Thursday, December 13, 2018

The Morning Call---How much to believe?


The Morning Call

12/13/18

The Market
         
    Technical

While the Averages (DJIA 24527, S&P 2651) did manage to close on the upside, (1) when I heard the China trade news, I thought that the Dow would be up 500-600 points, (2) it did trade up 300+ points but couldn’t even hold that gain.  That is not great pin action.  They both finished below both moving averages and have set a second lower high and second lower low.  I still believe that some kind of oversold rally could happen; but yesterday’s price movement suggests that those odds are going down.

Volume was flat; breadth improved.  The VIX was down 1 ¼%; but its chart remains positive (bad for stocks).

The long bond was down ½ %, finishing above its 100 DMA (now support), above its 200 DMA (now support) but below the upper boundary of its short term downtrend.  It needs to take out this downtrend to convince me that investors are truly shifting their outlook for interest rates (lower).

Three lessons from the bond market.


The dollar was down slightly, ending right on the lower boundary of its very short term up trend but above both MA’s and in a short term uptrend. So the chart continues to be technically strong.

GLD rose ¼ %, closing above its 100 DMA and continues to build strength. 

 Bottom line: my main take away from yesterday’s pin action was that stocks didn’t respond as positively to the trade data as I had expected, given the current highly volatile Market.   It once again suggests a complete lack of conviction among buyers and the likelihood of more downside.  Levels to watch are the October lows (25062/2601) and the February lows (23352/2536).
           
            The long bond has run into some resistance at the upper boundary of its short term downtrend.  That is not particularly surprising; but it does need to successfully challenge this level before the current move up is more than just a rally in a bear market.
           
            The dollar continues to trade like there are dollar funding (liquidity) problems.  And if you think about gold as a safety trade, then its pin action would support the notion of credit/liquidity problems are looming.

            Wednesday in the charts.

    Fundamental

       Headlines

            Yesterday’s stats were upbeat: weekly mortgage and purchase applications were up while November CPI was in line. 

Overseas, the numbers weren’t so good: EU September/October industrial production were poor.

            The big news of the day was the Chinese announcement of trade concessions; the most important of which was the agreement to back off of its industrial policy that incorporated the theft/usurpation of intellectual property.  This is one of those developments the importance of which can be easily over or understated.  So this is my best try.

            The easier one first.  If false, then this is just the Chinese giving Trump an apparent win in face of his potential domestic personal problems (impeachment), maneuvering to buy time and develop ways of getting around the ‘industrial policy’ issue.  The only question would be, does Trump see through it, keep the pressure on and refrain from his usual ‘this is the greatest thing since the wheel’ tweet storm.

If true, it would be a big plus for the long term secular growth rate of the economy and would buy Trump some huge ‘atta boy’ accolades.   Clarifying exactly what this means will, at best, take time.  Clearly, the Chines definition of industrial policy reform and our definition could worlds apart.  I have said repeatedly in these pages that the Chinese are skilled negotiators and they tend to lie a lot.  So it is too early to raise a victory flag.  Still, if true, this would be a great achievement for the Donald. 

Leaving aside the long term implications of this development, the short term cyclical effects are also a positive and much more easily determined---lowering auto tariffs, buying more soybeans, etc.---will be apparent soon and should have an impact on the cyclical growth rate of the US economy. 

So at the moment, I score this a plus for the US and for Trump short term but think it wise to withhold judgment on the potential longer term benefits until real action is apparent.  It would also help would revive my hope that he can deliver on his stated goal of revamping the global political/trade regime. 

Now for the not so upbeat news from yesterday:

            National Inquirer admits role in Trump hush money scheme.
           
            May survives no confidence vote; but that doesn’t solve any problems.

            What to expect if the government shuts down.

