On the Alert for Inflation

April 7, 2021

The first quarter of 2021 was a rewarding one for most investors. The Dow Jones Industrial Average rose nearly 8%, the S&P 500 gained about 6% and the Russell 2000 index advanced over 12%. However, the real winner in the first quarter of the year was the Dow Jones Transportation Average which soared a stunning 17%. This stellar performance in the transport sector was in anticipation of COVID-19 vaccinations becoming widely available, of the economy opening up, and of abundant government spending on infrastructure. But in general, the gain in the DJ Transportation Average was a continuation of a shift initiated earlier in the year from growth to economically sensitive stocks. Plus, the action of the first few trading days of April is encouraging and suggests equities could move higher in the second quarter.

The first few months of the year were also good to investment bankers as seen by the number of IPO deals priced, capital raised, and new filings. One hundred new deals were priced, versus the 25 a year earlier. Capital raised hit $39.2 billion versus $6.7 billion in a year earlier and 126 new deals were filed versus the 35 new deals filed in the first quarter of 2020. In fact, the only measure of IPO activity that showed any weakness was the IPO after-market, where prices underperformed the overall equity stock market. This detail could be a sign of fading demand and as such, should be watched carefully in coming months.

The first quarter was also memorable since it introduced investors to GameStop (GME -$77.97), a struggling video game retailer whose price rose 1500% in a matter of days. An investment forum on Reddit called WallStreetBets, led a massive buying spree in GME to oppose hedge funds holding large short positions. It was somewhat of a David versus Goliath anti-establishment movement that demonstrated the changes and hazards social media can wreak on the stock market. GameStop’s stock price soared from $18 at the end of 2020 to a peak of $347.51 on January 27 and is now trading below $200.

The quarter also revealed the existence of a new form of leverage called contracts-for-difference, or CFDs. These swaps were at the center of the collapse of Archegos Capital Management, a family office run like a hedge fund. Archegos borrowed capital from at least five different prime brokers to buy CFDs and held a concentrated portfolio of stocks with leverage estimated to be at least five-to-one. When underlying stock prices fell, Archegos was unable to make its margin calls and brokers sold Archegos’ underlying collateral to avert massive losses. Even so, Credit Suisse expects to take a $4.7 billion hit. But during the chaos, stocks like ViacomCBS (VIAC.O – $43.89) fell 60% from a peak of $100 in early March. In short, the first quarter was a time of rising stock prices, but it was not without its pitfalls.

From an economic perspective the quarter ended on a high note. The March ISM manufacturing index jumped to 64.7, its highest level since the early 1980’s. The ISM nonmanufacturing index surged to 63.7, exceeding its October 2018 record of 60.9. March payrolls grew by 916,000 in March while the job figures for January and February were revised higher. Unit vehicle sales rose to an annualized rate of 18.2 million, the highest since October 2017. These reports were signs that the economy was strengthening in 2021. But there have also been warnings that the recovery was not as uniform as it could be. According to the Wall Street Journal, annual SEC reports filed between July 1 and March 31, showed global employment rose by roughly 370,000 for the 286 S&P companies that filed annual reports. However, Amazon (AMZN – $3279.39) added 500,000 workers around the world, creating nearly as many jobs last year as 136 other companies in the index. This means that job gains in some companies were masking job losses in other companies. This is something to be concerned about. In addition, a Census Bureau study in late March reported that 18% of small businesses stated they would need financial assistance or additional capital in the next six months. These are some of the reasons critics warn that raising tax rates in 2021 would hurt entrepreneurs and US companies competing on a global basis. Supporters of the tax increases, including President Biden, say tax increases will not cool down the economy. We think this latter point is unlikely to prove true.

A number of recent surveys show consumer sentiment is rising but other data suggests there is a steady dependence upon government support. February’s personal income report showed a 7% decline from January’s level due primarily to the waning of government transfers. This drop should reverse dramatically in March, however, there are indications of stress in some households. The percentage of subprime borrowers with outstanding auto loans or leases more than 60 days past due hit 9% in the fourth quarter, the highest quarterly figure since 2005. Clearly, some households have navigated the coronavirus downturn and others have not. Car loans can reveal how riskier borrowers are faring. For subprime borrowers who do not have mortgages or college debt, car loans represent the biggest monthly debt payment. Keep in mind that many subprime borrowers work in restaurants, hotels, and bars hurt badly by Covid-19. Getting back to “normal” is therefore critically important for many small businesses, employees, and households.

We believe it is possible that several events are converging at the start of the second quarter that could be the catalyst for a 5% to 10% correction in coming months. The S&P 500 index has breached the psychological 4000 level which is a positive, but it will be important to see more upward follow through from this level. The SPX 4000 is the equivalent of 20 times 2022 consensus forecasts which now center around $200 a share. In other words, at the SPX 4000 level, stock prices are discounting all the good news expected in the oncoming 21 months. Interestingly, this price point is materializing just as first quarter earnings season begins. For the first time in four earnings seasons, expectations are high for earnings growth. This alone lends itself to the possibility of disappointment. But at this juncture, earnings must continue to beat the consensus forecasts if stocks are to continue to advance. Last but far from least, inflation could be a big threat in 2021. Inflation is pivotal to both monetary policy and to price earnings multiples. We believe there is risk that inflation benchmarks for March could show a CPI over 2% and a PPI greater than 4% and spook the market. If so, this could threaten the consensus view of monetary policy remaining stable through mid-2023. Low inflation and low interest rates have been the foundation of above average PE multiples in several years. If inflation becomes a concern, PE multiples will not expand, but could be at risk of contracting. With the election behind us, vaccines becoming more abundant, states opening up for business, and job growth getting a second wind, we are concerned that most of the good news is already priced in. All in all, we are a bit more cautious today than earlier in the year. 

Gail Dudack, Chief Strategist

strategist@wellingtonshields.com

Disclosure: The information herein has been prepared by Dudack Research Group (“DRG”), a division of Wellington Shields & Co.  The material is based on data from sources considered to be reliable; however, DRG does not guarantee or warrant the accuracy or completeness of the information.   It is published for informational purposes only and should not be used as the primary basis of investment decisions.  Neither the information nor any opinion expressed constitutes an offer, or the solicitation of an offer, to buy or sell any security.  The opinions and estimates expressed reflect the current judgement of DRG and are subject to change without notice.  Actual results may differ from any forward-looking statements.  This letter is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the specific needs of any person or entity.

