Market Update

Posted on December 2, 2017 by Gemmer Asset

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It was an interesting rotation week. Investors and traders basically sold the winners and bought the losers. For example, small-caps have lagged all year but gained +1.2% this week. However, the hot NASDAQ closed down -0.6%. Facebook, Amazon, Netflix and Google were down between 2% and almost 5% on the week. Along the same lines, emerging equities were hit hard (-3.9%). Chinese equities led the way. But overall the broad indexes in the U.S. gained ground despite Friday’s swoon.

 

Obviously, Friday’s decline was triggered by Flynn pleading guilty and indicating he’ll talk. This news comes at an interesting time for the stock market. Up until Friday it had been 353 days since the last 5% correction. As you can see below, this is the fourth longest run since 1930. Obviously, that’s not normal. No one would be shocked if the political situation is used as an excuse for a correction in the next month. But what also jumps out from this chart is just how common 5% corrections are. About every three-and-a-half months. We have been spoiled the last year!!!

 

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Bond yields dipped after the Flynn news broke, but yields inched higher on the week. The 10-year settled at 2.36%, up +2bps from last Friday.

 

Shaping Up to be a Solid 4th Quarter

 

There were a number of economic reports this week, and the general theme is one of solid growth:

 

• Friday’s ISM manufacturing reading was solid. It came in at 58.2%, down only slightly from last month. The employment part of the index was also solid.

 

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• Unemployment claims were down 2K to 238K in the prior week.

 

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• Growth in the 3rd quarter was actually higher than originally thought. The new number is +3.3% versus the original estimate of +3.1%.

 

• Home prices were up in October (+6.2%), more than forecast.

 

• The Atlanta Fed estimate for 4th quarter GDP growth was revised higher this week to +3.5% from +2.7% (chart below). The New York Fed estimate is up to +3.9%

 

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All in all decent stuff. The tax debate rolls on but passage in the Senate looks likely (at least as we write).

 

More of the Same at the Fed

 

With possible turmoil in the administration, at least the leadership at the Fed looks pretty stable. President Trump’s nominee for Fed Chair testified before the Senate Banking Committee on Tuesday. Jerome Powell said little to surprise anyone. If anything, he went out of his way to support the Fed’s independent role and he purposely avoided political landmines. Like many Fed chairs before, he expressed concern about rising public debts.

 

Janet Yellen also talked this week and stressed the same topic. While calling on Congress to adopt policies to:

 

“…encourage business investment and capital formation, improve the nation’s infrastructure, raise the quality of our educational system, and support innovation and the adoption of new technologies.”

 

…she also noted that America’s surging public debt outlook should be keeping people awake at night. The Senate is probably not listening as it tries to wrap up the tax bill.

 

But none of this changes the outlook for rate hikes. A quarter point hike is almost certainly coming in a couple weeks with another quarter point hike in the first quarter. And if wage pressures continue, (the chart below points towards this) we should expect another hike in Q2.

 

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Of Mania, Panics and Crashes

 

If you want a good read about the financial markets and human psychology, try this sometime.

 

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Well-worn copies are probably being cracked open again given the bitcoin phenomena.

 

Obviously, in retrospect, we should have cashed in all our retirement accounts and bought bitcoin at the start of 2017. After all, it’s gone from about $1,000 to roughly $11,000 this year. Not bad for something few really understand (and I count myself as part of that group!!).

 

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But the ride is, shall we say, entertaining. This week prices surged past $11,000, only to quickly fall 20% before recovering gain. Good times!! As The Economist notes:

 

“On the way, the currency has been controversial. Jamie Dimon, the boss of JPMorgan Chase, has called it a fraud. Nouriel Roubini, an economist, plumped for “gigantic speculative bubble”. Ordinary investors are being tempted into bitcoin by its rapid rise—a phenomenon dubbed FOMO (fear of missing out). Both the Chicago Mercantile Exchange, America’s largest futures market, and the NASDAQ stock exchange have seemingly added their imprimaturs by planning to offer bitcoin-futures contracts.”

 

Certainly, the bubble moniker is used far too easily in this post-tech bubble/post-housing bubble world. We seem to see bubbles everywhere. But bitcoin is something special. As the Wall Street Journal chart below shows, the move in bitcoin this year is something for the record books.

 

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Of course, bitcoin’s value is nebulous at best. What is one worth? This really is a case of ‘whatever someone is willing to pay.

 

There are a couple stories when it comes to bitcoin. First is the blockchain technology that underpins bitcoin. This method of recording transactions securely is very interesting. Just imagine closing a home sale utilizing blockchain. You transfer me the deed. I transfer payment. No title company, maybe no realtor, nominal fees.

 

The second story is bitcoin as an alternative currency. This is where the sceptics raise their hand. Certainly, you can use bitcoin to buy things (legal or illegal), but so far its use as a currency is limited. The Economist again:

 

“Bitcoin can be used to buy a few things. But a currency has three main functions: store of value; means of exchange; and unit of account. Bitcoin’s volatility, seen when it fell 20% within minutes on November 29th before rebounding, makes it both a nerve-racking store of value and a poor means of exchange. Imagine buying an iPhone X with bitcoin in January. You would by now be cursing as the same coin could buy ten phones—Christmas gifts for the whole family.

 

A currency is also a unit of account for debt. Paul Mortimer-Lee of BNP Paribas, a French bank, tartly remarks: “Imagine if you had financed your house with a bitcoin mortgage.” This year your debt would have risen tenfold. Your salary, paid in dollars, euros or whatever, would not have kept pace. Put another way, had bitcoin been widely used, the last year might have been massively deflationary.”

 

And then there is the fraud issue. Chainalysis, a digital forensics firm that studies the bitcoin blockchain, estimates that between 2.78 million and 3.79 million bitcoins are already gone for good. This works out to between 17% to 23% of all bitcoins mined. At $11,000 per coin this works out to between $30.6 billion to $41.7 billion.

 

How does this happen? Well, I read a few articles on it and I’m still not sure how it works. Even the term ‘lost’ is more than a little ambiguous. Can my coins disappear? I don’t think so, but maybe. Not a answer for a currency contender. But what is clear is the numbers do not include coins that are hacked or otherwise stolen.

 

Just this week there was a news report about an Austrian man’s laptop being hacked while on a public wifi network and $117K worth of bitcoin stolen. I guess this could happen with a bank account, but bitcoin fraud is the new virtual wild west!!

 

If Charles Kindleberger was still alive he might be thinking about penning another chapter.

 

Have a good weekend.

 

Charles Email Sig

 

 

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