Good Morning,

U.S. equities closed flat to higher Friday, taking a bit of a breather from their most recent record run, while investors awaited President Donald Trump's speech to Congress next week.

Nevertheless, stocks rallied in the last half-hour of trading Friday to recover losses from earlier in the session. The Dow Jones Industrial Average, which closed up 0.05 percent, has now hit daily highs for 11 consecutive sessions, its longest streak of records since 1987. The S&P 500 Index and Nasdaq Composite Index also finished higher, while the Russell 2000 Index lost ground.

On the local front, the TSX had a no good very bad day on Friday as earnings and dividend disappointments among gold companies, along with weakening oil prices and trepidation over President Donald Trump’s border tax proposals, erased two-thirds of this year’s rally. Not to mention the fact that growth is disappointing, Trudeau has run out of fiscal runway and inflation is higher than it has been in 2 years...

Our Take

Amidst the growing stock market euphoria it should be noted that gold rose for a fourth week after U.S. Treasury Secretary Steven Mnuchin said Thursday that he expects low borrowing costs to persist, sparking a drop in the dollar.

The bond market also seems to be at odds with the bullishness of the stock market as the benchmark 10-year note yield fell to 2.33 percent, while the two-year note yield declined to 1.15 percent. We would caution that it appears like bonds could have it right — that growth is coming, but probably not as quickly as the stock market would like to think.

The S&P 500 is up more than 10 percent since Trump's Nov. 8 victory, rising on the election, trading flat through much of December, then jumping again in the new year. The yield on the benchmark 10-year note immediately spiked as well, surging 38 percent to 2.6 percent by mid-December.

However, the yield, generally seen as a proxy for GDP growth plus the inflation rate, has fallen somewhat since then as fixed income investors have continued to buy government debt. Bonds often lose their lustre during boom times, particularly if inflation sets in.

There are other signs that investors are having some misgivings about growth.

Copper prices, which are seen as a reliable mirror of growth, tumbled about 3 percent Thursday after Mnuchin's comments. The metal, sometimes called "Dr. Copper" for its ability to signal the economy's direction, is up about 11 percent since the election but has fallen 4 percent since its mid-February peak.

These counter trends should be considered as contrarian indicators. THERE IS STILL CONSIDERABLE BEARISHNESS in this market.

Furthermore, perhaps investors, after 10 years of living in constant fear over a succession of financial and political cataclysms, have finally decided to tune out the headlines and focus instead on an economy that, while not great, is not doing so bad, either.

Ed Yardeni, a stock market strategist, calculates that savings deposits and money market funds, the two safest and lowest return options for the risk-wary, doubled to nearly $9 trillion at the end of last month from $4.5 trillion in early 2009. Since 2007 households in the USA have been a net seller of stocks, and have shrunk the amount of their financial assets in stocks by 18.6% since that time!

Perhaps a lot of this pent-up cash earning close to zero in terms of interest rates is finally going to start looking for higher returns in the stock market — with pension funds in particular leading the way. Perhaps, people are slowly starting to realize that you can get bent out of shape living in a sensationalist media environment but this noise has little to do with earnings and the valuation of those earnings in the stock market...

Thought of the Week

"We live in a world exquisitely dependent upon science and technology, in which hardly anyone knows anything about science and technology." -Carl Sagan

Stories and Ideas of Interest

These are the science concepts you need to know to understand political life in 2017. It’s early days of 2017 still, but already it’s become apparent that this year science will play a larger role in public discourse than it has in the past, at least in the US. The scientific community has found itself at odds with the new White House administration in countless ways, and is gearing up for a fight that will take place in labs and hacker spaces, in the halls of civic buildings, and in streets nationwide. Quartz has put together a compendium of the scientific concepts and terms that will be at the heart of these conversations—and will characterize the world of scientific discovery through the rest of the year. Concept #1 and perhaps the most important: skepticism: the application of reason to any and all ideas...

7 earth-like planets found orbiting star 39 light-years away. Scientists have discovered what looks like the best place so far where life as we know it may exist outside our own solar system. The new findings raise hope that further systems are waiting to be discovered, the researchers say. And it's something that astronomers and exoplanet hunters are eager to explore.

The anatomy of charisma. What makes a person magnetic and why we should be wary. Nautlius puts together an excellent historical account of charisma showing both the positive and the negative. Charisma will never be stamped out nor should it be yet the way to protect people from the dark side of charisma is to teach them how it works. It is best thought of like fire. It can be used to heat your house or burn it all down…

Rewriting the code of life. As if artificial intelligence and robotics weren’t enough the New Yorker puts together an excellent account of how through gene editing researchers hope to alter the genetic destiny of species and eliminate diseases.

Rich people literally see the world differently. Science of us magazine presents some controversial research demonstrating that “people who are higher in socioeconomic status have diminished neural responses to others’ pain,” the authors write. “These findings suggest that empathy, at least some early component of it, is reduced among those who are higher in status.” Generalizations are problematic but there are interesting implications for why lower-class people are more attuned to the people around them. The authors write that “higher-status people are more focused on their own goals and desires. They also ignore people a little more, maybe because they can afford to. “If you have more power and status, you may not have to care as much about what people are thinking and feeling; and also, if you’re in a resource-scarce environment, where things are a little more unpredictable and maybe a little more dangerous, it would be very adaptive to pay attention to others, how they’re feeling and what they’re going to do.”

The next financial crisis may be in your driveway. Lured by low interest rates, low gas prices, and a crop of seductive vehicles that are faster, smarter, and more efficient than ever before, American drivers are increasingly riding in style. Nevertheless, all the glitter ain’t gold —those swanky machines are heavily leveraged. The country’s auto debt hit a record in the fourth quarter of 2016, according to the Federal Reserve Bank of New York, when a rush of year-end car shopping pushed vehicle loans to a dubious peak of $1.16 trillion. The combination of new car smell and new credit woes stretches from Subarus in Maine to Teslas in San Francisco. Is it a surprise that Americans just clocked their biggest spike in stress in more than a decade...

As we sit at record highs in the market we should ask: should stocks be worth more now than they used to be? Stocks are not cheap. The CAPE ratio is 28.46, above the long-term average of 16.73 and more expensive than 96% of all readings. But exactly how expensive are they, and what might this mean for future returns? Michael Batnick puts together a very smart piece suggesting that expensive markets leave investors with a smaller margin for error. The more you pay, the less you get. Nevertheless, he makes some intelligent observations to counter the popular argument: “stocks are expensive, sell everything.” Let’s remember that long-term average stock returns smooth over the bull and bear markets that investors experience, and no two market cycles ever unfold the exact same way. Bull and bear markets can vary significantly in both duration and magnitude...

All the best for a productive week,

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