This communication is intended solely for use by Wellington Shields clients.  The recipient agrees not to forward or copy the information to any other person without the express written consent of DRG.

Copyright © Dudack Research Group, 2021.

Wellington Shields is a member of FINRA and SIPC

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Spring break … or compound fracture

DJIA:  32,620

Spring break … or compound fracture.  Little question there has been a break in the uptrend, but not one compounded by a poor overall technical backdrop.  The Dow and S&P are only a few days from their highs, far more importantly, the Advance-Decline index is only a few days from its high. This is not how important weakness begins.  Different this time, however, is the divergence between markets, the S&P, Dow and the NASDAQ 100 – the divergence between stay-at-home and re-open.  That the Dow was down three points and the NAZ 200 Wednesday may say it all.  The problem there, and it was true Wednesday, the bad begin to drag down the good – the idea you had better sell before someone else does. Tech may be washed out, or close, and that’s needed.  Meanwhile, we’re still all in on re-open/reflation.

The dramatic weakness in bonds against the dramatic strength in equities was expected to cause some rebalancing at the end of the quarter.  While we don’t typically place much emphasis on such things, the disparity this time is such that it could well be responsible for some of the equity weakness.  If it is, we’ve noticed it hasn’t had an effect on McDonald’s (224), let alone a dramatic one.  Rather than stay at home, McDonald’s is stay in your car, a new category?  The point is it’s still about the right stocks, and a number of defensive names have been improving – the PG‘s (134) and Colgate’s (78).  Rather than knee-jerk reaction to the recent weakness, the charts really aren’t bad, for example, see the SPDR Consumer Staples ETF (XLP – 67).  We are as tired of it as anyone, but welcome to a little more rotation.  Still, it’s preferable to all in on the downside.

As re-opening has come to dominate as a theme, Growth and Tech has suffered.  That’s not true of all Tech, however, as might be seen in the musketeers of yore – Cisco (51), Intel (62) and Oracle (69). It’s enough to make you miss 2000.  These all have remarkably good charts, especially in light of those Tech charts generally.  Just what’s behind the renaissance is hard to say, at Intel it would seem the new management and at Oracle we suppose it’s just that Larry Ellison never goes away.  That they should be outperforming the rest of Tech also seems about the theme we have stressed for a while now – how much of any of these do you own?  Much like the re-open versus stay at home stocks, these retro – Techs are under owned.

Cathie, as we all have come to know her, has her themes.  Certainly one is genomics, biotech to most of us, as per her ARK Genomics Revolution ETF (ARKG – 85).  It’s hard not to like biotech in terms of its life enhancing potential and as an area immune, so to speak, to the vagaries of stay-at-home/re-open.  That said, over the years we have seen the stocks cycle, and for now the cycle seems down.  Her ETF, the NAZ Biotech ETF and the SPDR Bio ETF look surprisingly the same, even more surprising given the XBI is equal weight.  Great stock picker that she may be, this would seem to suggest the trend is a bit all encompassing.  As we said, we’ve seen these cycles, and would harken to add the long-term trend here is excellent.  To flip the medium term trend, however, will take a move above the respective 50 day moving averages, something like 100 for ARKG.

The 12 months just ended were the best in the history of the S&P.  Since the index hit bottom after the onset of the Covid-19 pandemic, it has gained more than 70%.  Jim Reid of Deutsche Bank puts the return in perspective, having back calculated the index to 1929.  Other than the rebounds following the great crashes there has never been a 12 month period like this.  Strategists at LPL Financial cited the S&P’s performance other years after falling more than 30%.  It was the first year ever the S&P was down 30+ percent and ended in the green.  They identified five other instances since World War II and found that the S&P rose every time in the second year.  Gains for that year averaged 17%, according to Bloomberg.  That said, no one said straight up.

Frank D. Gretz

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US Strategy Weekly: Does the Market Believe the Fed?

The financial media is asking whether the stock market believes the Fed in terms of its future plans for monetary policy, and we feel the only answer to this question is yes. In fact, the answer is obvious since the indices would not have made all-time highs earlier this week if investors did not believe Chairman Jerome Powell and the Fed. Based upon the unprecedented fiscal and monetary stimulus promised by the federal government and the Federal Reserve, we believe investors should maintain a bullish bias. But at the same time, we remain very alert to anything that could jeopardize the consensus view that the economy will remain strong, interest rates will remain low, and earnings growth will continue to be solid in 2021 and 2022. In our opinion, there are risks to this view and they include the 9.5 million people unemployed, rising crude oil prices and margin pressure threats. So, the better question would be should the market believe the Fed?  

The Fed will be meeting this week and reporting on Wednesday when it will release both economic and interest rate forecasts as well as its statement. These will be closely analyzed by economists. Most expect the Fed’s statement will imply that interest rates are not likely to be raised until 2023. However, the consensus view regarding the end of quantitative easing has shifted to this November from November 2022. We do not expect the Fed will upset the consensus this week, particularly with a new administration in office for barely two months. But recent data shows there could be a growing inflation scare materializing in coming months. In sum, be bullish, but stay on high alert.

Inflation Can Bite

February’s inflation data was comfortably benign on the surface with headline CPI rising 1.7% YOY and core CPI rising a subdued 1.3% YOY. However, as seen in the table on page 3, February’s inflation was restrained by the 3.6% decline in apparel. Meanwhile most components of the CPI rose faster than the headline level. Fuel and utility prices rose 3.4% YOY while food and beverage prices rose 3.5% YOY. This means that prices of household necessities were increasing at a 3.5% YOY pace, well above the headline rate. In February, the PPI for finished goods rose 2.4% YOY and PPI for final demand rose 2.8% YOY. However, all inflation measures are impacted by the price of oil, which at the end of February was up 27% year-to-date and 37% YOY. In fact, at the current crude oil price of $64.97, oil prices are up 34% year-to-date and possibly up 220% YOY at the end of March. This will have a significant impact on March inflation data. In fact, even if the PPI for finished goods remains unchanged in March it will still be up 4.1% YOY. In our view, inflation comparisons will become very unfriendly as we approach the anniversary of the lows of March and April 2020.

Economists focus on core CPI due to the fact that food and energy prices can be erratic. Food prices are often impacted by droughts, storms, and other natural disasters but prices usually recover in a new planting season. Fuel prices can be influenced by politics and other temporary factors that change the short-term supply/demand balance. And as seen in the charts on page 4, energy prices have been extremely volatile since OPEC’s oil embargo of October 1973.

