November 17, 2016

Stocks opened higher this morning (Dow +7 pts; SPX +.35%). Consumer discretion and financials are leading the market higher. Materials, real estate and consumer staples are lower. By the way, over the last couple of months we’ve seen a change in sector leadership. The defensive sectors (utilities, telecom, staples) are losing momentum while the cyclicals (industrials, financials, tech) have been gaining momentum. The dollar continues to strengthen and interest rates are again on the rise. WTI crude oil is trading flat around $45.50/barrel. Copper and iron ore continue to surge higher, driven by stability in China and rising expectations for fiscal stimulus under President-elect Trump. Today, the 5- and 10-year Treasury yields are up around 1.69% and 2.25%, respectively. Rates are back to where they were at year-end 2015. 

Federal Reserve Chair Janet Yellen is testifying before a congressional committee this morning. She confirmed the Fed is ready to resume interest rate normalization. She said that information received recently confirms the Fed’s view that the case for rate hikes is stronger. Ms. Yellen reiterated that rate increases will be gradual. One of the key factors influencing this decision is the fact that wage inflation is beginning to rise. Ms. Yellen said that if the Fed waits too long to normalize rates, “it could end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of the committee’s longer-run policy goals.” Those goals are full employment and price (inflation) stability.  

Speaking of inflation, we got October’s Consumer Price Index (CPI) report. Consumer price inflation accelerated a bit to 1.6% y/y, in line with expectations. Housing and energy costs are rising, but according to Barron’s, “otherwise there are few signs of building pressure in the consumer price report.” Core CPI, which excludes food & energy costs, actually decelerated a bit to 2.1% y/y growth. Yes, prices rose a bit for education, apparel and tobacco but were offset by lower prices for air travel, recreation and communications. Core CPI has been hovering in the range of 2.1% to 2.3% all year. 

Cisco Systems beat third quarter revenue and earnings expectations. But sales growth has been soft for the last 4 quarters. And unfortunately, forward guidance was weak; management sees a slow-down in corporate IT spending. This quarter’s revenue will be down 2% to 4%. Wall Street analysts were expecting 2% growth. Cisco’s newer high-growth business lines are faring well, but the company still relies on more traditional switching and routing hardware for a significant portion of sales. Management says it is not losing market share, but some customers have put spending plans on pause. The stock is down about 5.5% this morning. Most investors don’t own CSCO expecting a surge in sales growth, but rather because the company generates a lot of cashflow and pays a 3.5% dividend. 

US housing starts (i.e. ground-breaking on new developments) exploded higher last month, rising to an annualized rate of 1.32 million units. This is the highest annualized rate of homebuilding in the entire cycle (since August 2007). Strong gains were broad-based, both for single-family and multi-family units. We are finally moving back toward historically normal levels of homebuilding (roughly 1.3 to 1.5 million units).  

Investor sentiment has taken a turn for the better. The surprise election outcome Wall Street said would damage the stock market, has actually fed the rally. The American Assn. of Individual Investors’ bullish sentiment survey tells the story. Survey results during the first week of November show that only about 24% of investors were bullish. In the two weekly surveys since then, however, bullish sentiment surged to nearly 47%. That’s the highest reading since early 2015. 

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