Thursday, December 14, 2017

The Morning Call--But CPI says inflation isn't rising and the Fed thinks that is OK

The Morning Call

12/14/17

The Market
         
    Technical

The indices (DJIA 24585, S&P 2663) turned in a muted version of ‘sell on the news’ yesterday, as the headlines were all upbeat but the Averages mixed (Dow up, S&P down).  Volume declined modestly while breadth remained strong.  The bottom line remains that both of the Averages continue to trade above their 100 and 200 day moving averages and are in uptrends across all time frames---with the assumption being that stock prices are going higher.
           
The VIX (10.3) rose 2 1/2 %, closing below its 100 and 200 day moving averages (both resistance) but finished above the lower boundary of its long term trading range.

The long Treasury was up big on volume, ending above its 100 and 200 day moving averages and the lower boundaries of a very short term uptrend, its short term trading range and long term uptrend.   So bond investors apparently viewed the FOMC statement as dovish.

The dollar was down big on volume, finishing below its 200 day moving average (now resistance) but above its 100 day moving average (now support) and back below the upper boundary of its short term downtrend (negating Tuesday’s break).  Dollar investors also aren’t that enthused with yesterday’s Fed (in) action.

            Gold was up big on volume, but remained below its 100 and 200 day moving averages and within a short term trading range.  GLD investors seemed to concur that the FOMC is filled with wimps. 

Bottom line: long term, the indices remain strong viz a viz their moving averages and uptrends across all timeframes. Short term, they are above the resistance level marked by their August highs, meaning that there is no resistance between current price levels and the upper boundaries of the Averages long term uptrends. The technical assumption has to be that stocks are going higher.  If you own enough cash to sleep at night, lay back and enjoy it.
           
Trading in UUP, GLD and TLT were back in sync reflecting an attitude of disdain for a weak wristed Fed.  The VIX seemed to be agreeing while stocks were more neutral in their response.  I remain confused and uncomfortable with the overall technical picture.

    Fundamental

       Headlines

            Yesterday’s economic stats were mixed: weekly mortgage and purchase applications fell while November CPI was in line---indeed portraying a much more benign picture of inflation than did the previous day’s PPI number.   I should note that PPI tends to lead CPI; but as long as the Fed’s favorite inflation indicator remains below its stated objective, there is little reason to assume that there is any pressure to speed up the normalization of monetary policy.
           
            ***overnight, November UK retail sales were better than anticipated; November Chinese industrial output and retail sales were below estimates.

            The lead items of the day were:

(1)   a second round of rumors on an agreement on the tax bill.  While the particulars were almost identical with the first set of rumors, it still provided another opportunity for investors to get jiggy.

Here is what we know so far (medium):

More on the exceeding low tax rate US corporations are now paying (medium):

                  Don’t expect an investment boom if corporate tax rates are cut (medium):


(2)   the conclusion of the December FOMC meeting, its policy actions and outlook.  All was pretty much in line with my assumptions: a quarter point rate hike [everyone expected this] and a bright and shining economic forecast---rising GDP growth, declining unemployment and inflation gradually reaching the Fed 2% objective.  Of course, that doesn’t occur until 2020, so it is nothing to be worried about today and far enough in the future to be rendered useless as a forecast.  As I noted above, most markets judged the action/statement as dovish---rising bond and gold prices and a lower dollar.  In short, the Fed is leaving not upsetting the markets [even though, as I have often observed, not upsetting the markets is not anywhere to be found in its policy mandate] as a priority to the timely unwinding of QE.

                        ***overnight, the ECB met and left rates and its QE program unchanged (short):

                        As did the Bank of England; also leaving policy unchanged (medium):

                        However, China raised rates slightly (medium):


Bottom line: the bulls had another goldilocks news day---tax reform is coming (however, ineffective it may be) and the Fed continues to have the Markets’ back.  At least some of the stock boys think so as did bond, dollar and gold investors.  In other words, buy everything except the dollar---because, you know, who wants to own the currency of a country whose ruling class is more concerned about short term effect of the headlines than their long term consequences. 

I have no idea how or when this ends.  As long as the headlines remain positive and the algos have a dollar left to push prices higher, all will be well.  But at some point, somebody or some event is going to point to the emperor and all the lemmings are going to realize that he has no clothes.  Until then, lay back and enjoy the ride.  However, I would have some cash for the aftermath.

            The latest from Doug Kass (medium):

       Investing for Survival
   
            The circle of competence.

    News on Stocks in Our Portfolios
 
            Caterpillar (NYSE:CAT) declares $0.78/share quarterly dividend, in line with previous.