Energy prices dropped dramatically in response to the shutdown of the global economy last year, and this has kept Inflation subdued. However, that benefit is fading and could clearly reverse with vaccines becoming more plentiful and with an administration that is unfriendly to the energy sector. See page 5. Rising fuel costs will have many repercussions; and in 2021, the trend in crude oil may be a key driver of interest rates. We previously pointed out the strong connection oil and interest rates have had since 2015. At present both appear to be moving higher in tandem. See page 6. The consensus view is that a 10-year Treasury yield above 2.4% could negatively impact Fed policy and rates of 2.8% or more will hurt the economy. Rising inflation will also decrease the buying power of consumers and thereby lower corporate profits. Note that for most of the last eight years, average weekly earnings have grown well above the rate of inflation. But as inflation rises, this could shift and thereby restrain consumption. All in all, rising crude oil prices threaten monetary policy, interest rates, household consumption, the economy, and earnings. We see rising crude oil prices as the number one threat of the year.

The chart of the 10-year Treasury yield shows it has broken above resistance at 1.45% and technically this points to a new higher trend for interest rates. The first range of resistance is seen at the 1.75% to 1.85% level and secondarily at 2.1%. However, the more substantial resistance is noted at 2.4% which is the level that most economists believe would threaten the Fed’s current easy monetary policy. The chart suggests this is possible. See page 7.

Retail sales fell a disappointing 3.0% in February, but still rose 6.3% YOY. As seen on page 8, February’s 6.3% increase was down from a 9.5% gain in January. Declines were substantial and broadly based with only gas stations rising 3.6% and grocery store sales rising 0.1% for the month. Year-over-year changes were diverse, ranging from negative 17% at restaurants to positive 25.9% at nonstore retailers. These sales declines were the result of fading federal stimulus, but February should be a one-off statistic since another round of stimulus checks will begin to reach consumers in March.

The NFIB small business optimism index ticked up from 95.0 in January to 95.8 in February, but the report was fairly glum with sales expectations, the outlook for expansion, and inventory plans all falling two points apiece. Capital expenditure plans and hiring plans each rose one point. The outlook for business conditions rose from -23 to -19 and credit expectations fell from -3 to -6. In general, the NFIB survey report was uninspiring. See page 10.

New 2022 S&P Earnings Estimates

This week S&P Dow Jones initiated a 2022 S&P 500 earnings estimate of $199.50 which joins the Refinitiv IBES estimate of $201.64. We are also initiating a 2022 earnings estimate this week at of $200. This represents an 18.6% gain over our 2021 estimate of $168.60. Note that a 20 PE multiple to earnings of $200 equate to an SPX target of 4000. See page 12 and 19.

Technical Update

The 25-day up/down volume oscillator is currently 1.55 (preliminary) and neutral this week despite the March 15 highs in all the indices. However, if the indices continue to move into new high ground, we should see this indicator attain another overbought reading to demonstrate that volume is confirming price moves. This oscillator was last in overbought territory for five consecutive trading days between February 4 and February 10 when several momentum indicators peaked. Five days overbought is a minimum confirmation for any bull market advance. See page 14.

The 10-day average of daily new highs is 496, well above the bullish 100 which defines a bull market. The 10-day average of daily new lows (68) is below the 100 that defines a bear market, yet it is well above the 10 or less that signals an extreme in a bull market advance. The 10-day new high average reached 521 on February 17, exceeding the 489 recorded January 22, 2000. We view this as a potential yellow flag since the 2000 advance peaked in March. The A/D line made its last confirming record high on March 15, 2021, which is positive. AAII bullish sentiment for March 11 rose 9.1 points to 49.4%, a 16-week high, and has been above average for 15 of the last 17 weeks. Bearishness fell 1.8 points to 23.5% and is below its historical average of 30.5% for the fifth consecutive week. The 8-week spread remains neutral. In sum, the lack of extremes in all the technical indicators is positive for the bulls.

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Woodstock is a fond memory …

DJIA:  30,924

Woodstock is a fond memory … will the same be true of Wood’s stocks?  Cathie Wood has garnered quite a bit of fame, and deservedly so.  Those ARK Funds which she founded were up a gazillion percent last year, but who’s counting.  Nonetheless, we always find it a bit risky when everyone knows your name, so to speak.  It certainly proved so for Gerry Tsai when, after his success at Fidelity, he founded the Manhattan Fund in 1965.  By 1969 the funds collapsed, losing 90% of their value.  While his was an aggressive style of growth stock investing, that of Bill Miller’s was a value style of investing.  His fame resided in his record of beating the S&P for 15 years in a row.  When the market turned against value in 2006, a run of underperformance left him lagging the S&P by 50%.  Changing fortunes in both cases were not a matter of intelligence, it was a matter of changing investment styles.  For now it’s about reopen/reflate, if that can be called a style.  Cathie Wood isn’t exactly covered in that look.

They say rising rates don’t matter if they’re rising because the economy is improving.  For Tech investors, that turned out to be a big fat lie, as last Thursday and most days since then have made clear.  You pay-up for Tech when Tech is the only growth in town, but in an improving economy there’s plenty of growth to be found – commodities, industrials and so on.  And, of course, most if not all Tech has had a good run.  Unless it’s their mandate, Tech investors likely are waking up to the idea they’re in the wrong stocks.  It’s always a bit of a mystery as to what triggers market moves.  After all, the bond hit last Thursday, 2/25, was an attention getter, but the real break began back on 2/12.  In any event, as often happens, it’s not whether you’re in the market it’s where you’re in.  The Tech bashing has left only around 10% of the NAZ stocks above their 10 day average, obviously pretty extreme and likely time for some reprieve.

The 50 day moving average isn’t exactly the riddle of existence, that would be those other numbers, the 1+1 = 2, 2 +1 = 3, and so on – those numbers.  While many Italians were about the serious work of discovering pizza, a guy named Fibonacci really was about discovering the riddle of existence, at least as it applies to nature’s code.  Each number of his sequence is the sum of the two numbers that precede it, and it is said to govern the dimensions of everything from the great pyramid of Giza to the iconic seashell.  The ratio of the numbers in the sequence, as the sequence goes to infinity, approaches the golden ratio, the most pleasing angle in nature.  Naturally technical analysis has glommed onto this to explain movements in the stock market, the so-called “Fib Retracements” of roughly one-third and two-thirds.  Far less esoteric is the everyman’s 50 day moving average, yet it has managed to hold in check the recent declines in both the Dow and the S&P.  Again under threat, it would be best to see it continue to hold.

