Investors and traders who looked at POTUS-Elect Trump’s economic plan — less regulation on business, repatriation of overseas cash, pushing for energy independence, and an infrastructure initiative, among other efforts, see stocks rising into 2017, and they went on a buying spree last week. Since Mr. Trump’s election, financials rose 11 percent, and the industrials by +5 percent; while, the defensive sectors like consumer staples fell 4 percent and utilities by -6 percent. Meanwhile, the U.S. dollar rose 2.2 percent to its highest level in thirteen years; and the 10-year U.S. Treasury yield climbed 0.2 percent to 2.337 — its highest level since November 2015.
Stocks also had a very good week, as the DOW rose 20.27 points, or +0.1 percent, to 18,867 points; while the S&P 500 ended the week higher by +0.8 percent to 2,181 points; and, the NASDAQ led the indices charge higher, ending the week up 1.6 percent, to 5,231 points. For the year, the Dow is +8.28 percent; while the S&P 500 is +6.75 percent; and, the NASDAQ is +6.27 percent.
Are investors and traders “ignoring a clear and present danger from the dollars sudden strength?,” Ben Levisohn asked in this weekend’s Barron’s. “Not necessarily,” he wrote. “It will crimp earnings of companies of businesses that do business overseas;” said Deutsche Bank strategist Alan Ruskin; “but, the dollar has been stuck in a range for the past year and a half, giving the market a chance to ‘get used to these levels. As for commodities, they have been beaten up so much that the dollar’s advance doesn’t have the same impact it once did. Throw in the potential for economic growth — a possibility if POTUS-elect Trump’s stimulus plans are enacted — and stocks and other risky assets can shrug off the dollar strength for now,” he said.
With a holiday shortened trading week ahead, the market is poised to consolidate around its current levels; and, then head into the end of the year — which historically the best time of the year for equities. “Signs of short-term exhaustion have arisen in macro-level indices, representing stocks, bonds, commodities, and currencies,” said Katie Stockton, Chief Technical Strategist at BTIG, in an email to Barron’s. “This tells us to expect a pause in their steep up-moves/down-moves in the next 1-2 weeks, as over-bought/over-sold conditions are absorbed,” consolidated.
But, after Thanksgiving, this market is likely to resume its upward trajectory, as economists and traders are optimistic about achieving three percent or better economic growth under POTUS-elect Trump’s economic stimulus plan. “And don’t be surprised if optimism about the state of growth “pulls forward” market gains from 2017 into the end of this year,” said Evercore ISI strategist Dennis DeBusschere. “That could make for a rocky 2017, as investors start fretting about the actual Trump stimulus, the number of Fed rate hikes, and economic growth in China — but, a wonderful year-end-rally. Enjoy it while it lasts,” he said.
I am much more optimistic than Mr. DeBusschere, and think we could rise from its current level just below 19,000, to 22,000 – 23,000 by the end of next year — all things being equal. A robust economy can handle several rate rises; and growing north of 3 percent and will also allow the U.S. to start demonstrably reducing our $19T of debt.
Tech Sells Off — But Future Looks Brighter
Jonathan Buck writes in this weekend’s Barron’s, that “technology stocks have falleis n out of favor in Europe on recent weeks; but, the sector still offers value for long-term investors.” George Evans, Chief Investment Officer for Equities at Oppenheimer International Growth Fund, (OIGAX), has put a big bet on what he calls ‘data deluge,’ which is predicated on the idea that digital traffic is growing at a rate of 35 percent to 45 percent per year,” Mr. Buck wrote. “Growth could be sustained at that level for the next fifteen years,” Mr. Evans told Barron’s.
“He’s putting his money where his mouth is: About 20 percent of his strategy is invested in companies with exposure to the digital economy with names such as, SAP (Sap.Germany), Temenos (TEMNA: Switzerland), and, Legrand (LR.France).
Here at home, I also think technology, along with financials and the bio-pharma sectors should do well; and, I am putting money where my mouth is — so to speak — as I remain heavily invested in technology and bio-pharma. I have positions in Chinese Internet giant Baidu (BIDU) and Alibaba (BABA), as well as cloud/Internet/deep learning companies: NVIDIA (NVDA), and Nutanix (NTNX). I am temporarily out of FaceBook (FB). but remain a long-term bull; and, I like other big-data, deep-learning, cloud companies such as Adobe (ADBE), Alphabet (GOOGL), Amazon (AMZN), and Netflix (NFLX). Microsoft (MSFT) also looks poised to have a run into 2017. Tencent (HKG:0700) is also a great China Internet play. Of all the above, Amazon is my favorite; but, because of its price per share — I cannot afford to take a position. I also own shares of Marvell Technology Group LTD. (MRVL).