Economics

   This Week’s Data

            Weekly mortgage applications fell 2.3% while purchase applications were down 1.0%.

            November CPI rose 0.4%, in line while ex food and energy, it was +0.1% versus expectations of up 0.2%

            Weekly jobless claims fell 11,000 versus estimates of a 3,000 increase.

            November retail sales were up 0.8% versus forecasts of up 0.3%; ex autos, they were up 0.8% versus projections of up 0.4%.

            November export prices increased 0.7%, in line; import prices were up 0.5% versus consensus of up 0.3%.
           
   Other

            Today’s bitcoin entries:

Politics

  Domestic

  International War Against Radical Islam


Visit Investing for Survival’s website (http://investingforsurvival.com/home) to learn more about our Investment Strategy, Prices Disciplines and Subscriber Service.




Wednesday, December 13, 2017

The Morning Call--Inflation is rising; will that have any impact on Fed policy?

The Morning Call

12/13/17

The Market
         
    Technical

The indices (DJIA 24504, S&P 2664) had another good day.  Volume was up; and breadth improved.  The bottom line remains that both of the Averages continue to trade above their 100 and 200 day moving averages and are in uptrends across all time frames---with the assumption being that stock prices are going higher.
           
The VIX (9.9) rose 6 ¼ %, closing below its 100 and 200 day moving averages (both resistance) but back above the lower boundary of its long term trading range.  Again, being up 6 ¼ % on a strong market day is a bit unusual.

The long Treasury was down fractionally for a second day, ending above its 100 and 200 day moving averages and the lower boundaries of a very short term uptrend, its short term trading range and long term uptrend.   So bond investors still don’t appear to be concerned about a Fed rate hike today.

The dollar was up, finishing below its 200 day moving average (now resistance) but above its 100 day moving average (now support) and above the upper boundary of its short term downtrend (if it remains there through the close on Thursday, it will reset to a trading range).

            Gold rose slightly, but remained below its 100 and 200 day moving averages and within a short term trading range.  GLD investors are apparently more concerned about a rate rise than the bond guys; but part of its poor performance could be impacted by cryptocurrencies. 

Bottom line: long term, the indices remain strong viz a viz their moving averages and uptrends across all timeframes. Short term, they are above the resistance level marked by their August highs, meaning that there is no resistance between current price levels and the upper boundaries of the Averages long term uptrends. The technical assumption has to be that stocks are going higher.  If you own enough cash to sleep at night, lay back and enjoy it.
           
Trading in UUP, GLD and TLT are back out of sync with themselves (sluggish economy, weak interest rates) and with the VIX and stocks.  I remain confused and uncomfortable with the overall technical picture.
           
    Fundamental

       Headlines

            Yesterday’s economic data were mixed: the November small business optimism index and month to date retail chain store sales were pluses; the November budget deficit was disappointing (questions:  [a] how can the US government be running a larger than expected deficit at a time when everyone is wee weeing in their pants about improved GDP growth? and [b] how can net tax cuts be helpful to this situation?)  November PPI was also above expectations but that can interpreted differently depending on your perspective.  The bulls undoubtedly are happy because inflation is nearing the Fed’s 2% inflation objective which they believe to be valid. 

Me, I don’t understand why anyone wants a 2% inflation rate.  It robs you and me of our purchasing power year after year.  Further, it is another sign of that the Fed has again waited too long to begin the transition toward monetary normalization.  The issue here is the extent to which rising inflation will push the Fed to a more aggressive tightening stance than is now expected by the markets.  I don’t know the answer; but the risk is it just moves the goal posts on inflation like it did on growth.  However, in my opinion, if inflation continues to accelerate, so do the Fed’s problems.  Having said all of that, CPI gets reported today and it may portray a much more benign pricing environment.

            In addition, we get Yellen’s famous final scene today which will most likely be a hike in rates coupled with the promise to tighten as slowly as possible.

            David Stockman on the latest economic numbers (medium):

            ***overnight, October EU industrial output was above expectations; November UK unemployment rose while CPI and PPI were in line.

            The headline item of the day was Sen. Cornyn’s optimistic assessment that the tax bill will be out of conference soon.

            But the Europeans don’t like it; and that could lead to trade issues (medium):

                And many still aren’t buying the ‘dynamic scoring’ results (medium):
            Given the above, it appears that even if the final version of the tax reform is as described above, it will not have changed enough to alter the conclusion that the bill will not be simpler, fairer or sufficiently stimulative to warrant the assumption of another $1.5 trillion in national debt.