            Fed now has a negative net worth (must read):

            Bottom line: whatever happens to May, the Italians or the outcome of the food fight over funding the wall, the Chinese resuming their purchases of soybeans and oil and lowering auto tariffs is probably more important to the near term economic growth rate of the country and to Market valuation.  Longer term, there is reason for hope; but that is not worth much.

            And not to throw a turd in the punch bowl, let’s not forget the effects (1) on economic growth of a rising budget deficit and an irresponsibly high national debt at a time they both should be shrinking and (2) on asset liquidity of a steady decline in the Fed’s balance sheet.

            ***overnight, the ECB confirmed that it was ending its bond buying program.

            The latest from Doug Kass (today’s must read).

            Where money goes to die.

            One constant in the stock market.

                The stock market stopped shrinking in 2018.

    News on Stocks in Our Portfolios
 
            EOG Resources (NYSE:EOG) declares $0.22/share quarterly dividend, in line with previous.

Economics

   This Week’s Data
           
      US

            Weekly jobless claims fell 27,000 versus expectations of 3,000 decline.

            November import prices were down 1.6% versus forecasts of -1.0%; export prices were down 0.9% versus consensus of +0.1%.
           
     International

            Auto sales in China decline dramatically.

    Other

            House passes $867 billion farm bill.

What I am reading today

            Yellow fever in France.

            Russia to withdraw bombers from Venezuela.

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Wednesday, December 12, 2018

The Morning Call---Can the bulls muster any kind of rally?


The Morning Call

12/12/18
                                  
The Market
         
    Technical

Try as they might, the Averages (DJIA 24370, S&P 2636) just couldn’t manage a follow through to Monday’s modest advance in spite of their oversold condition.  The pin action was again quite volatile.  They both finished below both moving averages and have set a second lower high and second lower low.  I still believe that some kind of oversold rally is likely.  But the more time that elapses and the uglier their charts get, the lower the odds of any kind of meaningful advance.

Volume was down and breadth was poor.  The VIX was down slightly---not usual for a down day in equity prices---but its chart remains positive (bad for stocks).

The long bond fell, finishing above its 100 DMA (now support), above its 200 DMA (now support) but traded back to the upper boundary of its short term downtrend, negating Monday’s break.  It needs to take out this downtrend to convince me that investors are truly shifting their outlook for interest rates (lower).

            Fed considering using another benchmark than Fed Funds rate.

            Goldman forecast for 2019 rate hikes.

The dollar was up ¼ %, ending above the lower boundary of its very short term up trend and above both MA’s and in a short term uptrend. So the chart continues to be technically strong.

GLD dropped fractionally, but remains above its 100 DMA and is developing a very short term uptrend. 

 Bottom line: my main take away from yesterday’s pin action was that stocks couldn’t stage a second up day in a row, despite being very oversold and starting the day 300+ Dow points to the upside.  That suggests a complete lack of conviction among buyers and the likelihood of more downside.  Levels to watch are the October lows (25062/2601) and the February lows (23352/2536).

            The long bond has run into some resistance at the upper boundary of its short term downtrend.  That is not particularly surprising; but it does need to successfully challenge this level before the current move up is more than just a rally in a bear market.
           
    Fundamental

       Headlines

            Yesterday’s data was discouraging: the November small business confidence index and month to date retail chain store sales were below estimates.  Confusing matters, the November PPI came in a bit hotter than expected.  Stats like this help keep alive the debate within the Fed about whether it needs to continue to act to contain inflation or to let up because the economy is weakening.

            Overseas, October UK industrial production was well below consensus; October GDP was in line.

            Two headlines yesterday:

            While there was a heated exchange between Trump, Pelosi and Schumer on government funding/the wall in which Trump doubled down on shutting the government down.  As you know if I had my way, they would close DC permanently.  But that won’t happen; and generally, the shutdown strategy has not been a winner Market-wise.

Trump also upped the ante in the US/China standoff threatening arrests of Chinese hackers.

            Opposing strategies in the US/China trade war.

