Sun, 01/15/2017 - 10:00pm

John Davidson

I was asked by a friend if I had any advice on the best way for an investor to "play" Trumps tweets. I had to consider how to best answer this question. Was there a way to play the tweets? Could one know which companies or industries would benefit from a new set of policies? Could we know which campaign rhetoric would actually lead to policy changes or legislation? Whatever one believes about the incoming President and his appointed cabinet, this week's confirmation hearings demonstrated that not every advisor is in sync with the President-Elect campaign promises. Not every Republican member of Congress is in lock-step with the incoming President.

The President-Elect's recent actions can give us some clues.

1) Trump will continue to tweet, at will, as President.

2) The targets of his tweets could be companies, individuals, or news organizations.

3) The logic of the selection of target will have little to do with economic impact and much to do about media impact. So, for instance, in the case of Carrier, few jobs were really saved; the company was in the state of Trump's VP; the tweeted threat to Carrier generated media attention, but had very little economic impact. Nonetheless, the random tweeting could hit a stock price of a tweet's target.

It will be difficult to identify tweet targets in advance. Could the targets hit health companies? Which ones? Could targets hit exporting companies or importing companies, big companies or small companies? Could targets hit Media Companies that are critical of Trump's statements or actions? If so, which ones?

The strength of the post-election rally has eased in recent weeks and valuations are high as are the expectations for greater growth. So, upside surprises may already be built into today's prices. Interest rates have risen (over 60 basis points on the 10-year); inflation expectations have increased (over 35 basis points on the TIP's spread), and credit spreads have narrowed since the election. Now may not be the best time to back up the investment trucks and fill them with maximum risk.

The target of tweets may be difficult to predict in advance; the impact of such a tweet could be felt on the individual, company, or even a whole sector. I don't see a sure-fire way to play the Trump tweets. Therefore, my advice to my friend: 1) manage your risks, 2) diversify, and 3) keep your investment expenses low.

Economic Releases: U.S. Employment

Initial Claims for Unemployment Benefits rose 10,000 to 247,000 the week of January 7th; the 4-week average of Claims (blue in the chart below) slipped to 256,500. Continuing Claims, reported on a 1-week lag and displayed in red in the graph below fell 29,000 to 2.087 million. The Claims data, along with the very low 1.5% unemployment rate for insured workers, all support the solid jobs recovery that has occurred since the Great Recession. In other employment releases, the November JOLTS (Jobs Openings and Labor Turnover Survey) increased on trend to 5.522 million in November; yet, the report (5.5 million openings vs 7.4 million unemployed) suggests a "skills-gap" where the employers are having a hard time finding people with the right skills.

Source: St Louis Federal Reserve, FRED, Econoday via WSJ.com

Other U.S. Releasess

Retail Sales increased +0.6% in December, spurred by automobile sales; Retail Sales, less autos, increased only +0.2%. The University of Michigan's preliminary Consumer Sentiment Index for January slipped a tick to 98.1; the survey reported the extreme partisanship among the consumers, at twice the average of a cycle.

Source: Econoday and the Wall Street Journal

Economic Releases outside the US

Eurozone Unemployment remained 9.8% and Industrial Production (IP) rose +0.5% in November. IP increased +0.4% in Germany, and surged 2.2% in France and 2.1% in the UK in November.

Source: Econoday and the Wall Street Journal

Equity and Bond Index Returns:

With very little economic news, in the second week of the year, the equity markets were mixed, but the bond markets rose with the decreased interest rates. Valuations remain high at 17.0 times Factset's forward earnings estimates. This P/E is well above the 5- and 10-year average but near the 20-year average, which includes the valuations at the time of the tech bubble.