Bottom line: the bulls have very reason to be optimistic: (1) the economic data is improving [though the issue is whether this is the beginning or the end of an expansion], (2) the Fed is slow playing the normalization of monetary, even though the aforementioned economic numbers are meeting its objectives [though they were altered several times to allow the Fed to maintain monetary ease longer than its original guidelines], (3) the electorate is apt to get a big beautiful tax cut [to coin a  phrase] this year [though the only things that are big are {i} tax cuts for corporations and wealthy individuals and {ii} the increase in the deficit] and (4) there is now the likelihood of a infrastructure spending bill [though we have so few specific, it is hard to draw any conclusions about its potential impact on the economy]. 

To be sure, there are plenty of historical arguments on both sides as to whether the tax bill as it is currently structured will indeed be stimulative.  As you know, in my opinion, it will not.  That said, if it stimulates economic hopes of businesses and consumers, that in itself could prompt a change in behavior that could raise the level of investing and spending.  Whether that happens or not, I have no clue.  But I believe that current equity valuations reflect a goldilocks result---which may occur.  But I wouldn’t have all my assets riding on that bet.

            The latest from Jim Grant (medium):

       Investing for Survival
   
            What a complacent investor looks like.

    News on Stocks in Our Portfolios
 
           

Economics

   This Week’s Data

            Month to date retail chain store sales growth rose from the prior week.

            The November budget deficit was $138.5 billion versus consensus of $134.0 billion.

   Other

            Today’s bitcoin entries:

            On a related matter---the EU’s war on cash (medium):

Politics

  Domestic

  International War Against Radical Islam


Visit Investing for Survival’s website (http://investingforsurvival.com/home) to learn more about our Investment Strategy, Prices Disciplines and Subscriber Service.




Tuesday, December 12, 2017

The Morning Call--T'is the season to be jolly

The Morning Call

12/12/17

The Market
         
    Technical

            The indices (DJIA 24386, S&P 2659) had a good day, though volume was flat and breadth was mixed.  The bottom line remains that both of the Averages continue to trade above their 100 and 200 day moving averages and are in uptrends across all time frames---with the assumption being that stock prices are going higher.
           
The VIX (9.3) fell 2 ½ %, closing below the lower boundary of its long term trading range for a second day, below its 100 and 200 day moving averages (both resistance).  It is again nearing its July low (8.8) 

The long Treasury was down fractionally, ending above its 100 and 200 day moving averages and the lower boundaries of a very short term uptrend, its short term trading range and long term uptrend.   So bond investors still don’t appear to be concerned about a Fed rate hike later this week.

The dollar was unchanged, above its 100 day moving average (now support), right on the upper boundary of a very short term downtrend but below its 200 day moving average (now resistance).

            Gold was down ½ %, continuing its poor performance.  It is below its 100 and 200 day moving averages and reset its short term trend from up to a trading range.  GLD investors are apparently more concerned about a rate rise than the bond guys. 

Bottom line: long term, the indices remain strong viz a viz their moving averages and uptrends across all timeframes. Short term, they are above the resistance level marked by their August highs, meaning that there is no resistance between current price levels and the upper boundaries of the Averages long term uptrends. The technical assumption has to be that stocks are going higher.  If you own enough cash to sleep at night, lay back and enjoy it.
           
Trading in UUP, GLD and TLT are back out of sync with themselves (sluggish economy, weak interest rates) and with the VIX and stocks.  I remain confused and uncomfortable with the overall technical picture.
                       
    Fundamental

       Headlines

            Yesterday was quiet on most fronts: no economic data in the US or abroad.  Investors spent the day (1) getting jiggy with bitcoin, (2) anticipating a grand exit by Yellen on Wednesday and (3) ignoring more accusations of sexual harassment by Trump.  No wonder stocks were up.

            I have linked below to a number of articles on relevant issues: bit coin, Brexit, a slowdown in volume of containerized shipping.

            This from two big supporters of tax reform (medium):

            Bottom line: animal spirits are high partly as a function of the seasonal bias and partly in anticipation of upbeat news on tax reform and infrastructure spending.  The question is, assuming the successful passage of both, what will be the impact on corporate earnings and how those earnings are valued?  In my opinion, the most optimistic investment scenario possible is more than adequately reflected at current price levels.  Be careful.

       Investing for Survival
   
            Three unexpected retirement costs.

    News on Stocks in Our Portfolios
 
           

Economics

   This Week’s Data

            The November small business optimism index came in at 107.5 versus expectations of 104.4.

            November PPI was up 0.4% versus estimates of up 0.3%; ex food and energy, it was up 0.3% versus forecasts of up 0.2%.