It’s not surprising that consumer staples are lagging.  First it was a market all about tech, and now it seems all about the reflation trades of commodities and industrials.  There hasn’t been much need for, or room for staples.  And to look at a stock like Clorox (178), you can believe every closet runneth over.  Still, lagging is one thing, of late they’ve turned outright weak.  Typically the stocks offer a bit of a counter market trade – down in good markets but up in weakness.  Last week that changed, with notable breaks in stocks like Procter & Gamble (122) and the SPDR Staples ETF (XLP – 63).  The explanation, we suppose, is there is still money out there but it’s not infinite.  The money going into the reflation trades has come from Tech, but likely from these dormant staple stocks as well.  By the look of the charts, this doesn’t seem about to change.  Despite their numbers, the good news is the poor action here hasn’t had a dramatic effect on market breadth.

It’s a good time to be a technical analyst rather than one of those funny mental types.  Looking at price-to- sales, the S&P is the most expensive ever and information technology is almost as expensive as 2000.  How in good conscience can those guys be bullish?  We technicians can be bullish because we understand it’s liquidity that drives markets, and there is still plenty around.  We always refer to the Advance-Decline Index as a guide to whether the average stock is keeping pace with the stock averages, an important measure of the market’s health.  These simple numbers, stocks up and stocks down, tell you something about liquidity as well.  There were more than 3000 NYSE stocks up on Monday – that takes money.  What seems important now is where the money is going, and that would be to the reflation/re-opening stocks.  Tech isn’t going away, but it likely will underperform.  The stay-at- home stocks, like Zoom Video (343) and Peloton (105), they could go away.

Frank D. Gretz

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US Strategy Weekly: Momentum and Mania

There is no doubt that the current equity market is displaying significant positive momentum. This is made clear by the fact that the Russell 2000 index has been core to price leadership in 2021. In fact, the iShares Russell 2000 Value ETF (IWN – $152.31), the iShares Russell 2000 ETF (IWM – $225.83) and the iShares Russell Growth ETF (IWO – $329.01) are all beating other indices with gains of 17.2%, 16.7%, and 16.5%, respectively. This compares to the 6.3% year-to-date gain in the SPY. See page 14.

Similar but Different from 2000

Several technical indicators are confirming the advance. The NYSE cumulative advance decline line is corroborating the advance with a record high as of February 12. Our favorite 25-day up/down volume oscillator is neutral this week but recorded five consecutive trading days in overbought territory last week. In this indicator, five to ten consecutive days in overbought territory is a sign that persistent buying pressure is supporting the move. See page 10. Even more impressive has been the 10-day average of daily NYSE new highs which hit 514 this week, exceeding both the 10-day average of 492 made on January 20, 2021, and the previous record of 489 made January 22, 2000. See page 11. This last point should also come as a warning flag to investors since the strong market breadth seen in January 2000 preceded the bull market peak made in March 2000 by less than two months. However, the 2000 market was driven by both momentum and more importantly a mania for stocks. Today’s market appears to be a bit different. First, the equity advance is much broader today than the narrow bull market of 2000. Second, valuations were far more stretched in March 2000 than they are at present. Third, the mania for stocks seen in 1999 and early 2000 is not apparent, at least not yet.

Too Dangerous to Short

Normal sentiment indicators are surprisingly benign. The ISE Call/Put Volume ratio remains neutral. AAII bullish sentiment for February 11 jumped 8.1 points to 45.5% and bearish sentiment declined 9.3 points to 26.3% which puts it below its historical average of 30.5% for the first time this year; nevertheless, the 8-week bull/bear spread remains solidly neutral. On the other hand, February’s Bank of America survey of 225 global institutional, mutual and hedge fund managers did reveal a surprising level of bullishness. Cash levels in these investment portfolios dropped to 3.8%, the lowest level since May 2013. (This 2013 benchmark is significant since it coordinates with a Treasury bond sell-off triggered by Federal Reserve Chairman Ben Bernanke when he indicated his intention to taper bond purchases.) A net 91% of money managers indicated that they expect a stronger economy. This is the highest percentage reading in the history of the survey. One concerning fact is that only 13% of participants indicated they were worried about an equity market bubble. About 53% of all managers felt equity markets were in a late-stage bull market while 27% believe the bull market is still in its early stages. Equally notable, a net 25% of the investors surveyed said they were taking “higher-than-normal” risks at the present time. This was the highest percentage ever recorded. The most crowded trades were long technology and bitcoin and short the US dollar. Although this survey gives us concern, we believe it would be extremely dangerous to short this market at this time.

Consensus 2022 Hits $200

One reason it could be unwise to short the current market is that consensus S&P earnings for 2020 and 2021 continue to move upward. For this year and next, S&P Dow Jones consensus earnings estimates rose $0.08 and $0.22, respectively, and Refinitiv IBES consensus estimates rose $0.61 and $0.66, respectively. Full year 2021 earnings forecasts for S&P Dow Jones and IBES are now $170.77 and $173.70, respectively. But it is most important to note that the IBES consensus estimate for 2022 has exceeded $200 for the first time and is currently estimated at $200.41. Applying a 20 PE multiple to this estimate equates to a target for the SPX of 4000. In short, one could argue that the market is not wildly overvalued – just discounting future earnings.

What Could Upset the Apple Cart?

However, this last statement – just discounting future earnings — is dangerous since no investor can actually predict the economy, stock market or earnings two years in advance. With this in mind, it is prudent to think about what could go wrong with the two factors that underpin the bullishness of professional investors today — strong fiscal stimulus and easy monetary policy. In short, what could upset the apple cart?

The Democratic majority in Congress and the White House makes fiscal stimulus relatively predictable for 2021. But what about monetary policy? As we previously noted, low interest rates, high liquidity, and a benign Fed are the perfect recipe for speculators. Therefore, it is not surprising that a net 25% of the investors surveyed by Bank of America, the highest percentage ever recorded, said they were taking “higher-than-normal” risks today. However, keep in mind that as interest rates rise the risk/reward ratio for speculators will also change and at some point, potential risk will outweigh potential rewards. In a word, the risk for 2021 could be inflation.

The Biden administration has been quickly reversing the energy policies of the Trump administration and oil prices have been rising accordingly. This coupled with the freezing temperatures in Texas which are disrupting energy transportation while increasing demand for heating needs, have boosted the WTI future above $60 this week. This is a 35% YOY increase. It is likely to move higher and thereby be the driver of higher inflation in 2021. See page 3.

