Despite multiple calls for its demise, the post election rally keeps going and going and going.

Weekly Statistics

Friday Statistics

The three major indexes completed a feat they have not been able to do in more than five years. The Dow, S&P and Nasdaq all posted gains for five consecutive days in the same week. They all ended at new highs with portfolio managers being forced to hold their nose and buy the overbought shares. The gains are continuing despite a likely rate hike next Wednesday. If the Fed claims it is bullish on the economy we could blow out to even higher highs.

Market sentiment is increasing rapidly and consumer sentiment is moving sharply higher on the Trump bump. For an election that created so many protests after the results the impact on sentiment has been very positive. Consumer sentiment for December rose from 93.8 to 98.0 and only 1 tenth of a point below a 12-year high. In January 2015, the reading was 98.1 and I expect that to be exceeded in the revision later this month. Sentiment was at 87.2 in October. That is better than a 10-point gain in only two months.

The present conditions component rose from 107.3 to 112.1 and the highest reading since 2005. The expectations component rose from 85.2 to 88.9 and the highest level since January 2015. The percentage of respondents expecting good economic conditions over the next year rose from 46% to 51%. Those business owners surveyed and saying business conditions were favorable rose +8 points to 43%. More than 80% of consumers said it was a good time to make a major purchase.

There are two reasons for these gains. The first is that the election is over and all the negativity in the campaign attack ads has passed. The second is the normal honeymoon period after a new president is elected. This particular honeymoon appears to be stronger and longer lasting than any I can remember in the recent past. The potential for lower taxes and reduced regulation have business owners very excited.

This boost of bullish sentiment is completely ignoring the potential for a rate hike next week. The current probability is now up over 97%. The key will be the guidance and how the Fed projects future rate hikes in 2017. I suspect they will try and maintain a dovish picture and not kill the market with a harsh outlook for multiple hikes.

There are a lot of reports next week but the normal economic releases pale in importance to the Fed statement and Yellen press conference.

Since the election, the routine economic reports have been ignored. Nobody seems to care what the economy is doing today because they expect it to do a lot better in 2017.

The Dow is well on its way to moving between 1,000 point milestones in a record amount of time. The 19,000 level was first hit on Nov-22nd and we could easily hit 20,000 as early as next week. The shortest time between 1,000 point increments was in 1999 when it took 35 calendar days, not trading days, to move from Dow 10,000 to Dow 11,000. It took 7.5 years to make it to the next level at 12,000.

Note that each increment requires a much smaller percentage move than the prior increment. To go from 1,000 to 2,000 is a 100% increase. To go from 10,000 to 11,000 was a 10% increase. The move from 19,000 to 20,000 will be a 5.26% increase. Using those percentage numbers it only makes sense that we should be reducing the time between milestones but there are those pesky bear markets to deal with. The first Dow print was 40.96 when it was introduced in 1896. To reach the first 1,000 milestone required a 2,341% rise and 76 years.

Stock news was very sparse on Friday with the market activity already starting to wind down for the holidays. The new market highs are about the only thing keeping investors in the markets. There are still some big losers on the radar because business still has potholes that have to be avoided.

A big loser on Friday was Restoration Hardware (RH) with an 18% decline. The company reported earnings after the bell on Thursday of 19 cents compared to estimates for 16 cents. Revenue of $549 million also beat estimates for $533 million. However, the guidance was a killer. They lowered Q4 revenue estimates to $562-$592 million with earnings in the 60-70 cent range. Analysts were expecting $637.62 million and $1.08 in earnings. Comp sales for Q3 also declined -6% compared to a 7% rise in the year ago quarter.

The CEO said there were multiple problems including excess inventories, too many SKUs and consumers did not like their new products. It was not an encouraging conference call.

Broadcom (AVGO) was a big winner after reporting earnings of $3.47 compared to estimates for $3.38. Revenue of $4.14 billion rose +125% and beat estimates for $4.12 billion. The company also doubled its quarterly dividend to $1.02. The company guided to revenue of $4.07 billion in the current quarter but did not guide on earnings. Analysts are expecting $3.18 on revenue of $3.96 billion, a 122% increase.

Vail Resorts (MTN) reported a loss of $1.70 compared to estimates for -$1.57. Revenue of $178.3 million missed estimates for $183.5 million. Losses in lodging and real estate sales offset rising revenue in lift ticket sales. The Q3 quarter normally produces a loss since the ski mountains are not yet open for business. They did raise 2017 guidance from $482-$518 million to $567-$597 million. Shares rallied 4% on the guidance.