   Other

            Is softness in the global containerized shipping market a warning sign? (medium):

            The math of unwinding the Fed’s balance sheet (medium):

            Some analysis of the Brexit ‘break through’ (medium):

            China’s plan to combat US tax reform (medium):

            Is the World Trade Organization worth effective? (medium):

            Today’s bitcoin entries:

Politics

  Domestic

  International War Against Radical Islam


Visit Investing for Survival’s website (http://investingforsurvival.com/home) to learn more about our Investment Strategy, Prices Disciplines and Subscriber Service.




Monday, December 11, 2017

Monday Morning Chartology

The Morning Call

12/11/17

The Market
         
    Technical

            Here is even a longer term chart than I presented last week; but the point is the same.  The S&P is on a sizz.  The assumption has to be that the upward momentum will continue, though clearly it is nearing a powerful resistance at the upper boundary of its long term uptrend.



            Despite some volatility, the long Treasury continues to move to the upside.  It remains above both moving averages and the lower boundaries of a very short term uptrend, a short term trading range and a long term uptrend.  In other words, the weak long term rates or safety trade is holding in the face of the FOMC meeting this week in which it is expected to raise rates.



            The dollar is now above its 100 day moving average and is on the cusp of challenging its short term downtrend.  If successful, it would point to a stronger economy/higher interest rates or a safety trade.



            GLD had a punk week, resetting its short term uptrend to a trading range and reverting its 100 day moving average to resistance.  That tends to indicate higher interest rates and/or a retreat from a safety trade.



            While equity prices rose last week, the VIX was pounded to greater extent than commensurate with the stock price advance.  Indeed, the VIX is closing in on another challenge of its July lows.  Something seems off.



            Bottom line: the disparate performance of the indicators keeps me very uneasy with the technical picture given the seeming inconsistency of the thinking/rationale of investors in various markets.

    Fundamental

       Headlines

The data last week was pretty evenly matched; although the primary indicators were a solid plus.  The call is a plus.   Score: in the last 113 weeks, thirty-six were positive, fifty-six negative and twenty neutral.  However, as I noted last week, the recent trend has been upbeat which I attribute to the Trump regulatory agenda, the increasing growth in the EU economy and a rising level of consumer and business sentiment as congress continues to make progress on the tax bill.

            Overseas, there was not many stats out of the EU while those from China were mixed and the Japanese continues its positive trend.  That really doesn’t change the global economic picture: EU a plus, China a negative, Japan attempting to demonstrate some consistent growth.

            IMF stress test of Chinese banks reveals serious shortage of equity capital (medium):

            The ruling class kept us busy last week.

(1)   the senate passed its version of tax reform.  The GOP is now driving to the hoop for passage of a tax bill.  I suspect the odds are for success; though at the moment, the terms of the bill are still up for question as political process evolves.

Whatever the details, it still appears that

[a] corporations will get the lion’s share of tax reductions---which {i} I don’t believe is fair and {ii} they are receiving this largess on the thesis that they will spend the extra cash from tax savings on investment and creating jobs.   There is only one thing wrong with that notion---corporations already have a lot of free cash flow and have to date used it buyback stock and grow their dividends.  While they have every right to spend their money as they see fit, I fail to see how lowering their tax rate, thereby increasing their cash flow will alter their decision on how to spend cash.

[b] the legislation will still add $1.5 trillion to the national debt.  I have beat this horse to death; but the bottom line is that at the US current level of debt, adding another $1.5 trillion will be do more to hinder economic growth than increase it.

That said, the big unknown is the psychological effect a tax bill, however, flawed, will have on corporate investment decisions.  To be sure, we witnessed a brief surge in economic activity immediately following the Donald’s election, only to peter out with the realization that one man wasn’t going to change how business got done in DC.  Will this time be different?  Certainly, an initial spurt in economic activity is easy to imagine.  The question is, is it sustainable?  That is probably the biggest issue impacting the economy in 2018.

(2)   Congress managed to extent the spending authority of the government by another two weeks.  While that is not exactly a moment for jubilation, it does indicate that the GOP and dems can reach some kind of agreement in order to avoid a government shutdown.  True, the same problem will again come to a head shortly; but with all the negotiations occurring on multiple fronts, hopefully, our governing class can come up with a compromise that keeps the government open.

On the other hand, keeping the government in business at a negative run rate [deficit] at a time of unsustainable national debt isn’t exactly a victory to cheer about.

(3)   the Donald has already started talking about an infrastructure bill.  We have no idea what his proposal will contain, but here is what I am watching for: [a] how big will it be.  Early rumors have it a $200 billion; and that is relatively modest, [b]what projects will it entail?  More Obama ‘shovel ready’ imaginary spending or real ventures that improve America and produce jobs?

