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Friday, December 22, 2017

Some interesting facts about the North Pole, the northernmost point on earth. In the North Pole the sun only rises and sets once a year. The sun stays above the horizon during the entire summer and in the winter the North Pole experiences 24 hours of darkness. There are no residents living in the North Pole (except Santa) because of shifting ice but many countries are looking to lay claim to the area. Why? It's estimated 30% of the worlds undiscovered natural gas and 15% of untapped oil is under the North Pole's ice. Although oil prices have recovered this year and oil sector earnings have rebounded, expectations for further oil price increases are subdued. These continuously increasing supplies are keeping a lid on prices. Hence the energy sector is the only S&P 500 sector posting negative returns in what has turned out to be a spectacular year for stocks. The energy sector pays on average one of the highest corporate tax rates of any sector at a median 36.8%, so the tax reform will help profitability and returns in 2018. Despite a little hesitancy today, it looks like yet another up week for stocks. Please read the Global Perspectives 2018 Forecast. Oh, and if you need to send any last minute correspondence to the North Pole, the Canadian zip code for the area is HOH OHO.

Thursday, December 21, 2017

The tax reform package has finally passed. It has been a long time coming and many investors may not realize that President Obama proposed slashing the corporate tax rate to 28% back in 2012. So now what? Investors may be tempted to succumb to "buy the rumor and sell the news” but wise investors should check that sell list twice. Santa is not just delivering corporate tax cuts and higher earnings projections. His sleigh is loaded up with lots of other economic growth goodies including increases in capital expenditures, a projected surge in business investment, more job training and higher wages. Please read the Global Perspectives™ 2018 Forecast – Pro-Business Economy Unleashes Growth.

Wednesday, December 20, 2017

The U.S. economy keeps producing the hits of 2017. Strong opening to holiday retail sales, November manufacturing production up, Markit PMI for December (preliminary) up to 55; initial jobless claims at a 40+ year lows; the NY Fed Q4 Nowcast is 4% with Q1 2018 at 3.2%. So why cut taxes now? Well the current recovery is long but very slow. Peak GDP growth was under 4% and the five-year average has begun to slip at 2.1%. Compare that with other recoveries, where the five-year growth rate bounced above 4% (Bush in the recovery). The U.S. economy has basically been in a 21st century-long growth drought.

The growth impact of cuts is widely debated. The Tax Foundation estimates a long-run impact raises the growth rate to 2.4% from 2.0%, providing $600bn of extra revenue. One reason for the pessimism is that belief in U.S. growth has ebbed, permanently. I estimate that the trend growth rate of the economy has slipped from over 3% in 2001 to about 2% now. There’s plenty of reasons to doubt that trend growth will remain this sluggish; trend growth slipped to about 2% by 1980 before rebounding to well above 3% in the 1980/90s. Of course, the 1980s were a period of tax cuts and deregulation, and capital taxes were slashed along with continued deregulation in the 1990s. Go figure…

The key for success will be how much investment comes from the cuts, because increased capital is the key to a) higher productivity and b) higher real wage growth. Lower taxes, deregulation and (perhaps an afterburner) increased infrastructure spending are going to offset the impact of the Fed removing monetary accommodation. The good news is that the government is now moving to use the correct tool of fiscal policy to fix the problem of sluggish growth.

Please take a look at page 70 of the Global Perspectives™ book for more information on Real GDP. - Guest Blogger: Tim Kearney, PhD

Thursday, December 14, 2017
At about 70% of GDP, the U.S. consumer is the game changer in economic growth. Consumption, income and retail sales have achieved all-time highs.

Retail sales were more than double expectations, up .8% in November. If autos are excluded from that figure, sales were even better, up 1% MoM. Internet companies were especially busy in November and led the retail sales pack. It’s more than too many eggnogtinis driving the consumer. Consumers are realizing that the economy is strengthening and that pro-business policies are ushering in an era of sustainable growth. Both the Fed and ECB are upping their 2018 growth expectations. This is not a fake candy cane high of central bank stimulus, but real economic growth not seen in decades. In addition, initial jobless claims surprised on the upside by falling 11,000 and the more reliable four-week average fell 6,750 to an ultra-low of 234,750. Growth, spending, employment – nary a stale fruitcake in sight. The strong fundamentals justify the stock market’s ride higher. Please watch retail sales and note that, as shown on page 13 of the Global Perspectives™ book, we are at the highest levels ever.

Wednesday, December 13, 2017

PPI inflation hit 3.1% YoY in November, up from -1% in November 2015. The movement in the PPI has been straight up and could portend an increase in PCE deflator inflation. While the two indices move together, it’s not uncommon for the difference between PPI and the deflator to be +/- 1.5%. The weight of goods is much higher in the PPI though the breakout to the upside requires attention. The FOMC clearly is set to hike on Wednesday - the markets have priced in about a 99% increase. We doubt that the Phillips Curve-type analysis will prove to be a good tool for inflation forecasting as it has a long record of not providing an exploitable forecast. Likely, more important to the inflation outlook is the shift to a new Fed Chair and new members on the FOMC. Clearly, Dr. Yellen’s policies have proven to be very credible and contained inflation. It will be up to new Chair Jerome Powell, and his new team including his as-yet named Vice Chair, to deliver a credible message to economic actors and nudge inflation towards the target 2% PCE deflator rate. Please take a look at page 60 of the Global Perspectives™ book to see how the Consumer Price Index correlates with inflation.

