Monthly Commentary

For the first time ever, the Philadelphia Eagles are the Super Bowl champions!  What a phenomenal game and as a long time Eagles fan, it was a joy to watch and couldn’t be more happy for the entire organization.  The US stock market charged higher in January but started to stumble at the end of the month and into February as the tax benefits were digested.  The Fed kept rates unchanged in a surprise move as Yellen departs and Powell takes the reigns.  The Fed is worried about the potential for inflation to increase this year and have included my own thoughts about this below.  Mnunchin is all for a weaker dollar and stated this publicly at Davos.  He believes this will be good for our economy and in some ways it will and in other ways it won’t be.  A weak dollar is good for exports and bad for imports so it’s a mixed bag.

If you’ve been following cryptocurrencies, Bitcoin (along with most others) have been in a steep decline since they peaked in mid-December.  Bitcoin is now trading around 7,000 from hitting almost 20,000 in mid-December which represents a 65% loss in value had you bought then!  Buyer beware.  Again, I believe in the power of blockchain, not cryptocurrencies and would treat any amount invested the same way you do when walking into a casino.  Don’t gamble if you can’t afford to lose.

Three corporate behemoths — Amazon, Berkshire Hathaway and JPMorgan Chase — announced they would form an independent health care company for their employees in the United States.  This is a sign of how frustrated businesses are with the state of our health care system.  Their fed up and not going to take it any longer…maybe.  Details were scant and it’s unclear what they’re actually going to do.  Still, it makes you stand up and take notice.


My 2 Cents:

The biggest potential shock in my opinion could come in the form of inflation.  I’ve seen countless reports about businesses increasing wages and paying out one time bonuses as a result of the tax cuts.  It’s still too early to tell if we’ll see a meaningful increase in wages across the country and if we do, will it show up in the data in a real way.

In terms of inflation and CPI, energy and owner’s equivalent rent are doing most of the work.  With energy continuing to rise, it’s possible this trend continues.  But with interest rates increasing and mortgage rates going higher, it’s possible we see owner’s equivalent rent drop putting downward pressure on CPI.

Sticky Core Inflation (ex-housing) is only running around 1.25%.  Again, if we see meaningful pickup in wage inflation, we could see a broad increase in inflation.  If that happens, the Fed will raise rates quicker which also has it’s own set of consequences.




Charts & Commentary

These charts and commentary are rapid fire and in no particular order.

The bank’s cross-asset measure of risk appetite around the world is the highest since it started the gauge in 1991. Euphoria is turbo-charging global equities while 10-year U.S. government bonds are suffering their worst performance in risk-adjusted terms, according to Goldman. (…)

“While high risk appetite increases risk of disappointment, we find historically that the signal from macro data tends to trump the signal from risk appetite,” Goldman said.
Population growth is important.  Don’t think so?  Ask Japan what happens when your population ages and you don’t have enough young people to replace them.
 The US is now a net exporter of natural gas!  This is a big deal and should have a big impact on us becoming fully energy independent.  We are starting to export crude ever since the ban was lifted.
PMI and GDP are closely linked and Europe’s PMI is still in an uptrend and moving higher.  This should lead to higher GDP forecasts out of the EU.
Services are important in the US and accounts for approximately 70% of GDP.  The recent results were a little disappointing but could be due to weather related issues in parts of the country in December/January.
I highlighted Greece last month and it still surprises me that 10 year Greece debt yields less than 4%. This is a country we thought would default on their debt less than 3 years ago.
 Venezuela had to throw it’s hat in the crypto-ring and created a petro cryptocurrency backed by their oil.  They say this is an attempt to get around sanctions on the country.  It’s also unknown as to who would be buying the petro as it’s called.  Rumors are the sale will occur privately with up a 60% discount.  Sounds like desparation.
Look at how competitive we are now globally!
Private equity dry powder hits a trillion dollars. It’s not clear how this capital will be deployed given current valuations. Investors will need to taper their return expectations significantly, especially with the leverage interest deductibility sharply curtailed by the new tax law.
According to Ned Davis Research, optimism is at extreme levels in the US when looking at the S&P 500.
The US fiscal deficits are not looking good if this chart is correct.
Junk bonds now pay you the least for their risk (relative to US treasury bonds) than since 2007.  I have never been a big buyer of junk bonds for clients due to their asymmetric downside and certainly couldn’t fathom it here as well.
This shows the price to operating cash flow for the S&P 500.  Including the internet bubble, we’re at the highest level.  Again, this is single factor and not to be taken in isolation.
This is the price to operating cash for for the Russell 2000 which isn’t as high as the internet bubble but it still showing signs of extreme loftiness.
 The study of demography can sometime explain trends in the markets and the data itself.  US CPI and the civilian labor force growth rate show signs of correlation and even causation.  If people aren’t working, they won’t be spending as much and therefore CPI won’t be as high.  Makes some sense. And with a lot of people retiring, the assumption is CPI should also stay lower for longer.
Apparently, the Russell 2000 companies have done a great job leveraging their balance sheets while not increasing profits.  Canary in the coal mine?
The savings rate is approaching the same levels last seen in 2005-06 at around 2%.  Low savings usually means high consumption which is good for GDP but at a cost.  This looks unsustainably low.
The fed is drinking the cool-aid and is forecasting above 4% growth for Q1 in 2018.

I hope you enjoyed this months financial markets update.  If you have any questions please contact us directly.  If you’re interested in a topic that you’d like us to address, please email us so we can include them in future updates.

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Best Regards,

Jared Toren
CEO & Founder

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