Trade Alert: Adding a Tooling & Re-tooling position to the Select List

Trade Alert: Adding a Tooling & Re-tooling position to the Select List

 

Key Points in This Alert:

  • We are adding shares of Rockwell Automation (ROK) to the Tematica Investing Select List as part of our Tooling & Re-tooling investment theme with a $235 price target.

 

We are adding shares of Rockwell Automation (ROK) to the Tematica Investing Select List as part of our Tooling & Re-tooling investment theme with a $235 price target.

As a result of tax reform, the new tax rules allow companies over the next five years to immediately deduct the entire cost of equipment purchases compared to writing off only a portion of the cost in a single year. This earnings season we’ve started to hear from companies, like Boeing (BA) that are boosting capital spending plans and investing in product development as well as its factories. Based on these prospects as well as statistics for private fixed assets that reveal the average age of US factory stock is near 60 years old, the Association For Manufacturing Technology forecast U.S. orders of manufacturing equipment to rise 12% in 2018 up from an annual rate of 9% it forecasted this past November. Given the tax code changes, odds are this upgrade and expansion spending will span more than just 2018.

Rockwell Automation is a leader in industrial automation and information products that serve the automotive, textiles, food & beverage, infrastructure, personal care, oil & gas, life sciences, power generation, semiconductor and other industries. Roughly 55% of the company’s business is domestic in nature, with the balance spread across 79 other countries, which positions the company to take advantage of the improving global economy.

Over the last several months, ROK shares have been a strong performer, but over the last few weeks, they’ve drifted lower despite the upward revisions we are seeing in EPS expectations for both this year and next. Current Wall Street consensus expectations have the company delivering EPS of $7.78 per share this year, up 15% year over year, and climbing another 12% to $8.75 in 2019. Based on historic P/E multiples, I see upside in ROK shares to $235 vs. downside to $175. On a percentage that’s upside of 20% vs. downside of 11%. Factor in the company’s increasing dividend policy and the current dividend yield of 3.4%, and it tips the upside vs. downside into a more favorable position. With roughly $1.4 billion available under the company’s recently upsized share repurchase plan, the shares have a nice safety net as well, which means historic downside multiples may not be as applicable this time around.

In terms of catalyst to watch, I’ll be focusing on forecast updates from the Association for Manufacturing Technology, monthly industrial production and manufacturing capacity utilization data as well as aggregate capital spending forecasts for US companies.

 

  • We are adding shares of Rockwell Automation (ROK) to the Tematica Investing Select List with a Buy rating as part of our Tooling & Re-tooling investment theme with a $235 price target.

 

 

Boosting our price target on LSI Industries

Boosting our price target on LSI Industries

 

Our shares of LSI Industries (LYTS) on the Tematica Investing Select List are popping today following a solid earnings beat for the companies December quarter and raised bottom line expectations for the coming year due in part to the benefits of tax reform. With that benefit, which is based on a consolidated tax rate of 29% vs. 34% for 2017, we are boosting our price target on LYTS shares to $11 from $10, which keeps the shares a Buy rating despite this morning’s 15% move higher. We’re more than happy to take that 15% move as it brings the return thus far on LYTS shares to just under 14%.

As I mentioned above, the earnings beat was partly due to tax reform. The other part was the stronger than expected operating performance as revenue for the quarter rose 7.7% year over year to $92.3 million, well ahead of the $88.5 million “consensus” expectation formulated by all two of the Wall Street analysts that follow the shares. More impressive was the sharp improvement in operating profit that rose significantly higher year over year as its operating margins climbed to roughly 4.9%, up from 3.3% in the year-ago quarter. This continues the trend of year over year margin improvement, which bodes well for incremental EPS growth in the coming quarters, even before we factor in the company’s new tax rate.

