Mood Check

I was reading this week that the S&P 500 has now gone 250 trading days without declining more than 3% which is its longest streak ever. Think of having 70 degree weather in January for two weeks in the northeast. Highly irregular and not likely to last much longer. You may not have noticed the intra-day price swings but there are some hints of volatility returning into the system over the last two weeks for what it is worth.

Earnings season remains “ok” but the market is punishing companies that disappoint to the tune of being down 10% or more in some cases. Sectors that remain in downtrends are energy, consumer staples and retail. Industrials and financials are likely the next sectors to show topping activity in the coming weeks. Semiconductors, technology, biotechnology and healthcare all look to have recently pulled back and are now moving higher. A bifurcated market is likely to continue for the foreseeable future.

Pay attention to social mood in the coming months. There is a great deal of questions people are thinking about regarding 2018. There is the question of interest rates rising and how less accommodating central banks will affect global stock markets. There are political changes in Spain (Catalonia), U.K. (BREXIT), Turkey (dictatorship?), Saudia Arabia (new King) and China (Xi consolidates power). In the United States there are questions regarding tax policy, trade policy, immigration, healthcare and an upcoming mid-term election. There are also bad actors popping up (Harvey Weinstein) and manias like bitcoin which can’t be denied in the main stream media. Eventually, a fatigue factor may set-in where uncertainty and negative moods creep into the enthusiasm for the stock market. Stay tuned.


Fun Fact of the Week


Economic & Central Banking Snippets

  • Vietnam’s central bank has declared the use of digital currencies in the country illegal. The central bank also announced that it will impose a fine on anyone caught utilizing the cryptocurrencies starting early 2018. The law also states that the only authorized payment methods in the country are those issued or controlled by the State Bank of Vietnam.
  • The Bank of England (BOE) raised its benchmark interest rate for the first time in a decade, a telegraphed move that represents the latest step by the world’s major central banks to withdraw crisis-era stimulus. The BOE lifted its policy rate to 0.5%, from 0.25% and signaled two more increases by 2020. The British pound and U.K. government bond yields fell sharply in the wake of the decision.
  • US personal spending rose by the most in more than eight years in September, as households hit by Hurricane Harvey and Irma replaced flood-damaged cars and goods. “New motor vehicles was the leading contributor to the increase,” said the BEA in a statement.
  • Despite the bloc’s strengthening economy, eurozone inflation unexpectedly slowed in October, cooling to 1.4% from 1.5%. ECB President Mario Draghi has already warned that headline inflation figures will probably decline over the next few months.
  • U.S. employers hired at a strong pace in October, and revisions showed the labor market weathered hurricane damage better than previously estimated. Nonfarm payrolls rose a seasonally adjusted 261,000 in October, a pickup from the prior month, the Labor Department said. The unemployment rate declined to 4.1%, its lowest level since December 2000. Wages rose 2.4% from a year earlier, a slowdown from last month. September’s payrolls data, initially reported as the first drop in seven years, were revised to show employers actually created 18,000 new jobs that month, extending the economy’s streak of job gains to a record 85 straight months.


Politics! Politics! Politics!

  • Spain’s public prosecutor has accused the entire former Catalan government of rebellion, sedition and misuse of public funds as Madrid looks to reimpose its authority on the breakaway region.
  • A new anti-corruption commission in Saudi Arabia arrested at least 11 princes and dozens of senior officials and prominent businessmen. King Salman earlier on Saturday ordered the establishment of the commission and named his son Crown Prince Mohammed bin Salman to lead it, with a vow to protecting public money and taking measures against individuals and entities accused of corruption.
  • President Nicolas Maduro said Venezuela will seek to restructure its global debt after the state oil company makes one more payment, blaming U.S. sanctions for making it impossible to find new financing. The government will transfer funds for a $1.1 billion principal payment on Petroleos de Venezuela bonds that came due Thursday, Maduro said from Caracas. From there on out, the nation will renegotiate its debt with banks and investors, he said in a national address. Bonds of the state oil company and government notes maturing next year slumped in London trading on Friday.
  • Finally, here is a comment from Merrill Lynch on the concept of tax cuts “paying for themselves.” BofA Merrill Lynch: – “President Clinton worked with Republicans and cut the capital-gains tax rate from 28% to 20% in 1997. Capital-gains tax cuts are among the most likely to generate greater revenues because taking a capital gain is optional. If the tax on the gain is 20%, you are more likely to realize the gain and pay taxes than if the tax rate is 90%. If you don’t take the gain, there are no tax revenues. The booming stock market in the late 1990s generated a wealth of potential gains, and more were realized at lower tax rates. While it is common to hear pundits in the financial media say something to the effect that “no respectable economist believes that tax cuts can pay for themselves,” the late-1990s experience is a case study in why “respectable” economists are so often wrong. Indeed, that was the last time that the U.S. government ran a fiscal surplus and the bounty of capital-gains revenues was a major factor behind the budget surpluses of the late 1990s.” (Elliott Wave International)
  • New Tax brackets as proposed by the tax bill in Congress:


Chart Time!

S&P 500 (SPY)




Russell 2000 – Small Caps (IWM ETF)


Market Snippets

  • Broadcom is planning an unsolicited takeover approach to rival chip maker Qualcomm. Broadcom was planning to launch its bid for Qualcomm as soon as this weekend, the person said. A deal would be enormous, given Qualcomm’s current market value of nearly $90 billion. Any potential deal could face regulatory hurdles. (FT)
  • Starbucks was downgraded by both S&P Global Ratings and Fitch on Friday after the coffee chain unveiled plans to return about $15B to shareholders said it would fund the payments with debt and operating cash flows. S&P, which downgraded the company’s corporate credit rating by one notch to “A-” with a stable outlook, said it expected Starbucks to issue between $3B to $4B in debt over the next year.
  • Last month, the yield-to-worst (i.e., a worstcase scenario for investors) on Bloomberg’s High Yield Emerging Market Corporate Bond Index fell to 5.85%, a new all-time low for the index, which dates back to 2010. The yield is down from nearly 12% in early 2016. (EWI)


  • Warren Buffett’s Berkshire Hathaway is on course for its first annual insurance underwriting loss since 2002, after taking a $3B hit from the recent run of natural disasters. The company disclosed late on Friday that losses from hurricanes that affected the southern US and Puerto Rico and from an earthquake in Mexico had tipped its insurance underwriting business into a $1.4B loss for the quarter. That was the business’s third consecutive quarter in the red, taking losses to $1.7B in the first nine months of the year.
  • The road ahead for Tesla is strewn with potholes. Last quarter it aimed to make 1,500 Model 3 vehicles. In the end, it produced just 260. During quarterly results on Wednesday that showed a 67 per cent rise in post-tax losses to $671m, Tesla laid out some of its production “bottlenecks”. Analysts have also calculated that Tesla’s “work in progress” — an industry term for costs tied up in unused goods and materials — is many times higher than other more established carmakers. Jefferies calculates Tesla’s work in progress at 14 per cent of its total sales — compared to 2% at BMW and 4% at Volkswagen.

Paul McCarthy

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