Weekly wrap by Tematica – Business Insider

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financial crisis 2008 traderReuters
/ John Gress

Despite several reasons to be unnerved
about the overall market
, the week began with what we would call a
“sigh of relief rally” as the weekend’s hurricane turned out to
be not quite the Armageddon that was feared. Monday’s breakout to
new all-time highs for the S&P 500, (for the first time in 23
trading days) makes this now the second longest and second
strongest bull market on record, while the economy continues to
muddle through. As of Friday’s close, we will have gone 3,112
calendar days since the last 20% decline – the longest on record
was 4,494 calendar days, ending in the March 2000 dotcom bubble
bursting.

Looking under the headlines, some things aren’t
right

As we discussed on this
week’s


Cocktail Investing
Podcast


, the recent
rally in Euro junk bonds pushed yields for them below U.S.
Treasury rates… eh? While the average for real yields on
10-year sovereign bonds in the U.S., U.K., and Germany sits near
record lows, equity markets are reaching new all-time highs –
naturally. This week’s AAII sentiment survey showed a surge in
optimism as the percentage of bullish investors rose from 29.3%
to 41.3% — the largest one week increase since the end of April
and the highest level we’ve seen since January — talk about
climbing a wall of worry. As we shared earlier this week, these
rapid sentiment swings by individual investors tend to be viewed
as a contra-indicator by institutional investors.

Those bulls are making it happen with this
market

Even though market breadth has
been rather concerning in recent weeks, as of Thursday’s close,
we’ve gone from less than 42% of stocks in the S&P 500 above
their 50-day moving average in mid-August, to 64%. The S&P
500 advance/decline line has also been making new highs, which is
a positive indicator. We’ve also seen the number of NYSE stocks
making new lows decline, so while this market remains richly
priced with a bond market warning that growth prospects are weak,
some of the market fundamentals have been improving.

Disappointments for the week


Tim Cook Apple employees
Apple CEO Tim
Cook.

Handout / Getty
Images


At the top of our list for disappointments was the rather lame
event held by Apple (AAPL) at which it introduced several new
upgrades for its Apple Watch, Apple TV and iPhone offerings. Yes,
we love our Apple products, but in our view these efforts largely
shored up its position in the slowing smartphone market. On a
positive note for several of our Disruptive Technology investment
theme positions on the Tematica Investing Select List, Apple
confirmed its inclusion of organic light emitting diode displays
in its iPhone X.

Enthusiasm for the new smartphone
model was tempered by the high price tag ($1,000) and a later
than expected ship date in early November. We will see how
willing consumers are to adopt the iPhone X later this year, but
from our perspective we see Apple shares as being stock range
bound until the company is able to deliver a new product or
service that will put it back on the growth path. Fro now, we’ll
continue to favor key suppliers that are seeing the benefits of
technologies being placed inside the iPhone and Apple
Watch.

On the economic front, not much was inspiring

While the NFIB’s small business
optimism index posted a small increase that beat expectations,
Taxes and Labor Quality continue to be the biggest problem for
business owners. Fifty-nine percent of businesses reported hiring
or trying to hire, (down 1 point), but 52%, (88% of those hiring
or trying to hire) reported few or no qualified applicants for
the positions they were trying to fill.  

Later in the week the JOLTS
report from the Bureau of Labor Statistics confirmed this
problem, as Job Openings hit a new high with the ratio of Job
Openings to Hires also hitting a new high. The gap between
Openings and Hires illustrates the difficulty businesses are
facing in finding qualified applicants – that’s a headwind to the
economy. We also don’t like seeing that the biggest area of
increase in the JOLTS report was in “leisure & hospitality,”
which has the lowest wages and lowest overall compensation.
Looking at our


Aging of the
Population


investing theme, we continue to be concerned
by the wide gap between the number of healthcare job openings and
new healthcare hires. We see this becoming an even greater pain
point as more baby boomers turn 70 in the coming years.


Screen Shot 2017 09 15 at 5.27.02 PMTematic
Research

Before Harvey, construction
workers across the U.S. were already in tight supply and material
costs were rising. With the profound level of destruction,
Houston is likely to face such a severe crunch that it could
affect the national economy by pushing up material costs and
driving down the U.S. unemployment rate for construction workers
even further. For context of just how tight this portion of the
labor market is today, there were 225,000 unfilled construction
jobs in June, near the recent high of 238,000 recorded in July
2016, according to a National Association of Home Builders
analysis of Labor Department data.

