November 27, 2017

Stocks opened up this morning but quickly gave way. The Dow is currently up 26 pts and the SPX is flat. Retailers, gold miners, utilities and telecoms are faring well today. On the other hand, energy and materials sectors are in the red. The VIX Index is trading up around 10. The dollar is about flat against a basket of foreign currencies and most commodities are lower. WTI crude oil is down 1.5% to $58/barrel. Bonds are mostly unchanged today. The 5-year Treasury yield is hovering around 2.05% and the 10-year yield is trading at 2.32%. 

US holiday sales are expected to rise between 3.5% and 4% from year-ago levels. That would be slightly higher than 2016’s 3.5% growth. The Conference Board’s Consumer Confidence Index is near a 17-year high, and we know that home and stock prices have risen quite a bit this year. Despite this very positive backdrop, brick-and-mortar stores are still planning huge discounts to lure in customers. Retailers simply have no pricing power. Even with discounts, we know that foot traffic has been weak. A Barron’s article notes retail store foot traffic was down 7.5% y/y in October and analysts at Cowen & Co. estimate Black Friday foot traffic fell 4-6%. Obviously, more consumers are looking to buy online. Last holiday season, online sales rose 13%. And we understand that Black Friday spending hit a record $5bil, up nearly 17% from last year. 

New home sales rose 6.2% in October from prior month levels, surprising economists who expected a decline in sales activity. The annualized rate of sale transactions climbed to 685,000 units, the highest since late 2007. Homebuyers are competing aggressively as for-sale inventory levels remain very low. At the current rate of sales, all inventory would be cleared out in 4.9 months. Low inventory is obviously pushing up prices. The median selling price rose 3.3% to $312,800. Bloomberg says prices will continue to rise as long as demand outpaces supply. That means homebuilders are going to have to accelerate construction activity. 

The near-term trade is all about tax reform. At this point, Bloomberg reports it is likely to happen. The Senate bill should clear committee this week and could go to a floor vote by Friday. JP Morgan says US stocks will rise another 5% if tax reform is passed. 

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