Consolidation and Inauguration

I would call last week a choppy five day holding pattern with not much price action to note. It was a good week for me to have the stomach bug. At least I got to start that 2017 diet by losing five pounds out of the starting gate. It also gave me time to consider some parallels of the incoming Presidency to others in the past.

Some have compared this point in time to when Ronald Reagan assumed the Presidency in 1981. However, the economy was in a much different place at that time. When Reagan took office, unemployment and inflation were in the double digits, US Debt/GDP was under 30%, the P/E multiple of the S&P 500 was 9.02x and the Federal Reserve had interest rates at 13%. Clearly, the pumps were primed for a change in policies to ignite the economy but not without a 16 month recession that began in July of 1981. The political mantra during the Reagan-era was to use the economy to build corporations where a trickle down effect would benefit the working class.

Gross federal debt

When Donald Trump is sworn in on Friday, unemployment is at 4.7%, inflation is less than 2%, US Debt/GDP is over 100%, the P/E multiple of the S&P 500 is 26.17x and the Federal Reserve has interest rates at 0.75%. Quite a stark contrast to the financial markets of 1981!

In terms of the middle class, Donald Trump will have to find a way to re-build this part of the population like we experienced in the Truman and Eisenhower Presidencies. In fact, our economy today parallels the post WWII economy in terms of Debt/GDP ratio, low inflation and low interest rates. The political mantra at that time was to use the economy to strengthen the working class, and their purchasing power would expand the economy. Perhaps our new President will do this through re-negotiating trade agreements and prodding corporations to build American. It will be an interesting change to say the least.

As you can see in the chart below of GDP, the Truman/Eisenhower period
resulted in good economic growth which benefitted the middle class.

Gross domestic product

Chart Time!

The post-election rally is becoming quite choppy these past few weeks. In some cases this could indicate a completed uptrend with a pull back to come in the near future. Sometimes it is a consolidating pattern that portends higher prices and new highs which would explain why any of the recent declines have been shallow. In either case, we should get a resolution soon – maybe at or right after the inauguration on Friday. By the way, a typical decline in this uptrend would be right around 5%.

S&P 500 (SPY)
S&P 500 (SPY)
Dow Jones (DIA)
Dow Jones (DIA)
Russell 2000 - Small Caps (IWM ETF)
Russell 2000 – Small Caps (IWM ETF)
10 Year Treasury Yields - TNX
10 Year Treasury Yields – TNX

Market Snippets

  • Fiat Chrysler (FCA) said it will invest $1B to modernize two plants in the Midwest and create 2,000 jobs. FCA’s announcement that it would retool factories in Ohio and Michigan highlighted the auto industry’s interest in getting relief from fuel economy rules enacted by the outgoing administration.
  • McDonald’s has entered an agreement to sell 80% of its 2,200 stores in China and Hong Kong to a consortium. The deal includes 20-year mass franchise rights and will likely help McDonald’s trim its overall operational costs and preserve capital.
  • Alphabet (Google) revealed that it has built all of its sensor hardware inhouse for its self-driving car and was ready to offer its autonomous-drive technology in “millions” of vehicles at a competitive price. A package of LIDAR sensors and radar, which used to run approximately $75,000 a few years ago, has fallen by more than 90%. (FT)
  • Jerome Powell, a Federal Reserve governor, has called on Congress to revise the Volcker rule, a facet of the Dodd-Frank Act that restricts proprietary trading. Powell contends that the rule places unnecessary expense and burdens on banks, but agrees that vigilance should be exercised on the buildup of financial risk.
  • Fiat Chrysler could face a fine of up to $4.6B after the EPA accused the company of violating emissions laws in 104,000 diesel vehicles.

International Snippets

  • Pakistan has successfully fired its first nuclear-capable submarine-based cruise missile, in a move that escalates tensions with neighboring India. The Pakistani navy said on Monday afternoon that it had launched a nuclear-capable Babur-3 missile, which has a range of 450KM.
  • Russia views the arrival of more than 3,000 U.S. troops in Poland as a security threat, a spokesman for President Vladimir Putin said, BBC reported Jan. 12. In deploying the armored brigade Washington is signaling its continued support for countries in Europe’s borderlands in the face of Russian aggression.
  • Volkswagen agreed to plead guilty to three felonies and pay $4.3B to settle a US Department of Justice investigation as six of its executives were indicted for their role in the diesel emissions scandal that has engulfed the German carmaker for 16 months.
  • French authorities have started a preliminary investigation into Renault amid suspicion the company may have “cheated” to conceal abnormal emissions of pollutants from some of its diesel engines. Last year, three Renault sites in France were raided by authorities as part of a sprawling national investigation linked to the Volkswagen emissions scandal.
  • Taiwan’s Foxconn and its Japanese subsidiary Sharp are studying the possibility of building an LCD plant in the United States. The plan is “on the table,” a company executive told Nikkei. “We will make a decision carefully.” Foxconn, a major producer for Apple and is also considering iPhone production in the U.S.
  • Italian Bank Monte dei Paschi will have to wait another two weeks for a green light on its rescue plan after eurozone finance ministers scheduled a Jan. 26 meeting to discuss the “compatibility” of Italy’s bailout with EU rules.
  • Takata, the Japanese automotive supplier at the center of a global recall crisis over exploding airbags, agreed to plead guilty on Friday to criminal wrongdoing in the US, as three of its executives were indicted for their roles in the scandal. (FT)

Paul McCarthy

Mr. McCarthy is the President and founder of Kisco Capital.