Week Ending 3/30/2018


  • Support holds as equities manage a 2% advance.
  • Markets are still stretched looking at a quarterly chart.
  • Tesla takes a hit in both the equity and fixed income markets.
  • The yield curve flattens as interest rates decline.
  • A comparison between the post-election equity markets after Kennedy won in 1960 and today.
  • Economic news was good this week.


Equities bounced off the 200-day moving average and increased by about 2% in the US and 2.43% outside the US. For the month, US stocks were down by 1.96% and international stocks fell by 0.38%. Year-to-date, US and international equities were down by 0.71% and 0.21% respectively. It was the first losing quarter since Q2 of 2015.

Even with the loss, looking at a quarterly chart (see below) from a technical perspective, the market still looks overbought. The relative strength index (RSI) on the top of the graphic, shows a current reading of 80.91. A measurement over 70 is considered overbought, which could mean a pause or a fall for stocks. Or it could mean nothing at all, as evidenced by the market’s performance in the 90s, when it continued to advance despite being labeled as overbought for a good portion of the decade.

Tesla, a high flyer for most of the past few years, closed the week at $266.13 and is now down 31.87% from its September high of $385. Tesla bonds have been falling in value as higher interest rates and negative cash flow are starting to spook investors. Tesla will most likely have to tap the equity or bond markets at a future point if cash continues to burn up. Facebook, which is off by 17.25% from its January high, managed a small gain for the week.

Bonds were up for the week and the month. The aggregate increased by .60% for the week. Bond yields fell across the curve, but the decline was greatest on the long end. The spread between the 2 and the 10-year treasury declined to 47 basis points, that is the lowest difference of the year and has brought back fears of a flattening yield curve. Most recessions are preceded by a flat or negative spread.


Comparisons have been made between the market run-up post-election in this cycle and a similar advance after Kennedy won in 1960. In both cases, the market flew higher after the election. And in each case, the economy was growing with no near-term signs of a recession. Valuations were similar, with p/e ratios in the 22+ range.

From the day before each election, until the end of the third quarter, the Kennedy market rallied by 26.20% as measured by the S&P 500. That compares to the current Trump rally of 26.41%. A mere difference of 21 basis points. It is what happened next in 1962 that is of interest.

Last week, the current US market bounced off a double bottom (see C & D below). That may or may not hold. In 1962, a similar double bottom (see A & B below) was broken and the market fell hard through June by 22.95%. From the December 1962 high, the decline was 28%. The good news was that the market then went on for a huge rally and had matched the December 1962 high by September of 1963 and would have a strong advance from there. A testament to why a long-term view is often the better approach.

We are not saying that we will get a repeat of 1962 here in 2018, but the comparison is striking. And it is always good to look back at history to see what has happened before.


For the most part, the economic news was positive. The estimate for Q4 2017 growth was raised to 2.90% from 2.50% by the Bureau of Economic Analysis. Initial jobless claims were 215,000. That is the lowest number in 45-years. And estimates for Q1 growth were raised by the Atlanta Fed to 2.40% from 1.80%. The NY Fed Nowcast model has growth at 2.71%.


Week Ending 3/23/2018


  • Stocks take a major hit as US equities fall by 5.66% and international equities drop by 3.55%. US stocks are down 2.62% for the year.
  • The market is selling right at its 200-day moving average and close to the lows from February.
  • LEI is up again. Strong PMI reports and low initial claims for unemployment.
  • More disarray at the White House.
  • Trump and China both announce new tariffs.
  • Facebook data was misused in the 2016 election as calls for regulation increase.
  • A government funding bill totals $1.3 trillion and adds more to the deficit.
  • LIBOR has been increasing at a rapid rate.
  • The Citi Surprise Index for the Eurozone is at a two-year low.
  • FHA delinquencies increase.


It was a brutal week for the markets as US equities fell by 5.66%. The Nasdaq Composite dropped 6.5%. International stocks dropped by 3.55%. US stocks are now down 2.66% for the year. Even though treasuries dropped a few basis points across the curve, the aggregate bond index also fell, by 0.08%. Crude oil rallied by 5.68%.

Market technicals have not been good. On Thursday and Friday, stocks opened close to their high for the day and then sold off and finished very close to their low for the day. The market is now at its 200-day moving average and close to breaking the lows from the February sell-off.

One bright point is that the SP500 is now selling as 16.4 times 2018 estimated earnings, a more reasonable value.

There are lots of reasons to explain the fall. We explain the good and the bad below.


