Market Briefing For Wednesday, December 28

The hangover from holiday cheer may instill a little fear, as to whether the projected and historic Trump Bump is mostly factored-into markets, as we move into 2017. While most say 'don't worry', we say be wary about the prospect of this move persisting without disruption for reasons outlined over recent days. Yes the Averages have reached (or surpassed depending on a particular Index) the Dow 20k vicinity or equivalent; so debating that really is an exercise in futility. It's a done-deal.

Hooray, and no surprise given 'potential' economic growth transformation as well as the spike in optimism the Election has provided (contrary naysayers are either chasing the move or failing to comprehend what this means, not with respect to 'liking' Trump or not, but as relates to big changes favoring a larger proportion of taxpayers, as well as enhancing corporate earnings just by virtue of the promised, though pending, tax-cut proposals).

How fast these changes occur (or whether they fully matriculate) makes at least a lot of difference for the year ahead. Regardless, up to now it's been mostly an 'absence of offers' that allowed the projected advance to occur as well as hold-together pending at-least the arrival of 2017 tax settlement day, which would suggest that trades as of Thursday will settle in 2017. We've pointed out the twin benefits of tax deferment to 2018 (providing essentially use of funds that might have to go to Uncle for another year), combined with the prospect of those gains being taxed at lower rates.

Besides that we have the pending 'reallocation' of equities 'back' into Bonds, where a fund or institution is mandated to not exceed particular percentages in various categories and/or investment sectors. This is presumed triggering Billions in shifts late this week; for which buy-side absorption might lag. 

  

Globally, there are many caveats out there; though none have immediate potential impact, unless there was (for-instance) a European banking crisis such as in Italy. Or (perish the thought) the so-called (nearly defeated) rebel forces 'called moderate' (but are they nevertheless Jihadists?) in Syria, that 'in theory' could be equipped by the US with surface-to-air shoulder-fired (or heat-seeking) missiles as they are authorized by the National Defense Act (to authorize spending) that President Obama signed-off on Christmas Eve. (Do you think that occurred and wasn't widely reported purposely that day?)

The Russians today warned that any US missile fired at their aircraft by the 'rebels' will be viewed as a hostile act by the USA. That too isn't in the news. I'm not picking-apart the virtues (or lack) in the Authorization Bill, or Russia's reaction. I'm pointing-out yet-another potential undermining of the incoming Administration with these last minute moves that either are concurred upon, with the Trump team, or more likely are invitations by the White House now, to extend policies viewed as suspect, that Trump would try to reverse. That is not the spirit of continuity and transition that was promised.

Then there is the EU 'disintegration' risk or even a 're-integration' with the U.K., (unlikely, though better deals between them will be essential as the EU admits rather subtly) they can't fund themselves without money from Great Britain. But with populism on the rise; elections coming in Germany, France, and with the Czech Republic adamantly refusing to accept migrant 'quotas', per a speech on Christmas by it's President, you have European tension not at all reduced, even as the flow of migrants is clearly going to abate. Terror risk is a given, and now ISIS admits (what a shock to Berlin and others) that they have actively tried to radicalize and recruit terrorists among refugees.

I only mention these issues (as examples; I could explore China and more, as China both militarily, trade, and debt-wise, is a multiple Black Swan risk), as most strategists are extrapolating statistics to argue much higher prices in the Averages, which really supports their portfolios and is hand-holding of course for their investors or clients (unless they genuinely believe this is all going to go-off without a hitch, or even without a correction).

Our view agrees (suspect we said it earlier stating how few would realize a dramatic switch to being bullish if we had a Trump win) with the idea that it's bullish in the very long term; but likely to run-into resistance early in 2017. It will be volatile in our view, though the swings are variable and our timing for that must be flexible, because some of it will hinge on actual statements and proposals, as well as responses we get here politically, or overseas as well.

If we're (by chance) going into a 'trade war' rather than negotiate bilateral or multilateral deals, that makes a huge difference in the disruptive factor. And with the market high (despite shakeouts) in lateral macro fashion before the Election, the Fed-levitated price levels were already way-ahead of business conditions. That all changed with the Election, but how much is discounted, by virtue of this historic 7 week rally, is what matters. That's why I call for (at least allow) a significant correction in the wake of the 'honeymoon', a larger part of which, more so than usual, has likely already occurred.  

Bottom-line:

The old-line 'last will be first' basic industries are not even now overvalued, 'if' expectations really pan-out. And few want to short boring or seasonally strong times. They are presuming no numbers will be missed; a Fed series of hikes would still be at relatively low interest-rate levels; as the quality of balance sheets being degraded is generally ignored, for now. At the same time, Financials, Oils and others will do well; but again, isn't most of it in the market? Part will depend on dividend growth and the tax cuts that would automatically enhance earnings. Nevertheless a lot of unproven cash flow and leveraging capacities of many stocks is excessively extended.