Markets have tempered these last two weeks. Largely on jitters over oil market volatility. And today's likely interest rate hike. Which saw its statistical probability hit 93 percent. From only 50 percent the prior week.
Why the increasing probability of a rate hike? Improving economic conditions.
Initial jobless claims hit a new trend low. Falling 19,000 to 223,000. And new private sector jobs skyrocketed last week.
Of course, markets needed a pause. If only to refresh. As stocks have done nothing but elevate since the November 8th election.
Two weeks ago, the president addressed Congress. Delivering a well-received speech of which The Wall Street Journal wrote:
"President Donald Trump, after reaching the White House with fiery rhetorical attacks and a combative message, pitched his agenda to voters and Congress with language that was much more presidential and traditional in tone. He also issued a call for American renewal in stark contrast to the aggressively nationalist posture he outlined at his inauguration just over a month ago...
His speech largely avoided his signature attacks on his adversaries and the political establishment. While he once again highlighted the challenges of violent crime in some urban communities and drew attention to crimes committed by illegal immigrants, he didn't repeat his denunciation of "American carnage" in his inaugural address.
Although there were no major policy shifts - he called for reworking trade deals and cracking down on illegal immigration without using the controversial "America First'' label to describe them - the edges of his most incendiary rhetoric were sanded off. It was the Trump doctrine with aspirational overtones."
While sparse on economic details, the speech was enough to resume the "Trump Trade." Stocks surged to a new all-time high on Wednesday. With the Dow pushing above 21,000 for the first time.
Of course, the president did not bask in his good will. But followed the speech with a claim that the previous administration had wire tapped Trump tower leading up to the election. A claim for which, as I write this, there remains little-to-no evidence.
While on the topic of Trump, Goldman Sachs published a note to clients last week stating that the "Trump Trade" was overdone. That the repeal and replacement of the Affordable Care Act is already dragging (45 days in... really?). And so, Goldman concludes, tax reform is apt to be a helluva lot more difficult. With the end result being markedly different than what most have in mind. All of which will cause stocks to lose steam over the course of the year.
Our opinion?
Near term, the Trump Trade has been overdone. Stocks don't jump nine percent in four months without a pause. Markets rose in anticipation of what "will be accomplished." Now, they're focused on "what's getting accomplished." And thus far, what's transpired in Congress has not inspired.
Goldman's preening represents little more than my nine-year old son calling out a half-court shot. It's not likely to go in. But still, he just wants to be heard. Ultimately, such bold prognostications will likely bring the opposite. With higher highs ahead.
Short term? We expect a pullback. From a technical perspective, the percentage of NYSE stocks above their 50-day moving averages has fallen to 65 percent. Well off the 90 percent peak hit in January when the Dow remained well below 20,000.
Further, given the lack of volatility over the last six to nine months, and the idea that the market hasn't pulled back in some time? Which is to say, stocks haven't scared the tar out of half-baked investors in a while? We have all the ingredients for a short-term sell off.
Keep in mind that, ultimately, the market is a discounting mechanism. Anticipating outcomes four to six months in advance. Good expectations? Stocks rise. Poor expectations? They fall.
Stocks have recently paused to see how D.C.'s political class responds to the challenges ahead. If progress is made on deregulation, healthcare and tax reform? Stocks move higher. If politicians stumble, however, stocks will likely incur a steeper decline.
Tax reform remains the critical issue.
Under the Obama administration, tax receipts increased from $2.1T to $3T. And still the deficit rose. Big government is incapable of prudent, systematic spending. A fact for which we have over one hundred years of anecdotal evidence. So let's allow people and companies to keep more of what they make. And spend it on their top priorities. Not those of political appointees in distant D.C.
On Wall Street, March 2nd brought a successful Snapchat (SNAP) IPO. Though I can't figure out why one would buy the stock. SNAP listed at a higher revenue multiple than Facebook, Twitter and Alibaba. Hard to appreciate a stock run by a management team which states that they expect losses to grow for the foreseeable future. That those losses will actually exceed revenues.
We see little value in the shares.
Speaking of value, Warren Buffett's annual letter became available. You can read it here.
Buffett's annual missive provides a wealth of experiential wisdom capable of educating novice and seasoned investors. We highly recommend it. But, we realize that you are strapped for time. So following are some memorable quotes:
* American business - and consequently a basket of stocks - is virtually certain to be worth far more in the years ahead.
* During scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well.
* As the subject of repurchases has come to a boil, some people have come close to calling them un-American - characterizing them as corporate misdeeds that divert funds needed for productive endeavors. That simply isn't the case: Both American corporations and private investors are today awash in funds looking to be sensibly deployed. I'm not aware of any enticing project that in recent years has died for lack of capital.
* Our efforts to materially increase the normalized earnings of Berkshire will be aided - as they have been throughout our managerial tenure - by America's economic dynamism. One word sums up our country's achievements: miraculous. From a standing start 240 years ago - a span of time less than triple my days on earth - Americans have combined human ingenuity, a market system, a tide of talented and ambitious immigrants, and the rule of law to deliver abundance beyond any dreams of our forefathers.
