December 16, 2016

The major stock market averages opened mixed this morning (Dow +28 pts; SPX flat). Real estate and utilities are the best performing sectors, up over 1%. Financials, consumer discretion and materials are lower. So we’re seeing a risk-off trend today. The VIX Index is down 3% to 12.4, suggesting little fear on the part of investors. The dollar is flat today but has been trending upward (+4.5% this year). And yet, commodities are mostly higher on the year. That could possibly signal better global economic growth overcoming the currency headwind. At the moment, WTI crude oil is up to nearly $52/barrel. Bonds are flattish. The 5-year and 10-year Treasuries are yielding 2.07% and 2.60%. 

Tobias Leftkovich of Citigroup says the rally may be a bit overdone in the near-term. The SPX is now up about 8% since Nov. 4th. Longer term, new policy proposals are clearly encouraging, and that “should turn into something more positive” for the market. Dollar strength & bond yields moving higher could mute the rally, “but the other side of that, you’re going to get some pro-business legislation probably by the second half.” So the real question is, will growth overpower the dollar and rates in 2017 & 2018? He thinks so.

Housing starts delivered a sensational headline that means nothing. Ground-breaking on new housing developments fell nearly 19% in the month of November to an annualized rate of about 1 million units. That’s the largest month-to-month drop in 10 years. The weakness was driven by multi-family (apartments & condos). This data series has been extremely volatile lately and Bloomberg says that if you smooth out some of the month-to-month ups and downs, home construction in the fourth quarter is actually rebounding from a dip in the third quarter. And buy the way, 1 million annualized units is the lowest rate in…2 months. Our nation has been under-building housing for years. The average annual unit rate to absorb population growth is somewhere between 1.2 million and 1.5 million. We may be nearing saturation on multi-family, but not on single-family homes. 

We’re seeing a flurry of Wall Street stock ratings upgrades/downgrades. Nordstrom (JWN) is down 6% today after JP Morgan cut the stock to a sell rating and said it sees no catalyst to revive flagging sales growth. Separately, JP Morgan recommends buying Starbucks (SBUX) on any weakness. The firm says SBUX “remains a core holding even if the 15-20% 5-year EPS target looks aggressive…” The stock is flat today and is down 4% this year. Piper Jaffray reiterated its “overweight” rating on Apple (AAPL) and expects the stock to rally 30% over the next year. The call in large part depends on a strong showing for the next iPhone (iPhone 8?). This morning AAPL is up flat today. Bernstein says General Electric (GE) could rally to $40/share over the next year as the company restructures its portfolio of businesses and benefits from lower corporate tax rates. The stock is up 1.2% this morning. 

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