Week In Brief: January 28

January 30, 2017

Markets climbed to new all-time highs following another peaceful transition of power to a new administration. Save for a small coterie of protesters who set fires and threw punches, it appeared that both sides of the political aisle were able to get along. If only for a day.
The market nodded its approval. With the Dow, S&P 500 and Nasdaq each ascending to record heights. Volatility (VIX) managed to fall. Crude oil edged higher. While gold prices fell.
Local consumer products giant Procter & Gamble climbed 3.3 percent on solid quarterly results driven by better-than-anticipated sales growth.

President and Michelle Obama walked gracefully from the D.C. stage. At least for the moment. As the former president took his family to California for some much deserved R&R.
Some will denigrate President Obama's White House tenure as ineffective or unfocused. Others will paint much more devious portrayal. But the fact remains that - regardless of your political leanings - President Obama brought a sense of calm and cool to the Oval Office. Distinguishing himself by his grace under fire. His keen intellect. And his broad oratorical skills.
I think the history books will look very favorably upon much of the president's agenda for social change. While postulating that he failed to steer the nation's economy back to where it might have been. Some of which may have been a byproduct of his early legislative priorities. And ended up with the nation posting its longest-ever period of sub-three percent GDP growth.
In the end, however, let's not forget what an immensely challenging task awaits the holder of that office. And the massive amounts of responsibility, anxiety and gravity attached to each and every decision. Clearly evident in the means by which it has aged everyone who holds it.
Regardless of political affiliation, legislative track record or history's ultimate job assessment, when an individual can do the job while displaying much needed grace and dignity, one can't help but respect that trait.
President and Michelle Obama, as well as their daughters, are owed a debt of gratitude for their efforts. Just as President Trump and his family are owed the courtesy and respect due anyone who runs wins The White House. Much as the nation's Founders intended.
While on the subject of politics, did some interesting reading over the weekend. Regarding attitudes towards the nation's new president. Topically interesting, but even more so as we always take an interest when sacred cows are killed. And this new research goes a long way toward dispelling long-held American notions regarding which socioeconomic stratifications support which political parties.
In fact, recent research runs counter to traditional American thinking regarding Trump, Democrats and Republicans.
Many on the left tend to imagine that the nation's wealthiest one percent tend to oppress much of the country. Creating opportunities for themselves to the detriment of the rest. Further, they often associate that top one percent with the Republican party. But new research by social scientist Charles Murray of American Enterprise Institute reveals a different picture.
Murray points to the most socioeconomically blessed parts of the nation. The zip codes comprising New York, Los Angeles, San Francisco, and Washington D.C.
"It is difficult," Murray writes, "to hold a nationally influential job in politics, public policy, finance, business, academia, information technology or the media and not live in the areas surround New York, Washington, L.A. or San Francisco."
Wealthy oilmen in Dallas may have outsized influence on who becomes the next president of Exxon Mobil. But the rich folks in those four big cities cast the decisions that impact everyone in the nation. They determine what's on the evening news. Which conservatives to ban from Twitter. What shows appear on TV. The loopholes for future tax laws. And whether the Keystone pipeline gets built.
And while the stereotype is Republican fat cats pulling levers and moving elections, Mr. Murray's research paints a different picture. He analyzed the most affluent parts of the country. Examining individual donations to candidates of the two major parties. His findings?
Americans in the most elite five percent who live in the big four power centers donated overwhelmingly to Democrats. In fact, they sent over $96 million to Democrats. While giving $30 million to Republicans. A better than three-to-one ratio. Moreover, when those four power centers were donating to out-of-state candidates - which is to say, non-local candidates and issues - 70 percent of donations were made to Democrats.
In other words, the top five percent of the wealthiest American tend to support Democrats by a three-to-one margin. Interesting. As it does run counter to what we're oft led to believe.
Further opinions on Trump?
He is detested in the nation's money and power centers. Election results revealed as much. Rust Belt? Midwest? The South? Love the guy. Coastal power centers? Media and money capitals? Cannot stand him.
And overseas?
China? Loves him. "He's a businessman." Japan? Terrified of his protectionist tendencies. Europe? Equal parts amusement and abhorrence. Though he gives NATA the willies due to previous disparaging remarks about the alliance.
So, how might such sentiments affect markets this year?
Well, as those power centers wage combat against the new administration, and Trump responds in kind, we can expect market volatility to rise. Which, in our estimation, will be positive. As such environments lend themselves to the sort of opportunities available only to active managers like us.
Further, Trump doesn't mind debt. His companies have used it to his benefit throughout his career. He also understands business cycles. Perhaps as well as any president in modern times. And, given his experience with banks, that could be very positive in terms of fiscal management. Which could bring a change in the Fed's role regarding national economic policy and how rates are managed. As he's often spoken of allowing the market to move rates, as opposed to rates being moved by Fed dictate.
