Week In Brief: August 26

August 29, 2016

The S&P 500 has gone 36 straight days without closing a day one percent higher or lower than where it began. The third-longest such streak in two decades. Though that could be about to change.
For equities, September tends to be the worst performing month of the year. Large caps. Small caps. International. All have traditionally posted negative September returns. Election years included.
Moreover, we're not lacking for downside catalysts.
Earnings remain poor. The Fed remains schizophrenic. And continues to tease a September rate hike. And given the uncertainty emanating from this presidential election, it's surprising that markets haven't already headed lower.
But, they haven't. We sit right at all-time highs.
As the S&P 500 tries to push higher, only one sector of the index remains under water for the last decade. Not energy. Nor materials. While both of those have under performed the S&P 500's 65 percent appreciation the last decade, they remain positive. only financials remains mired in the red. Down 29 percent these last ten years. More specifically banks, brokers, insurers and card companies have trailed all others. Struggling to regain some semblance of normalcy.
Why have financials been dreadful?
First, massive increases in regulatory scrutiny. Especially in the form of Dodd-Frank. Banks, brokers and insurers have been forced to endure multiple annual stress tests ensuring their solvency in the event of a crisis.
Second, financials were hobbled by the credit crisis. And today remain hampered by the Fed's low-interest rate regime. Which has clipped profits and scared off talent.
Third, the spastic economic recovery has not afforded an environment in which financials could regain their previous form. Too much uncertainty. And an absentee expansionist mindset that has left the banks on the outside looking in. From the look of things, we don't expect that to change anytime soon.
Another issue in which in don't expect any near term improvement? The nation's debt.
A recent report by the non-partisan Congressional Budget Office estimates that the 2016 federal budget will increase in relation to economic output. The first time that's occurred since 2009. More notable, however, is the CBO's contention that the deficit's ratio to GDP projects to be much larger than its 50-year average (report highlights here).
Accordingly, the CBO forecasts that deficits and debt held by the public will continue to rise from already high levels. A situation that would worsen, states the CBO, should the Fed raise interest rates, so increasing our interest payments.
None of which will surprise those American households holding fast to the dying tradition of spending less than is earned.
While we're on the topic of spending less, I can assure you - unfortunately - that you won't be lumping healthcare into that category.
According to The Wall Street Journal, nearly a third of the nation's counties appear likely to have a single insurer offering plans on the Affordable Care Act's exchanges next year. Leaving much of the nation with far fewer choices than it has this year. Let alone those available prior to the passage of healthcare reform.
Many insurers continue to lose money on the health plans sold through the exchanges. Companies like UnitedHealth Group, Humana and Aetna have cited losses as reasons for withdrawing from ACA marketplaces. As have smaller insurers. Some of whom have simply shut down.
Those that remain? Counter to consumer wishes, the survivors are being forced to enact large premium increases. Leaving one to pine for the days before we "fixed" the healthcare industry. The days when consumers had an abundance of low-cost healthcare options.
Remember, the laws of economics dictate that prices rise as choices decline. So those aspiring towards inexpensive, single-option healthcare systems will be in for a rude awakening.
Home Sweet Home Builders
Housing and related stocks have performed well of late. With the ITB home builders index up six percent these last three months. Beating the S&P 500 by two percent. And according to technical analysis guru Tom McClellan, higher highs may be ahead. Because lumber prices reveal more gains to come.
McClellan points to a correlation in housing starts and lumber prices. One in which lumber prices tend to provide a one-year leading indication of future share prices for housing-related stocks, like those in the HGX Index. One reason for the correlation being that lumber prices provide a leading indication of for future new home sales.
Surprisingly, this current multiyear high is coming earlier than lumber said it should. Possibly because of the pent up demand of the early 2010s is finally impacting housing data.
Lumber's primary message? We should see a big rise in the new home sales data, and in the housing sector stock prices, after the echo of the September 2015 bottom in lumber prices.
Need more?
Zillow reports that the average age of a first time home buyer is 33 year old. That number has been creeping higher from the 1970s low of 29. And it's an important concept. Because a rise in the age input translates to fewer potential home buyers.
The peak birth years of the "Echo Boom" generation (kids of Baby Boomers) were 1990-91. So those babies are now just 25-26 years old. Still a few years from hitting that 33 year old first-time-home-buyer sweet spot. Meaning, the wave is coming. And it should be bullish for real estate prices. As lumber continues to tell us that, following September 2016, we should see a one-year move higher in new home sales and the accompanying housing sector stocks.
Finally, a glance at precious metals.
Many of you have been asking about the recent pullback in gold and silver. After months of huge gains, we've seen gold fall 3 percent from its highs. While silver has fallen 10 percent. And the gold miners index has declined roughly 15 percent.
Remember, bull markets cannot travel constantly heavenward. Like a mountain climber on a steep ascent, stocks must occasionally take a breather to replenish energy supplies.
Pullbacks remain a welcome part of any bull market. Scaring off the weaker hands. Providing less expensive shares for accumulation. And replenishing stores of energy for the next run higher.
Further, there are fundamental catalysts for precious metals.
1) Sentiment against gold has risen to extreme levels. Placing it back in the realm of contrarian considerations.
2) The dollar. When it rises, gold prices weaken. And when it weakens, gold moves higher. Right now, dollar strength hurts the economy. Making the price of U.S. goods and services more expensive to foreign buyers. Many analysts believe that the dollar appears to be at the top of its range. And if the Fed does not raise rates in September, that could be just the catalyst to send it lower.
3) China's growth appears to be picking up. Which, if true, will put a bid under the entire commodity complex. Including gold and silver.
4) Seasonality should help. As Q4 and Q1 tend to comprise the hot gold buying period in India, the world's biggest gold buyer.
5) Finally, Hillary Clinton has been proposing policies inspired by Bernie Sanders. In a recent economic address, she laid out her plan to make college "debt-free" and tuition absolutely "free" to children from families who earn less than $125,000 a year.
To make this plan happen, income taxes will need to be hiked. And if history tells us anything, it's that gold demand has increased when socialist policies threaten economic growth.
So, having climbed ever higher since February, precious metals (and miners) were ready for a break. Take advantage of it. Enter the trade were you not in it before. Consider adding to positions if you'd thought of doing so. Recalibrate your position size. Reset your trailing stops.
Then sit back and enjoy the ride. As we believe these positions have room to run. Stay tuned.
Weekly Results
Major indices finished mixed last week. DJIA lost 0.85%, S&P 500 fell 0.68%. The Nasdaq lost 0.37%. While small cap stocks gain 0.10%. 10-year Treasury bond yield rose 4 basis points to 1.63%. Gold closed down $19.76 per ounce, or 1.47%.

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