At the end of 2020, all inflation benchmarks were stable and hovering around 1.4%. This 1.4% level is good for both consumers and businesses as well as for Federal Reserve policy. However, history has shown that a sharp rise in crude oil pricing will not only negatively impact the CPI but will be the catalyst for higher long-term interest rates. This is already happening. The 10-year Treasury note yield is currently at 1.2% which is higher than any time since the pandemic struck in March 2020. See page 4.

On a not-seasonally-adjusted basis, January’s CPI rose 0.4% month-over-month and 1.4% year-over-year. Yet, January’s benign 1.4% inflation rate was contained by a seasonal 2.5% YOY decline in apparel and a 1.3% decline in transportation. The decline in transportation inflation is expected to be a temporary phenomenon. Fuel prices peaked in December 2019 at $61.06 and fell to $18.84 at the end of April 2020. In short, the easy year-over-year comparisons for fuel prices are behind us. See page 5. Charts of the crude oil future and the 10-year Treasury note yield index show the correlation between the two, but more importantly, the 10-year yield chart shows that there is resistance at the 1.4% yield level. If 1.4% is exceeded, it could indicate much higher levels for interest rates. Not only would inflation put pressure on interest rates and the Fed in terms of its easy monetary policy, but it could also force the FOMC to adjust its long-term outlook. A change in monetary policy is the opposite of what the consensus is expecting in 2021 and it could shock the equity market. In sum, do not fight the Fed, but beware of what could change the Fed’s outlook.

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The January effect … in February

DJIA:  31,430

The January effect … in February.  The “January effect” is the tendency for beaten up stocks, many of them low price, to rally when December’s tax loss selling is over.  Somewhat ironically, we’ve found even the January effect to have become discounted, that is, of late it has started in November.  Yet here we are in February looking at the January effect of a lifetime.  A colleague recently pointed out every low price stock is up, something we had noticed as well.  We screen for stocks with a change in volume – not an increase in volume, an increase in a stock’s own volume.  We realized of the 250 stocks in the screen this particular day, half or more were $5 or less.  Volume in these lottery tickets, the so-called penny stocks, has been the highest in a decade, according to SentimenTrader.com.  Similarly, NASDAQ versus New York Stock Exchange volume is at a record high, perhaps a proxy for speculating versus investing.

With the lift in so many low price stocks, it should come as little surprise that the Advance-Decline numbers have been better than good.  There’s the catch 22 that the numbers, abetted by these low price stocks, reflects the speculation binge, but the numbers are the numbers.  The Advance-Decline numbers, of course, just reflect direction – stocks up or down.  That more than 90% of stocks are above their 200 day average would seem to confirm the breadth of the rally.  On a longer term basis, it seems important to recognize the durability of the strength here.  More than 80% of the S&P stocks have been above their 200 day for three months.  That’s the longest streak in seven years and among the longest since 1928.  When dealing with mediocre momentum numbers, overbought means risk.  When dealing with momentum numbers like those above, overbought is a good thing, the strength tends to persist.

Momentum typically trumps sentiment and it has recently.  Still, the over the top Call buying does pose a risk.  Two weeks ago in the midst of the GameStop (51) speculation we saw a risk similar to that of last August, prior to the September 9% selloff.  A couple of days of heavy selling and a near historical spike in the VIX made a correction seem likely.  The market, however, was able to right itself, perhaps coincident with the peak in GME.  Last week saw 2-to-1 up days four of the five days, while the VIX collapsed, meaning the panic was over.  Monday this week saw better than 3-to-1 Advance-Decline’s, while on the NASDAQ 700 stocks hit 12 month new highs, the highest since the late 1980s.  Tuesday saw positive Advance-Declines despite minor weakness in the averages.  That’s the opposite of strength in the averages against weakness in the Advance-Declines – the pattern we refer to as a weak rally.  It’s that pattern that causes problems.

As we suggested last time we’ve grown a bit weary of typing re-open/stay-at-home trades, in many cases a difference without a distinction.  We have opted instead to just go with good versus evil, in terms of the charts.  That’s said, we find many of the good charts in the relatively unexploited area of commodities, which, of course, is pretty much a reopen trade.  They are also, we suppose, a China trade for those of us who would rather not actually buy China.  Last time we picked up on a commodities article in Barron’s, and mentioned the copper stocks like Freeport (31), and ETFs like DBA (17) and DBC (16).  This past week there was a Barron’s article on Platinum, suggesting its importance as a component of hydrogen fuel cells is likely to grow. Among the ETF‘s mentioned the GraniteShares Platinum Trust (12), is an excellent chart.  We continue to like Lithium, and names like Lithium America (22) and Piedmont (53).  Finally, we still expect another leg up in Energy.

The market in 2021 clearly is about re-opening.  The commodity stocks as much as anything make that clear, as do the semiconductors.  Even the better action in Disney (191) versus Netflix (560) seems to tell that story – it’s about the parks, the re-opening. As for the market, speculation is simply over the top, or is a market led by crypto and pot stocks a good thing?  Some of this will prove self-correcting – there’s a reason they called it the January effect and not the January/February/March effect.  If you’re one of those looking for trouble, there’s something called the Smart Money Index.  It measures market performance in the last hour where it is thought more informed investors trade.  It’s currently near its lows while the S&P is near its highs.  We prefer instead to stick with our own brand of in-depth analysis – most days most stocks go up.  The Advance-Decline numbers have been positive eight consecutive days through Wednesday, come what may in the averages.

Frank D. Gretz

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US Strategy Weekly: Earnings Rising

Last week we outlined eight factors that typically identify a stock market bubble and discussed where we believe the current market stands in regard to each. One important and obvious characteristic of an equity bubble is that prices disconnect from valuation. Yet as we noted last week, while current valuation levels are rich, they are not at the inane levels often recorded at a bubble peak. We quote: “In short, fundamentals may be stretched today, but interest rates are low which means a 20 PE for 2021 is within our model’s fair value range. It will not be a surprise if valuations get even more stretched in coming months. All in all, equities are disconnecting from fundamentals, but this may continue for a time.” (US Strategy Weekly “And if it is a Bubble” January 27, 2021)

What is currently in the market’s favor is that this year’s consensus earnings estimate for the S&P 500 Composite is on the rise. According to Refinitiv IBES, to date, of the 203 companies in the S&P that reported fourth quarter earnings, 84% have beaten expectations. This is well above the long-term average of 60.5%. The blended earnings estimate for the fourth quarter now shows a decline of 1.2% YOY versus the decline of 10.3% YOY expected on January 1. Excluding the energy sector, IBES estimates fourth quarter earnings should actually rise 2.4% YOY, which would end three consecutive quarters of negative earnings comparisons for the S&P. In addition, energy sector earnings are expected to rebound sharply in 2021 and this should give an added boost to 2021 results.

