September 20, 2017

Stocks are mixed in early trading (Dow +16 pts; SPX flat; Nasdaq -.24%). We’ve seen a rotation in the last couple of weeks away from defensive sectors (i.e. utilities, consumer staples) and toward cyclicals (industrials, financials, energy, materials). This seems to be driven by a rebound in interest rates & oil; it’s hard to say how long that will last. This morning, transports are up 1.5%, biotechs are up .7%, and energy stocks are up about .6%. We are seeing some uncharacteristic weakness in semiconductors after Apple (AAPL) admitted lower pre-orders for the new iPhone 8 because consumers are waiting for the iPhone X.  

Existing home sales have decelerated over the last few months to an annualized rate of 5.35 million units. That’s down from 5.7 million units back in March. Bloomberg asserts Hurricane Harvey impacted home sales in Texas. And indeed purchases in Houston fell 25% y/y. But it’s also true that the inventory of for-sale homes continues to fall throughout the country, and home prices continue to rise. So affordability is becoming a problem. As evidence, first-time homebuyers now make up 31% of transactions whereas 40% is considered normal. The total number of home sale transactions is roughly flat with year-ago levels while inventory is down 6.5% and home prices are up 5.5%. Something has to give and I think analysts would be glad to see home price growth slow down to 2-3%; at least then it would match wage growth. 

The Federal Reserve wraps up its monthly policy meeting today. They’re not likely to announced another interest rate hike but should provide some details on the plan to reduce its holdings of Treasury bonds. The Fed will not likely make another rate move until and unless economic growth and inflation are seen on a sustainable path to recovery. Second quarter economic growth did rebound to 3%, but I’d point out that the Atlanta Fed’s GDPNow forecast for the third quarter is tracking to only 2.2%. And while a couple of inflation readings have edged upward, one cannot describe inflation as stable and rising this year.  

You may know that Procter & Gamble (PG) is fighting with a major shareholder regarding the appropriate strategic direction of the company. Nelson Peltz, famed activity investor and owner of Trian Fund Management, owns about 1.5% of the company and has requested a seat on the board of directors. The company refused and just released a 106-page presentation explaining why it disagrees with Mr. Peltz’s views, and also asserts that his firm’s involvement in Mondelez (MDLZ), Heinz (KHC) and Wendy’s (WEN) didn’t necessarily produce meaningful improvement in their operating metrics. So today an analyst from Jeffries raised his 12-month price target on PG to $104/share saying “management is highly capable,” but “a number of Mr. Peltz’s views have merit and his involvement raises the execution bar at P&G.” He calls this a “win-win” for shareholders. Indeed, the stock up nearly 10% since Mr. Peltz became a major shareholder. 

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