AdvisorShares Weekly Market Review – Week Ending 11/3/2017
Highlights of the Prior Week
Bitcoin Graduates From Mania To Hysteria
There was a tremendous amount of potentially market moving news last week, truly big stuff all of which lead to the equity markets being highly unchanged as the VIX hit a closing low just above 9.0. The Dow Jones Industrial Average gained 0.44%, the S&P 500 added 0.26%, the NASDAQ was a little stronger moving ahead by 0.93% and the biggest mover was the Russell 2000 which fell 0.93% which is somewhat surprising given that the tax plan was presented and should start to move forward (more on that below). For the month of October the Dow led the way, up 4.33%, the S&P jumped 2.22%, the NASDAQ was helped by mega cap tech and rallied 3.56% and the Russell 2000 tacked on 0.81%.
Last week was another strong one for mega cap tech with more strong earnings, a big product launch and news on Friday of what we will call (and trademark) a possible Quoadcom merger. We tend to believe that sector weightings are very important to monitor. Excessive weightings, relatively and nominally, have been harbingers of doom before and tech is now approach 25% of the S&P 500. Back in 2000 tech grew to about 30% and that of course became problematic. It would be productive to spend a little time taking inventory of the tech weighting you have in client portfolios and be cognizant of the potential need to scale back.
The jobs report came in with fewer jobs than expected, adding 261,000 in the bounce back from the hurricanes while the unemployment rate fell to 4.1% and the broader U6 came in at 7.9%. The labor force participation rate fell to 62.7% as 765,000 people left the workforce. Wages were unchanged bringing the year over year change down to 2.4%. Revisions added 90,000 jobs to the previous two reports and we think there is a good chance of more hurricane related revisions yet to come.
Some observations on the proposed tax plan; certain college endowments would be taxed 1.4%. The corporate rate would drop to 20% but CNBC says S&P 500 companies have an effective rate of 24% so not much of a drop….unless the effective rates under the new plan go way below 20%. Congress decided not mess with 401k and IRA deductions. For now it looks like medical expenses will no longer be deductible nor will student debt. It will, by all accounts add another trillion or so to the deficit. One nugget in the plan that didn’t get a lot of attention is the tax exempt bonds used for funding sports stadiums would lose their tax exempt status. As we learn more there will no doubt be things that sound good and others that sound dreadful.
Jerome Powell was nominated to replace Janet Yellen as FOMC Chair. Similar to Yellen, expectations are that Powell will take a familar, dovish approach. Different from Yellen is that Powell is not an academic (or an economist), his background includes stints at Dillon Read and the Carlyle Group as well as working under the first President Bush. In an opinion piece for the FT Glenn Hubbard lays out the challenge pretty succinctly; the Powell led Fed will need to reassess how to maintain price stability and financial stability, figure out how to move forward on a regulatory basis if confronted by another too big to fail situation and maintain its independence.
There is an ETN in Sweden that track Bitcoin. Eric Balchunas from Bloomberg reported in a series of tweets than the ETN as of Friday morning had AUM of $430 million, bigger than 70% of all US ETFs and accounts for 10% of Sweden’s ETF market. Balchunas also posted a screenshot showing eight ETFs in registration in the US looking to provide cryptocurrency access or blockchain access along with a couple of funds that would short Bitcoin. The entire cryptocurrency theme has elements of truly manic, group behavior and elements of truly transformative technology but the question is whether today’s cryptocurrencies are the modern day equivalents of Pets.com (the sock puppet) or if they are more like one of the internet 2.0 companies that are knocking on the door of trillion dollar market caps.
Saudi Arabia had a strange (many princes arrested in an anti-corruption round) and tragic (a few other dignitaries died in a helicopter crash) weekend. It is still very early in whatever this is but the follow up here is the potential Aramco IPO slated for 2018 and as one tweet said, hard to get full price for that Aramco deal with these sorts of actions.
Some will find this interesting, we do. Rob Ivanhoff from the ETF Business Review reported that a firm in London is planning to list ETFs that offer 2x exposure to individual stocks. If this actually happens it would obviously target stocks that are more popularly traded but if the idea can succeed in the UK then maybe these will make their way here. Of course someone using these wouldn’t have to use the full leverage available. A 100 share buyer who wanted just a little leverage could buy 55 or 60 shares of the 2x proxy.
The Vintage news tells us about the most isolated tribe in the world and how much they hate visitors:
Believed to number anywhere from 50 to 400, the Sentinelese tribe people are known to be extremely aggressive and violent and the tribe is one of the last of its kind on Earth, almost always attacking visitors. The Telegraph reported that in 2006 two fishermen were attacked and killed by the Sentinelese tribe. Sunder Raj, 48, and Pandit Tiwari, 52, were probably drunk and drifted too close to the island and were killed by the Sentinelese. When the Indian coastguard tried to recover the bodies using a helicopter the Sentinelese people attacked the helicopter with bows and arrows.
The New England Patriots traded backup quarterback Jimmy Garoppolo to the San Francisco 49ers for a second round draft choice. ESPN theorizes that this could cause a problem for Kirk Cousins:
If Cousins does leave Washington as a free agent in the offseason, the popular assumption was that he would end up in San Francisco. Cousins reportedly clamored to be dealt to the Bay Area during the offseason, given that Washington has shown little interest in signing Cousins to a market-value extension. His fallback plan might have been to play under fellow former Washington offensive coordinator Sean McVay in Los Angeles, but with Jared Goff breaking out after a dismal 2016 campaign, the Rams aren’t going to be in the Cousins market. After the Garoppolo trade, Cousins’ path out of Washington isn’t anywhere near as clear. If both Los Angeles and San Francisco are blocked, Cousins will be down to a few options.
Source: Google Finance, Yahoo Finance, Wall Street Journal, SeekingAlpha, Bloomberg, Ycharts.com, Reuters, Barrons, ETF.com, XTF.com, Bespoke Investment Group, CME Group, ETF Business Review, ESPN