Friday, December 8, 2017
Total payrolls, including all non-farm employment, have inched steadily upward with private job creation leading the way.

The U.S. economy added 228,000 jobs in November and the unemployment rate is 4.1%, a 17-year low. Job gains were broad-based, but notably strong in education and health care categories as well as in construction and manufacturing. The hiring in the manufacturing sector is an affirmation of the extremely robust PMI’s we have been seeing over the last several months. So what’s not to like? Wage gains. Despite the tight labor market, wages inched up only a mere .2%. Companies are bound and determined to hold down costs and therefore reluctant to invest in their employees. Corporate tax cuts should help jumpstart corporate investment, wages and productivity – but that will take time. Meanwhile, the market continues to grind higher on a steady stream of upbeat economic data. Please follow the non-farms payroll report on page 63 of the Global Perspectives™ book.

Thursday, December 7, 2017
Since 1999, earnings for S&P 500 companies have grown more than 200% while the price level is now only 60% higher.

The 17th century is often referred to as the Dutch Golden Age because during this time period, the economy of the Netherlands soared – primarily due to their expansion of trade across the world. In fact, Amsterdam was one of the richest cities in Europe between 1600 and 1700 due to the Dutch dominance in global trade. In the mid-1500’s an exotic flower was brought to Holland from the east. It was a tulip. The rare and elegant flower soon became a status symbol. Soaring demand created tulip traders. As the growing season was limited, tulip derivatives contracts were created. Popularity and prices soared until a single tulip bulb was worth about 10 times a craftsman’s annual salary. It is approximated that tulip flippers could rake in an estimated equivalent of $60,000 per month. No wonder farmers were selling their houses, animals, and heirlooms for a single bulb! Then one day in 1636, the music stopped. Panic ensued, sellers overwhelmed the market and prices dropped to the floor. The Tulipmania bubble popping sent the Dutch economy into recession for several years. A bubble is an irrational sharp increase in prices based on the greater fool theory, not economic fundamentals. The trouble with bubbles is that they can persist for years, confounding investors, and you don’t know just when they will pop. Does this remind you of anything? Hint: it’s not Beanie Babies. That one already popped. And it’s not the market – corporate earnings levels are supportive of these price levels. Please compare earnings to prices on page 7 of the Global Perspectives™ book and watch Karyn Cavanaugh’s latest comments on the market.

Wednesday, December 6, 2017

The 3% growth rate of the past two quarters seems to be continuing. The NY Fed Q4 Nowcast is expecting near 4% real GDP growth, while the Atlanta Fed GDP Now is looking for 3.2% growth. The St. Louis Fed Economic News Index of Real GDP is clocking in at 3.1%. And the PMI data shows good growth as well. The November ISM Manufacturing PMI came in at 58.2 with the Overall Index at 53.8, up a trick from October. Importantly, the New Orders component is at 64 with the 12-month moving average at 62 – the highest rate in over a decade.
Plus, the synchronized e global rebound can clearly be seen in the current level of PMIs and the on-going rise from mid-2016. Right now, basically no major country has a sub-50 reading compared with seven countries below 50 in May 2016. The big engines of global growth – The Eurozone, U.S. and UK are all printing results around 60, with Germany at the head of the league table at 62.5. Today is St. Nicholas day, the traditional day in Europe for gift giving. The round-up of November data looks like a very satisfying present. Please see page 9 of the Global Perspectives™ book.

Tuesday, December 5, 2017
Projected market volatility spikes in times of crisis then drops as fears subside. Current levels are below average, but the Fed’s path to normalization of rates may lead to more typical volatility levels.

As tax reform moves forward, investors are jockeying for position, rotating in and out of stocks and sectors, trying to determine the biggest beneficiaries of the potential tax plan. The tech sector is taking it on the chin because these companies generally have the lowest effective tax rates and therefore lower potential gains. The consumer, financial, and healthcare industries - on the other hand - generally pay higher tax rates. Value vs. growth has also been added to the mix with value expected to outperform growth. And bets are being made on small caps vs. large caps, with small caps expected to outperform due to their more domestic orientation and the limitation anticipated on pass-through tax rates. Although some businesses will be bigger winners than others, the winnings will be widespread. In fact, S&P 500 earnings are expected to surge by 6-10% in 2018 due to tax reform. Earnings are the fundamental driver of markets, so investors want to make sure they stay in this horse race. In addition, ensuing economic growth will help not just earnings but consumers, manufacturing, jobs, housing and confidence. In the meantime, all the uncertainty surrounding the tax plan specifics could spook markets and cause a surprise volatility spike. Investors should always remember this and try not to get too complacent in the saddle. To learn more about market volatility, please see the chart on page 26 of the Global Perspectives™ book.

Friday, December 1, 2017
The U.S. manufacturing report has rebounded after a month of contraction; the latest eurozone and emerging markets reports also indicate expansion.

The Senate says they have the votes to pass tax reform, mitigating some of the impact from the latest Washington drama roiling markets. It is likely tax cuts will happen and that will move the already positive earnings trajectory higher. The latest Washington headlines are providing an unwelcome distraction but lack the power to derail the bull market when the economic backdrop is so darn good. Today’s ISM PMI is just another affirmation of economic strength – 58.2% with an employment component up to 64% and 14 out of the 18 industries tracked reporting expansion. The manufacturing renaissance bodes well for accelerating corporate earnings in 2018. So keep your eye on the ball – corporate earnings growth. You can review the lofty manufacturing PMI’s on page 8 of the Global Perspectives™ book.


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