Economic reports continue to show strong growth ahead. The Conference Board’s Leading Economic Index (LEI) was up by 0.6% in February and it was the fifth consecutive month with an increase. Eight of the ten LEI components made positive contributions and all indicators posted gains over the past six months. The six-month rate of change of rose to 4.0%, its fastest pace since March of 2011. Year over year,  the LEI was up 6.5%, the most since July 2014.

The Markit U.S. flash Manufacturing Purchasing Managers Index (PMI) increased by 0.4 points to 55.7, its highest level in three years. The flash Services PMI fell 1.8 points to 54.1, still in expansion mode. New orders were close to a three-year high.

Initial claims for unemployment insurance were up by 3,000 last week to 229,000 and the four-week average of claims was 223,750, close to its lowest level since 1973, as labor markets.


The market is being hit on multiple fronts, many self-induced.


We wrote about this last week. It is hard to ignore the turnover and complete disarray in the White House. Trump’s primary outside lawyer, John Dowd, resigned. A clear indication, not necessarily that Trump is guilty, but something just is not right about working for the White House. Then Trump fired National Security Council Chief General H.R. McMaster and replaced him with John Bolton. Bolton is considered an extreme hawk. These changes are on top of an avalanche of other changes in prior weeks and indicate serious problems and mismanagement in the Executive office.


Trump announced that he would impose tariffs on about $60 billion of Chinese imports, in addition to the already announced tariffs on aluminum and steel. China responded announcing it would levy about $3 billion in tariffs on U.S. goods. We have the beginning of what could turn into a trade war. That is what is the market fears.

The U.S. does have legitimate complaints about the way China, and some other countries handle trade. China has stolen intellectual property and forced technology transfer, among other violations. But the government should be doing everything possible to negotiate free trade in China and around the world, to eliminate restrictions, and let companies compete on a fair plane. Work to open markets, not close them.

The question is this, is the tariff plan a negotiating tactic by the Trump administration to force open Chinese markets? Or is it the start of a much bigger and deeper effort to stifle imports, close markets and to bring down the trade deficit. If it is the ladder, and if this escalates into an all-out trade war, the world is in for some darker times.

Even if it does not turn into an all-out trade war, tariffs can impact the intricate supply chains that businesses have built up over decades. Changing supply chains that will result in less efficient commerce translates to lower profits, and lower profits usually mean lower equity prices. So far, the overall tariff numbers being bandied about is not that significant, but for now, the real damage can be the psychological spillover effect.


The week got off to a bad start on Monday when it was revealed that Facebook data was utilized to sway voters in the 2016 election. Apparently, this is news. Cambridge Analytica, a vendor of the Trump campaign, used data that it was not supposed to have in their efforts to help elect the President. Millions of users had their privacy data violated, leading to calls from across the spectrum (political and business) for regulation in the social media space and especially at Facebook. Facebook fell x% on Monday to lead the market down and finished off by 14% for the week.


Trump signed a 2,232-page bill that will fund the government through October. The bill authorizes the spending of $1.3 trillion and further blows up the deficit. This, at a time of economic expansion when the budget deficit should be declining. More deficit spending means a larger supply of treasuries, on top of the already expanded supply to fund the roll off from Fed’s balance sheet. More bond supply requires higher interest rates to attract investors, and higher interest rates results in competition for investing dollars with equities, a negative for the stock market.


On Wednesday, as expected, the Fed raised rates by a quarter point to between 1.5% and 1.75%. However, the interest rate news that was more troubling involved the London Interbank Offered Rate (LIBOR). Libor impacts borrowers worldwide and has been increasing at a rapid rate, now at 2.285% up from 1.69% at the end of 2017.  Higher libor costs will flow directly to the bottom line and especially impact companies that are levered up or operating on tight margins (see our commentary last week on the danger of debt). Libor’s sharp rise is due to (1) the Fed roll off, (2) repatriation of cash from overseas, (3) share buybacks and (4) economic tension around the globe from the US tariffs and the threat to the global trading system. Banks were hit particularly hard this week, as rising interest rates on the short-end and falling rates on the long end can begin to squeeze margins.


Economic reports have been coming in less than expectations recently in Europe. That might be due to more optimism than was warranted. The Citi Economic Surprise Indicate for the Eurozone is now at its lowest level in the last two years.


The FHA delinquency rate increased by 0.39% to 9.41%, excluding the areas impacted by hurricanes. This should not be happening when the economy is supposedly improving and suggests credit terms have been too easy.


