A VERY CONCENTRATED MARKET AND FEDERAL TAX REVENUES

Many times I have commented about the narrowness of the markets, the breakdown of “fail safe trading strategies,” and the intense concentration of funds into a handful of names. Yesterday Goldman further quantified this view stating the “crowdedness” in the market is the highest level in many years.  Goldman commented that all are buying the same 13 stocks.

In my view the concentration of funds into a handful of name is a bona fide investment strategy (Berkshire Hathaway’s top seven positions comprises 79% of its publically traded stock portfolio).   However it is the concentration in the same names that is dangerous.

The greatest risk at hand is what happens when everyone runs for the exit at the same time as was the case in December and February 2018?  Will there be an equal and opposite reaction or will the reaction be amplified?

A crowded trade is nothing new but today it is perhaps amplified given the proliferation of ETFs and passive strategies that base investment decisions entirely upon capitalization not on what may or may not happen in the future.

Radically changing topics, most are expecting a considerable economic slowdown, a view that I do not share, partially the result of tax reform.

According to the CBO 80% of the projected cost of the 2017 tax reform is covered, the result of stronger than expected growth.  The deficit is exploding because of increased spending. If the economy continues to expand at a 3% rate, the CBO reports the growth would pay for the tax cuts on an annual basis.

Many are befuddled about the strength of the economy adamantly stating the economy will slow.  After President Obama raised income taxes in 2013, the CBO expected to collect an additional $650 billion over 10 year and the economy was expected to expand by 3.7% through 2016.

When the actual growth rate for 2014-2016 was 40% lower than projected, the CBO revised its revenue estimate down by $3.1 trillion or 4.7 times less than the amount the tax increase was supposed to collect.  The end result was the inverse of academic projections.

Today I will argue because of the lack of new regulations coupled with increased monies available to the private sector that is being partially utilized to fund productivity enhanced capacity, growth on an annual basis could continue to exceed 3%.

February’s ISM non-manufacturing index surprised on the upside posting its largest increase in a year.  The strength was driven by a 13 year high in gauges of new orders and business activity.  All 18 industries reported growth.

This is a continuation of the trend of either stronger or weaker than expected statistics.  Generally speaking the top tier data points have surprised on the upside and the secondary and tertiary on the downside.

Friday’s release of the February’s labor report can offer considerable insight to the underlying strength of the economy.  It can also potentially alter monetary policy expectations.

Commenting about yesterday’s market activity, markets were relatively quiet with equity volume about 17% below average.  All are searching for the next catalyst.  Could it be Friday’s jobs data?  A strong argument can be made any trade treaty has been discounted.

Last night the foreign markets were mixed.  London was up 0.32%, Paris down 0.13% and Frankfurt down 0.22%.  China was up 1.57%, Japan down 0.60% and Hang Sang up 0.26%.

The Dow should open mixed awaiting for fresh catalysts on trade and moentary policy.  The 10-year is up 2/32 to yield 2.71%.

 

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.