Nicholas Colas (Chief Market Strategist): 212.448.6095 | [email protected]
Jessica Rabe: 212.448.6085 | [email protected]
Stocks advanced on Tuesday as the Dow Jones Industrial Average closed just 25
points short of the 20,000 mark. (Dow +0.46%, NASDAQ +0.49%, S&P 500
+0.36%). Crude-oil futures rose 0.21% to $52.23 a barrel. Financials and consumer
discretionary shares outperformed, while energy and consumer staples trailed the
broader market indices. Small-cap stocks rallied: Russell 2000 (+0.89%). The VIX
declined 2.22% to 11.45.
Morning Markets Briefing
Market Commentary: December 21, 2016
A SNAPSHOT OF THE MARKETS
THROUGH THE LENS OF CONVERGEX.
This presentation is not intended for retail clients.
Off the Grid with Trump and Coolidge
Summary: This last Morning Markets Briefing of 2016 is our quarterly look at “Off the Grid” economic indicators. Out key takeaway: the
U.S. economy is still growing but in the late stages of the current cycle. Workers are quitting their jobs like it’s the peak of labor market
cycle. Also, consumers register confidence more typical of peaks than troughs for this measure. Full sized pickup truck sales are running
in line with prior periods of high demand. Used car prices are stable, but have not increased in 5 years. Food stamp enrollment hasn’t
declined since May 2016. Gallup’s take on consumers’ daily cash spend is modestly higher than last year, but largely in line with the
average of the last 3 years. Bottom line: this data explains why markets are so enthusiastic about the novelty of Trump presidency, for
the current expansion feels very much like it is out of gas.
“After all, the chief business of the American people is business.” That quote is not from President-Elect Donald Trump, but rather
former President Calvin Coolidge. It is certainly his best known public statement and still cited to this day, a rare acknowledgment of a
man whose nickname was “Silent Cal”.
Given that U.S. equity markets have rallied since Election Day on the hopes that Donald Trump will channel Coolidge’s
sentiment (if not his moniker), let’s take a quick look at the origins and background of this hallmark observation and how
some interpret it today:

It comes from a 1925 speech to the American Society of Newspaper Editors in Washington DC. Unlike now, however, the
newspaper business of that day was extremely profitable. Coolidge opined that such commercial success contributes to the quality
of the news industry, because “a press which maintains an intimate touch with the business currents of the nation is likely to be
Market Commentary – Pages 1 – 8, Equities/Conferences and Earnings – Page 9, Fixed Income – Page 10, Exchange-Traded
Funds/Indexes – Page 11, International Markets – Page 12, Recommended Online Readings – Page 13
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1
Nicholas Colas (Chief Market Strategist): 212.448.6095 | [email protected]
Jessica Rabe: 212.448.6085 | [email protected]
more reliable than it would be if it were a stranger to these influences.” That, in fact, is the line right before “After all, the chief
business…”
You can read the entire speech here (and see that politicians used to speak quite eloquently):
http://www.presidency.ucsb.edu/ws/?pid=24180

Business conditions in 1920s America were generally very good. Real GDP growth from 1922 – 1926 (the period around
Coolidge’s speech) averaged 4.5%. Income taxes fell throughout the decade, having peaked at the end of World War I. Radio set
production (the smartphones of their day) went from zero in 1922 to 40 million in 1929. The percent of US households with
electricity went from 34% in 1920 to close to 70% by the end of the decade.
If you are thinking “Sure, but then you had the 1929 stock market crash”, here’s a great piece with a lot of historical
data that shows the growth of the 1920s had little to do with the Crash (speculative securities lending leading to
overvaluation was more to blame) : https://eh.net/encyclopedia/the-u-s-economy-in-the-1920s/

In the June 2013 edition of the Harvard Business Review, historian Niall Ferguson asked “Is the Business of America
Still Business?” His answer was “No”. Regulation and a dysfunctional legal system means companies routinely choose other
countries when making investment decisions. You can see his note (and the links to several studies that prove his point) here:
https://hbr.org/2013/06/is-the-business-of-america-still-business
When we started crafting our “Off the grid” economic indicators in 2011, the “Business of America” was not exactly clear
(beyond perhaps just not falling into a post-Financial Crisis depression). A few of the things we included:

The auto industry is always a useful “Tell” about the state of the U.S. economy, so we included used car prices and
large pickup trucks sales.

