Saturday, February 25, 2017

The Closing Bell

The Closing Bell

2/25/17


Statistical Summary

   Current Economic Forecast
                       
2016 estimates

Real Growth in Gross Domestic Product                     -1.25-+0.5%
                        Inflation (revised)                                                          0.5-1.5%
                        Corporate Profits (revised)                                            -15-0%

2017 estimates

Real Growth in Gross Domestic Product                      +1.0-2.5%
                        Inflation                                                                         +1.0-2.0%
                        Corporate Profits                                                            +5-10%



   Current Market Forecast
           
            Dow Jones Industrial Average

                                    Current Trend (revised):  
                                    Short Term Uptrend                                 18812-20870
Intermediate Term Uptrend                     11782-24634
Long Term Uptrend                                  5751-23298
                                               
                        2016    Year End Fair Value                                   12600-12800

                        2017     Year End Fair Value                                   13100-13300

            Standard & Poor’s 500

                                    Current Trend (revised):
                                    Short Term Uptrend                                     2202-2536
                                    Intermediate Term Uptrend                         2050-2654
                                    Long Term Uptrend                                     881-2561
                                               
                        2016   Year End Fair Value                                      1560-1580
                       
2017 Year End Fair Value                                       1620-1640         

Percentage Cash in Our Portfolios

Dividend Growth Portfolio                          55%
            High Yield Portfolio                                     54%
            Aggressive Growth Portfolio                        55%

Economics/Politics
           
The Trump economy will likely provide an upward bias to equity valuations.   This week’s data was basically neutral:  above estimates: January existing home sales, month to date retail chain store sales, February consumer sentiment and the February Kansas City Fed manufacturing index; below estimates: January new home sales, weekly mortgage and purchase applications, the February Markit flash manufacturing PMI and the January Chicago national activity index; in line with estimates: weekly jobless claims.

 Further, the primary indicators were also a wash: January existing home sales (+) and January new home sales (-).  The score: in the last 73 weeks, twenty-four were positive, forty-two negative and seven neutral.

If you are an optimist, then the interpretation of this week’s stats is that they are a weak continuation of the prior two weeks’ upbeat dataflow which in turn is an indication of a pickup in the numbers due to the improved post-election Market sentiment being translated into a more rapidly growing economy.  While I have put myself in that camp, it is still a bit too short of a time span to declare victory.

On the political side, Trump continued his deregulation agenda; and while it may deliver upbeat economic results long term, to date, his measures have not been enough to move the needle on our economic forecast.  But just to be clear, this phase of his presidency, in my opinion, is a positive, economically speaking. 

Trade is the other area that Trump has spent a lot of time and capital on; and while he has unquestionably shaken up the establishment by criticizing NAFTA/Mexico, Germany and the euro, nothing really concrete has been done---and that is the good news. I am not going to repeat the endless number of reasons why actually following through with his threats would be a negative for both our trading partners and ourselves.  My hope is that they are just negotiating bluster and the final results will be much more free trade friendly.  But if he is serious, this will be a major economic negative.

Just as important, it is becoming increasingly apparent that tax reform is going to take some time.  Much debate continues on the efficacy of the border tax; and the Senate appears to be steadfast in opposing anything that will increase the budget deficit.  To be clear, (1) I have always doubted the rapid passage of a tax cut and (2) increasing the budget deficit is not, in my opinion, sound economic policy given the current level of federal debt.  So I consider neither of these factors a negative.

But if you have noticed, the semantics of taxes has changed a bit.  The discussion has gone from tax cuts to tax cuts versus tax reform---the former being cuts without offsetting increases or spending cuts, the latter a revenue neutral restructuring, the intent of which is to make the tax code simpler and fairer. 

Of course, tax cuts are generally received with much enthusiasm for obvious reasons. And there are times when they can be quite stimulative.  But this isn’t one of those times---at least if you accept the Reinhart/Rogoff thesis (at a certain level [which the US has achieved], additional government debt inhibits rather fuels economic growth).  This is a major reason the Senate leaders have opposed cuts with no offsets and have the power to enforce it. 