                ***overnight, Trump tweeted that (1)  he would be willing to release the high tech CFO in exchange for more Chinese trade concessions and (2) the Chinese were lowering auto tariffs [already rumored] and increasing dramatically their purchases of soybeans.  I await confirmation.

                ***also overnight,PM May will face a ‘no confidence vote today.

            Bottom line: the dataflow is not exactly helping a ‘data dependent’ Fed plot policy.  But as you know, I think what it does with interest rates is much less important than what it does with its balance sheet---which continues to run off (decreasing liquidity, price pressure on misallocated assets).  And as have noted before, the ECB is not far behind.

            More on the end of ECB QE.

            I don’t like piling on the bad news when there is already enough to go around; and I try to avoid discussing political issues, especially at this moment in time when the ruling class, media and country are so divided.  But there is a growing consensus among the guys I talk to (not the media) that the coming report from the Mueller investigation may contain offenses that could be interpreted as impeachable. 

I clearly have no insight as to what Mueller may conclude.  But, as I said, given the general attitude of the media and a good portion of the political class, any excuse would be enough to bring the ‘I’ word into play.  I lived through the Nixon impeachment; and I can promise that it was not a fun time in Marketville.  To be sure, the economic conditions were quite negative then.  But the political drama had an impact on the level of sentiment in the country.

    News on Stocks in Our Portfolios
 
           

Economics

   This Week’s Data

      US

November CPI was flat, in line; ex food and energy, it rose 0.2%, also in line.

Weekly mortgage applications were up 1.6%, purchase applications 3.0%

     International

            October EU industrial production advance 0.2% versus forecasts of +0.3%; the September reading was revised from-0.3% to -0.6%.

    Other

            Budget deficit continues to rise in first two months of this fiscal year.

            Economic risks in 2019.

            EU scores.  Italy appears to have buckled.
           
What I am reading today

            This can’t be good---Russia sends two nuclear capable bombers to Venezuela.

                Follow up.

                Researchers found a way that marriages stay happier over time.


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Tuesday, December 11, 2018

The Morning Call---Oversold bounce versus Santa Claus rally


The Morning Call

12/11/18

The Market
         
    Technical

The Averages (DJIA 24423, S&P 2637) had another roller coaster day, swinging 500 Dow points intraday before closing slightly up.  They both finished below both moving averages and have set a second lower high and second lower low.  The only good news is that both tested their late October lows and bounced off a very oversold condition.  More upside would not be surprising.  However, the indices’ charts continue to deteriorate.   

Volume rose and breadth was mixed.

The VIX was down slightly, but its chart remains positive (bad for stocks).

The long bond rose ½ %, finishing above its 100 DMA (now support), above its 200 DMA for a fourth day, reverting to support and above the upper boundary of its short term downtrend (if it remains there through the close on Wednesday, it will reset to a trading range.   Clearly, investors continue to shift their outlook for interest rates (lower).

Interview with BofA’s head of global rates.

The dollar was up, ending back above the lower boundary of its very short term up trend, voiding Friday’s break. So the chart continues to be technically strong.

GLD slipped, but remains above its 100 DMA and is developing a very short term uptrend.  

 Bottom line: yesterday’s dramatic intraday reversal notwithstanding, the Averages’ charts continue to deteriorate technically, making any meaningful Santa Claus rally ever more difficult.  That said, they remain oversold, so more upside short term wouldn’t surprise me. 

            The pin action in the long bond continues to point to lower rates.  While that may be good news with respect to Fed policy, it also suggests bad news for the economy (i.e. weaker). 

            For the bulls.

            Monday in the charts.

    Fundamental

       Headlines

No US economic releases yesterday.  But we did get some overseas data which was mixed: November Chinese CPI and PPI were below estimates; in addition, exports/imports weakened though the trade surplus with the US grew; and third quarter Japanese GDP fell.
           
            And aside from the market itself, it was a quiet day save for the ongoing turmoil over Brexit.

