A Week to Remember 11-16-16

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Wednesday, November 16, 2016
Dr. Stephen Leeb, Ph.D.
The last week has been historic—in more than one way. Yes, for the first time in American history, Americans elected a President with no previous political or military experience, also the only newly elected president to have begun his eighth decade of life. We will leave to other pundits the many other firsts about Trump. What most struck me was the market action after his victory.
 
Despite no sign of a sell signal from either of our two trusty longer term indicators—the relative performance of unweighted averages and any upward burst in oil prices—we see pretty strong signs that stocks could back off near-term, perhaps by as much as 7 to 10 percent.
 
But even that is not the real story. The real story: market action from mid-year until now was arguably the most divergent in at least a generation and very likely ever. Last week, in other words, punctuated a change in market leadership that was more distinct and faster than any we have ever seen.
 
It was like someone blew a whistle and everything stopped in its tracks only to begin again at a completely different tempo. Measuring such divergences requires some pretty complex math but has a relatively simple implication. Whenever you see such major divergences, it results from a sharp—in this case, an unprecedented sharp—change in market leadership, which in the vast majority of cases causes at least a minor overall market setback.
 
In a sense, the recent change was the obverse of what happened in 2007 to 2008. Then, market leadership switched from high flying commodity levered plays to more defensive stocks. The result was an historic bear market. We don’t expect anything like that right now. Moreover, a correction of anything more than 10 percent might suggest that the new commodity and infrastructure levered leadership is fleeting.
 
This shift between big tech growth stocks and levered commodity/infrastructure plays has been credited to the Trump election. Rather I think the Trump election was very much like the cherry on the sundae. True, Trump does plan to spend more on infrastructure than his opponent. Also true, Angela Merkel, Europe’s austerity queen, is reeling. If she loses her European leadership position that could make infrastructure spending easier there. Indeed, even if Merkel keeps her job, continental pressure on fiscal action will remain great. That could lead Merkel to open Germany’s purse, and by extension that of Europe, in search of real growth—the type of growth previously deployed monetary tools cannot produce.
 
But we think the real action is in the entire East, not just China. The new Silk Road, sometimes referred to as the One Belt One Road (OBOR) was officially announced three years ago as a project to knit together more than 60 countries through infrastructure spanning both land and sea. Estimated at a financial cost equivalent to 12 Marshall Plans, OBOR actually will only start links between those countries. It means increased trade among them; including China, their cumulative populations represent about 60 percent of the world.
 
Lest you think this project is a pie in the sky dream, do not dismiss the roughly one trillion dollars in Chinese exports to other OBOR countries in 2016. Also, do not forget China’s rocketing commodities imports of all sorts and its burgeoning refining business. Moreover, what slipped completely under the radar was China’s recent delivery of its first cargo by land, through Pakistan, to Gwadar’s deep-water port, from which the goods will find their way to the Middle East. When completed, the China Pakistan Economic Corridor (CPEC) will have cost some $50 billion dollars and consist of many highways, train routes and pipelines and represent a massive boom for Pakistan’s economy. CPEC is just one of many such projects across the new Silk Road.
 
Western infrastructure spending is good news for U.S. citizens and for TCI portfolios as we have recommended infrastructure stocks for some time. But those who put too much weight on Western changes  will be less inclined to believe in the sustainability of the change in the market. While the comparison with the Marshall Plan suggests the size of OBOR, a better example might be China’s development and the resultant wild commodities performance as the 21st century opened. This time there are another three billion people in addition to a developing China.

 

While we believe the stocks we've highlighted lately along with many others—see our next issue of TCI—will go higher, a pause would not be unexpected. We are all fortunate in a way to be living in such dynamic times, but let’s hope we have the foresight to take full advantage of the opportunities.

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