One anxious point? The market has for some time moved higher in near correlation with the Fed's expansion of its balance sheet. If Trump plans to trim government spending and so reign in the balance sheet, that would obviously be positive for the nation. But would it send stocks lower? Worth keeping an eye on.
Trump will be a contrarian president in every sense of the word. Monday of this week, he abandoned the Trans-Pacific Partnership (TPP) trade deal. A move that angered many core GOP members. And pleased the hell out of Big Labor. Which has traditionally shunned Republicans.
Don't forget that Trump ran as much against traditional Republicans as he did against Democrats. Accordingly, he will not be easily defined, labeled nor put in a box. He will do things that will enthuse and infuriate both parties. Which remains the primary reason he was elected.
From a market perspective, we should temper our expectations. For the time being.
Stocks have tended to dramatically recede following the inauguration when returns have been strong between then and election day. And in the years when the pre-inauguration returns have been strong heading into a GOP presidency? The S&P 500 has fallen all four times. For a median decline of 2.62 percent.
Strong early gains typically borrow from the future. And then are given back. Considering that the recent transition performance was the second best transition period gain behind Herbert Hoover in 1928 -- +20.8 percent? Let's exhale and relax.
Trump's inauguration speech echoed campaign themes. Economic nationalism. Quasi-isolationism. Populism. The need to clean up D.C. Pledges to increase infrastructure, military spending, and border security.
We've taken a number of calls from clients asking what Trump might do next. The answer appears to simply be: what he said he would. Which is counterintuitive. As that's not been the modus operandi in D.C. for quite some time.
Peruse his inaugural speech. Or the address he made in Gettysburg at the end of the campaign. Which was later dubbed "The Contract with the American Voter." Both can be summed up as follows: America first. Buy America. Hire America. Keep America safe. Protectionism produces growth. Renegotiate trade deals. Build up the military. Create American jobs. Generate economic growth. Doesn't appear that he wants a trade war. Nor does he want a shooting war.
From the context of those stated goals, one understands Trump's initial actions.
From a stock market perspective, investors appear ready to "buy high" at the start of this new administration. As equity markets sit within two percent of all-time highs. Laying in stark contrast to the opportunity to "buy low" at the start of the Obama's administration.
Bottom line?
Bulls continue to support their crusade to elevate markets. Responding to Bear's every move with strategic and timely buying. Many have expected to see markets head lower following the inauguration's crescendo of expectation. A few months of angst following the 6.6 percent run higher. But so far? Not the case.
And this market wants to go higher. Valuations do not look extreme. Nor do we rest at the levels of investor optimism and participation generally viewed as the hallmarks of market tops.
While the media continues in its attempts to portray a bleak, dystopian American landscape, reality paints a different picture.
Love him or hate him? Trump will upset a lot of apple carts. And simultaneously please many an unsuspecting party. Just this week, the GOP leadership was aghast at some of the proposals he'd placed on the table. While the Big Labor Union leadership - typically acting in lockstep with Democrats - was at The White House celebrating some moves made that were very pro-labor.
Moreover, don't ever forget from whence most of the nation's skin comes from in the economic game. Small business. Which employs two-thirds of the nation's workforce. Buys much of the technology, resources and services. And drive most of the wage growth.
For years, small businesses squirreled away capital. As they took a dim view of the business landscape. Contending, as they were, with huge regulatory hurdles. Rising taxes. Government imposed healthcare (or penalties). Against a bleak backdrop of low economic growth.
But that's changed. Today, small business operators report an increasing propensity towards hiring employees, capital expenditures and expansion plans. Believing, as they do, that the next few years may represent an opportunity to make some real money.
This new, new normal will hit some hard. Particularly the party apparatchiks on both sides of the aisle. Whom will have the most difficulty acclimating to this non-traditional presidency. And the changing landscape in D.C.
Politics aside, the administration has been working frenetically. Getting things done. And undone. And regardless of key messages from pundits of both parties, or the palpable rage emanating from the American media, investors need only gauge how the market responds. As the stock and bond markets represent the proverbial Canaries in the Coal Mine. Letting us know if things are good or bad long before the consequences manifest for all to see.
Talking heads will talk themselves blue in the face. But when capital is being placed behind one's opinions and prognostications - as it is in the market - then prescient, considerate people begin to reveal their most-true forward-looking sentiments.
And the market canary, thus far, has been chirping. Unless one can provide another reason as to why the market has risen over seven percent in two-and-a-half months. Or why the Dow crossed the 20,000 mark for the first time in history.