At the same time, government assistance post-Great Recession gave a unique insight into the true state of the
American economy, so we also included Supplemental Nutrition Assistance Program (a.k.a. food stamps) program
data.

Gun sales took off after the Financial Crisis due to a combination of fears over incremental regulation and general
societal uncertainty. FBI background checks for gun sales have more than tripled from pre- to post- Great Recession, from 8
million/year to +24 million/year now.

Google autofills (which offer up the most commonly entered completion for a partial search entry) were a useful proxy
for what Americans want to “Buy” and “Sell”.
2
©2016 Convergex Execution Solutions LLC. May not be redistributed without express permission. All rights reserved.
Nicholas Colas (Chief Market Strategist): 212.448.6095 | [email protected]
Jessica Rabe: 212.448.6085 | [email protected]
You can see the full gamut of indicators in the attachment, but since I am probably keeping you from last-minute Holiday
shopping let me give you a brief summary here:

Our most reliable cyclical indicators – those from the domestic auto industry – show a U.S. economy operating at a
healthy level but with very little room for further growth. Large pickup trucks, the workhorses of small businesses, are no
long selling in greater numbers than the prior year. Used vehicle prices, a critical if underused indicator of future car and truck
sales generally, have not moved higher since 2011.

Employment levels are very good, and workers feel confident enough in their job prospects to quit far more often than
employers choose to fire them. That data comes from the monthly JOLTS report and shows 61-62% of all workplace
“Separations” are the worker’s idea, not the company’s. These are cyclical peaks; the trough levels are closer to 40%.

Food stamp participation, at 43.5 million Americans, seems to have stopped declining. Yes, we are thankfully off the
peaks set in late 2012 at 47.8 million. But since March of this year that downward trend has stopped.

Lower gasoline prices over the past year seem to have made consumers a little more free with their discretionary daily
cash spend. Gallup polls consumers on what they spend “Out of pocket”, and the current $98/day is better than last year’s
$92/day. At the same time, it is not substantially different from the $91/day and $95/day of 2013 and 2014 (when gas prices were
higher).

