2016/12/22 Commentary: US Equities ‘Surge’ or ‘Splurge’?
© 2016 ROHR International, Inc. All International rights reserved.
Extended Trend Assessments reserved for Gold and Platinum Subscribers
COMMENTARY: Thursday, December 22, 2016
US Equities ‘Surge’ or ‘Splurge’?
It might seem counterintuitive that a US equities market which has gained so much since Donald Trump’s election victory might be in for more of a rally even prior to his inauguration on January 20th. Yet as we noted in last week Monday’s post section on the US Equities Surge, the combined impact of multiple policy changes might prove greater than the sum of their parts. We noted the obvious boost for US business and ultimately employment and wages likely to flow from tax and regulatory reform (in other words reductions in each.) For anyone who has not already reviewed it there was a most interesting excerpt from a very rough S&P Global Market Intelligence assessment of what the proposed corporate tax reductions alone might mean to the net (i.e. after tax) earnings of corporate America. Still worth a look.
Yet we also noted that there were other incentives (in the section with that title) which were at least as compelling as the sheer reduction of the corporate tax rate. Primary among those along with another key factor is the potential for full expensing of corporate capital investment that can further drive extensive employment growth. Yet it is always interesting to us when prominent analysts and portfolio managers confirm our views.
And that has occurred once again in this case through the good offices of some folks we really respect. Not the least of those is the world’s largest hedge fund founder and still one of its primary portfolio managers, Bridgewater Associates’ Ray Dalio. In a recent LinkedIn post he reversed his previous skepticism of the market impact of the Trump election victory. As noted in Monday’s Business Insider article RAY DALIO ON TRUMP (our marked-up version), Dalio recommends that anyone who hasn’t read Ayn Rand lately should do so. We suspect some younger market participants may not have ever read Ayn Rand, and we also suggest they do so.
In fact, Dalio’s reversal did not wait until this week. As cited in our assessment that the US economy was going to head back into much more constructive territory in our December 19th Welcome Back to ‘Normal’ post, Dalio was already saying that “…on the economic side of things the developments were broadly positive…” Yet he went far beyond that in his latest observations, noting that a return of long suppressed US business’ “animal spirits” was now likely. That is a Keynesian term indicating that the combined effect will restore the sort of confidence lacking over the past eight years. Worth a read.
Authorized Silver and Sterling Subscribers click ‘Read more…’ (below) to access the balance of the opening discussion. Non-subscribers click the top menu Subscription Echelons & Fees tab to review your options. Authorized Gold and Platinum Subscribers click ‘Read more…’ (below) to also access the Extended Trend Assessment as well.
NOTE: Given the likelihood the US economy will now get the structural reform that we (along with Mario Draghi and others) have been loudly complaining was not forthcoming since our dual It’s Lack of Reform, Stupid posts in January 2015, we need to adjust our view that a potential economic and equity market failure is coming. We previously referred you back to our December 8, 2015 post for our major Extended Perspective Commentary. That reviewed a broad array of factors to consider Will 2016 be 2007 Redux? While a continued regime of higher taxes and more regulation (i.e. under Clinton) might have fomented a continued weak or even weaker US economy, the tax and regulation changes proposed by a Trump administration that will likely be approved by the heavily Republican Congress now diminish the similar fears we had to what transpired in 2007-2008.
▪ We have already fully explored the lack of any likelihood the Fed’s continued ‘behind the curve’ proposed single further rate hike for 2017 (i.e. three instead of two) will create much of a headwind for the combined taxation and regulatory changes noted in last Friday’s Commentary: Fed Dread All in the Head. That has much to do with the Fed being stuck in the depressingly predictable rut of only being capable of ‘stochastic’ economic views and policy changes that are inadequate in rapidly changing circumstances. This included Larry Summers’ very prescient criticism of macroeconomics from way back in 1991. For anyone who has not already at least skimmed that, we also suggest a read.
Yet it is also that quite a few of those other analysts and observers we respect are now reinforcing their views on the degree to which the US equities might be ready to push higher in the near term. That is irrespective of what might happen if and when the Trump agenda hits some of the typical snags once it is in the process of being legislated in the US Congress. The ‘animal spirits’ are indeed afoot in the land.
One of the few remaining questions is whether holiday-accelerated important remaining US economic data to be released today prior to a lull into next week will inspire the US equities to push up this week? Or will the more extensive ‘Trump Bump’ be deferred into next week and beyond. It is important to note that geopolitical events and renewed concerns about the European banking system have given the equity markets some pause over the past couple of sessions.
So today into Friday would seem one of those pivotal times when we will find out if the US equities can assert bull market primacy once again, or will be subject to external drags. Yet the indications from the folks who have been most prescient on what to look for in the markets remain rather upbeat.
