September 10, 2017

Kisco Capital Market Update 1733: The Heart of Hurricane Season Note: You can zoom in on the charts on your iPhone or iPad.

Whether its a real hurricane (Harvey, Irma), military (North Korea), political (Swamp vs Citizen) or stock market (Fed vs equity valuations) you can’t deny the number of trigger points that could cause a slide in the stock market. Not to mention that the coming weeks are historically weak seasonality periods for the stock markets.

Since my last update there isn’t much to report in terms of the stock market price action. Many of the sub-sectors are showing topping activity (retail, energy, industrials, insurance, financials) which will eventually trickle up to the broader S&P 500 and DOW indices. We ended the week on a nervous note with hurricane IRMA approaching Florida so we will have to wait until early next week to assess the damage.

Fun Fact of the Week (Elliott Wave International) At $4.75 in stocks for every $1 in a money market fund, the latest extreme shows that the public’s preference for equities is now an order of magnitude stronger than it was in 2000 and 2007. Notice the ratio never declined below the 1:1 ratio of the 1987 extreme. Perhaps, this is due to less yield in the bond market over the last 30 years. The only place to “make money” has been in the stock market - especially since the early 2000s when the Fed lowered interest rates to 1% in the aftermath of the tech bubble.

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Economic & Central Banking Snippets • Who has ongoing trade activities with North Korea?

• The Swiss economy grew 0.3% year on year in the second quarter, coming in well below estimates of 1.1% growth.

• Thanks to central banks suppressing the cost of borrowing via quantitative easing, companies have feasted on cheap credit, using the proceeds to help fund share buybacks or higher dividends. The leveraged buyout and

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cash merger boom also reflect the fact that debt finance is cheaper than that of equity, as seen in the chart. We also see how the rise in debt — via the blue line — has accelerated since 2010, providing a tailwind for share prices. As investors survey US equity benchmarks in record territory, and many companies and sectors sport lofty valuations, the question is whether the high degree of leverage on balance sheets will prove this bull run’s Achilles heel. (FT)

• Growth in total auto sales may have peaked in 2016. A leading indicator of a slower economy? Keep in mind, ultra-low interest rates have fueled auto loans with low monthly payments. The Fed’s current policy of rising interest rates can impact this sector directly. (WSJ)

• For the first time since 2011, spending on office space construction has not grown from the previous year. (WSJ)

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Hurricane Harvey and Houston (Morgan Stanley) • Greater Houston accounts for 3.5% of the nation's housing starts, 2.6% of

retail sales, and 2.8% of GDP. • The 10,062 square mile area of Houston MSA is home to 6.5 million people,

who make up 2.1% of national employment. • In terms of its effect on GDP, the timing of Hurricane Harvey is key. We have

over a full month left in the third quarter, which means the economic effects of Harvey may be fairly neutral on 3Q as a whole, but the lagged effects of rebuilding homes and replacing motor vehicles can last longer, providing a lift to GDP in 4Q and beyond.

• Jobless claims will be the earliest data to show the impact of Hurricane Harvey. In the wake of Hurricane Katrina there was a sizable and prolonged impact on initial claims. The peak effect occurred three weeks after the storm hit when Katrina-related filings alone totaled more than 100,000.

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Politics! Politics! Politics! • North Korea has apparently successfully tested a hydrogen bomb. The test

follows Pyongyang's claim that it had completed the miniaturization of a hydrogen bomb capable of being fitted to an intercontinental ballistic missile. Here is a graphic of nuclear tests since 1945.

• British Prime Minister Theresa May is set to approve a Brexit bill of up to 50 billion pounds (roughly $64 billion) after the Conservative Party conference in October in an effort to start trade talks with the European Union. Under this plan, Britain would pay between 7-17 billion pounds a year to Brussels for three years after Brexit.

