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Strategic Insights

Volume 6, Edition 31 | August 14 - August 18, 2017

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A Time for Contemplation

Doug_Walters Doug Walters | Articles

Read Time: 6:00 min

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It was a roller coaster for U.S. stocks this week, as investors were forced once again to contemplate, “Will this latest political turmoil impact Washington’s ability to pass tax reform, deregulation and infrastructure spend?”

Market Commentary

Contributed by Doug Walters

Gains earlier in the week gave way to losses as thawing rhetoric with North Korea was replaced with political turmoil in the wake of the sad events in Charlottesville. Investors, who have been happy to turn a blind eye to Washington’s missteps for much of this year, are now forced to contemplate whether corporate-friendly tax reforms and infrastructure spending will take a back seat to political infighting.

Expanding the Swamp

Tensions somewhat abated with North Korea, as they canceled plans to fire rockets towards Guam. However, investors had little time to celebrate. The President’s response to the disturbing events in Charlottesville left many who have been trying to work with him, in need of political separation. His retort on Tuesday came across as showing sympathy for the white nationalists protesting with the white supremacists and neo-Nazis. In the wake of these comments, The President’s Strategy & Policy Forum and Manufacturing Council disbanded following the resignation of several CEOs. In an ironic twist, the President’s Chief Strategist, Steve Bannon, who help Trump woo the far and alt-right was fired on Friday. Despite Bannon’s departure, the swamp that Trump had promised to drain, looks more like Dagobah than ever.

Federal Reserved

Political drama is driving short-term moves in equities, but it is the economy that shapes long-term moves.  Minutes from the Federal Reserve’s policy discussion showed some concern about the trajectory of inflation. Last week we discussed the weaker than expected Consumer Price Index (CPI) print, and, based on the Fed minutes, this appears to have some policymakers nervous. The Fed has been counting on very low unemployment to drive up wages and prices, but that has yet to materialize. The pace of future rate hikes appears likely to slow.

Despite the political challenges and Fed concerns, the corporate earnings remain robust, which goes some way toward explaining the strength in equities this year.

Indices & Price ReturnsWeek (%)Year (%)
S&P 500 -0.68.3
S&P 400 (Mid Cap)-1.11.9
Russell 2000 (Small Cap)-1.20.0
MSCI EAFE (Developed International)0.013.8
MSCI Emerging Markets1.622.9
S&P GSCI (Commodities)-0.6-4.4
Gold-0.411.6
MSCI U.S. REIT Index0.0-0.9
Barclays Int Govt Credit0.01.3
Barclays US TIPS-0.30.7

Economic Commentary

Contributed by Mark Abdalla

The Blockchain Disruption

There is disruption coming to multiple industries including finance, and it is happening through blockchain technology. Blockchain has allowed contracts to be embedded in digital code and stored in transparent databases bypassing middleman including lawyers, brokers, bankers and venture capitalists. Analysts are now asking how fast rather than if blockchain will revolutionize businesses and industries.

The technology, which is often associated with Bitcoin, has enabled the creation of Initial Coin Offerings (ICOs) that are being used in place of traditional crowdfunding to raise capital for projects. In an ICO, the new cryptocurrency is sold to early backers of the project in exchange for legal tender. If the money raised does not meet the minimum necessary to finance the project, it is returned. If the money raised is greater than the minimum threshold, the project is enabled by the stakeholders holding the cryptocurrency as equity.

This year has been a breakthrough year for ICOs as they have become easier to launch and develop through new platforms such as Ethereum, where developers can make a new cryptocurrency by simply adding a few lines of code. There have been 92 ICOs this year that have collectively raised $1.25 billion. That is up from 46 ICOs last year that raised $96 million.

The new method for financing is poised for further growth as industries figure out how to use the disruptive technology. Blockchain is a revolutionary technology that is believed to provide a very secure method for transferring assets. However, the assets themselves that are being transferred, whether they be an ICO project or Bitcoin, are often far from secure. ICOs are not regulated by the Securities Exchange Commission, and often limited information is available regarding the quality of the projects being funded. Caveat Emptor.

