The Trump Rally is Over

In the last Market Update (two weeks ago), I discussed a correction along the lines of 5% that was imminent and what we got was a shallow zig-zag like correction that ended with the Fed announcement on Wednesday (more on this in the next section). A larger correction is still in the cards so we may have a “sell in May and go away” experience in the next several weeks. In my mind, the Trump rally ended earlier this month and now the Fed has likely given us the next leg up to new highs.

Notable sectors right now are retail and energy as they are weakening and may weigh on the broader indices in the coming months. In my experience, the retail sector always cracks first when the economy begins a recession so we will have to monitor this sector closely as earnings are released next month. Many retail stocks may be suffering at the hands of Amazon, so we need to keep that in mind. The oil sector was one of the culprits for the sharp sell-off we saw in Q4 2015 so energy stocks and oil need to be monitored closely, too.

The easy money has been made in the stock market so active management and sector rotation are the emerging themes for 2017. We will need some kind of positive development to carry markets significantly higher into 2018. One trigger to consider may be the repatriation of cash by corporations if we get tax reform later this year. The amount of cash is estimated to be $1-2Trillion which could act as a form of stimulus for the U.S. economy as this capital will be re-invested into the economy via corporate spending. Of course, not getting this tax reform could lead to a huge disappointment but that is a discussion for Q3.

 

Economic & Central Banking Snippets

  • On Wednesday, The Fed raised interest rates and indicated only three rate rises instead of four for 2017. The outlook on rate rises was a relief for the bond market and stocks rallied on the news. Yellen reiterated that the Fed is data dependent as there are still many indicators that show that modest accommodation is still necessary. In other words, the economy is “OK”.
  • Economists are currently estimating U.S. GDP to be running around a rate of 1%. In the last several years, Q1 GDP has been the weakest so we will need to wait and see if the economy will pick up later in 2017.
  • Industrial Production showed another good report with improvement in manufacturing and mining output. The reading was unchanged for last month but only because of another steep drop in utility output (-5.7%) during the second warmest February in the U.S. since 1895. Of note was manufacturing output that showed its strongest two-month increase in three years and the biggest two-month gain in mining since 2008 (one of the highest on record).
  • Another batch of positive data in housing starts pointed to better residential investment growth in Q1. Housing starts rose 3.0% in February to a 1.288 million unit annual rate, and single-family starts surged 6.5% to 872,000, a new cycle high. Unusually warm weather undoubtedly helped, but a surge in the homebuilders’ survey in March to a twelve-year high indicated that some of the “supply-side restraints” on homebuilding that have left inventories of unsold existing homes at record lows may be starting to ease. (Morgan Stanley)

Housing starts

 

  • Next week is light on economic data as we have some housing numbers during the week and durable goods on Friday.

 

Chart Time!

S&P 500 (SPY)
S&P 500 (SPY)

 

Dow Jones (DIA)
Dow Jones (DIA)

 

NASDAQ - QQQ ETF
NASDAQ – QQQ ETF

 

Russell 2000 - Small Caps (IWM ETF)
Russell 2000 – Small Caps (IWM ETF)

 

10 Year Treasury Yields - TNX
10 Year Treasury Yields – TNX

 

Market Snippets

  • In its second capital raise in a year, Tesla Inc (TSLA) announced a $250 million stock offering and $750 million in convertible senior notes due in 2022. The capital raise is necessary as Tesla’s operations burn cash so the clock is ticking for this company to generate positive free cash flow. There is a lot on their plate as they build a factory and integrate the operations of their acquisition of First Solar (that also burns cash).
  • Amazon is ready to do to the local liquor store what it did to the local bookstore. It is rolling out free beer and wine 2-hour delivery starting in Cincinnati and Columbus, Ohio. It is reasonable to expect this experiment to be wildly successful and for the company to roll it out more broadly in the near future.
  • The IPO market is active this year as luxury coat maker Canada Goose (Ticker: GOOS) celebrated a big pop on its first day of trading on the NYSE. Shares initially soared 25% as investors rushed in to get a piece of the popular apparel company.
  • Ford is testing large-scale 3-D printing for car parts, which could allow drivers to customize their vehicles. The plastic parts would also be lighter and create greater fuel efficiency.
  • RadioShack’s owner is preparing to seek bankruptcy protection for the second time in two years! The 1,500-store chain will likely need to shrink further in order to survive.
  • Intel is paying $15.3B in a cash deal to buy Jerusalem-based Mobileye that makes various autonomous driving technologies. The deal represents one of the biggest yet in the emerging field of self-driving cars and is the largest cross-border acquisition of an Israeli company.

 

International Snippets

  • Carmaker PSA has announced a €2.2bn deal to buy General Motors’ loss-making Opel division in a move that will make the Peugeot and Citroën owner the second-largest carmaker in Europe. The deal will see GM finally cutting ties with Europe after a decade of losses in the region.
  • Two former Tesla executives are aiming to set up Europe’s first big battery factory in an attempt to rival Asian manufacturers that dominate the industry as the fight to power electric cars heats up. (FT)
  • Japan’s Toshiba Corp is seeking to extend its Tuesday deadline for submitting official third-quarter earnings due to disagreements with auditors over issues at its U.S. nuclear unit, Westinghouse.
  • Kuwait has extended the recent run of mega-debt issues in the Gulf with a debut sovereign bond sale that attracted more than $20B in investor interest. Kuwait sold $3.5B in 5-year and $4.5B in 10-year bonds have been sold at a yield of around 2.8% and 3.6%, respectively.
  • In a sign of unrest in the Euro zone, the militant Greek group Conspiracy of Fire Cells has claimed responsibility for the parcel bomb that was mailed to German Finance Minister Wolfgang Schaeuble. The group has previously claimed responsibility for a wave of parcel bombs sent to foreign embassies in Athens in 2010. Obviously, this is a sign of unrest regarding all of the country’s debt issues which forces Greece’s government to bow to the demands of the Euro politicians in Brussels. (Reuters)

Paul McCarthy

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