Food deflation, which we measure with our Bacon Cheeseburger Index, is still with us. The CPI-measure price of ground
beef, cheese and bacon is down 5.7% year over year. Great for lactose-tolerant carnivores, of course… But bad for a Federal
Reserve still worried about consumer perceptions of current and future inflation.
The upshot of these data points is that the U.S. economy may be humming along, but it could really use a new catalyst to
assure investors that we aren’t at the peak of the current cycle. That nicely explains why equity markets have been so warm to the
idea of a Donald Trump presidency. And while investors may not feel comfortable that the future will be as predictable as the recent past,
that’s actually a feature of the incoming administration rather than a bug.
In summary, markets like the sentiment that “The business of America is business”. And for now, sentiment is enough. Come
the New Year, the new administration will have to deliver.
But for now, Jessica and I wish you a very happy Holiday/Christmas season and safe and prosperous New Year.
3
©2016 Convergex Execution Solutions LLC. May not be redistributed without express permission. All rights reserved.
Nicholas Colas (Chief Market Strategist): 212.448.6095 | [email protected]
Jessica Rabe: 212.448.6085 | [email protected]
4
©2016 Convergex Execution Solutions LLC. May not be redistributed without express permission. All rights reserved.
Nicholas Colas (Chief Market Strategist): 212.448.6095 | [email protected]
Jessica Rabe: 212.448.6085 | [email protected]
5
©2016 Convergex Execution Solutions LLC. May not be redistributed without express permission. All rights reserved.
Nicholas Colas (Chief Market Strategist): 212.448.6095 | [email protected]
Jessica Rabe: 212.448.6085 | [email protected]
6
©2016 Convergex Execution Solutions LLC. May not be redistributed without express permission. All rights reserved.
Nicholas Colas (Chief Market Strategist): 212.448.6095 | [email protected]
Jessica Rabe: 212.448.6085 | [email protected]
7
©2016 Convergex Execution Solutions LLC. May not be redistributed without express permission. All rights reserved.
Nicholas Colas (Chief Market Strategist): 212.448.6095 | [email protected]
Jessica Rabe: 212.448.6085 | [email protected]
"I want to buy"
"I want to sell my"
"I want to buy"
"I want to sell my"
"I want to buy"
"I want to sell my"
Q1 2011
a house
a car
stock
a gun
Q2 2011
a house
a car
something
a timeshare
house
car
ipad
Q1 2013
a gun
a car
stock
something
car
house
eggs
Q2 2013
a house
a gun
a car
stock
Google Autofill Results: Q1 2011 - Q4 2016
Q3 2011
Q4 2011
Q1 2012
Q2 2012
Q3 2012
Q4 2012
used
a house
you something
a car
you something
stock
a house
a car
a car
stock
a car
a car
a car
you something
stock
something
stock
a dog
something
stock
something facebook stock something you something
car
house
furniture
Q3 2013
a house
a car
something
stock
car
car
car
house
house
house
kidney
comic books
furniture
Q1 2015
Q2 2015
Q3 2015
stock
a house
a house
a house the world a coke a confederate flag
a car
stock
a car
something
a car
stock
car
house
kidney
car
house
kidney
car
house
kidney
car
house
furniture
Q4 2013
a house
stock
a car
a dog
car
soul
furniture
Q1 2014
a house
stock
a dog
a car
car
house
hair
Q2 2014
a house
stock
a car
something
car
house
kidney
Q3 2014
a house
a car
stock
a drone
car
iPhone 4s
house
Q4 2014
a house
stock
a car
a drone
car
kidney
hair
Q4 2015
a house
a car
a timeshare
stock
car
kidney
hair
Q1 2016
a house
a timeshare
a car
stock
car
kidney
house
Q2 2016
a house
a timeshare
a car
stock
car
house
kidney
Q3 2016
a house
a timeshare
a car
a dog
car
house
laptop
Q4 2016
a house
a timeshare
a car
stock
car
house
kidney
car
house
kidney
car
house
furniture
car
house
phone
car
house
fur coat
8
©2016 Convergex Execution Solutions LLC. May not be redistributed without express permission. All rights reserved.
Nicholas Colas (Chief Market Strategist): 212.448.6095 | [email protected]
Jessica Rabe: 212.448.6085 | [email protected]
U.S. EQUITIES
Nike (+1.85%) and Caterpillar (+1.76%) led the Dow (+0.46%) higher. Darden Restaurants (+0.08%) matched quarterly profit and
revenue expectations. BlackBerry (-2.72%) exceeded adjusted quarterly profit forecasts, but missed revenue estimates. General Mills (2.55%) reported adjusted quarterly profit and revenue below expectations.
Important Earnings Today (with Estimates)
From…




AIR: $0.35
ACN: $1.49
BBBY: $0.99
MU: $0.28
S&P Futures
One Day (High – 2269.50; Low – 2260.00):
):
Source: Yahoo Finance
Important Conferences/Corporate Meetings Today:
N/A
Prior Day ES/1 (High – 2263.75; Low – 2254.00; Close – 2260.75):
Three Day (High – 2269.50; Low – 2254.00):
Three Day (High – 872.50; Low – 832.75):
75):
al
Source: Thomson Reuters
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Nicholas Colas (Chief Market Strategist): 212.448.6095 | [email protected]
Jessica Rabe: 212.448.6085 | [email protected]
FIXED INCOME
Treasuries fell on Tuesday despite geopolitical concerns. Fed Funds futures give a 21% chance for a rate hike in March and a 71% probability
for June. The 30-year Treasury yield increased to 3.14%, and the 10-year and 5-year yields rose to 2.56% and 2.04% respectively.
Today’s Important Economic Indicators/Events (with consensus estimates):