Once again, we are seeing that stocks under covered by Wall Street analysts offer opportunity, provided the fundamentals and other data points support the investment thesis. As a reminder, LSI remains well-positioned with its lighting solutions as non-residential construction activity continues to rise in the coming quarters. Comments from construction equipment heavy weight Caterpillar (CAT) are certainly comforting in this regard as it “expects improvement in North American residential, non-residential and infrastructure. The outlook does not include any impact from a potential U.S. infrastructure bill.”

I continue to see the rebuilding of US infrastructure as pouring gasoline on non-residential contraction and LSI’s business. I continue to wait for more formal details to emerge out of Washington on this, but between now and then, I’ll continue to look for additional confirming data points as the December quarter earnings season heats up.

  • We are boosting our price target on LSI Industries (LYTS) to $11 from $10

 

Rising consumer credit card debt to be a headwind to GDP in 2018

We are starting to get not only holiday sales results from the likes of Kohl’s (KSS) and others, but also December same-store-sales results from Tematica Investing Select List resident Costco Wholesale (COST) and its retail brethren. Thus far the results are positive and in some cases much better than expected, but when we see we think about the other shoe to drop. In this case, that is “How are consumers paying for all of this given that wages barely budged in 2017?” 

The answer is they have been turning to their credit cards. Before the holidays began, the Federal Reserve found consumer credit card debt hit $808 billion exiting September. Now let’s add findings from MagnifyMoney that “people who used credit cards for holiday purchases charged an average of $1,054, about 5%  more than last year.” This helps support the view that consumer credit card debt will eclipse $1 trillion this year.

For us here at Tematica, it’s more reason to think consumers, especially Cash-Strapped Consumers, are likely to use the benefits of tax reform to get their financial houses in order, pay down debt and spend less than the Wall Street herd is thinking. In other words, we see this supporting views that were laid out by Chris Versace and Lenore Hawkins on last week’s Cocktail Investing podcast, and that’s before we factor in potential Fed rate hikes this year.

 

“The scary number — $1 trillion — we’ll definitely hit in 2018,” said Jill Gonzalez, an analyst with WalletHub. “It seems to say a lot of American consumers did not learn their lesson from the recession and are returning to living beyond their means.”

Credit card debt stood at $808 billion on Sept. 30, the end of the third quarter, according to the most recent data from the Federal Reserve Bank of New York. That’s $280 billion more than the previous high hit in 2008, at the height of the financial crisis that led to the Great Recession.

As consumers keep spending away on their credit cards — which typically come with interest rates starting at about 16 percent — the Federal Reserve is expected to have two or three quarter-point hikes this year to a key rate that affects consumer debt. It did so three times in 2017.”Every time there is a Federal Reserve rate hike, that adds about $1.5 billion to our collective financing rates,” Gonzalez said. “That has to do with these delinquency rates rising. And when you factor in mortgages, student loans and auto loans, that becomes a scary picture.”

Source: How to knock out holiday credit card debt

Tax Reform and the Markets

Tax Reform and the Markets

I have the good fortune of being invited to speak on various television news programs on a fairly regular basis. This month the main topic of choice has been tax reform and given that the Senate is voting on their version this week, I thought I’d present some thoughts and data on the subject.

I am often asked during my TV appearances if I think that any tax reform bill needs to be able to pay for itself. The short answer is yes, but there’s more to it – I am Irish after all! At the beginning of 2008, total public debt which includes federal, state & local was about 75% of GDP. Today it is over 110% of GDP. The interest rate we, the American taxpayers, are paying on that debt is incredibly low today by historical standards, but that debt is like an adjustable rate mortgage. We have no plans to ever reduce the debt, let alone pay it off so when big chunks of it come due, we need to get a new loan at current rates. If rates go up, that debt will cost us more and more. The more money that we have to pay on that debt, the fewer resources are available to invest in ways that can grow the economy.