Retailer Duluth Holdings (DLTH) reported earnings of a penny compared to estimates for breakeven. Revenue of $67 million missed estimates for $69 million. The company guided for the full year to revenue in the range of $360-$370 million and earnings in the 52-60 cent range. Analysts were expecting $380 million and 70 cents.

They opened three new stores in Q3 and two more in the current quarter to bring their total to 16. However, the most troubling statistic was the cash on hand of $173,000 compared to $37.87 million in the year ago quarter. That $173,000 is pocket change with a 16-store network that has salaries, rent and inventory requirements. They blamed the unusually warm Sept/Oct for the disappointing sales. Other retailers have had the same complaint. They also said it was a highly promotional environment, which others have also stated. Shares fell -33%.

InvenSense (INVN) shares spiked 27% after headlines broke claiming Japan's TDK Corp was in talks to acquire the chip company. InvenSense makes motion-sensing chips. Reportedly TDK has offered $12 per share, which was a 45% premium to Friday's opening price but only barely above the 52-week high from a year ago. The stock has been troubled with many competitors in its primary market. The company has been trying to diversify into things like drones, virtual reality, optical image stabilization, wearable devices and smart home IoT devices.

Bristol-Myers Squibb (BMY) raised its dividend +2.6% to 39 cents. It is payable February 1st to holders on January 6th. That equates to a 2.74% yield. The company also settled a multi-state probe over improperly promoted schizophrenia drug Abilify. The agreement with 42 states will result in a $19.5 million payment. The drug had been marketed for use on elderly patients with dementia without the FDA approval for that use. Shares rallied 3% from support at $55.

Stillwater Mining (SWC) spiked 18% after South African company Sibanye Gold Limited said it was acquiring the company for $2.2 billion and will assume $500 million in SWC debt. SWC is the only U.S. producer of platinum and palladium, the precious metals used to make catalytic converters and jewelry. The company has 1,400 workers in southern Montana. A U.S. subsidiary of Sibanye will pay $18 a share for SWC.

RigNet (RNET) shares rallied 16% after the company was awarded a contract with Statoil for their Mariner project in the North Sea. RigNet builds high specification networking and communications systems that operate from remote locations. The company will provide the latest VSAT communications and network technology for operating in the harsh North Sea environment. They will provide a fully managed voice and data network including video conferencing, crew welfare, asset monitoring and real time data services. No dollar value was given but it is in the millions of dollars.

Coca-Cola (KO) said CEO Muhtar Kent, was stepping down as CEO effective May 1st. Kent will be replaced by the COO, James Quincey, who has been at Coca-Cola for 20 years. Kent will remain chairman of the board. This announcement came at an odd time since Coke's biggest shareholder's son, Howard Buffett, resigned from the board on Thursday. Warren Buffett said he has known Quincey for a long time and was supportive of the move. Shares were up slightly on news that Warren would not be selling his shares.

OPEC officials and non-OPEC suppliers met in Vienna this weekend to discuss additional production cuts. They previously announced that non-OPEC producers would cut 600,000 bpd but there was no specificity. Russia said they would cut 300,000 bpd but then waffled on the commitment before the headline was even a day old.

The early headlines from the meeting claim the 11 non-OPEC producers agreed to cut 558,000 bpd for six months starting on January 1st. The eleven countries were Azerbaijan, Bahrain, Brunei, Equatorial Guinea, Kazakhstan, Malaysia, Mexico, Oman, Russia, Sudan and South Sudan. Talk is cheap and there is no assurance a cut will actually occur.

Saudi oil minister Al-Falih said "the intent by all those who participated is to contribute to drawing down oil inventories that are excessive. And whether the reduction in that over-supply comes from deliberate intervention, like it is the case in Saudi Arabia, or by simply managing the decline in a way that makes them meet this agreement is left to the countries themselves." Ponder that for a minute. They can cut production OR they can just let current production erode and it may or may not actually reach any of the targets. That is hardly a strong agreement that will remove 558,000 bpd starting on January 1st. This is another "We are going to cut production, move along now, there is nothing to see here" headline.

