Daily.


Time Inc , the publisher of Time, People and Fortune magazines, has rejected a takeover bid from billionaire investor Edgar Bronfman Jr. According to the New York Post, Bronfman offered $18 per share, representing a premium of 30 percent to Time Inc’s Friday close and valuing the publisher at $1.78 billion.


Shares in German airline Lufthansa are dropping by 3% in Europe after the pilots’ union said they would continue striking on Tuesday and Wednesday. Talks aimed at resolving a costly strike failed on Sunday. Strikes last week forced the cancellation of 2,755 flights, affecting more than 345,000 passengers.  Lufthansa is cancelling around 1,700 flights over the next two days.


Wells Fargo may be sounding a more friendly tone these days, but the big bank is still playing legal hard ball with victims in the fake account scandal. Wells Fargo customers have opened a class action lawsuit against the bank over the opening of unauthorized accounts in their names. But Wells Fargo is trying to derail that lawsuit. The bank asked the U.S. District Court in Utah, where the class action suit was filed, to force dozens of those customers to resolve their claims quietly in closed-door arbitration instead of open court. Forced arbitration clauses are controversial because it helps hide misbehavior by companies in private mediation rather than opening it up to scrutiny in public court documents.


Hackers apparently breached San Francisco’s mass transit system over the holiday weekend, forcing the agency to shut down its light-rail ticketing machines and point-of-payment systems and allowing passengers to ride for free. A message reading “You hacked. ALL data encrypted” appeared on ticket machines Saturday morning, along with a contact email address — suggesting a ransomware attack, in which a hacker can lock out a system from its owners. The San Francisco Municipal Transportation System, known as Muni, quickly shut down the payment system, opening its gates to passengers.


A winning Powerball ticket worth $421 million was sold in Lafayette, Tennessee. The winning numbers were 17-19-21-37-44, and the Powerball was 16. Saturday’s jackpot was the 12th largest in US history.


But you and I did not buy that Powerball ticket, and so we are trying to figure out how to make money in the markets. I have some good news and some bad news. Good news first. The S&P 500 stock index has been on a tear in recent weeks, adding a nifty 6.2% from the lows of November 4. It’s sitting right near the highest levels ever. Don’t focus on what you THINK the market should be doing, focus on what it is ACTUALLY doing. The trend is up and a trend in place is more likely to continue than it is to reverse, until it reverses. The good news is that we could very easily see the trend continue for a while. There is a seasonal tendency for the stock market to rally into the end of the year, if for no other reason than the Wall Street traders try to pad their portfolios for year-end bonuses. It’s referred to as the “Santa Rally”, a period that’s defined by reduced volumes, reduced volatility and, in many instances, market gains. Add in the fact that the Dow has just recently topped 19,000 – not statistically important but a big round number that gets headlines and attracts weak hands to the markets, afraid of missing a rally. Now, this is not a guarantee of gains, just probabilities. If the market crashes tomorrow, you need to have a plan in place.


Now, let’s look at the bad news. We have been in a bull market for 92 months; that is a long time, much longer than the normal duration of a bull market. Yes, there have been bulls that ran longer, but not many. Yes, a bull market does not die of old age but other factors. Let’s look at a few:


The market is overvalued, or at the very least it is richly valued. Take a look at the price to earnings ratio, and the best way to do that is with the CAPE ratio developed by Robert Shiller. The Cyclically Adjusted Price Earnings Ratio is based on average inflation-adjusted earnings from the previous 10 years – that smooths things out. The historic average is 16.7.  The CAPE ratio is about 26.5 right now for the US stock market. There are only a few countries in the world with a higher CAPE at the moment and in US history there have only been very few times where the CAPE has been higher. To be more accurate there have only been two situations where it was significantly higher – in 1929 the CAPE was 32.6 and in 2000 it was 44.2. Of course the CAPE ratio was high in 1997 when Fed Chair Greenspan talked about irrational exuberance, and then the CAPE went higher in 1998 and 1999 and into 2000. The CAPE doesn’t tell us when the bubble will pop, just that we are in bubble territory.


Another indicator that many people like to consider is the Buffett Indicator, made popular by Warren Buffett; it looks at the market capitalization of the US stock market compared to the GDP. Depending on what we use as measurement for the market cap we get numbers between 120% and 125% right now. Since the 1950s the indicator has only been higher once – in 2000 it was higher for a few short quarters (and peaked at the level of 151.3%).


And it is always important to consider the role of the Federal Reserve. The dollar was recently able to break to the upside with market participants expecting a Fed rate hike in December. A strong dollar makes American goods more expensive overseas, which can negatively impact earnings for multinational companies. However, the flip side of that coin is U.S. consumers will pay less for imported goods, allowing them to have more disposable income. However, the higher rates are likely to act as a brake on the economy. Central bank tightening will likely put an end to the 30-year old bond bull market, and that means an end to cheap money. Remember the old advice – don’t fight the Fed.


Next, consider that the S&P 500 is 53% above its 200-month exponential moving average. In other words, we have seen an outsized rally; markets tend to swing in big moves to the upside as well as the downside, and typically after a big move, the pendulum swings back the other way, or at the least we see some consolidation as the markets pause, and catch a breath before running further. We are just about due for a pause. I’m not sure when, just that we are about due. This market could run for a couple more years, just like back in 1997, or maybe Friday marked the top and today is the beginning of the downturn. We only know in time. We do know that at these heights, the air is thin.



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