At the end of last week IBES estimated 2020 consensus earnings were $138.71 and due to differences in accounting standards, S&P Dow Jones estimated earnings of $121.37. With only two more days of fourth quarter earnings results, IBES raised its 2020 estimate to $139.21. All told, fourth quarter earnings have been a pleasant surprise for investors.

Fourth quarter results are also a positive catalyst for 2021 earnings forecasts. At the end of last week, IBES estimated 2021 S&P earnings to be $171.55, but after two more days of earnings results, their estimate increased to $172.05 this week. S&P Dow Jones forecasted $169.39 for S&P 500 2021 earnings in their regular report at the end of last week. What is important about these various increases in earnings is that if one applies a 20 PE multiple to the current IBES estimate of $172.05 it equates to a price target of SPX 3441. Although this is 10% below current prices, the good news is that this does not represent an extreme overvaluation given the current low level of inflation and interest rates. Thus, any correction should find support around the SPX 3400 level. Conversely, stock market bubbles tend to end with ridiculously high PE multiples. In sum, if equities are forming a bubble market, it may continue for a time.

Adjusting our Earnings Estimates for 2020 and 2021

The S&P earnings results for the fourth quarter, and for 2020 generally, are much as we expected. So, with the annual earnings season nearly complete, we are adjusting our 2020 earnings estimate to match the S&P Dow Jones estimate of $121.87. This reflects a decline of 22.8% year-over-year versus our expectation of a decline of 20% to 25% in 2020. We are also raising our 2021 estimate from $166.60 to $168.60, representing a 39% increase this year. See page 19. But more importantly, we would not be surprised if this earnings estimate proves to be too conservative over time, particularly as the drag from the energy sector abates and the productivity improvements seen in 2020 help to drive the bottom lines for many companies in 2021.

Economic Reports

Real GDP grew in the fourth quarter at a seasonally adjusted annualized rate of 4%, which means that economic activity in the full year of 2020, contracted 3.5%. This 2020 contraction followed gains of 2.3% in 2017, 3.0% in 2018 and 2.2% in 2019. To our surprise, despite the 2020 recession, GDP grew at an average pace of 1.94% during Trump’s four years in office which was precisely the midpoint between the 1.89% rate for Obama’s eight years and 1.99% for GW Bush’s eight years. See page 3.

Economic growth in the fourth quarter was driven primarily by personal consumption of services and gross private investment. This shift in economic activity toward the service sector was a welcomed change since most of 2020’s economic activity was supported by personal consumption of durable goods, particularly housing and autos. The gains in gross domestic investment in the fourth quarter were primarily in residential structures. In fact, residential fixed investment hit a record $983.5 billion in the quarter which was an 18.3% gain year-over-year. This represented the strongest year-over-year rise in residential investment since the third quarter of 2013. See page 4. And as a percentage of real GDP, residential activity rose to 4.58%, the highest since the third quarter of 2007. This is strong but just slightly below its long-term average of 4.6% of GDP. See page 5. In sum, housing continued to be a major driver of economic activity at the end of 2020. But this may not continue in 2021. Ironically, as residential investment rose in the fourth quarter, homeownership levels declined rather markedly. See page 6. Total homeownership in the US fell from 67.4% of all households to 65.8%. The greatest decline was seen in the South where the homeownership rate fell from 70.8% at the end of September to 67.7% at the end of December. The Northeast was the only region in the US to experience a gain and rose from 62.0% to 62.6% in the fourth quarter. In terms of age groups, the 35 to 44 years old segment underwent the biggest decline in homeownership from 63.9% to 61.0%. Given the anecdotal evidence of households fleeing the Northeast and California to Texas, Florida and the Carolinas, this data seems illogical. However, the fourth quarter could be a transition phase as households move from states where restrictions have closed most institutions and establishments to states where schools and businesses have been open. Or it could be more ominous. The contraction of jobs in 2020 may have forced households to sell homes and move to apartments. Time will tell. However, we do believe economic growth in 2021 could disappoint investors if the federal government does not focus on stimulating job growth.

In December, personal income grew 4.1% YOY and real disposable income rose 3.2% YOY. However, a more revealing statistic is real personal income, which excluding current transfer payments fell 0.5% YOY in December. It also declined 0.45% in November. In short, government assistance, not economic activity, is propping up incomes and the economy. See page 9. And while personal income rose 4.1% in December, personal consumption declined 2.1%. Moreover, consumption has been negative in every consecutive month since March. This reveals the weak underbelly of the US economy and it is unlikely to change until the job market improves. See page 10.

Technical Indicators Little has changed in the technical arena. Our volume oscillator remains in neutral territory, the 10-day new high list has dropped from the record 492 hit on January 20th (breaking the previous record of 489 recorded in January 2000) to a more normal 259. Sentiment indicators are also surprisingly benign despite the headlines of individual traders driving volatile meme stocks. However, it is worth noting that at the end of the year stock market capitalization relative to nominal GDP was 2.1 and higher than the prior record of 1.82 set in March 2000. A similar Wilshire 5000 ratio was 1.83, exceeding its peak of 1.43 set in March 2000. These high ratios are signs that equity valuations may be outperforming the economy. See page 4. Expect 2021 to be a wild roller coaster ride and invest accordingly.   

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If you hear T-A-P, start selling … just in case an E-R follows.

 DJIA:  30,603

If you hear T-A-P, start selling … just in case an E-R follows.  Powell’s comments didn’t suggest taper is coming.  Then, too, you just can’t have it both ways – recovery and a Fed stoked market.  The havoc of the latter is clear in a word, GameStop (194).  A few years ago we had dinner with the man who put together Activision (91), and asked what he thought of GameStop.  His answer – think Blockbuster.  In the one or two years we’ve been doing this, we’ve always found short sellers better than most analysts.  We’ve also always found that when people talk about running the shorts, they miss the point. You don’t run the shorts when the stocks are going their way.  As GME has made clear, that’s the key.  Whether it’s the short-sellers, the cryptos, or whatever, the real point is that speculation is over the top.