I will point out though that rather than focusing on having tax cuts pay for themselves, we could look at ways to cut spending? In 1950 federal spending was 20% of GDP and the world wasn’t coming to an end. At the beginning of 2000, federal spending had grown to 31% of GDP.  This year it will account for about 36% of GDP. This level of spending comes at a time when unemployment is at 15-year lows. What happens when the inevitable recession comes? This is supposed to be the good times when we cut spending back and save up for the tough times.

What happens if we get bupkis from all this talk of tax reform? The current market valuations are so lofty and sentiment so lopsided bullish that there is no doubt in my mind that some level of cuts are already priced in, which means a hit if we don’t get them. The Republicans would likely have a tough time in the 2018 elections, which means that D.C. is likely to be even more dysfunctional as the Republicans try to shore up areas of weakness while the Democrats look to capitalize on the Republicans’ inability to enact reforms touted on the campaign trail.

Why do I think the markets are vulnerable? For starters, equities are really pricey: The trailing P/E ratio is higher today than at the 2007, 1987, 1976 and 1958 market peaks. The only time it was higher was during the 1999 dotcom lunacy. There is seriously lopsided sentiment with roughly 6 bulls for every bear. That is almost as lopsided as the all-time record pre-1987 crash. Even the c-suite has acknowledged that prices are inflated as share buybacks are at a 5-year low Finally, the US equity markets are a lot more expensive than many others around the world. Without tax reform, U.S. stocks will look less attractive than other international options as U.S. companies will continue to pay higher tax rates than the proposed rates.

WEEKLY ISSUE: Prepping for Tematica Select List earnings to come this week

WEEKLY ISSUE: Prepping for Tematica Select List earnings to come this week

A few days ago in the Monday Morning Kickoff, I cautioned that over the coming days we would see a profound increase in data in the form of economic data and earnings. We are seeing just that as we head into the eye of the earnings storm today and tomorrow. For the Tematica Investing Select List that means results will be had from Connected Society company Facebook after today’s market close, followed tomorrow by Disruptive Technologies company Universal Display (OLED) and the latest addition – Apple (AAPL). Yes, after patiently keeping our eyes on Apple for some time, we finally added the shares back to the Select List given what we see as a robust 2018 for the company. If you missed our deep thoughts on that addition you can find it here, and below we’ve previewed what’s expected from these three companies.

We all know there are a number of factors that influence the market, and two of them – the Fed and prospects for tax reform – will be in full coverage today and tomorrow. This afternoon the Fed will break from its November FOMC policy meeting, and while next to no one expects the Fed to boost interest rates coming out of it, the focus will be the language used in the post-meeting statement. Last week’s stronger than expected 3Q 2017 GDP print of 3.0% — you can read Tematica’s take on that here – and Fed Chairwoman Janet Yellen’s likely status as a lame duck keep the prospects of a rate hike in December fairly high in our view.

Tomorrow, the highly anticipated tax reform bill is slated to be revealed, a day later than expected “because of continued negotiations over key provisions in the bill.” It’s being reported that issues still being negotiated include retirement savings and the state and local tax deduction — two key provisions that involve raising revenue to pay for the plan. As the bill’s details are released, we suspect many will be interested in proposed tax bracket changes and the potential economic impact to be had as well as near-term implications for the national debt. We will have more comments and thoughts on the proposed bill later this week as it, along with the tone of earnings to come, will influence the market’s move in the coming days.

 

A quick reminder on Amazon and Nokia plus boosting our Alphabet price target

Before we preview what’s to come later today and tomorrow, I wanted to remind you that last week, on the heels of Amazon destroying 3Q 2107 expectations, we boosted our price target for AMZN shares to $1,250 from $1,150, keeping our Buy rating intact. As expected, other investment banks and analysts did indeed up their rating and price targets as we move deeper into what is poised to be one of the busiest quarters in Amazon’s history. The wide consensus is that once again digital shopping will take consumer wallet share this holiday season. As Amazon benefits from that e-commerce tailwind following robust Prime membership growth in 3Q 2017, the company is also poised to see its high margin Amazon Web Services business continue to benefit from ongoing cloud adoption. In our view, this combination makes Amazon a force to be reckoned with this holiday season, especially since it remains the online price leader according to a new report from Profitero.

