Market Briefing for Thursday, January 26

Technically-poised to breakout - Over the past several sessions (led by the NY Comp and NASDAQ, while Oil bears got trapped as hoped for), we got our forecast post-Inauguration 'relief rally' upside resumption we were pointing to with recognition that most Indexes were already at new highs, with the achievement by the Dow Industrial Average of 20,000 not so much anticlimactic, but a validation of what already happened in so many areas.

The alleviation of the market's prior overbought status sure helped position this for higher prices as consistently outlined. Now we have the historic DJIA 20,000 achievement, which is a pinnacle for now; not necessarily a market's top as such. Funds continue flowing into the U.S., as well as from bonds to stocks. That has less to do with politics and more to do with perceptions that returns will diminish in the future.

Credit markets are missing something. Policy risk for one. High valuations in the stock sector. The bond proxy may be mis-priced, because a slowing, for that matter even a mild recession 'could' result from excessive optimism (or relief) short-term; the prospect of healthcare and autos getting cheaper not pricier and even the bond market reversing slightly should business be just a big sluggish for a bit longer, after the initial projected 'Trump rush' forward.
 

Tonight I'm sharing a few auto-charts related to leasing with remarks that in this case suggest that a flood of near-new used cars (including the premium high-end models) is going to press margins and off-lease deals great for a consumer, but unprofitable for auto-makers who set-up residuals based on a better level after a short two-year leases (certain Mercedes and BMW's as examples, are actually down in resale price by as much as 30% rather than a more common 20% from their MSRP's of just a couple years ago).

Now, the irony here 'might' be that mortgage rates that have headed higher, actually slip back a bit, 'if' it's perceived that growth is coming, but deferred. Again that's the time-frame between proposal, legislation, enactment, and of course implementation of new projects and policies. This could temporarily reverse the flow out of bonds into stocks we've warned is coming for months, and occur concurrently with what I'm suspecting is a reasonable pullback in February. At the same time it would not deter a resumption of the trends you see now, thereafter (including this Spring).

Yes the Trump policies, including tax reform, will allow revenue expansion (AT&T's Randall Stephenson on today's conference call made that clear) in the future; and a new optimism going forward. This will clear the regulation 'underbrush' as AT&T put it, and grow the industry. They also welcome (he didn't mention it) a new FCC Chairman with a focus tending away from net neutrality. That will itself become controversial in the months just ahead.

This is going to lead to 'content deals' and more companies 'in-play'. That's a key to 2017 and 2018; not the focus on social or other agendas. Again it's by no means to suggest those aren't important; but they don't really relate to the market's focus at least for now. (To carry this to an extreme; for those of linear thinking viewing everything 'as if' it were fascist, even Mussolini built Italian industry and infrastructure before the ridiculous stuff began. Hence I am not reflecting on what may or may not be in a couple years; but simply a view about how this is as favorable as anticipated for the market near-term; a lot of which has been seen.)
 

In-sum: We got the historic achievement and indeed called not only for the upside if Trump won, but ideally a 'relief' rally running-in short-sellers after a fairly smooth Inauguration. Even during the mild contractions there was not a shred of serious selling; again pointing to eliminating overbought technical or similar concerns, setting-up the market to pop to new highs this week.