All Gaul is divided into three parts, we seem to recall from our high school Latin class.  Our style of technical analysis basically has only two parts.  The most important is momentum, or the strength of a move.  There are many measures here – stocks above their 10 day moving average for the short term, stocks above the 200 day moving average for the medium to long term. The latter should be the focus here, and around 90% it says strong market.  It’s overbought, but it’s that good overbought.  Think of momentum as a physics term, and in that construct any object with this kind of momentum is hard to stop.  And, perhaps there we should.  The other part of our style of analysis is investor psychology, what we like to call sentiment.  Here GameStop and its cohorts pretty much say it all.

We like to say momentum trumps sentiment, and it has.  Still, the excesses we are seeing now are extreme.  Investing is a matchup of greed and fear.  Bubbles happen when greed becomes excessive, and when fear ceases to exist.  Bubbles are not so much about valuations as they are the Greater Fool Theory.  In the case of GME, there really is no narrative, making it a bubble in the purest form.  It’s that condition where investor behavior is dominated solely by an attempt to sell to someone else something for a higher price.  There is no rational assessment of value.  The entire market doesn’t seem a bubble, the rally remains too broadly based.  The bubble stocks, however, have affected sentiment enough to leave the overall market at risk.  Over the last three weeks small traders have bought 60 million Calls.  That’s 20% greater than the bubble-like environment last summer.

We’re sure you’ve noticed we place little emphasis on valuations, believing stocks sell at fair value once on the way up and once on the way down. The trick is figuring out whether they will become more overvalued or more undervalued, in other words, the trend.  That said, we have come across a couple of things to suggest here, too, things may be a bit over the top.  One is a creation by the Bespoke Investment Group called the Ludicrous indicator.  It looks at US companies with a market cap of $500 million or more, that trade at a multiple of 10 or more times last year’s sales, and that have doubled in the last three months.  There are 600 companies on the list, dwarfing anything in the last decade.  You’ll be glad to know, however, the number still is half that of the dot.com era.  Another take on excess is by Goldman.  They have an index of unprofitable Tech companies which shows a fivefold gain since last March.  By way of perspective, that is more than five times the gain in the S&P Tech index

All good things must end someday, the not so good ones as well.  GameStop, of course, is a bit of both.  What we’ve seen this week is an extreme, but a natural extension of the speculation that has been going on for some time.  Powell is as much behind this as the traders.  He wasn’t close to saying taper, but had he, you could kiss GameStop goodbye.  All this, of course, is more than a little disruptive, including Wednesday’s 600 points down day, with losers close to 5-to-1.  Speculation is not new, what we’re seeing now is new, but still just speculation.  Monday saw a new high in the S&P, with only 45% of its components above their own 10 day average – a first little crack in momentum. The recent new high in the A.D. index says no big problem for now.  Still, this seems similar to last August which was followed by a 10% decline in September.  Keep in mind it’s not weakness that’s the worry, it’s any weak rally which may follow.   

Frank D. Gretz

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US Strategy Weekly: Sentiment and Inflation Warnings

One of the first warnings signs of the year was the rise in bullish sentiment reported by the Association of American Individual Investors (AAII) in their weekly survey. In the first week of 2021, bullish sentiment rose from 46.1% to 54.0% which means bullish sentiment has remained above the historical average of 38% for nine consecutive weeks. Bullish sentiment is also at its highest level since the November 11, 2020 reading of 55.8% which was a 12-month high. An early preview to current data suggests bullish sentiment may increase again in the current week. Nevertheless, the 8-week Bull Bear spread is negative for the second week in a row which is similar to the warning seen in early 2018. See page 18. As a reminder, 2018 was a roller coaster year of big price swings that ended with a loss of 5.6% in the Dow Jones Industrial Average and 6.2% in the S&P Composite.

It is important to keep in mind that sentiment indicators are not useful for timing market peaks or troughs, however they do provide good discipline for investors who may become too optimistic or pessimistic about equities. With bullish sentiment above 50%, investors should remain alert to other signs of risk in the markets. Nevertheless, most technical indicators are confirming the indices’ recent highs. The NYSE cumulative advance decline line made an all-time high on January 12, the 10-day average of daily new highs is robust at 433 and the 10-day average of daily new lows is 28, and well above the 10 or less per day that can appear at the end of a major advance. The one ambivalent technical indicator is the 25-day up/down volume oscillator which is currently neutral at 1.52. This oscillator was in overbought territory for 16 of 19 consecutive trading days between November 23 and December 18 and reached an extreme overbought reading of 5.52 on December 4. This combination was a solid confirmation of the new highs seen at year end. But if we see further gains in stock prices in 2021, we would also like to see an overbought reading to show that price gains are supported by solid buying pressure. See page 11, 12 and 13.

Last week we noted the favorable signal emanating from the Santa Claus rally given the gain during the last five trading days of the year and the first two trading days of the new year. The January Barometer, devised by Yale Hirsch of the Stock Trader’s Almanac in 1972, is another Wall Street adage that states “as goes January so goes the year.” This parable makes sense to us since liquidity, or cash, tends to at its best early in the year as a result of year-end tax-loss selling, year-end bonuses and annual funding of pension funds and IRA’s. History also suggests that the first five trading days of January predicts the month of January. On page 7 we show the performance history of the Dow Jones Industrial Average during the first five days of January, the month of January and the full year beginning in 1950. It indicates that the first five trading days of January has predicted the year’s action 79% of the time. However, the January Barometer has an even more impressive 95% accuracy in predicting the full year’s action if, and only if, January has a positive performance. The Barometer is less accurate when January ends with a loss. As the table shows, there have been 24 instances of losses in early January, 14 years with losses in the full month of January, and eleven years of negative performances for the full year. In short, January losses are far less predictive. But to date, the 1.6% gain in the first five days of January 2021 bodes well for the month and for the overall year. See page 9.

Anyone Focusing on Jobs?

The ISM manufacturing index increased from 57.5 to 60.7 in December, with most components, except for trade, also rising. Prices paid soared from 65.4 to 77.6. We remain nervous that inflation could be a big risk for equities this year. The nonmanufacturing index rose from 55.9 to 57.2 in December, but the employment index fell from 51.5 to 48.2. With the employment index below the 50 breakeven point, it suggests job growth in the service sector may weaken in coming months. See page 3.

