28 Trading Days

We had a fairly choppy week of market activity that ended with an options expiration Friday (3rd Friday of every month). Option expiration dates tend to lift stock prices higher so maybe this phenomenon carries over into next week given the holiday. The House passed the new tax bill this week so its on to the Senate where it looks to be a close call on passage. A disappointment will not be taken well by the stock market. Only 28 more trading days to go in 2017.


The technicals say a pullback of some kind is likely and complacency has been very high as evidenced by ultra-low levels of volatility. So it is a market that has a yellow caution flag written all over it.

It has been over 250 days since we had a 3%+ correction – the longest in the history of the stock
market. On average you see one every 60-90 days so we are due for something to happen. The larger concern is that the stock market could slip into a much larger correction given the level of complacency built into the system. Despite how 2017 ends, I think this low-volatility chapter of the stock market is coming to an end. That is a healthy thing as it will allow for better price discovery and begin the process of weeding out some of the excess we are seeing in places like the high yield bond markets.

Holiday week next week so have a Happy Thanksgiving!


Chart of the week!


Economic & Central Banking Snippets

  • The producer price index – a key measure of industrial inflation – was up 0.4% in October from the previous month, the Labor Department said on Thursday. The rise is likely to bolster the Federal Reserve’s case for one more interest rate rise in 2017. Most of the rise is likely due to the recent rebound in crude oil prices as noted, “Nearly half of the increase in prices for final demand services can be attributed to margins for fuels and lubricants retailing, which surged 24.9%” the agency noted.
  • Germany’s economy continued growing at a “high rate” of 0.8% in Q3, exceeding economists’ expectations and underscoring the rising strength of the eurozone’s biggest economy. ING economist Carsten Brzeski said “the German economy is currently showing its best performance over such a long period since the mid-1990s.”


Politics! Politics! Politics!

  • A bipartisan group of Senate lawmakers has tentatively agreed to relieve regional banks from some expensive regulations put in place after the financial crisis, according to people familiar with the matter and a document circulated among lobbyists. The deal, between Senate Banking Committee Chairman Mike Crapo (R., Idaho) and a group of moderate Democrats, would exempt banks with up to $250 billion in assets from heightened oversight from the Federal Reserve, up from a current threshold of $50 billion.
  • Western countries suffered more deaths from terrorism in 2017 than any other year since 2001. A report from the Institute for Economics and Peace suggests that as Islamist extremists retreat in Syria, Iraq and Nigeria, terror groups have been exporting deadly attacks to western countries. (FT)


Chart time!

S&P 500 (SPY)




Russell 2000 – Small Caps (IWM ETF)


Market Snippets

  • GE has announced a halving of its quarterly dividend ahead of an update on strategy later on Monday by John Flannery, chairman and chief executive. The projected payout will be cut to 12 cents a share from the current 24 cents a share — the lowest quarterly dividend since 2010. It comes after a painful year for the industrial conglomerate, which historically was one of the most reliable dividend payers in corporate America. Its stock price has fallen by a third since the end of December and it has underperformed one of its main rivals, Siemens.
  • The last Da Vinci in private hands sold for $450m on Wednesday after a fevered, 90-minute long round of bidding at Christie’s in Manhattan. It is believed to be the most expensive piece of art ever sold.
  • CLO Issuance. These are vehicles that buy high-yield debt. Issuance has been strong in the post-financial crisis era. Will these vehicles be the cause of another debt crisis like we saw with CDOs and mortgage products? These vehicles tend to drive down underwriting standards which will continue until the junk bond market has a series of credit events


  • General Electric is cutting its dividend for only the second time since 1938 and will divest two of its longest-held divisions, including the remainder of the lighting business created by Thomas Edison. The move is part an effort by its new chief executive to revive the storied conglomerate. Shares had their worst single-day decline since 2009 after the turnaround plan was revealed. (FT, CNBC)


Crowded Trades

  • Wall Street banks secretly shared client information in online chat rooms in order to rig auctions for the $14 trillion US Treasury market, according to an explosive lawsuit filed in Manhattan federal court on Wednesday. The move wrongly fattened the banks’ profits and picked profits from clients, the suit claims. The funds, representing retirees and public workers, also claim the banks conspired to rig the secondary Treasury markets beginning in the 1990s through tightly controlled electronic platforms that inhibited more competitive trading. The funds continue to allege the banks mined their own customers’ bids for Treasury bonds to get a bigger share of the auction, and sell the bonds for more profit. (NYPOST)


International Snippets

  • Russia has agreed to restructure $3.15B worth of Venezuelan debt held by Moscow, in a show of support for crisis-wracked Caracas. Venezuela this week suffered what is expected to be the first in a cascade of defaults on more than $60B of international bonds. Caracas is already overdue on another $420m of interest payments on other sovereign bonds, which will also soon be in default, as will payments on debt from PDVSA, the state oil company. Russia has emerged as the country’s most prominent foreign supporter, with loans and financial assistance to the country and its oil company through state-owned Rosneft.
  • Moreover, there are signs that Sweden’s housing market is cooling.


  • Proof that capitalism is the best mechanism to remove people from poverty. Look at how much the Asian region has fallen since 1987. Think wealth building in China. (WSJ)


  • Norway’s trillion-dollar sovereign wealth fund has proposed dropping its investments in oil and gas stocks, warning western Europe’s biggest energy producer already has enough exposure to petroleum. The Norwegian central bank, which runs the Oslo-based fund, said its view was that offloading investments – which includes companies like BP, Royal Dutch Shell and ExxonMobil – would make the country’s wealth “less vulnerable to a permanent drop in oil and gas prices”. While environmentalists heralded the fund’s proposal, the move has more to do with hedging risk than saving the planet. Norway derives about 20% of its economic output from oil and gas. Finance officials have long debated whether reinvesting those profits back into petroleum producers leaves Norwegians overly exposed to the volatility of oil prices. (FT)
  • The Bank of Japan’s (BoJ) balance sheet is approaching 100% of GDP. The BoJ frequently purchases stock in their equity markets as part of their quantitative easing program.

Paul McCarthy

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