MBA Mortgage Applications (7:00am EST)
Existing Home Sales (10:00am EST): 5.535 M/5.600 M
EIA Petroleum Status Report (10:30am EST)
10
©2016 Convergex Execution Solutions LLC. May not be redistributed without express permission. All rights reserved.
Nicholas Colas (Chief Market Strategist): 212.448.6095 | [email protected]
Jessica Rabe: 212.448.6085 | [email protected]
N
International Market Summary
Asian Markets
Asian markets were mixed on Tuesday after the Bank of
Japan left interest rates unchanged. (Nikkei +0.53%, HSI 0.47%, ASX 200 +0.52%). In China, the Shanghai Composite
Index and Shenzhen Composite Index dropped 0.49% and 0.14%
respectively. In Hong Kong, Bank of China and HSBC Holdings
slumped 1.17% and 1.96%. Property shares retreated: Henderson
Land Development Co Ltd (-0.49%), China Vanke Co Ltd (-2.03%),
and China Resources Land Ltd (-0.46%).
In Japan, the yen weakened against the dollar. Auto stocks ended
lower: Toyota Motor Corp (-0.18%), Honda Motor Co Ltd (-0.23%),
and Nissan Motor Co Ltd (0%). Technology shares mostly fell: Sony
Corp (-0.56%), Toshiba Corp (-1.06%), Sharp Corp (+2.60%), and
Panasonic Corp (-1.48%). Bank shares retreated: Mitsubishi UFJ
Financial Group Inc (-1.40%), Sumitomo Mitsui Financial Group (1.34%), and Mizuho Financial Group Inc (-0.68%).
European Markets
European markets gained on Tuesday following attacks in
Germany and Turkey. (FTSE +0.38%, DAX +0.33%, CAC 40
+0.56%). In Germany, Deutsche Bank and Commerzbank climbed
3.26% and 2.34%. Auto shares advanced: Volkswagen (+1.95%),
BMW (+0.16%), and Daimler (+0.18%). In France, bank shares
rallied: BNP Paribas (+1.60%), Credit Agricole (+1.79%), and
Societe Generale (+1.20%).
In the U.K., bank shares finished mostly higher: HSBC Holdings
PLC (-0.46%), Barclays PLC (+2.52%), Lloyds Banking Group PLC
(+2.22%), and Royal Bank of Scotland Group PLC (+1.43%).
Lloyds bought Bank of America’s U.K. credit-card business MBNA
Ltd for $2.35 billion. Energy shares rose: BP PLC (+0.88%), Royal
Dutch Shell PLC (+0.30%), and Tullow Oil PLC (+0.88%). Mining
shares followed suit: Anglo American PLC (+0.93%), BHP Billiton
(+0.86%), and Rio Tinto PLC (+1.43%).
In Australia, mining shares broadly dropped: Fortescue Metals Group
Ltd (-1.00%), Newcrest Mining Ltd (+4.59%), BHP Billiton Ltd (0.72%), and Rio Tinto Ltd (-0.49%). Bank shares gained: Westpac
Banking Corp (+0.49%), Commonwealth Bank of Australia
(+1.03%), ANZ Bank (+0.63%), and National Australia Bank Ltd
(+1.06%).
Important Economic Indicators/Events (with Consensus estimates):

N/A
Important Economic Indicators/Events (with Consensus estimates):
Eurozone

Consumer Confidence (10:00am EST): -6.0/-6.1
Great Britain

GfK Consumer Confidence Survey (7:01pm EST): -8/-8
11
©2016 Convergex Execution Solutions LLC. May not be redistributed without express permission. All rights reserved.
Nicholas Colas (Chief Market Strategist): 212.448.6095 | [email protected]
Jessica Rabe: 212.448.6085 | [email protected]
Additional Reading (Online Blog and News Stories)
(Please click on the titles below to view the links)
Telegraph
Music videos included: The 10 Best Pieces Of Classical Christmas Music
Bloomberg View
Mohamed El-Erian: A Chance To Fix The Way The IMF Picks Its Leader
Volatility in 2017: Markets Are Going To Roil Next Year
The Big Picture
Previous forecasts: Is The Bond Bull Market Over?
Interview: John Roque, Technical Analyst For Soros Fund Management
Deal Book
To Problems With China’s Financial System, Add The Bond Market
Trump’s Treasury Pick Moves In Secretive Hedge Fund Circles
Real Time Economics
New study: What Eases The Financial Burden Of Having Young Kids? Sending Them To School
12
©2016 Convergex Execution Solutions LLC. May not be redistributed without express permission. All rights reserved.
Nicholas Colas (Chief Market Strategist): 212.448.6095 | [email protected]
Jessica Rabe: 212.448.6085 | [email protected]
GENERAL DISCLOSURES
This presentation discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions. It is provided for general
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Please be advised that options carry a high level of risk and are not suitable for all investors. To receive a copy of the Options Disclosure Document please contact the
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