We can all spend the next four years talking, blathering and railing against each other. To little avail. But when politics are pushed aside? The stock market is telling you that everything is fine.
That said, after two straight weeks of one percent leaps to achieve new highs? Equities markets do appear overbought. Which likely means that a pullback awaits.
An aside on the immigration controversy. And of course, as this is an investing newsletter, we shall remain apolitical.
First, we don't completely agree with the steps taken. And were perplexed as to why the ban was enacted last weekend. As there appear to be more pressing priorities with which to contend.
But, respected analysts in the national security complex argue that there is no more critical an issues than national security. Which, we assume, is why the administration moved forward. This is an issue that requires observers to set aside political leanings. And remain as impartial as possible.
The administration temporarily banned (four months) immigrants from seven primarily Muslim nations. The seven countries are either war-torn and/or state sponsors of terrorism. Because of the seven nations involved, some have called the action an anti-Muslim ban. Though it's important to note that the nation's involved comprise only eight percent of the Muslim world. So, that charge seems spurious.
Also interesting to note that all of the countries on the temporary travel ban happen to be among those that have permanently restricted Israeli citizens from entering their own nations.
Moreover, and putting politics aside, travel bans are nothing new. Nor "walls" or border fences. According to expert Elisabeth Valls of Quebec University, there are 65 border fences currently under construction worldwide. When the Berlin wall fell? There were only 16 total.
Nor are such restrictions unique to this administration.
In 2011, the Obama administration enacted a scenario in which they briefly stopped taking applications from Iraqi migrants. The reason? Two unidentified refugees had slipped through the system and turned up in Kentucky. The administration slow application processing in order to ensure that the integrity of the system was intact. And establish the primacy of American national security.
What the administration has done is not unique. More unique are the media and some members of Congress reactions. Acting as if this has never occurred before. Vetting on Ellis Island, New York was common at the turn of the 20th century.
So long as this is a temporary, four-month-or-less scenario, we view it as a systems check. It is regretable that innocent bystanders will be inconvenienced. But, with ISIS publicly announcing plans to infiltrate and take advantage of America's broken immigration policy, it would appear that desperate times call for measures that prevent desperation. And we hope that the administration will go out of its way to assuage those legitimate travelers who will be briefly denied entrance. As America should always honor and recognize those fleeing persecution, chaos and tyranny. But must do so within the parameters of a safe and secure system.
If you're wearing a watch that has stopped functioning properly, what do you do?
Most likely, you'd temporarily remove it. Fix it. And then - when back to working order - you'd strap it back on your wrist.
The administration makes a similar argument. War torn nations and/or state sponsors of terrorism cannot properly vet refugees. So nations accepting them have no means of verifying who they are. Their backgrounds. Affiliations. A permanent ban would signify something entirely different. Something more sinister. But this is not that. Even as the new administration's many critics and enemies attempt to use it for political purposes.
And while it is true that only 11 of the 184 individuals involved in terrorism on American soil have been foreign nationals, there is, unfortunately, much more precedent in Europe. Where numerous atrocities have been perpetrated by non-European-born terrorists.
All of this remains massively unfortunate. An ugly sign of the times. But, detached analysis leads us to conclude that it is better to contend with this now than it would be to wish we had after some lunatic detonates a dirty bomb in Chicago.
From an investment perspective, whether walls, barricades, fences or vetting immigrants is commonplace or not, markets thrive on confidence. Not on protests and riots. If this unrest gets out of hand and commerce is impacted? U.S. equity markets could suffer.
Thanks for maintain your detached objectivity. Upward and onward...
Two weeks ago, 300 language scholars crammed into a conference room in Austin, Texas. There for the American Dialect Society's meeting at which they would select the Word of the Year.
I would argue that, of all the _______ of the Year designations granted annually across this great nation, none may be more important than the A.D.S.'s W.O.Y. As it cuts across socioeconomic, academic, religious, athletic and business stratifications. Pointing directly to the national ethos for the year that was.
Last year's word? Dumpster Fire. N. An exceedingly disastrous or chaotic situation.
For example: Last year's election was nothing less than a dumpster fire.
For the regular readers of this missive, you'll no doubt smile for having already been familiar with this important piece of the lexicon. For Dumpster Fire has long been one of our favorite means of defining those situations that have devolved into - well, nothing short of a Goat Rodeo.
Stay tuned.
Weekly Results
Major indexes finished mixed last week. DJIA gained 1.34%, S&P 500 fell 1.03%. The Nasdaq climbed 1.90%. While small cap stocks rose 1.40%. 10-year Treasury bond yield rose 1 basis points to 2.48%. Gold closed down $18.98 per ounce, or 1.57%.

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