I looked at every post meeting report I could find and there was nothing about specific cuts by each country. The only specific statements said Oman would cut by 45,000 bpd and Kazakhstan said it "would try to reduce by 20,000 bpd next year." Amrita Sen from Energy Aspects Consultants said, "While a lot of the countries are formalizing natural declines, cuts by Russia, Kazakhstan and Oman are real. Russia and Kazakhstan were between them expected to add 400,000 bpd to production next year." I think that is the bottom line. Only three countries actually claim they are cutting and the rest are just agreeing not to add any new production. Multiple Russians have said over the last week that the Russian cuts will never happen so it will be interesting to see what total production levels are in March/April after full implementation of the claimed cuts.

Crude prices rebounded to $51.50 on short covering ahead of the meeting and the hope by some traders for the participants to surprise us.

The formal agreement by OPEC the prior week did wonders for the rig count. Active rigs rose by +27 for the week ended on Friday. That was an addition of 21 oil rigs and 6 gas rigs. It will be interesting to see if the non-OPEC meeting commentary will impact rig activations in the coming weeks.




"Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria." Sir John Templeton. The big question today is whether we are in the optimism phase or the euphoria phase.

Dow Theory also states that in any bull market there are three phases. They are called accumulation phase, public participation phase and excess or panic phase. Source

Generic Chart Example

This theory applies to all phases of a market whether it is multi years or multi months. The accumulation phase is the first stage of a bull market where patient, informed investors enter the market after a period of volatility where a bottom has formed. The bad news is priced into the market and institutions begin to build positions.

The public participation phase is where negative sentiment begins to fade and bullish sentiment grows. Good news begins to flow and the public, always in reaction mode, begins to build positions. This is typically the longest phase and as technical conditions improve, more technical and fundamental traders enter the market.

The excess phase is where the improved economic and market conditions have attracted the attention of retail investors and they begin to chase prices higher thinking the market is going to run away from them. Twenty years ago last week, Greenspan called this "irrational exuberance." The perception is that everything is pointing to a continued rally and investors believe only good things are in our future.

The first phase of a bear trend follows the excess phase. It is called distribution. This is where the informed investors sell their positions but not all at once. They "distribute" their holdings over several days or weeks to those panic buyers still expecting higher highs. The beginning of a distribution phase could look like minor profit taking or a topping in the market. The market does not go down but it begins to have trouble continuing its gains. Volume normally increases as the sellers feed shares to the panic buyers. Eventually, distribution turns into outright selling and the market rolls over.

In the Dow chart below, I have marked the phases according to the Dow Theory description. We are clearly in the excess phase where investors are chasing prices on the expectations for wonderful changes in 2017. Reality is going to be a harsh wakeup call when 2017 arrives and nothing happens for many months, if at all. It could be 2018 before many of the proposed changes actually occur.

If we see the excess phase transition into a distribution phase, we should head for the sidelines.

The Dow is up 1,868 points or 10.4% over the last 22 trading days. It is only 244 points from Dow 20,000. If we actually reach that level before the end of December, I see that as a sell the news moment. The index would be up roughly 2,100 points on optimism and euphoria. The expectations are lower taxes and reduced regulation. Since those things require approval by both houses and there is only a simple majority in each house, it could take months to get anything passed and the process could be ugly. Trump still has to get all his appointees confirmed by the Senate and this is where the battles for control will begin.

We also have to get past the inauguration without a disaster. Whenever you have a million people gathered in one location and the opposing party is trying to organize two million people to block the event, there is a tremendous potential for a disaster. Add in the obvious terrorist threat and investors could be in for a nasty surprise. This would be an added incentive to lighten up on long positions at Dow 20,000.

Fortunately, there are still 14 trading days left in 2016 and they are typically bullish. This year I would expect the high for the year to be made before Christmas. In the 22 trading days since the election, the Dow has closed at a new high 14 times.

The Dow gained nearly 600 points last week alone. Just looking at the Dow chart should give every investor nervous chills. I cannot imagine any investor wanting to buy that chart but everybody has their own ideas about investing.

The S&P gained +3% last week and is up 174 points or 8.3% since the election. The gains last week clearly qualify as panic mode. Asset managers are rotating out of bonds and into equities and fund managers are putting every penny to work trying to keep up with their peers. Charles Biderman said most funds are fully invested and have almost no cash on hand. That means any end of year or new tax year withdrawals will require selling to raise cash. Today, nobody is withdrawing money so every penny in the fund goes towards maximizing gains before year-end.

There is a disturbing historical trend where the post election honeymoon is sometimes followed by bear markets. I am not going to go back and dig up all the facts to present here but the trend exists. With the current economic expansion at 7 years and growing, there is always the potential for a recession. Greenspan said last week, his main worry for 2017 is stagflation. I do not see that potential but I am sure that risk exists.