Week Ending 3/16/2018


  • US equities fall by 1.14% but bonds rally.
  • The yield curve flattens.
  • Mayhem continues in the White House.
  • Inflation is at bay for now, economic reports were mixed.
  • Two high profile bankruptcies.


US equities fell by 1.14% and international stocks were down 0.61%. The SP500 closed the week at 2752.01, just about halfway between its closing high and low for the year. Bonds managed a 0.31% rally. The yield on the 2-year note increased by 4 basis points but the 10-year and 30-year yield fell by five and eight basis points, accounting for the increase in bond prices. That means the yield curve has begun to flatten again and is only three basis points away from where it started the year (looking at the difference between the 10-year and the 2-year). Bond prices have begun to stabilize, and for the first time in a while, the trend is either up or flat on 2-week and one-month basis, instead of down across the board.


Mayhem, you can find it in every State Farm commercial and in the White House. Chief of Staff John Kelly was rumored to be out, but a supposed truce will keep him temporarily in place. Word is that General McMaster, the national security adviser will exit soon. Secretary of State Rex Tillerson was terminated via a Tweet during the week, to be replaced CIA Director Mike Pompeo. Gary Cohen, who ran the National Economic Council, left last week opening the door for Larry Kudlow. That is on the human resource side.

Special Counsel Robert Mueller issued a subpoena to the Trump Organization, demanding information about Russia. A former consultant misused Facebook data on millions of citizens. Infighting over tariffs continues.

This is supposedly the preferred management style of the President. But he might want to consider the consequences, Republicans continue to lose seats they should be winning, including this week in Pennsylvania where Democrat Conor Lamb won a special election in a district that Trump won by 20 points last year, despite personal campaigning by Trump.


The CPI numbers came in as forecast at a reasonable 0.2%, keeping the inflation scare at bay for now. Housing starts and building permits were less than estimates, but manufacturing data was better. Employment reports continued strong, initial claims for unemployment were a low 226,000 and the JOLTS Job Openings survey hit a new record high.

The Atlanta Fed’s GDPNow model continues to fall, now at 1.8% growth for Q1. And the NY Fed’s Nowcast is at 2.73% estimated growth.  The slowdown in growth estimates has not been felt by small business owners, the NFIB Small Business Optimism survey rose to 107.6, the highest reading since September of 1983 and the third highest reading ever.


The poison of high debt often turns deadly, and that has been the case with a couple of high-profile companies this past week. iHeartMedia (IHRT), formerly Clear Channel Communications, filed for Chapter 11 bankruptcy burdened by $20 billion in debt. IHRT was loaded up with debt by private equity firms Bain Capital and Thomas H. Lee Partners when they bought the firm in 2008.

Toys ‘R’ Us, already in bankruptcy, announced they would close or sell their remaining stores. It is the end of an era for what was once an American retail icon. Toys were taken down by multiple factors, but you can count Amazon and a balance sheet loaded with debt as the main reasons.  KKR, Bain, and Vornado paid $6.6 billion in 2005 for the chain in a deal financed primarily with debt. Toys ‘R’ Us was spending more than $400 million per year to cover its financing costs. “These substantial debt service obligations impair the company’s ability to invest in its business and future. As a result, the company has fallen behind,” CEO Dave Brandon previously told the bankruptcy court.

As interest rates rise, there will be more stories like these. Years of artificially low-interest rates and easy money have resulted in poor business decisions and companies that are hanging on by a thread, encumbered with high debt. Ultimately, the economy and productivity should benefit from the process of creative destruction, but there will be disruptions along the way.




Week Ending 3/9/2018


  • US equities increase by 3.66% and international stocks rise by 2.13%
  • Non-farm payrolls explode higher by 313,000 in a very strong employment report.
  • Trump makes the steel and aluminum tariffs official.
  • Trump jumps at the opportunity to meet with the North Korean leader to discuss nuclear disarmament.


Markets rallied powered by a very strong employment report. US equities were up by 3.66% for the week and international stocks rallied by 2.23%. The market celebrated its nine-year anniversary, now just three years short of the longest bull market ever, which ran from December of 1987 to March of 2000. Interest rates rose by a couple of basis points.


Non-farm payrolls increased by a whopping 313,000 in February. That was 108,000 over consensus and the biggest increase since July of 2016. It was, without question, a remarkably favorable report. The combination of global growth and a pro-business administration (at least prior to the implementation of tariffs, read below), helped by deregulation, has put job growth into a higher gear. The prior two months were increased by 54,000 jobs. The year over year increase in average hourly earnings dropped to 2.6% from a downwardly revised level of 2.8%. The unemployment rate stayed steady at 4.1%, but that was due to a big increase in the labor force (another positive sign). Initial unemployment claims increased by 21,000  to 231,000. That was the biggest increase in six months, but 231k is still a low number.