Wednesday’s Producer Price Index
(PPI) report was mixed versus expectations. The year-over-year
overall change was up 2.4%, but that’s due to big bump in Energy
(Houston anyone) which was offset a bit by 1.3% decline in foods.
Excluding those and trade saw the index up 1.9% year-over-year,
nearing the Fed’s target 2.0%. For context PPI at the end of last
year was 1.8, peaked in May at 2.1% and is now down to
1.9%.

Thursday we got August’s Consumer
Price Index (CPI) report which saw core CPI up 1.9%, above
expectations for a 1.8% increase as the extreme weakness we saw
from March to May starting to wear off. Energy was by far the
biggest driver of price increases with the largest year-over-year
declines occurring in apparel, airline fares, and as we’ve
discussed quite a bit, used cars. New cars are currently
experiencing the worst deflation since the Great
Recession.

Shelter inflation has started to
tick up with the 3 months annualized growth in rent or shelter
now stronger than the year-over-year trend. We suspect rents are
unlikely to be able to continue rising at a near 4% annual rate
if wage growth remains around 2.5%. The combined CPI and PPI
reports didn’t help the wave of global bond selling and fueled
the spike in U.S. short-term rates as the probability of a third
rate hike in 2017 jumped up over 50% on Thursday, putting us
firmly into “coin toss” territory.

Friday morning saw a
disappointing Retail Sales report, falling 0.2% in August versus
the 0.1% expected increase. Excluding autos, retail sales rose
0.2% versus expectations for a gain of 0.5%. Auto sales
experienced the biggest drop since January, likely related to
effects of Hurricane Harvey, which hit Texas in the last week of
August. We expect that auto sales will see a material boost
thanks to all those flood damaged vehicles, which should help
dealerships that have been struggling with high inventory levels.
Thursday’s CPI gain compressed the growth in real wages
 such that real average hourly earnings year over year
declined to sit at a meager 0.56%.

We’ll point out that if inflation
really was starting to kick in, the U.S. would have rallied
yesterday rather than slipping 0.4% and bond yields would have
jumped rather than remaining a disinterested flat for the day.
Tough for us to buy into inflation and growth story when
Utilities are up 12.5% year-to-date, outperforming consumer
cyclicals by 2% and industrials by 3%.

On the political front of things not everything was
peachy


North Korea
Servicepersons
of the Ministry of People’s Security met on August 10, 2017 to
express full support for the Democratic People’s Republic of
Korea (DPRK) government statement.

Reuters/KCNA

North Korea fired another missile over Japan, with this launch
traveling roughly 2,300 miles versus the prior overflight of
Hokkaido on August 29th,
which travelled 1,700 miles. Guam, which Kim Jong Un has
threatened to envelope in fire, is 2,100 from the missile launch
site  – not good. Japan is none too pleased. Something here
is going to have to give, but the stock market appears to be
rather bored with the North Korean nuclear saber rattling – go
figure. Friday morning witnessed yet another terrorist bombing,
this time in a West London Tube station. Although 23 people were
injured, thankfully no lives were lost and this one looked like a
pretty amateur attempt – small blessings. Again, the market
mostly just yawned – go figure.

Bottom line for the week

September, having a track record
of being hellish on one’s digestive tract, so far has been
relatively calm, despite Mother Nature and that nut in North
Korea testing our intestinal fortitude. While equity valuations
at historically high levels in the face of an economic picture
that continues to be rather ho-hum are reasonably worrisome,
market dynamics aren’t giving us much in the way of imminent
warning signals. Trump’s deal with the Democrats managed to kick
the debt-ceiling can past the November elections, but the
bickering and

contradictory
inconsistent messages make the already
herculean task of tax reform all that more unlikely, at least
before the end of the year. Overall this was a week that could
have been a Pepto-Bismol guzzler, but instead was oddly
calm.

As we get ready to bid you a fond
weekend, we do have one bit of dour news. Earlier today it was
reported Tropical Storm Jose is expected to re-strengthen to a
hurricane and produce high surfs and life-threatening rip current
conditions along the U.S. East Coast as it moves up the Atlantic.
As if that wasn’t enough, yet another tropical depression has
formed far out over the Atlantic and is expected to become a
tropical storm. And we thought it was March that was supposed be
the month that was “in like a lion, out like a lamb.” Then again,
given the data we’re seen and the hurricane related revisions,
we’re starting to see there’s reason enough to think October
won’t start off as soft and warm as a lamb.



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