  • As we have said for some time, as consumers and business continue to migrate increasingly to online and mobile platforms Amazon shares are ones to own, not trade.
  • Our price target on Amazon is $1,250.

 

We also used the sharp sell-off in Nokia (NOK) shares to scale into that position as its high margin licensing business continues to perform as its addressable device market continues to expand. That addition helped improve our NOK cost basis considerably as we patiently wait for the commercial deployment of 5G networks that should goose its network infrastructure business. Hand in hand with those deployments, we should see even further expansion of Nokia’s licensing market expand as the connected car, connected home and Internet of Things markets take hold.

  • We continue to rate Nokia (NOK) shares Buy with an $8.50 price target.

 

Also last week, Alphabet (GOOGL) soared following the company’s 3Q 2017 results that crushed expectations and confirmed the company’s position in mobile. More specifically, the company delivered EPS of $9.57, $1.17 per share better than expected, as revenue climbed nearly 24%, year over year, to $27.77 billion, edging out the expected $27.17 billion.

Across the board, the company’s metrics for the quarter delivered positive year-over-year comparisons and in response, we are upping our price target to $1,150 from $1,050. Given its positions in search, both desktop and mobile, the accelerating shift in advertising dollars to digital platforms, and YouTube’s move into both streaming TV and proprietary programming, we continue to rate GOOGL shares a Buy.

  • We are upping our price target on Alphabet (GOOGL) shares to $1,150 from $1,050.

 

After today’s market close, Facebook will report its 3Q 2017 results

Following positive reports from Amazon, Alphabet and even Twitter (TWTR) that confirmed the accelerating shift to digital platforms for advertising and consumer spending, Facebook shares rallied in tandem over the last few days. This brings the year-to-date rise in the shares to more than 55% fueled in part by several investment banks upping their price targets and ratings for the shares. For now, our price target on FB shares remains $200.

Despite the better-than-expected results from those companies mentioned above, we have not seen any upward move in consensus expectations for Facebook’s 3Q 2017 results that will be reported after today’s market close. As I share this with you, those expectations for 3Q 2017 sit at EPS of $1.28 on revenue of $9.84 billion while those for the current quarter are $1.70 in earnings and $12 billion in revenue. On the earnings call, we’ll be looking not only for updated quarterly metrics but also updates on its monetization efforts and how its video streaming offering, Watch, is developing. We see Watch as a salvo against TV advertising given its 2 billion-and-growing user footprint across the globe. We also hope to hear more about Facebook’s virtual reality initiatives and its plan to expand the recently launched online food-ordering capability.

  • As Facebook continues to garner advertising dollars and flexes its platforms to gather more revenue and profit dollars, we are once again assessing potential upside to our $200 price target for this Connected Society company

 

Thursday brings Apple and Universal Display earnings

After tomorrow’s market close we receive earning from Disruptive Technology company Universal Display (OLED) and Connected Society company Apple (AAPL). There have been a number of positive data points to be had for our Universal Display shares over the last several weeks and they have propelled the shares higher by 13% over the last month. That latest move has brought the return on the OLED position that we have had on the Tematica Investing Select List since October 2016 to more than 175%. Patience, it seems, does pay off as does collecting and assessing our thematic signals.

In terms of 3Q 2017, consensus expectations call for the company to deliver EPS of $0.12 on revenue of $47.1 million. We’d remind subscribers the company has a track record of beating expectations and a favorable report this week from LG Display points to that as once again being likely tomorrow.

As noted by LG Display, “Shipments of big OLED TV panels have increased, as 13 manufacturers adopted our products…We plan to focus on investing in OLED products as part of our long-term preparation for the future” away from LCD displays. LG Display also shared it is planning to spend 20 trillion won to expand OLED production through 2020.