However, while the labor market continues to shine, GDP estimates for Q1 growth continue to sink, both the GDPNow and the Nowcast are now less than 3%, at 2.5% and 2.83%, respectively.


The battle over steel and aluminum tariffs raged on this past week. Trump made it official by authorizing a 25% tariff on steel and a 10% tariff on aluminum. There was intense lobbying against the tariffs from countries around the world, as well as businesses that will be impacted inside the US, and most Republican lawmakers. 107 House Republicans signed a letter to Trump asking him to reconsider. The opponents made some headway, as an exemption was made for Canada and Mexico, with an invitation to other countries to explain why they should also be exempt.  We have no issue with tariffs levied on countries that legitimately “dump” steel and aluminum and do not abide by normal rules of trade, but to punish companies and countries that play fair is not right and will be damaging from an economic standpoint to all. How much damage will depend upon if countries around the word retaliate or not. Trade is not a zero-sum game. Free trade sets up a win-win scenario that promotes economic growth around the world, including here in the United States.


North Korean leader Kim Jong Un offered to meet with Trump in a few months, and Trump quickly replied “Yes.” North Korea agreed to talk about eliminating their nuclear weapons. For a US President to agree to talks of such importance literally on the spur of the moment, is highly unusual and probably without precedent. But this is Trump, the self-proclaimed ultimate dealmaker, and if he can pull this off and make Korea a nuclear-free zone, no one can question that this would be a “win” of monumental proportions. No one is assuming this will actually happen, but it is more than worth the try.


Week Ending 3/2/2018


President Trump announced he would impose steep tariffs on steel and aluminum producers worldwide, setting off fears of a trade war. That, coupled with new Fed Chair Jay Powell’s testimony that the economy might be strong enough for four rate hikes this year, instead of the expected three, turned the markets down. US equities declined by 2.02% and international stocks dropped by 2.82%. US equities are now up by a mere 0.72% year-to-date and international equities are in the red by 0.58%.

With markets turning back down, the Bulls hopes of a quick “V” turnaround pattern in stocks is off the table. Now is the time to watch if stocks can hold their lows of a few weeks back.


Trump entered dangerous territory announcing punitive tariffs on steelmakers worldwide. Not just countries that are supposedly “dumping” steel, but legitimate steel producers around the globe. History has shown that tariffs have, at times, led to unintended consequences, causing great economic damage to all countries. The threat is Trump just laid the opening shot in what could become a worldwide trade war. If Trump was intent on stopping unfair trade practices in the steel market, he could have targeted specific countries in that regard. Trump is invoking Section 232 of the Trade Expansion Act of 1962, which is a national security act that is supposed to be used only under extreme circumstances when there is a national security threat. That is not the case today. The World Trade Organization (WTO) allows such tariffs in the face of a legitimate national security threat. With Trump’s action, the bar has just been lowered and could easily invite retaliation from other countries impacting many different types of industries.

Adam Posen, president of the Peterson Institution for International Economics, said: “this is fundamentally incompetent, corrupt and misguided.” Steve Liesman, an economist at CNBC, remarked “I am hearing three words, technical terms from economists, bad, stupid, and dangerous. This is seen as one of the worst possible policies that any President could ever enact.”

The reaction to the President’s announcement on Thursday was not good. Steel stocks rose in market value by $2.3 billion but the S&P 500 dropped by $328 billion (see below).


The February ISM report for manufacturing came in at 60.8. It was the strongest reading since May of 2004. The manufacturing sector is red hot right now. However, reports of new orders declined for the second straight month, a signal that the ISM could be topping out. Initial jobless claims were 221,000. An extremely low number indicating that the job market is still very strong.

The revised estimate for Q4 2017 growth came in at 2.50%, down from 2.60%. Current estimates for the current quarter are still in the 3%+ range according to the Atlanta Fed’s GDPNow and the NY Fed’s NowCast.


New Fed Chair Jerome Powell made his initial testimony on Tuesday in front of the House Financial Services Committee. Powell was optimistic about the economy, explaining we are in a “moment of global growth”.  Due to a tightening labor market, he expects wage increases to pick up.  He is not that concerned about recent volatility in the equity markets and stated that the Fed will continue with gradual increases in interest rates and a decrease in the Fed’s balance sheet. Powell did not comment on the increasing Federal deficit.