The point to this discussion is that the S&P and the other indexes are in what Elon Musk would call insane mode. That is the mode on his cars where acceleration is insanely fast. The market gains last week were insane since they were on top of already strong gains.

The Nasdaq finally broke out to a new high but it is not nearly as over extended as the Dow and S&P. The Nasdaq big caps other than Google did not participate. Facebook gained only 77 cents, Amazon +1.33 and Netflix lost 36 cents. In order for the Nasdaq breakout to have any staying power the FANG stocks all have to contribute, not just Google.

The biotech sector remains weak and Trump's comments last week about bringing down drug prices caused a new wave of uncertainty. While that is significantly easier to say than actually do, it still causes selling in the drug stocks.

The Russell 2000 is up +232 points since the election or exactly 20%. That would be a great year under normal conditions but that occurred in only 22 trading days or roughly 1% per day. In any universe that is very over extended and due for a rest.

I do believe we will see higher highs before Christmas. However, I do not expect the kind of gains we saw last week. I believe the market could be choppy and toppy as we target that 20,000 level on the Dow.

I would refrain from being overly long and I would definitely keep my stop losses in place.




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Random Thoughts

There was almost no change in sentiment for the week. Everybody has made up their mind and those "not bullish" still make up 57% of the total. There are plenty of investors left to convert. This survey ended on Wednesday.

Last week results

Mark Zuckerberg in politics? Recently released documents in an ongoing lawsuit about the creation of the Class C non-voting shares, disclosed communications between board members and Zuckerberg. The board discussed giving the CEO a two-year leave of absence it he decided to become involved in "a government position." The "Facebook has no political bias" CEO apparently has an interest in serving in government. Since 98.1% of political donations from Facebook employees were to democratic candidates, we can guess which way Facebook is leaning.

The board member comments on the Class C share suit were concerned about Zuckerberg converting the majority of shares owned by the public into class C shares with no voting rights. That would allow Zuckerberg to basically abandon the company for years to go into government and have minimal input to Facebook but still retain total control. According to board members Erskin Bowles and Mark Andreessen they "rediscuss that problem on every call."

If you currently have a functioning Galaxy Note 7 phone by Samsung, it is about to become a paperweight. The phones have been under mandatory recall but apparently, some users liked them so much they refuse to give them back. Next week, Samsung will force a software update that will remove the ability to make calls and the ability to charge the battery. The phone will become totally useless and with a discharged battery, and no further danger to Samsung. In Canada, Samsung has already implemented those changes as well as disabling Bluetooth and Wi-Fi functions. Strangely, you can still buy a Note 7 on Ebay for about $350.

iPhones are shutting down all over the world as a result of two problems. One iPhone 6s problem is hardware and requires a battery replacement so the phones have to be exchanged. Apple has notified everyone impacted on how to get the exchange. The China Consumers Association disagrees with Apple saying it affects more than just the 6S and they have requested Apple step up their exchange program to cover other models.

The second problem is related to a recent update to iOS. The iOS 10.1.1 updates reduces battery life by increasing the phone's internal temperature. Some users claim the charge dwindles from 30% to 1% in only a few seconds and then shuts down. When it is rebooted after being recharged, it shows only 30% but runs for a couple hours before shutting down again. Users are resorting to carrying an extra battery to make it through the day.

JP Morgan cited information from Orbital Insight saying mall traffic is slowing. Orbital takes satellite pictures of mall parking lots and compares them to the same period in prior years. They claim mall traffic is down -4.1% from year ago levels and this could hurt Apple more than anyone else because they get a lot of their sales from big box stores like Best Buy and mall stores. JP Morgan expects iPhone sales to decline -11% compared to consensus estimates for a 7% rise.

The Wall Street Journal said Apple's high tech jack-less AirPod earbuds may not be available in the near future. Apple originally said they would be for sale in October at $159 a pair but then withdrew them saying they needed more time to provide a quality user experience.

According to the WSJ article, the problem is technical. Bluetooth technology cannot stream to two devices at the same time. Other devices like Bragi Dash and Samsung Gear IconX solve that by transmitting to one earbud and then that bud retransmits to the other earbud. However, results are spotty because people's heads tend to get in the way. Because we are all different, the transmission from bud to bud performs differently for each person and dropouts occur. Do not expect AirPods in the near future.

Apple shares were actually one of the better tech performers last week with more than a $5 rebound off Monday's $108.25 low.


Enter passively and exit aggressively!

Jim Brown

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