We see this rising capacity as bullish for our Universal shares as well as our Applied Materials (AMAT) shares given its display equipment business, but also as a signal that OLED display demand is poised to expand into other markets, including automotive.

  • Our price target on Universal Display shares remains $175.
  • Our price target on shares of Applied Materials (AMAT) remains $65.

 

With regard to Apple’s 3Q 2017 earnings, expectations have this Connected Society company reporting EPS of $1.87 on revenue of $50.8 billion. As we mentioned when we added the position, given the timing of both new iPhone model launches we are likely to see 3Q 2017 results get a pass as investors focus on the outlook for the current quarter. As I shared on Monday, our strategy will be to use any pullback in AAPL shares near the $140-$145 level to improve our cost basis for what looks to be a favorable iPhone cycle in 2018.

  • Our price target on Apple (AAPL) remains $200.
Something more than Harvey and Irma have Goldman Sach’s CEO “unnerved” about the current stock market?

Something more than Harvey and Irma have Goldman Sach’s CEO “unnerved” about the current stock market?

As we witnessed over the weekend, the Caribean and Florida took a beating from Hurricane Irma, and its impact is going to be a major source of weakness in the economy for the current quarter. Paired with the impact of Hurricane Harvey, we’re looking at one-two punch to the GDP gut and we expect existing GDP forecasts for 3Q 2017 will be revised sharply lower in the coming days. That’s enough to rattle the market, but there are other reasons investors should be increasingly cautious. Last week, when speaking at a conference in Germany, Goldman Sachs (GS) CEO Lloyd Blankfein shared that he was “unnerved” by things going on in the stock market. As we’ve been analyzing the economic data and watching the political landscape in Washington, we here at Tematica have been talking about a growing sense of unease in the market over the last several months. Yet, the market has at least thus far managed to shrug these mounting concerns off its proverbial shoulders.

In today’s increasing frenetic society, short attention span filled society sometimes it takes a “voice from on high” to catch people’s attention and wake them up. All it took was a short comment from Blankfein during the question and answer session of his presentation at a conference in Germany:

“Things have been going up for too long,” he told attendees at a Handelsblatt business conference in Frankfurt. “When yields on corporate bonds are lower than dividends on stocks? That unnerves me.”

 

We certainly share Mr. Blankfein’s concerns and have been hammering the points home weekly in our Monday Morning Kickoff report and the Cocktail Investing Podcast.  To fully understand the source of Mr. Blankfein’s current unease let’s explore his statement:

 

#1: “Things have been going up for too long.”

While there have been modest pullbacks in the market, like the ones in late 2014 and the second half of 2015, a longer view shows the major averages have moved sharply higher over the last five years, with the S&P 500 in the upper range of its long-term upward trend. Before factoring in dividends, the S&P 500, a key benchmark of institutional investors, is up more than 70% since September 2012.

More recently, the S&P 500 has gone more than 300 trading days without a 5% or more pullback, the longest such streak since July 19, 1929. For those wondering, the record still sits at 369 trading days per Dow Jones data. Historically speaking periods of suppressed volatility tend to be followed by periods of heightened volatility, as market volatility reverts back to its mean. Given the extended period of low volatility, the probability of entering a period of heightened volatility moves higher.

As the stock market has moved higher, so too has its valuation. As we write this, the S&P 500 is trading at 18.7x expected 2017 earnings versus the 5 and 10 year average multiples of 15.5x and 14.1x, respectively. In 2015 and 2016, we saw earnings expectation revised lower during each year until annual EPS growth was nil. With economic data that is once again leading the Atlanta Fed to reduces it GDP forecast, we’re seeing downward earnings revisions to EPS expectations in the back half of 2017. We at Tematica classify that as “unnerving.”