Equity Indices % Change	Price	% Chg since:	QTD	ETD	Calendar	'08-'16
	01 /13/ 17	01 /06/ 17	12 /30/ 16	11 /04/ 16	2016	12/31/08
Dow Jones Industrials	19,886	-0.4%	0.6%	11.2%	13.4%	125.2%
S&P 500 Index	2,275	-0.1%	1.6%	9.1%	9.5%	147.9%
Nasdaq	5,574	1.0%	3.5%	10.5%	7.5%	241.3%
S&P/TSX Composite	15,497	0.0%	1.4%	6.8%	17.5%	70.1%
FTSE 100 Index	7,338	1.8%	2.7%	9.6%	14.4%	61.1%
CAC 40 Index	4,922	0.3%	1.2%	12.5%	4.9%	51.1%
DAX Index	11,629	0.3%	1.3%	13.4%	6.9%	138.7%
Swiss Market Index	8,452	0.4%	2.8%	11.3%	-6.8%	48.5%
Nikkei 225 Index	19,287	-0.9%	0.9%	14.1%	0.4%	115.7%
HK Hang Seng Index	22,937	1.9%	4.3%	1.3%	0.4%	52.9%
Shanghai CSI 300	3320	-0.8%	0.3%	-1.0%	-11.3%	82.1%
Bond Indices % Total Return
Bloomberg Treasury Index	124.6	0.2%	0.4%	-2.9%	1.0%	19.5%
Bloomberg Corporate Index	144.5	0.2%	0.6%	-1.6%	5.9%	72.1%
Bloomberg High Yield Index	171.8	0.2%	1.2%	3.2%	17.4%	167.4%
S&P 500 Valuation		P/E				P/E
Factset forward Earnings	$133.49		$132.79	$130.69	$132.79
% Change in Earnings		5-Year Ave	10-Year Ave	2.1%	4.5%	20-Year Ave
Price/Earnings Ratio	17.0	15.1	14.4	16.9	16.9	17.2

In the tables I have kept the Election to Date (ETD) data and added the Quarter to Date (QTD) in addition to the Calendar 2016 and 8-year records.

Data Source: Bloomberg app for the Iphone; Earning Estimates from Factset

Bond Yields and Spreads:

In the second week of the year, government yields were a bit lower and credit spreads were little changed with high yield spreads increasing and investment grades decreasing by a few basis points. The TIPS increased 5 basis points. By this measure, since the election inflation expectations have increased 35 basis points.

Government Bonds	Bond Yields (%)	bp chg since	QTD	ETD	Calendar	'08-'16
	01 /13/ 17	01 /06/ 17	12 /30/ 16	11 /04/ 16	2016	12/31/08
UST 2-Year	1.19	-2	0	41	14	42
UST 10-Year	2.40	-2	-4	62	17	23
US TIP 10-Year	0.36	-7	-11	27	-23	-163
UST 30-Year	2.99	-2	-8	43	5	39
Canadian 10-Year	1.71	-1	0	56	32	-97
UK 10-Year	1.36	-2	13	23	-73	-179
French 10-Year	0.80	-2	12	34	-30	-273
German 10-Year	0.33	4	13	20	-43	-275
Swiss 10-Year	-0.21	-5	5	20	-14	-236
Japan 10-Year	0.04	-1	0	11	-22	-113
Bloomberg Credit Spreads		bp chg		bp chg	bp chg	bp chg
Corp OAS BUSC	126	-2	-2	-17	-43	-445
HY OAS BUHY	404	3	-25	-107	-304	-1374
Rates		bp chg		bp chg	bp chg	bp chg
US Mort 30-yr %	4.03	-1		54	16	-117
10-Year TIPS Spread	2.04	5	7	35	40	185

Data Source: Bloomberg app for the Iphone

Currency and Commodity Markets:

Increased BREXIT concerns pushed the Pound lower, but the US dollar was otherwise lower on the week and QTD against the other currencies in the table. With the exception of the Loonie, since the election, the dollar is stronger than the currencies in the table. In the second week of the year, oil prices slipped, but the other commodities have gained.