Now that Ms. Clinton isn’t going to be our next POTUS, the bio-pharma sector can breathe again. Her campaign statements over a year ago hammering the pharmaceutical companies was in essence that sector’s version of Dodd/Frank. Companies were worried about price controls and onerous oversight of their industry — stifling innovation, and risk-taking. I think this sector still has a ways to go; and, should do well in 2017. Currently, I have positions in: Acadia Pharmaceuticals (ACAD), Array BioPharma (ARRY), Bellicum Pharmaceuticals (BLCM), Cara Theraputics (CARA), CellDex Theraputics (CLDX), and Sarepta Theraputics (SRPT).
Remember, if you decide to invest in any of these companies, do your own due diligence, there are no guarantees, you can lose money. Also understand your risk tolerance, time-horizon, and financial goals. Otherwise, good luck.
Surging Yields Create Bargains In Bonds
Finally, Andrew Bary had an article in this weekend’s Barron’s with the title above. Mr. Bary writes that “the recent selloff in municipal bond funds, and preferred stocks, could spell opportunity for investors — and, “where to find yields of 6 percent, or more.”
I am already pushing the length on this article; so, I refer you to Mr. Bary’s article in this weekend’s Barron’s for additional background material. “There are plenty of ways to invest in the muni, and preferred markets, including open-end mutual funds, close-end funds, and exchange-traded funds. After the recent sell-off, many close-end muni-funds carry 6 percent dividend yields. Among them,” Mr. Bary notes, are: the industry’s largest fund, Nuveen AMT-Free Quality Municipal Income (ticker: NEA), which traded last week around $13.25, a 10 percent discount to its net asset value.”
“The Black Rock Municipal 2030 Target Term Trust (BTT) winds up in 2030, an attractive feature that makes it more like a regular muni bond than the typical closed-end fund with no maturity. The Black Rock Fund trades around $22, and yields 4 percent,” Mr. Bary wrote. “For those seeking higher yields, the Black Rock Taxiable Municipal Bond Trust Fund (BBN), which invests in Build America Bonds, trades around $22, and yields 7.3 percent; but, the income is taxable.”
“The 34-year old bond bull market looks to be ending, and there is a risk that rates could be heading much higher, a scenario outlined last week by Double Line Capital Chief Executive and Barron;s Roundtable member, Jeffrey Gundlach,” Mr. Bary wrote. Mr. Gundlach is also known as ‘The Bond King,” is a CNBC Contributor, and correctly predicted that Donald Trump would win the presidency. “The idea that inflation and interest rates can never go up is a very tired narrative, born of years of stability in both,” he told Barron’s in their post-election issue.”
Mr. Gundlach said “the 10-year Treasury yield could approach 6 percent, within four to five years.” “If so, bond prices are headed a lot lower,” Mr. Bary wrote. But, he added, “Mr. Gundlach’s view is an outlier now; and, five years is a long time. With U.S. equity prices near record levels, investors might want to reallocate some money in the coming months — from stocks, to bonds, and also keep an eye on fixed income markets for opportunities,” he added.
Tom Kozlik, PNC’s Municipal Analyst, told Barron’s that “the municipal bond market is likely to lower, new-issue volume in 2017, relative to what could be a record 2016 volume of $440 billion.” “That is due to higher interest rates,” Mr. Bary notes. Mr. Kozlik notes that “overall credit quality is strong, with notable exceptions such as Puerto Rico and Illinois.”
“Since individual long-term munis generally have above-market coupons, or interest rates, of 4 percent to 5 percent, investors need to evaluate yields based on call rates — usually ten years after the issuance date — if the bonds trade much above par,” Mr. Bary noted. “The largest open-end muni mutual fund, Vanguard Intermediate-Term-Tax-Exempt (VWIUX) yields almost 3 percent.”
Mr. Bary also has a paragraph on preferred stock. He writes “the largest preferred ETF, the iShares S&P U.S. Preferred Stock (PFF), traded last week around $38 and yields 5.8 percent. There are several preferred-focused-closed-end funds, including Nuveen Preferred Income Opportunities (JPC), which trades close to $9.30, yields 8.7 percent (reflecting leverage), and fetches an 8.6 percent discount to NAV.”
Other preferred stock plays to consider include: Bank of America 6 percent series EE issue (BAC Pr A), now sporting a yield around 6 percent. The BoA issue trades near its face value of $25,” according to Mr. Bary. “Public storage, the big, self-storage real estate investment trust, is one of the biggest preferred issuers outside the banking sector. Its 4.9 percent, series E issue (PSA Pr E) trades at about $21.50 for 5.8 percent yield.”
“Wells Fargo’s 7.5 percent convertible issue looks appealing,” Mr. Bary wrote, “despite a high price of $1,200, (WFC Pr L) — the face value is $1,000 par issue) and yields 6.2 percent. (Different online brokerages use different ticker formats for preferreds.). That’s all for today. V/R, RCP