 

#2: The Current “Recovery” is Now Over 100 Months

If we look back to when the stock market bottomed out during the Great Recession, the timeframe for the current “recovery” has been over 100 months. By comparison, the average economic expansion over the 1945-2009 period spanned 58.4 months. In other words, the current expansion is rather long in the tooth and a variety of data points ranging from slowing growth in employment to peak housing and auto to a flattening yield curve support this assessment. While the length of expansion has likely been affected by the Fed’s aggressive monetary policy, the bottom line is at some point

While the length of expansion has likely been affected by the Fed’s aggressive monetary policy, the bottom line is at some point it will come to an end. As the Fed looks to unwind its balance sheet and gets interest rates closer to normalized levels, we’re reminded that the Fed has a track record of boosting interest rates as the economy heads into a recession. Let’s not forget that every new presidential administration coming in after a two-termer going all the way back to 1900 has experienced a recession within the first twelve months. Yep, we color that as “unnerving.”

 

#3: The Market’s Post-Election Euphoria Has Worn Off

Coming into 2017 there was a wave of euphoria surrounding newly elected President Trump with high hopes concerning what his administration would accomplish. Over the last few months, a number of executive orders have been administered, but we have yet to see any progress on tax reform or infrastructure spending. The risk is that expectations for these initiatives are once again getting pushed out with tax reform that was slated for August now being expected (don’t hold your breath) near the end of 2017. The risk is the underlying economic assumptions that powered revenue and EPS expectations in the second half need to be reset, which will mean those lofty valuations are even loftier.

 

#4: Precious Metals Are Gaining Strength

Since August 1, Gold, Silver and the Utilities sector have significantly outperformed financials and consumer discretionary stocks – never a positive sign. The KBW index of regional banks has fallen below is 50-day, 100-day and 200-day moving averages and is down over 18% from its March 1st

 

#5: The Breadth of Current Rally Isn’t Looking So Hot

The median Dow stock is down more than 4% from its 52-week high and the median S&P 500 stock has dropped nearly 7.5%. Only 44% of Nasdaq members are trading above their 50-day moving average.

 

#6: Another Contra-Indicator Has Reared its Head — Individual Investor Confidence

TD Ameritrade’s (AMTD) Investor Movement Index (IMX) has continued its month-over-month rise. For those unfamiliar with this, it’s a behavior-based index created by TD Ameritrade that aggregates Main Street investor positions and activity to measure what investors are actually doing and how they are positioned in the markets. The higher the reading, the more bullish retail investors are. In August, the IMX hit 7.45, up from 7.09 in July, to hit an all-time high.

Why is that unnerving you ask?

While TD Ameritrade opted to put a rosy spin on the data, saying, “Our clients’ decision to continue buying reflects the resiliency of the markets.” Institutional investors, however, see this continued surge higher as a warning sign. Here’s why: Historically speaking, retail investors have been late to the stock market party. Not fashionably late, but really late, which means they tend to enter at or near the point at which things start to go seriously awry.

Complicating things a bit further, over the last month CNNMoney’s Fear & Greed Index has slumped from a Neutral reading (52) to Fear (38). Taking stock (pun intended) of these two indicators together at face value sends a mixed message on investor sentiment. Not a hardcore piece of data like the monthly ISM data, but one institutional investors and Wall Street traders are likely to consider as they roll up their sleeves and revisit the last few weeks of data.

 

How to Know What’s Next

These are just some of the points that could be unnerving Blankfein. Generally speaking, the stock market abhors uncertainty and anyone of those points on their own would be a cause for concern. Taken together they are reasons to be cautious as we move deeper into September, which is historically one of the most tumultuous months for stocks.

Whether you’re a subscriber to Tematica Investing or not, we would recommend you subscribe to both our Monday Morning Kickoff and Cocktail Investing Podcast to get our latest thoughts on the economy, the stock market as well as thematic signals that power our 17 investing themes.

 

Dow on Track for Longest Losing Streak Since 2011 as Trump Trade Stalls

Dow on Track for Longest Losing Streak Since 2011 as Trump Trade Stalls

We are shocked, shocked and just shocked I tell you. President Trump has not been able to effortlessly end the gridlock in D.C. and push through his agenda. Hmmm, something so new and novel for a resident of the White House.