* You need not be an economist to understand how well our system has worked. Just look around you. See the 75 million owner-occupied homes, the bountiful farmland, the 260 million vehicles, the hyper-productive factories, the great medical centers, the talent-filled universities, you name it - they all represent a net gain for Americans from the barren lands, primitive structures and meager output of 1776. Starting from scratch, America has amassed wealth totaling $90 trillion.
* Before we leave this investment section, a few educational words about dividends and taxes: Berkshire, like most corporations, nets considerably more from a dollar of dividends than it reaps from a dollar of capital gains. That will probably surprise those of our shareholders who are accustomed to thinking of capital gains as the route to tax-favored returns.
* Many companies, of course, will fall behind, and some will fail. Winnowing of that sort is a product of market dynamism. Moreover, the years ahead will occasionally deliver major market declines - even panics - that will affect virtually all stocks. No one can tell you when these traumas will occur - not me, not Charlie, not economists, not the media. Meg McConnell of the New York Fed aptly described the reality of panics: "We spend a lot of time looking for systemic risk; in truth, however, it tends to find us."
* During such scary periods, you should never forget two things: First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy. It will also be unwarranted. Investors who avoid high and unnecessary costs and simply sit for an extended period with a collection of large, conservatively-financed American businesses will almost certainly do well.
Even at 86, Mr. Buffett remains a munificent font of wisdom. On investing. And life.
Wednesday, March 1 saw equities break higher in route to new highs. Prior to that, January and February had featured an abject lack of volatility. With markets posting zero moves -- up or down -- of one percent or more.
Sentiment Trader's Jason Goepfert reports that of the 21 times in the S&P 500's history during which the index went 50 or more days without a one percent daily gain or loss, only six of them ended with an upside breakout. And most of those coincided with new highs. Two of which resulted in huge upside moving forward. 1954 and 1995.
Of the other four, momentum generally waned. As stocks posted either a negative or flat return over the next two to three months.
It's notable that even with 1954 and 1995, the two dates that led to massive upside over the next year, the risk-to-reward ratio up to six months later was barely skewed to the positive side.
Into which camp will these markets fall? Time will tell. But until the narrative changes -- and it thus far has not -- the trend points to higher highs.
Finally, Time magazine contacted me to discuss financial planning (here). Specifically wanting me to address the benefits of Health Savings Accounts (HSAs). If you've never considered an HSA, check out the article. My redress on HSAs appears in paragraph six.
Stay tuned...
The North Korean Threat
Don't underestimate North Korea's Nuclear Arsenal. Instant experts allege Pyongyang is not yet a serious nuclear threat to the US. These are dangerous delusions. Google the history of nuclear testing and weapons development and North Korea's tests suddenly seem a lot more serious. Testing is not necessary to develop nuclear weapons. North Korea has intercontinental ballistic missiles, the mobile KN-08 and KN-14, that can strike the US mainland. They are probably nuclear-armed. The Congressional EMP Commission - and Russian, Chinese and South Korean sources - assess that North Korea probably has nuclear arms specialized for electromagnetic pulse, designed to produce gamma rays, not a big explosion. These are the most dangerous weapons known to man. A single Super-EMP warhead detonated over North America could permanently black out the US and Canada and kill up to 90% of the population through starvation and societal collapse. Since North Korea and Iran are strategic partners, and since nuclear testing is unnecessary to develop weapons, Iran too might already have nuclear-armed missiles. The US should immediately harden its national electric grid to deter and defeat a nuclear EMP attack. Fur ther , it should quickly redeploy Aegis guided missile cruisers to America's most vulnerable regions. Looking to the future, President Trump must work with Congress to modernize the US nuclear deterrent and revive President Reagan's Strategic Defense Initiative by deploying space-based missile defenses to render nuclear missiles obsolete. James Woolsey, Director of the Central Intelligence Agency (1993-95),
-The Wall Street Journal, February 28, 2017
Why "1984" Should be Read in 2017
The dystopia described in George Orwell's nearly 70-year-old novel "1984" suddenly feels all too familiar. A world in which Big Brother (or maybe the National Security Agency) is always listening in, and high-tech devices can eavesdrop in people's homes. (Hey Alexa, what's up?) A world of endless war, where fear and hate are drummed up against foreigners, and movies show boatloads of refugees dying at sea. A world in which the government insists that reality is not "something objective, external, existing in its own right" - but rather "whatever the Party holds to be truth is truth."
-Michiko Kakutani, The New York Times, Jan 27, 2017
Weekly Results
Major indices finished mixed last week. DJIA fell 0.49%. S&P 500 fell 0.44%. The Nasdaq dropped 0.15%. 10-year Treasury bond yields rose to 9 basis points to 2.57%. Gold closed down 2.53%.