Market Recon (New Year’s Eve) Special

Good Morning,
                        Put on your helmets, gang, I’m going to hit with what I’m looking for in 2016, and then we’ll throw the daily macro at you.  Buckle up.  As for today…. I think there’s going to be a play at the plate with two outs in the bottom of the ninth.
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2016
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A Nasty Cold Gale
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                  Headwinds?  What headwinds?  All of those roadblocks to success that littered your path in 2015, are still in place….. and then some.  Strong US Dollar…check.  Weak Oil….check.  Lack of Global Demand…..check.  Emerging Market Mayhem….check.  Actually, all of those are indeed one connected problem, adding up to a nasty, cold gale.  You can also think of them as a train,  The strong dollar is the engine.  That’s what decides what direction the train will move in.  The lack of global demand, the emerging market melt-down, and weak oil (commodities) are all boxcars on that train.  Certain areas may improve, but this is going to be a rough go…. and they’ll keep dragging each other along.  Then there’s the caboose.
                  The caboose is monetary policy.  The caboose used to be the engine.  For years, and years, we’ve seen quantitative easing coupled with artificially low interest rates.  What this did, was pull consumption forward.  Not that consumption was all that awesome, but it would have been even worse.  This caused a boost in equity (all asset) valuations to the high end of what I would call a comfortable range.  Now, with QE over and out…and an increase (at least for now) in the Fed Funds Rate, valuations may not come in (Oh…they may), but I find hard to believe that in the midst of an “earnings recession” they will go any higher.  One obvious support for current valuations is that grandma and grandpa still can’t make any money away from the markets.  There’s  a lot more to this, and we should go into greater depth, but this is supposed to be a short note, and I am but a simple man.
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Spitting Into the Wind
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                    So, we’ve got mouths to feed.  We’ve got people who need us to find a way…. so, we will find a way.  We will adapt to our environment.  What seems likely?  Well, core inflation does seem to be around 2%, that is if you don’t try to be deceptive when you measure it.  Wages do seem to be waking up just a little bit.  To me….that means that household spending is likely to rise.  Things are still not easy out there.  Increased use of credit (at a greater pace than increased household spending) seems somewhat likely to me…perhaps…even the use of….revolving credit.  So, as ugly as it is, rotating into Consumer names doesn’t seem that stupid to this guy.
                    The economy may not cooperate.  The yield curve is flattening.  That’s often sign of a coming recession.  Even on days that the dollar flexes it’s muscles, the Small Caps fail to lead.  Small Caps do not do much international business.  In a healthy economy with a raging dollar, Small Caps should be amongst the leaders.  Not happening.  That extra household spending we spoke of, may be spent just to maintain familial standards of living.  Therefore, I think I’m going to favor the Staples over the Discretionary.  Food and household products before video games, and recreation…. making sense?
                    What to bet against?  Health Care has been a top performing sector for what seems like ages.  They even call it the Obama-Care put.  (I don’t touch Bio-Tech, so I’m not going to go there)  This is an election year…just sayin’.  Health Care costs are on a tear versus other consumer costs.  The middle class is getting their collective faces ripped off here, but the middle class does get themselves out to vote.  The Republicans are sure to go after Obama-Care yet again, and the Democrats, in my opinion, will likely have to agree to some kind of impactful change in this space.  If you decide to hedge your longs with a negative bet in the Health Care sector, just remember,  buying puts risks a whole lot less dough than shorting equity when you’re wrong.  Just thinking out loud.
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Allocation
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                    For the entire 2015 calendar year, I never went below 35% cash, nor below 17.5% bonds (No junk, keep your fat yields).  You know what?… My levels are high for Wall Street, and maybe overly conservative, but they have served me well.  I think you need at least 5% in the precious metals (I am currently below that)… A rip in the price of gold in either direction would seem possible.  Thinking I want some exposure/insurance.  That only leaves 42.5% for equities/options.  I don’t give advice, I just tell you what I’m doing, or thinking of doing.  If the S&P 500 is up 25% in 2016, and you’re only up 10% because you go with these numbers, I’ll buy you a cup of coffee.  We don’t swing for the fences here, we get on base so we can score in case there’s a big inning.
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Today’s Macro
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08:30 ET
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Initial Jobless Claims (Weekly): This had been an item, that even though near long term lows…. had been trending higher in recent weeks.  Until last week, that is, when the number reported was 267K, a four week low.  Expectations for today are for 272K, which is just a smidge below the four week moving average……. how this data-point is intended to be viewed.  One note of caution…the consensus is very close to the low end of the range for this one today, with the skew to the upside.  There could possibly be a nasty surprise here.
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09:45 ET
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Chicago PMI (December):  This one had lost stature in recent years, at least in my eyes, and then wham !!!  In November, the Chicago PMI very nearly hit the ISM November print right oin the head with a very contractionary 48.7.  Projections for this item today (Which I am notably not mocking) are for a very slightly expansionary 50.2.  This one is going to be close, kids.  Philly, NY, and Dallas all got their tails kicked in December.  (Man, did Dallas get their tail kicked.)  The market will watch this one today.
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10:30 ET
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Natural Gas Inventories (Weekly): This data-point has printed in contraction for four consecutive weeks.  Now normally, I warn you about the insanity of trading Nat Gas Futures on Thursday mornings.  Been there, done that… not going back.  Ever.  Now, with the recent volatility surrounding Nat Gas, I can only….utter…   “The Horror, the horror”.  I’d rather trade Bio-Techs.
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Notes to Clients, Prospective Clients, and Readers
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 *                Happy New Year, Gang.  I truly hope that all of your hard work is rewarded with some prosperity in the coming year.  It is also my wish that for your families, 2016 is a healthy year full of all of the blessings that God will allow.  Amen.
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 *                Your old buddy (that’s me) will be on vacation next week.  Mind you, Deep Value would never leave you flat while I am away.  Your other old buddy, Paul Lawless will man my spot on the trading floor, and be answering my phones.   Get fired up for a week with Paulie !!  Market Recon will not publish during the period 4 January thru 8 January.