081817_Graph

$1.25 billion
The total amount raised in Initial Coin Offerings (ICOs) so far in 2017. Source: coinschedule.com

Week Ahead

Contributed by Aleksey Marchenko

JEDI Needed to Restore Balance to The Force

Jackson Hole Summit is one of the most prestigious economic conferences in the world.

  • The main event is Chairwoman Yellen speaking about financial stability this Thursday.
  • In the past, the conference was used by the central bankers to foreshadow the Fed’s policy actions.
  • The ECB’s Mario Draghi will be attending the event. According to Reuters, Draghi is not expected to deliver a new policy message.

Eclipse viewing will begin on Monday around 1:15 p.m. for most people on the East Coast.

  • The Solar Eclipse will reach its peak around 2:35 pm and will last about 2 minutes and 40 seconds.
  • This will be the first coast-to-coast solar eclipse in 99 years.
  • Global executive outplacement firm Challenger, Gray & Christmas estimates that the mid-workday eclipse will cost the U.S. economy $694 Million in lost productivity.

Durable goods orders are expected to decline by 5.8% in July.

  • The survey measures current industrial activity and provides insight into future business trends.

Index of Manufacturing data from various Federal Reserve Banks and the FHFA home prices index will be released next week.

  • The Chicago Fed index gives insights about economic activity and inflation in Illinois, Michigan, Wisconsin, Indiana, and Iowa.
  • FHFA home prices measures the movement of single-family house prices in the U.S. This index has been reaching new highs each month for more than a year, implying that house prices (based on the national average) are higher than the peak of the housing bubble in 2007.

Strategy Updates

Contributed by Max Berkovich , Aleksey Marchenko

STRATEGIC ASSET ALLOCATION

All That Glitters

Gold continued its advance this week, running past $1,300 per troy ounce hitting fresh nine-month highs. There are several reasons for Gold’s move higher…

  • Political instability (see our Market Review above) has created uncertainty which explains most of the move higher for the shiny metal this week.
  • The FOMC minutes revealed a divide among central bankers about the state of the economy and sluggish inflation numbers. A discussion about further Fed rate hikes and possibly their balance sheet reduction may be on the back burner again. This should delay a strengthening of the U.S. Dollar. The declining value of the dollar against major currencies, combined with declining interest rates is a benefit to gold.
  • Gold’s previous high was above $1,900 per troy ounce on September 6th, 2011.

STRATEGIC GROWTH

Kicked Around

The Energy sector was by far the most beat up sector this week thanks to a decline in crude prices. The Materials sector was the leading sector. In other strategy news…

  • Nike Inc. (NKE) received several kicks this week from its product’s retailers. First, Dick’s Sporting Goods (DKS) reported a soft quarter and followed it up with guidance of flat to shrinking sales. Then Foot Looker (FL) and Hibbett Sports (HIBB) followed with their own set of ugly results. The one positive for Nike came from Foot Looker’s conference call, where the CEO dispelled concerns that Nike’s online association with Amazon (AMZN) will impact shoe retailers. Foot Looker believes that online sales are of low-end models and that consumer still wants to have physical contact with high-end apparel. Time will tell.

STRATEGIC EQUITY INCOME

Sowing Their Seeds

REITs joined Utilities at the top thanks to a pop in interest rates this week. Energy was the biggest laggard, but the Industrials sector was next in line thanks to an earnings report from…

  • Deere & Co. (DE) reported a decent quarter thanks to agricultural revenue increasing 13% and construction revenue increasing by 29% year-over-year. Future outlook, on the other hand, was not so cheery. The company expects North America full year farm equipment sales to drop by roughly 5%, thanks to low crop prices. The expected agriculture weakness will outweigh the strength in construction equipment.

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