 

This morning the Wall Street Journal reported that,

Stocks around the world fell Monday, putting the Dow Jones Industrial Average on track for its longest losing streak since 2011 as doubts percolated about the Trump administration’s ability to push through on campaign promises.

You don’t say. Doubts? Why on earth? Apparently, others are starting to wonder just how easy this is all going to be for the new administration,

“There is some real concern about whether [President Donald Trump] is going to be able to get these policies through,” said Dianne Lob, managing director for equities at AB. “I think the theme for the year will be uncertainty.”

“Markets are questioning the high expectations built over the past few months,” said Jeremy Gatto, investment manager at Unigestion. “[Mr. Trump] did promise a phenomenal tax reform package, and the market would be disappointed if we got something smaller than expected or nothing at all.”

What is surprising, we must admit, is that President Trump spent all of 17 days trying to push the ACA repeal/replace through. Let that sink in for a moment.

Donald the “I am the best dealmaker” candidate, who pledged that the first thing he’d do would be to repeal and replace the “disaster” of Obamacare, spent all of 17 days before calling it quits. Whether you think the ACA is a disaster or divine, on face value that doesn’t exactly look like solid effort. In comparison, it took Reagan about five years to reduce the top marginal tax rate from 70 percent down to 28 percent, but then Reagan enjoyed a higher approval rating at the time, which gave him more firepower. What we’ve seen here is that enough Republicans, never mind the Democrats, are unafraid of Trump to thwart his efforts.

That’s not a good sign for the markets that have had quite the run-up based on the assumption that this time things are different and with Trump in the White House, sky-high valuations make sense and economic realities, such as an aging population, are no anchor.

Never fear, though! Those financial talking heads are spinning this as a positive because now, (thank God!) Trump can focus on tax reform, which will be the first attempt at major reform since 1986 no less! I’m sure that’s going to go much more smoothly given the consensus in Washington around spending, the national debt, and income inequality. Remember too that the Ryan plan for health care would have reduced the budget by $1 trillion, so any reform is already in the hole $1 trillion, but I’m sure this won’t be a problem – eye roll.

Then there is that resolution that’ll need to be passed in April to keep the government funded and then we get to experience yet another debt ceiling debate this summer. Get that popcorn ready, we are in for a show, which means more rocking and rolling in the markets as investors get their arms around just what are reasonable expectations for the new administration.

Up next for the Trump team, tax reform, deregulation, and infrastructure. Regardless of whether you love Trump and his plans or hate them, today the probability of success on any of those items is lower today than it was just a few weeks ago. Their successful implementation was expected to usher in accelerating growth, which would lead to inflation, but when we look at the yield on the 10-year Treasury today, we see it is still well within its multi-decade long-term downtrend. (Pulled from YCharts)

 

If the bond market was buying into this great acceleration story, would the 10-year yield really be at 2.4 percent? Mr. Bond market remains skeptical.

Keep in mind that over the past few months, the year-over-year data for commodity prices has been off of extremely low levels as the sector experienced quite the downturn this time last year, making small changes, on a percent basis look unusually large. If, as I suspect, we are not actually seeing a sustained acceleration in the economy, these increases should begin to moderate over the coming months. Stay tuned…

Since the beginning of March, all the major U.S. equity indices are down, from the small cap Russell 2000, down 4.2 percent to the S&P 500, down 2.2 percent to the Dow Jones Industrials down 2.5 percent. U.S. bank stocks have fallen around 8 percent from their recent highs, that’s a bit wobbly for what could be the first earnings season to toss cold water on those sky-high growth expectations under the new administration.

Bottom Line: The market’s “This time it’s different” fairy tale is fading. With earnings season right around the corner, we will be getting some hard data on just what is actually happening versus the optimism. We’ll keep you posted!

Source: Dow Poised for Longest Losing Streak Since 2011 – WSJ