            No give at the EU.
                          

            Bottom line: there remain some potentially impactful events in our near future: the FOMC December meeting, the Trump/dem showdown on funding the government/the wall and the Chinese response to the arrest of the CFO of a major Chinese tech company.

I am not going to speculate on the political dynamics or the outcome of the latter two; though clearly we have to leave open the possibility of some not so positive outcomes.

Trump threatening an end around of the wall.

                Chinese are still acting nicey, nice on trade.

                This just in.  Chinese detain former Canadian diplomat.

               
            Whatever the Fed does with interest rates, it is less important than the continuing unwind of its balance sheet (less liquidity).  It will be joined shortly by the ECB (not selling securities, just not buying them).  This at a time of record levels of debt, in particular, lower rated corporate debt.  I continue to believe that this is the beginning of the reversal of the misallocation/pricing of assets.  It may start in the credit markets, but stocks will likely not be far behind.  I am happy with my cash position.

Is the ECB now more hawkish than the Fed?

50% downside?

            Hedge funds still have stocks to sell.

    News on Stocks in Our Portfolios
 
           

Economics

   This Week’s Data

      US

            The November small business confidence index was reported at 104.8 versus expectations of 107.0.

            November PPI was up 0.1% versus estimates of 0.0%; ex food and energy, it was up 0.3% versus forecasts of +0.1%.

            Month to date retail chain stores sales grew slower than in the prior week.

     International

            October UK industrial production was well below consensus; GDP was in line.

    Other

            The R word.

            Or not.

            Macron’s surrender will blow out the French budget deficit.  Cue the response from Italy.
               


What I am reading today

            More on cryptocurrencies.

            Quote of the day.


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Monday, December 10, 2018

Monday Morning Chartology


The Morning Call

12/10/18

The Market
         
    Technical

            The S&P made a valiant two day attempt to reverse the deterioration in its technicals but failed.  It is now back within a very short term downtrend, below both MA’s and has set a new lower high and lower low.  I have to think that stocks will stage some kind of oversold rally; but I thought that last Thursday and Friday and look what happened.  You can clearly see the next two support levels: the late October low and the lower boundary of its short term trading range.



            The long bond’s chart changed dramatically in the last week, apparently the result of a morphing of bond investors’ sentiment from bearish (higher rates) to bullish (lower rates).  Its 100 DMA reverted to support on Friday and if it remains above its 200 DMA through the close today, it will also revert to support.  It did challenge the upper boundary of its short term downtrend, but failed.  It really needs to bust through that resistance level to confirm that a major change in attitude has occurred.

      


                 The dollar continues to perform reasonably.  It ended above both MA’s and in a short term uptrend.  The only negative note is that it closed below the lower boundary of its very short term uptrend; if it remains there through the close today, the trend will be voided.



            Gold’s chart is improving.  It has lifted above the upper level of a trading range and is developing a very short term uptrend.  It is holding above its 100 DMA.  The pin action usually responds positively to lower rates and the need for safety, so this better performance isn’t surprising.  In fact, given the deluge in equities and the developing reversal in TLT’s chart, I had expected better.



            Not surprisingly in a week full of big declines, the VIX’s chart remained strong.  Notice the 100 DMA is crossing above its 200 DMA, a technical positive.



    Fundamental

       Headlines

            China threatens severe retaliation if Huawei CFO not released.
           
            Surging federal expenditures and declining tax revenues are not a prescription for a growing economy (must read).


    News on Stocks in Our Portfolios
 
           

Economics

   This Week’s Data

      US

     International

            November Chinese CPI and PPI were below estimates; in addition, exports/imports weakened though the trade surplus with the US grew.

            Third quarter Japanese GDP fell 0.6%, in line.

    Other

            Consumer credit hits all-time high.

What I am reading today

            If US quits INF treaty.

                        Listen to the Martian winds.


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