Shiller
Yale economics professor Dr. Robert Shiller is renowned for quite a few things, yet none more so than his cyclically adjusted price-to-earnings (CAPE) ratio. This is considered a more effective guide to the relative valuation of stocks than the straight (unadjusted) price-to-earnings ratio. In a Wednesday CNBC segment he notes that even though CAPE seems high presently at 28.0, it has been much higher previous. That is especially so during strong bullish phases. The first 1:30 is definitely worth a look.
Liesman on the 2017 FOMC Voting Rotation
In another CNBC segment on Tuesday their respected Fed observer Steve Liesman reminds us of key changes to the FOMC voting governors in 2017 (effective from next year’s first meeting.) As we had been pointed as well in our very early warning back in the Fear of Fed… with a twist October 13th post on these changes, we are glad that he has reminded everyone as the actual change draws near.
He highlights especially the removal of the very hawkish Esther George from the voting roster. And that she is replaced by the most dovish of Fed Governors, the Chicago Fed’s Charles Evans. As we noted back in October, this will also leave somewhat more dovish Philadelphia Fed head Patrick Harker replacing the recently more Hawkish Cleveland Fed President Loretta Mester.
Those changes mean that even if President Trump should (as is considered likely) select a couple of more hawkish Fed governors it will still leave no worse than a balanced FOMC voting structure. That will reinforce the likelihood a ‘stochastic’ change oriented Chair Yellen will be able to prevail with very gradual rate increases through 2017. Of course, the irony there is that Mr. Trump’s complaints about a ‘corrupt’ Fed leaving rates too low during the Obama administration might become quite a bit more muted once his regime is their beneficiary; especially on the implications for over US government debt service.
Santelli and Harris on FX
On Tuesday CNBC’s Rick Santelli had our old friend Yra Harris on a Santelli Exchange segment discussing how anticipated US policy changes and the geopolitical situation are already driving the international flows in favor of the US dollar. This is something we also had reviewed in some depth in last Monday’s Commentary: Not THAT Taper & US Equities Surge post. Yet as Yra Harris is one of the more astute central bank and market observers we know, we are always happy when our we are on the same page. And in the Tuesday segment Yra and Rick add some additional insights.
From an historic perspective Yra notes how combined loose fiscal policy and tightening monetary policy of the early years of the Reagan administration were the drivers for the sustained strength of the US dollar. And now it seems that the still depressed nature of the European and Japanese economies that leave them saddled with very low rates means the same sort of scenario is likely to play out. Unless and until those two finally implement real structural reforms (which still seem unlikely under current circumstances) the further rally of the US dollar is likely.
That is in spite of some of the Cassandra’s already worried about the proverbial loss of export competitiveness. That was also a concern back in the 1980’s that did not derail the US dollar rally. What they miss is the commensurate lower costs to US corporations from their extended global supply chain, and the degree to which lower important prices buffer the rise in domestic US inflation. The latter is actually a buffer against the Fed raising rates any faster than necessary, which is good for the already leading US economy.
Conclusion
The operative decision out of this morning’s on balance constructive US economic data (especially GDP) is whether that is enough to overcome recent weaker indications out of Europe noted above. Will it maintain only a steady ‘surge’ or fully ‘splurge’? We shall see.
Markets
And as noted since last Wednesday’s FOMC announcement, projections updates and press conference, its still circumspect incremental ‘stochastic’ approach is likely as good for US equities as it is negative for US govvies. Insofar as it encourages more US economic and equities strength than if the Fed were more aggressively hawkish once again, it is likely also constructive for the US dollar even up at its current elevated levels.
And as noted above this is all unfolding as expected in previous assessments, with a couple of key factors noted below prior to the full update of the Extended Trend Assessment Market Observations after Friday’s US Close (even though we are done with direct market advisory contact from midday today) to prepare everyone who is still interested for next week’s markets. That also includes the weekend distribution of next week’s Report & Event Calendar.
EQUITIES
▪ The March S&P 500 future maintained its overrun of the upward adjusted weekly Oscillator resistance in the 2,252-57 range (MA-41 plus 125-130) last week, and has mostly pushed up from that level this week.
Yet as noted over the past several weeks, the recent more aggressive increases in weekly MA-41 (as it loses old low end Closes from the sharp early year selloff) means extended weekly Oscillator levels now move up roughly $7 each week. Even if it should not fail 2,252-57 late this week, that moves up to 2,259-64 into next week. That puts some pressure onto the bulls in spite of the ongoing strength. However, even if it should slip the lower Oscillator threshold moves up into the 2,234-39 area next week as well. And if it does manage to push higher the March S&P 500 future ‘contract’ interim resistances at 2,269-73 are likely to finally be overrun (possibly in conjunction with the DJIA also finally exceeding 20,000.) In that case a swing up to the higher Oscillator resistance that moves up to 2,294 into next week remains likely.
