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Morning Commentary

Chasing the Rebound
By Charles Payne, CEO & Principal Analyst
6/16/2017 9:43 AM

Report after report points to drift optimism about the economy from the private and public sectors. One group remains ebullient about the economy; small businesses.  In the latest report from the National Federation of Independent Businesses (NFIB), the post-election spike is holding. This is a group that believes completely in the Trump economic Agenda.

The question is, how long small business optimism will hold if legislative wins don’t start happening soon?

This statement says it all:

“The remarkable surge in optimism that began last year right after the election shows no signs of slowing down” said NFIB President and CEO Juanita Duggan. “Small business owners are highly encouraged by the President’s regulatory reform agenda, and they remain optimistic there will be tax reform and health-care reform. This is a policy-driven phenomenon.”

Of course, all of this optimism isn’t just about anticipation of an easier business backdrop but a reflection of actual improvement, including a spike in actual earnings over the last three months.

Big Investments on Pause

One major problem, without a change in taxes and regulations, is the drag in capital outlays which is the key ingredient that would help take US GDP north of 3%, and perhaps help to nudge it even higher than 4%. 

As for the consumer, it is 70% of the US economy. The difference comes when companies make investments such as plants and factories. 

While President Trump has used his pen and some legislation to remove billions in over burdensome regulations the administration admits it needs much bigger cuts and to streamline permitting processes.

Till there, it’s unlikely there will be mega projects without erasing significantly more regulations, this is another point driven home by the folks at NFIB yesterday.

“Typically, in a strong economy, we see a lot more spending on capital,” said Dunkelberg. “We’re seeing increased hiring activity and some other positive signs, but the capital-outlays component is the missing ingredient for robust economic growth.”

Jobs & Skills Crisis

In the past three months, 59% of respondents reported hiring, a number that’s near the all-time high in this 43 year report.  Moreover, planned hiring in the next three months will climb sharply, but trail significantly the number of actual job openings. This brings up a major problem that haunts, employers and the unemployed.

The Single Most Important Problem

  • 22% Taxes
  • 19% Quality of Labor
  • 13% Government Regulations

Beyond the role of Washington DC, the persistent problem is the skills’ gap which seems to become more acute as 51% of respondents say they had few or no qualified candidates for positions they’ve been trying to fill. Taxes ranking higher than quality of labor is the single most important problem for small business owners.

This is an issue so critical it was posed as a question to Janet Yellen, and it was the focus of President Trump press conference on apprenticeships.

There is no doubt government training programs have been a bust, mostly job placement programs that redistribute taxpayer funds by paying poorly trained folks to train people with less training. 

On that note, there will be a pushback from some that think government should cheerlead, and some that think government shouldn’t be putting any funds into jobs programs or apprenticeships.

Message of Market

It might look dull and uneventful on the surface, but this was an exciting session that speaks to the economy and the Trump agenda.

I love the action in industrial names, leading today by companies in the trucking industry. 

  • CH Robinson (CHRW)
  • Expeditors (EXPD)

Also looking great, companies that make moving-earth equipment and building things such as roads and factories. 

  • Caterpillar (CAT)
  • Illinois Tool Works (ITW)

All the major indices closed in the red, but here’s the real story. The Dow, S&P and NASDAQ all finished higher than the opening trade for the session and that’s a major sign a bottom is developing.

 

Major Equity Indices

Opening Quote

Closing Quote

Dow Jones Industrial Average

21,291

21,359

S&P 500

2,397

2,432

NASDAQ

6,127

6,165

 

Market Breakout

Pulling the trigger after dips, whether individual stocks and sectors or the broader market, starts with understanding the fundamentals and why selling has been overdone.   Then you have to look to buy up from key support points. In other words, not trying to get the exact bottom, but instead buying with a greater sense that near term risk has diminished. 

This is where many individual investors get it all wrong. 

Usually individual investors feel like that they “missed it,” and decide not to buy that stock in the company they love simple because they didn’t get the lowest entry point.  Applying this to broad markets today, the buy signal isn’t an early rebound but a combination of things including yesterday rally off opening prints.

Dow Jones Industrial Average is up 8.1% for 2017, and the 30 components are already flashing buy signals, although my focus is on industrial and material names.

The S&P 500 breaks out on closing basis above 2,445.

The NASDAQ Composite reverse from recent weakness with close above 6,325 and the usual suspects probably led the way.

Note: There will continue to be rotation into beaten down names and sectors, something to keep in mind depending on your risk tolerance and comfort holding period.

Today’s Session

Market futures were acting like this would be a big break out session, however; we’ll get a mixed start to the day after a massive disappointment in housing data and a bombshell from Amazon. 

For housing, it was both single family homes and condos/co-ops swooned month-to-month although the former fared better than a year earlier.

Housing Permits

May 2017

April 2017

May 2016

I Unit

779,000

794,000

735,000

5 Unit

358,000

398,000

412,000

 

Starts Permits

May 2017

April 2017

May 2016

I Unit

794,000

826,000

732,000

5 Unit

284,000

315,000

382,000

 

I continue to be bullish on homebuilders despite this plunge, the worst month-to month since January 2009, and lament the issues of labor shortages but I think the underlying shift in household formation among millennials is only just beginning.

Bezos does it Again

Amazon is buying Wholefoods and is sending ripples across the grocery space which was already floundering after that huge earnings warning from Kroger yesterday. I’m not sure what the ramifications are beyond the obvious facts, the way we buy food is going to change big time. 

There will be tech winners, but I am not sure if any brick and mortar retailer can take solace or find a silver lining in this news.

The biggest winner in this deal is Amazon which initially saw its shares down $15 now indicating up $15 at the open.


Comments
After watching, noting & in business for 30 years, May is always quiet & when I go to west Maui.

Donald J McArthur on 6/16/2017 10:53:39 AM
Trend setters (us) out west see the start of growing volume at our Fred Meyer TO: Order on-line & let them load your car. Cost $5 Saves lots of time. Amazon knows this. Les frivolous buys but still go there if they diversified offerings.

Donald J McArthur on 6/16/2017 11:05:36 AM
 

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