The loss of 140,000 jobs in December did not surprise us given the extended shutdowns of businesses in states like New York and California; so, we are encouraged that Governor Cuomo appears to be ready to ease some restrictions. Still the risk of lengthy shutdowns is that businesses and entrepreneurs have been and will continue to face bankruptcy, which weakens the economy, and foreshadows more jobs losses. In December, the number of people employed was down 6.2% from a year earlier. Typically, any negative growth rate in employment suggests the economy is in the midst of a recession. The US economy has been buoyed by extraordinary fiscal and monetary stimulus for much of 2020, but stimulus cannot solve all problems. The unemployment rate in December was unchanged at 6.7%, but this is still well above the 3.6% seen in December 2019. Plus, when we look at the breakdown of unemployment, we find it is not evenly distributed. Those hurt the most in 2020 were workers with less than a high school degree which means households in the lower end of the job market remain under the greatest pressure. This dilemma is linked to the closure of food and drink establishments, hotels, and all employees tied to business and leisure travel. In our opinion, a weak job market will be another risk factor for the economy, earnings, and investors in 2021. Strangely, politicians seem focused on other matters and are ignoring this fact. See pages 4 and 5.

Small Business Confidence is Crumbling

Entrepreneurs and small businesses were feeling the impact of the pandemic at the end of 2020. The NFIB small business optimism index fell 5.5 points in December to 95.9 and all components with the exception of inventory satisfaction were lower. Owners expecting better business conditions over the next six months plummeted 24 points to a net negative 16. Sales expectations for the next three months fell 14 points to a net negative 4. Hiring plans fell 4 to 17, which was down but only to the lower end of the range seen over the last three years. This survey makes it clear that small businesses are concerned about their future in 2021.

The two areas of strength in the 2020 rebound have been housing and auto. Existing home sales were fairly robust at 6.69 million (SAAR) units in November, down slightly from October, yet up nearly 16% YOY. New home sales were 841,000 in November which was down from 945,000 units in October, but still up 21% YOY. The one warning sign we see for homebuilders is the pending home sales index which fell for the third consecutive month in November to 125.7. See page 7.

Earnings Forecasts are Stabilizing Consensus earnings estimates were revised significantly lower at year end but edged up slightly last week. S&P Dow Jones estimates rose $0.20 for 2020 and $0.17 for 2021 while IBES estimates rose $0.13 for 2020, $0.36 for 2021 and $0.37 for 2022. The S&P Dow Jones and IBES estimates for 2020 are $120.54 and $135.79 and for 2021 they are $164.57 and $167.61, respectively. Keep in mind that PE multiples have expanded dramatically in the last twelve months due in large part to low interest rates and indications from the Federal Reserve that monetary policy will not change before 2023. However, our valuation model indicates that the current low inflation/low interest rate environment translates into a 20 PE multiple. If we apply a 20 PE to the IBES $167.61 estimate for this year it implies a target for the SPX of 3352. In other words, the SPX has a 12% downside risk should optimism regarding earnings, the economy, interest rates or inflation change in the near term.

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If you forecast for tomorrow what happened today …

DJIA:  31,041

If you forecast for tomorrow what happened today … you’re right some 70% of the time.  And now you know all you need to know about forecasting the weather.  As for the stock market, that’s different.  Arthur Burns suggested the secret to forecasting is to keep forecasting.  Keynes seemed to agree, saying when things change he changes his mind.  The philosopher Mike Tyson perhaps sums it up best – everyone has a plan until you get hit in the mouth.  Keeping in mind you get what you pay for, our two cents is that it will be a good year, but a different one.  While there are signs of euphoria and valuations that arguably are stretched, the technical backdrop remains sound – hence, a good year.  History, however, suggests a different one.  It’s likely to be one of more muted gains and one with a different type of leadership.

The S&P was up 16% last year, and 29% in 2019.  It is rare for the market to be up 10%+ three years in a row.  Similarly, Tech stocks have had back to back 40% gains.  Against that backdrop, it is rare that any group does not underperform the following year.  We offer this not so much as a forecast, but rather an observation.  The NAZ was up 40%+ last year and more than 50% of that was Apple (131), Tesla (825), Amazon (3165) and Microsoft (218).  It’s not hard to see how any underperformance by Tech could hold back the averages.  Meanwhile, it’s easy to see how the forlorn infrastructure stocks like United Rentals (264) and the metals and mining stocks could lift the market without giving a big boost to the averages.  We’re still positive on biotech, and gold finally has shaped up – silver even more so.  And those energy stocks you’ve been meaning to sell, suddenly have come in handy.

If you saw The Graduate, surely you remember – plastics!  Our update on that is – lithium!  As measured by the Lithium ETF (LIT – 73) and the many stocks here, lithium has been on a tear.  The main driver for lithium and materials like cobalt and rare earth elements is electric vehicles.  Then, too, lithium isn’t exactly new.  Your smart phone, your laptop, your tablet are all devices that rely on lithium.  It’s electric vehicles, however, that seems behind the recent run.  Bloomberg forecasts sales of electric cars will hit 41 million by 2040, representing 35% of all global new car sales.  While EV sales in the US jumped 81% in 2019, that’s a drop in the bucket compared to China where EV sales topped 1.2 million cars.  You may not want to build your portfolio around lithium, but it should have a place.

If lithium is not to your liking, maybe we can interest you in a little Solar.  Solar and its ETFs like the Invesco Solar (TAN – 121) and the iShares Global Clean Energy (ICLN – 33) have done quite well.  Components like the Daqo Energy (DQ – 80), have done even better.  We have thought of Solar as a hedge against the Georgia election, but that seems overthinking.  Chinese President Xi Jinping, a man you can trust, has pledged to make his country carbon neutral by 2060. There’s many a slip twixt the cup and the lip, and by then we just might be old.  Still, given that China gets two-thirds of its power from coal, the implications are almost staggering.  China has created seven of the world’s top 10 Solar module manufacturers, according to Wood Mackenzie.   Like lithium, Solar may not be something you want to build a portfolio around, but something that should be part of it.

So how about the market’s reaction to the Georgia election outcome?  The NAZ, that is Tech, did selloff, but on the NYSE breadth was more than respectable, and on the NAZ it was even better.  A surprise, or validation of one of our long held beliefs – when it comes to the stock market, what we all know isn’t worth knowing.  And there is a rationale, well expressed by Nicholas Colas of Data Trek.  If you ask CEOs how they feel about a two point hike in their tax rate in return for a $2 trillion stimulus plan, they’re more than good with it.  Amidst all that is going on, best to keep in mind the basics.  For all that can be worried about both in and outside of the market, most days most stocks go up.  When that changes, then heed the Keynesian advice.  Meanwhile, as we suggested above, this year could be different.  If you look at the charts, should you own Microsoft (218) or, of all things, US Steel (20)?

Frank D. Gretz

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