Tax reform is also generally applauded as a good thing; but it is quite different in its economic impact than tax cuts. There is little doubt that a simpler and fairer tax system will have a positive effect on the economy; but it likely won’t produce the magnitude of growth in GDP and corporate earnings that the dreamweavers have been prognosticating.  Just to be clear, I want to repeat that, assuming tax reform is anywhere close the model that has been floated, reform will result in growth, just not to the extent that I now see in Street forecasts of GDP and corporate profit growth.  Particularly, if the reform includes the border tax as a revenue offset.

Overseas, the data this week returned to the plus side, supporting the notion that there is a decent probability that the ‘muddle through’ scenario gets replaced by an improving economy.  But it is just too soon to make that call.  That said, there are still problems out there: the Monte Paschi bailout, the Brexit, currency turmoil in China, Mexico and Turkey, the potential impact of a Trump anti- free trade agenda and Greece’s bailout difficulties. 

Bottom line: this week’s US economic stats were neutral, neither helping nor damaging the notions that either the economy is improving or is about to improve based on increasing investor sentiment.  More is needed before I will feel confident with my revised tentative short term forecast.  But I will wait until we see any concrete changes in the Trump/GOP fiscal agenda before altering the long term secular economic growth rate in our Models.   

In the meantime, my take is that we are in an economy (1) that is making only sluggish headway, (2) in which the known Trump economic policy changes are not that encouraging [‘border’ tax; currency valuation] and (3) the unknown [tax cuts and infrastructure spending] policies have yet to be addressed in any meaningful way, but which may be about to change. 

Our (new and improved) forecast:

‘a possible pick up in the long term secular economic growth rate based on lower taxes, less government regulation and an increase in capital investment resulting from a more confident business community.  However, there are still a number of potential negative unknowns including a more restrictive trade policy, a possible dramatic increase in the federal budget deficit, a Fed with a proven record of failure and even whether or not the aforementioned tax and regulatory reforms can be enacted.   

It is important to note that this change in our forecast is all ‘on the come’ and hence made with a good deal less confidence than normal.  Nonetheless, I have made an initial attempt to quantify this amended outlook with the caveat that it will almost surely be revised.’

Bottom line: the US data this week was mixed.  While it could still be part of the improvement from the recent trend of lousy stats, it is hardly a sign that the economic growth is something other than slow. 
                       
       The negatives:

(1)   a vulnerable global banking system. The good news is that there was nothing in this arena this week occurring in the US.  Overseas is another story.  [a] the EU and the ECB are at odds over Monti Dei Paschi rescue and [b] IMF told Greece that it must make further structural changes before assistance can be provided. 

A bankruptcy of either Monti Paschi or Greece would not be a plus for the EU or global banking systems.  That said, the EU ruling class has always been able to cobble together measures that allowed them to muddle through---and, indeed, that has been our forecast for years.  But that doesn’t mean that there is not a risk in assuming they will do it one more time.


(2)   fiscal/regulatory policy.  I continue to hope that the Donald’s new policies will prove beneficial to the economy and I can eliminate this factor as a negative.  Certainly, his efforts at deregulation are a positive.

However, Trump’s comments on trade demonstrate the seeming lack of understanding of what free trade has meant to global prosperity and peace.  Plus trying to talk down the dollar only generates similar responses from our trading partners, which in the end accomplishes nothing expect fostering ill will. 

That said, I remain open to the notion that many of Donald’s initial currency/trade positions may just be for negotiating purposes.  So the ultimate outcome could be quite positive.  However, until we know how this turns out, there is cause for unease.

One of the most important elements of Trump’s campaign pledges was tax cuts.  Two weeks ago, he sent the Market into ecstasy with his ‘phenomenal’ tax plan that he said would be out in two or three weeks.  And here we are two weeks later and nada.  Indeed, in a Thursday interview, Treasury Secretary Mnuchin suggested that the timing would be much longer than implied by the Donald.  In addition, as in noted above, the administration is now comparing and contrasting tax cuts [not revenue neutral] and tax reform [revenue neutral].  Meaning it is unclear what tax cuts/reform will look like.