Currencies vs $	Closing	% Chg since	QTD	ETD	Calendar	'08-'16
	01 /13/ 17	01 /06/ 17	12 /30/ 16	11 /04/ 16	2016	12 /31/ 08
Yen	87.34	2.2%	2.2%	-9.9%	2.8%	-22.5%
British Pound	1.22	-0.8%	-1.2%	-2.7%	-16.4%	-15.5%
Euro	1.06	1.1%	1.2%	-4.5%	-3.2%	-24.7%
Canadian Dollar	76.25	0.8%	2.4%	2.2%	2.9%	-9.5%
China Renminbi	14.49	0.3%	0.6%	-2.1%	-6.5%	-1.6%
Commodities
West Texas Intermediate	$52.37	-2.5%	-2.7%	18.8%	45.4%	20.7%
Brent Crude	$55.45	-2.4%	-2.4%	21.7%	52.4%	58.6%
Natural Gas	$3.42	4.6%	-8.6%	23.4%	60.5%	-35.6%
Spot Gold	$1197	2.1%	4.0%	-8.3%	8.5%	32.4%
Spot Silver	$16.82	2.1%	5.5%	-8.7%	15.2%	40.7%
CBOT Corn	$358.50	0.1%	1.8%	2.8%	-1.9%	-2.1%
Spreads
Brent-WTI	$3.08	-1.6%	3.4%	104.0%	$0.24	-$8.78

Data Source: Bloomberg app for the Iphone

Equity Index Gains in U.S. dollar terms:

The equity table above shows the percent change of different stock indices in terms of its local currency. To calculate the return to the US dollar investor one must combine the change of each index with the change in the applicable currency. The following table shows the 5-day, quarter-to-date and year-to-date results of investments made in each index in US dollar terms:

Return to USD Investor		% Chg	QTD	ETD	Calendar
	since:	01 /06/ 17	12 /30/ 16	11 /04/ 16	2016	'08-'16
S&P 500 Index:	USD	-0.1%	1.6%	9.1%	9.5%	147.9%
Nikkei 225 Index:	Yen	1.3%	3.1%	2.8%	3.2%	67.3%
FTSE 100 Index:	Pound	0.9%	1.5%	6.7%	-4.4%	36.0%
DAX Index:	Euro	1.3%	2.5%	8.3%	3.4%	79.7%
CAC 40 Index:	Euro	1.3%	2.5%	7.4%	1.5%	13.7%
S&P/TSX Composite:	CAD	0.8%	3.8%	9.2%	21.0%	54.0%
Shanghai CSI 300:	Yuan	-0.5%	0.9%	-3.1%	-17.0%	82.1%

The US dollar weakness caused other markets to do better this week for US dollar investors. Since the election, only the Canadian market beat the S&P 500.

Most recently, he was the president of PartnerRe Asset Management Corporation, responsible for the management of PartnerRe's invested assets, which grew from $4 billion to $12 billion during his tenure. After joining PartnerRe in the fall of 2001, he hired the staff, built the trading floor and created the infrastructure to manage both fixed income and equity assets internally. He retired from PartnerRe at the end of 2008 and moved to Maine, where he focused on board work.

He has more than 35 years of industry experience, including positions with investment management responsibility for separate institutional accounts, mutual funds, trusts and insurance assets. Prior to joining PartnerRe, he served as president and chief executive officer of two other investment management companies. For various companies he has held positions as chief investment officer, chief economist, head of fixed income and portfolio manager. As a portfolio manager, Davidson managed and traded U.S. Government Securities as well as futures and options on fixed income instruments.

His real world experience is backed by a strong academic foundation, which includes earning a Master of Business Administration in finance and a Master of Arts in mathematics from Boston College, as well as a Bachelor of Arts, cum laude, in economics from Amherst College. He holds the professional designation of chartered financial analyst.

His experiences and credentials have brought him to the public as a television commentator and conference speaker. In addition to his frequent past appearances on CNBC, CNNfn, Bloomberg TV and Yahoo FinanceVision, he appeared as a special guest on Wall $treet Week with Louis Rukeyser. Reuters, Bloomberg and other business press services have quoted his views on the market. He has taught CFA preparation programs, as well as other courses offered by the Stamford and Boston CFA Societies, and the National Graduate Trust Officers' School.

Davidson is a natural leader in both his professional and personal life, having developed those skills early in his career as a naval officer. He spent three years on active duty, which included a year on the rivers of Vietnam, and 24 years in the Naval Reserve, from which he retired as a captain in 1994.

Davidson is treasurer and board member of the Camden Conference. He is also on the investment committee of the Pen Bay Health Foundation. He serves as an independent trustee for mutual funds.

In his leisure time, he is an active sailor, tennis player and skier. With his wife, Barbara, he renovated a 100+-year-old home in Camden, where they enjoy spending time with their two golden retrievers and having visits from their five children. He can be reached at jwdbond@me.com.