GOVVIES
▪ In the govvies the December T-note future below violated 128-00 support had also been ranging below next support in the 126-00 area with 124-00 next. Yet the Fed’s nominally stronger outlook accompanied by what were still subdued interest rate hike projections into 2017 (i.e. only up to 3 from 2 previous) was toxic for the govvies. It is important to revisit the historic tendency for the Fed to be led by the long-dated fixed income trend rather than lead it.
Once the December T-note future violated 124-00 area as well the front month expiration will also play a role here. The March T-note future took over after the December contract expiration this Tuesday. It is trading at more typical three-quarters of a point discount (24/32nds) to the December contract than the premium in the March Bund future prior to its December contract early month expiration.
So the December T-note future below 124-00 left the March contract ranging down into the mid 122-00 area prior to the recovery to the low 123-00 area at present. That is now very critical, as the far more major critical congestion from late-2013 into early-2014 (post Fed ‘taper tantrum’) is the five-and-a-half year lows in the 123-00/122-22 range. Next major supports below that are not until the 120-00 and 118-00/117-22 areas, and any failure in the US govvies could lead the others lower.
▪ Even the previously deferred failure of European govvies had finally dropped below key supports. That includes the December Gilt future failure back below its pre-Brexit low-124.00 resistance prior to the recent stabilization around that area, with next levels around 122.00. While the Gilt future expiration is always very late in the month (on Wednesday the 28th), from around the time of the US T-note future expiration it is important to focus on the second month Gilt due to all of the liquidity moving over.
With the March Gilt future typically trading at almost a full point discount to the December contract, it will be very important to see if it can recover to also stabilize back up in the 124.00 area it has now reached on the rally, or becomes more likely to weaken down to the 122.00 area. That is especially so with all of the recent rally highs of the March contract stalling into no better than the low-124.00 area. Next lower support below 122.00 is not until the 120.00-119.00 range.
▪ Only the more resilient December Bund future had recovered well back above 160.50-.00 without ever remotely nearing next support into the 158.00 area. This all fits in with each economy’s growth prospects. For anyone involved in the Bund it was of course also important to note the implications of the premium March Bund future pricing as we headed into its typical early quarterly expiration on Thursday, December 8th… right into the ECB press conference.
That meant that in spite of the short sharp ECB reduced asset purchase shock two weeks ago today, it only dropped back for a quick test of that 160.50-.00 front month support prior to recovering above it once again. That has seen it recover back above the 161.50 interim congestion, with it now trading into the more formidable 163.20-164.00 area resistance. All of this reflects the individual country reform and attendant economic growth prospects, and in this case the ECB need to buy suitable assets for its still massive QE program.
FOREIGN EXCHANGE
▪ Last but not least, foreign exchange saw the predictable further strength of the US Dollar Index after it finally overran the .9860 resistance in early November. That has seen it ratchet up above the more major 1.0000-1.0050 old highs of the rally from March and December of 2015 prior to its recent setback into that area as support. It was not much of a surprise that once the ECB signaled its continued accommodation two weeks ago Thursday it recovered from that area. The chart is striking.
While next resistances are up into the 1.04-1.05 range (with more major resistance up around the 1.10 area last seen in 2002), the weak sister EUR/USD had to be watched closely. While it has failed both 1.1000-1.0950 and 1.0850-00 supports, the post FOMC meeting failure below recent and extended historic 1.0500-1.0450 support is the really critical indication for the near term trend of the US Dollar Index as well. Also note that while there is interim EUR/USD support in the 1.0300 area, the major support is not until the broad berth down into the 1.0000-.9800 range that has not been retested since the way up in 2002.
▪ The other extremely weak currency is the Japanese yen, as reflected in the USD/JPY immediately remaining bid above 105.00 since the post-US election Wednesday afternoon. It subsequently duly pushed above the mid-July 107.50 trading high by the end of the US election week. That left it ready to challenge 110.00-109.50 historic congestion it has now overrun along with the more recent 111.00 congestion from back in February and March.
Of course, we need to allow that the yen is also a ‘haven’ currency, and there seems quite a bit less need for that in the wake of the current US equities rally. As noted previous, much above 111.00 there was not much until the mid-114.00 area it stalled against initially but then overran. Now the far more major resistance in the 116.00 area major congestion along with the February long term channel DOWN Brea has been exceeded.
That said, the major (all-2015) 118.00 congestion is a buffer above that which was only modestly exceeded on last week’s Close prior to slipping somewhat back below it. So it now seems a binary decision on whether it slips back below 116.00 or can sustain more aggressive activity above 118.00; with next higher resistances into the 122.00 and 124.00 areas, and ultimately the 125.85 June 2015 high of the entire 2011-2015 rally.
Extended Trend Assessment is available below.
The post 2016/12/22 Commentary: US Equities ‘Surge’ or ‘Splurge’? appeared first on ROHR INTERNATIONAL'S BLOG ...EVOLVED CAPITAL MARKETS INSIGHTS.