In addition, rumors now suggest that infrastructure spending, the second major element of Trump fiscal plan will be put off until 2018 (medium):

To be fair the Washington sausage making process always take longer than anyone expects; so I am not going to hold a delay against Trump.  But, but, but, it seems clear that [a] the pushback on tax cuts from multiple parties and [b] the implementation of a border tax as a revenue offset in a tax reform package should give pause to those who are forecasting significant growth [again, please note, ‘significant growth’; some pick up in ‘growth’ will almost surely happen] in the economy and corporate profits. 


Bottom line, it seems like congress is faced with a Hobson’s choice on tax policy.  Tax reform, assumes the border tax, which as you know I think economically unsound.  Tax cuts run up the budget deficit, which longer term is even worse.

(3)   the potential negative impact of central bank money printing:  The key point here is that [a] the Fed has inflated bank reserves far beyond any comparable level in history and [b] while this hasn’t been an economic problem to date, {i} it still has to withdraw all those reserves from the system without creating any disruptions---a task that I regularly point out it has proven inept at in the past and {ii} it has created or is creating asset bubbles in the stock market as well as in the auto, student and mortgage loan markets.  

The minutes from the last FOMC meeting were released this week.  They depicted the same old Fed engaged in a great discussion about the economy and the risks it faces but completely unable to make a decision. 

Of course, no decision is a decision.  The problem being that the longer the Fed takes to initiate a normalization of monetary policy, the more it harms the economy and diminishes its own credibility.  I know that there are plenty of people out there that believe that the Fed is doing a spectacular job.  I suspect that most of that admiration is derived from current equity [over] valuations.  But when Act III is over, I also suspect that same group will be excoriating the Fed as villain not hero.

The Fed’s credibility (medium and a must read):

(4)   geopolitical risks: I continue to worry about Trump’s seeming willingness to throw diplomacy aside and treat the rest of the world like they are the press.  To be clear, I don’t have an issue with most of the principles behind his offensive comments. And I understand that he may just be trying to set up a negotiating position.

This article supports that notion (medium):


My point here is that, in my opinion, duking it out with foreign leaders in public increases the odds of a misstep that could be costly in far more ways than just economically.



(5)   economic difficulties in Europe and around the globe.  This week, the number from the rest of the world were scarce as they were from the US; but they were all upbeat:

[a] the February EU Markit composite, manufacturing and services PMI’s were above projections; January EU inflation was less than anticipated; fourth quarter UK GDP growth was revised higher; February German business was better than expected;

On the other hand, news reports indicated that the bankruptcy problems at Italy’s Monti Paschi and the Greek bailout have not been resolved  If history repeats itself the EU ruling class will come up with band aid that will buy more time; but that won’t solve the problems.  Ultimately somebody has to swallow some bitter medicine.

While sparse, this week’s data gets the global economy back on its winning track, leaving a change in our forecast on the table.  We are just not quite there yet.  Part of my hesitation is because of the continuing potential economic/financial problems in Italy, Greece, China, Mexico, Turkey and the UK.


            Bottom line:  the US economic stats were neutral---a microscopic boost to those hoping that the economy is currently improving.  In addition, the Donald continues his drive for deregulation and that is a decided plus.  Finally, while there has been a lot of dialogue about taxes, spending, Obamacare, trade, nothing is even in writing much less close to enactment.  In other words, while I am hopeful that Trump will be able to deliver on his promises, it is too soon to be building economic models assuming some specific outcomes.  Net, net, at this moment, what has been accomplished to date may only modestly alter long term secular growth rate of the economy.

Foreign economic data this week improved, leaving open the possible revision to our ‘muddle through’ scenario.