• North Korea set a goal in April of increasing its oil reserves to 1 million tons in anticipation of additional international sanctions. More than 90% of North Korea's petroleum imports come from China. (FT)

• The secessionist coalition government of Catalonia (a province of Spain) could introduce legislation approving the legal framework to hold an independence referendum on October 1. Prime Minister Mariano Rajoy’s government says it has prepared measures to stop the vote taking place, whatever the Catalans might try. (Bloomberg)

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Chart Time! S&P 500 (SPY)

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10 Year Treasury Yields - TNX

Market Snippets • Top of the market enthusiasm? Lilium, a German start-up with Silicon Valley-

scale ambitions to develop a 5-passenger “flying taxi”, has raised a second, $90 million round of financing from top tech investors, making it one of the best-funded electric aircraft projects to date.

• Bitcoin's price fell 11% after China's central bank announced initial coin offerings were illegal and requested an immediate halt to all fundraising activity, Bloomberg reported on September 4th. Though the bank's directive made no mention of cryptocurrencies such as bitcoin, it did prohibit financing and trading platforms from doing conversions of digital tokens into yuan.

• Apparently, start-ups are “ditching venture capitalists and raising millions of dollars in minutes by issuing digital tokens in what have become known as initial coin offerings.” Offerings have raised $2 billion, mostly since April.

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And Bloomberg says the process for “issuing digital tokens that have similar properties as financial securities...is about to become easier.” The easy way becomes the obvious way. In this case, all a person has to do is push a button to literally create money. What could go wrong? (Elliott Wave International)

• According to TD Ameritrade, retail investors went into September with the most bullish sentiment in years. Institutional investors often view this level of retail exuberance as a significant red flag for the market.

• Toyland in trouble! Hasbro, Inc., Mattel, Inc. and JAKKS Pacific, Inc. each plunged on Wednesday on news that Toys R Us hired restructuring lawyers to help address about $400 million in debt and potentially file for bankruptcy

• Federal law-enforcement authorities in New York are investigating whether Uber Technologies used software to interfere illegally with its competitors, according to people familiar with the investigation, adding to legal pressures facing the embattled ride-hailing company and its new chief executive. (FT)

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International Snippets • Lego said it would lay off 8% of its staff and revamp its business after

reporting its first fall in sales in more than a decade on Tuesday. The Danish toymaker announced a 5% decline in mid-year revenue a month after abruptly removing its CEO. Lego said it could not promise a return to growth in the next two years, a jolting acknowledgement for a group widely admired for embracing the digital era and tying up lucrative franchises from Harry Potter to Minecraft.

• China has reached its 2020 solar power target three years ahead of schedule, and renewable energy groups have urged Europe to show similar ambitions. But solar power still satisfies only 1% of China's energy demand, while coal continues to reign supreme in the country's energy mix. (STRATFOR)

That is all for now until next week’s Market Update. If someone forwarded you a copy of this report, you can sign-up directly at www.kiscocap.com.

Please reach out to me if there is anything you want to discuss about the markets, your portfolio (for clients) or if you would like a copy of the firm’s brochure if you are not a client.

Regards,

Paul J. McCarthy, III President - Kisco Capital paulmccarthy@kiscocap.com (347) 709-9539 www.kiscocap.com

About The Author

Prior to founding Kisco Capital, Mr. McCarthy held senior positions at two multi-billion-dollar hedge funds, where he acted as a trader and portfolio manager. Mr. McCarthy has managed capital in adverse market conditions, including the post-tech bubble crash of 2000, the terrorist attacks of 9/11 and the collapse of the financial markets in 2008-2009.

Managing risk in highly volatile markets is

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considered his specialty. During Mr. McCarthy’s tenure in the hedge-fund world, he managed investment accounts that had a combined market value of up to $6.5B where he generated positive returns every year and had his best years during the financial crisis of 2008-2009.

Mr. McCarthy attended Bentley University, where he received a B.S. in Finance, and earned his M.B.A. in Banking and Finance from Hofstra University. Since 2000, Mr. McCarthy has held the Chartered Financial Analyst (CFA) designation and is currently a member of the New York Society of Security Analysts (NYSSA).

Mr. McCarthy enjoys spending his free time skiing, traveling and working on his golf game. His free time is limited these days, however, as he raises his two small children with his wife, Dawn.

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