One other piece of overseas news worth mentioning: the EU and UK inched closer to agreement on Brexit.  This is good news and lessens any risks that would be associated with any economic disruptions that could result from a contentious breakup.

Bottom line: the economic data continues to improve; and I upgraded our 2018 growth forecast to reflect that.  To be sure, it wasn’t wildly optimistic but it did portray an economy emerging from a near year long bout with stagnation.  Further, it may be given an additional boost depending on the outcome of the tax bill and Trump’s infrastructure spending plans.  At the moment, I am not all that hopeful regarding the former and I simply don’t know enough to have any opinion of the latter. 

That said, I think that the big unknown is not what the terms of the aforementioned legislation may be but how businesses and consumers react to it.  So far, everybody is jiggy.  However, the rubber has yet to meet the road.

            Earnings may not matter but dividends do (as in the present value of future cash flows):

       Investing for Survival
   
            The death of equities, redux


    News on Stocks in Our Portfolios
 
           

Economics

   This Week’s Data

           


   Other

            The latest thoughts from Bill Gross (medium):

                A pentagon audit---it is about time, if they really do it (medium):
               
                Stockman on employment and wages/income (medium):
               
            Since bitcoin is now on everyone’s lips with few understanding it, I am going to start making regular entries of the subject.  Here is the original paper done by the developer of bitcoin.  Don’t worry, it is not that technical:
            https://bitcoin.org/bitcoin.pdf

Today’s entries:

Politics

  Domestic

  International War Against Radical Islam


Visit Investing for Survival’s website (http://investingforsurvival.com/home) to learn more about our Investment Strategy, Prices Disciplines and Subscriber Service.




Tuesday, December 5, 2017

The Morning Call

The Morning Call

12/5/17

My diagnosis has gone from viral infection to pneumonia.  I am confined to bed.  Back when I can

The Market
         
    Technical

            The indices (DJIA 24290, S&P 2639) had another schizophrenic day, opening up big in initial trading but giving much of that gain for the remainder of the day including a negative close for the S&P.  Volume was up; breadth mixed.  The bottom line remains that both of the Averages continue to trade above their 100 and 200 day moving averages and are in uptrends across all time frames---with the assumption being that stock prices are going higher.
           
The VIX (11.7) was up another 2 ¾%, closing above the lower boundary of its long term trading range, above its 200 day moving average (reverting to support) and above its 100 day moving average (now support). 

The long Treasury was up, ending above it 100 and 200 day moving averages and the lower boundaries of a very short term uptrend, its short term trading range and long term uptrend.  

The dollar rose, finishing right on its 100 day moving averages (now support) and the upper boundary of a very short term downtrend but within a short term downtrend and below its 200 day moving average (now resistance).

            Gold was off, closing below its 100 day moving average---continuing its see saw pattern around this moving average.  It remained above its 200 moving average (now support) and in a short term uptrend. 

Bottom line: long term, the indices remain strong viz a viz their moving averages and uptrends across all timeframes. Short term, they are above the resistance level marked by their August highs, meaning that there is no resistance between current price levels and the upper boundaries of the Averages long term uptrends. The technical assumption has to be that stocks are going higher.  If you own enough cash to sleep at night, lay back and enjoy it.
           
Trading in UUP, GLD and TLT are back out of sync with themselves (sluggish economy, weak interest rates) and with the VIX and stocks.  I remain confused and uncomfortable with the overall technical picture.
           
    Fundamental

       Headlines

            One US datapoint yesterday: October factory orders were down less than expected.  Nothing overseas.

            Investor focus was on the tax bill getting passed.

            More feedback on the senate’s piece of s**t tax bill.

            And Ed Yardini on the corporate tax cut (medium):

            But a government shutdown (12/8 drop dead date) is now starting to draw attention (medium):

            Bottom line: the good news is that the economy is improving.  The bad news, however, is that the negative consequences of an inefficient tax bill and yet another hike in the national debt will, in my opinion, more than offset of the benefits of the current upturn in cyclical growth.

            Update on valuations (medium):

       Investing for Survival
   
            Notes from an unwelcome future.

    News on Stocks in Our Portfolios
 
           

Economics

   This Week’s Data

            October factory orders fell 0.1% versus estimates of -0.4%.

   Other

            Government debt now surpasses household debt (medium):

Politics

  Domestic

  International War Against Radical Islam


Visit Investing for Survival’s website (http://investingforsurvival.com/home) to learn more about our Investment Strategy, Prices Disciplines and Subscriber Service.