This week’s data:

(1)                                  housing: January existing home sales were well ahead of forecast while January new home sales were below; weekly mortgage and purchase applications were down,

(2)                                  consumer: month to date retail chain store sales growth improved from the prior week; weekly jobless claims rose slightly more than projected; February consumer sentiment was better than the January reading,

(3)                                  industry: the February Markit flash manufacturing PMI came in below estimates; the January Chicago Fed national activity index was considerably worse than anticipated while the February Kansas City Fed manufacturing index was very strong,

(4)                                  macroeconomic: na.

The Market-Disciplined Investing
         
  Technical

The indices (DJIA 20821, S&P 2367) made a dramatic intraday comeback on Friday to close in the plus column.  Volume fell (for the sixth day in a row), but remained at a high level; breadth was weaker despite the positive finish.   The VIX (11.5) was down 2%, ending below its 100 and 200 day moving averages (now resistance) and in a short term downtrend but is near the lower boundary of its intermediate term trading range (10.3)---leaving complacency at a near record high level.
               
The Dow closed [a] above its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] in a short term uptrend {18812-20870}, [c] in an intermediate term uptrend {11782-24634} and [d] in a long term uptrend {5751-23298}.

The S&P finished [a] above its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] within a short term uptrend {2202-2536}, [d] in an intermediate uptrend {2050-2651} and [e] in a long term uptrend {881-2561}.

The long Treasury was up 1% on heavier than normal volume, breaking above the upper boundary of that developing pennant---a sign that the bond guys may be having second thoughts on the Trumpflation trade.  But it still has work to do to correct its negative chart since it remains below its 100 and 200 day moving averages and in a very short term downtrend.

GLD advanced on elevated volume, closing within a very short term uptrend and above its 100 day moving average (now support).  Plus it ended near its 200 day moving average (now resistance) and within a short term downtrend. 

The dollar was up, ending above its 100 day moving average (now support), its 200 day moving averages (now support) and in a short term uptrend.  

Bottom line: yesterday’s pin action just provides more support that there is a strong bid below the Market and that the Averages are headed for the upper boundaries of their long term uptrends.  However, the sharp rally in bonds suggests that the hopes associated with Trump fiscal plan may be fading in the bond pits.  If the bond guys are right, stocks are at risk.

Fundamental-A Dividend Growth Investment Strategy

The DJIA (20821) finished this week about 62.8% above Fair Value (12782) while the S&P (2367) closed 49.8% overvalued (1580).  ‘Fair Value’ will likely be changing based on a new set of fiscal/regulatory policies which may lead to an as yet undetermined improvement in the historically low long term secular growth rate of the economy; but it still reflects the elements of a botched Fed transition from easy to tight money and a ‘muddle through’ scenario in Europe, Japan and China.

This week’s US economic data were a draw.  Some may want to read that as more evidence that a growth spurt is in the making.  Certainly, the Market continues to interpret all data/news in a very positive light---which currently is that a major turnaround in the economy is occurring based on pro Market regulatory/fiscal policies from the new administration.  I think more information is needed to draw that conclusion.

Politics continues to dominate the headlines.  This week, Trump issued more executive orders to undo the regulatory infrastructure.  These cumulative regulatory changes should have a positive economic impact on the economy. 

In addition, the reality of the legislative process and math seem to be working their way into the discussions on tax cuts and infrastructure spending.  But the Market seems to have not grasped that same reality quite yet.  To be clear, as a result of fiscal and regulatory reforms, I may very well make upward revisions in our forecast for GDP and corporate profit secular growth and that could in turn positively impact stock valuations in our Model.   On the other hand, many on the Street have already made huge changes in their forecast based on, what I believe, are extraordinary leaps of faith on what will be enacted. As long as this remains their perspective, the gap between reality and the numbers in their models will persist.  At the moment, their hopes are all that matters to the Market; but if I am correct, then ultimately those models will change for the worse.

I remain concerned about Trump’s push towards tariffs and manipulating the dollar lower.  Free trade is and always has been an agent of economic progress and global political stability.  His proposals would inhibit those objectives.  Although I have acknowledged that his moves may be nothing more than initial negotiating positions from which positives can be derived.    Still the evidence to date keeps this factor as a negative.

Finally, I don’t believe that the Donald’s unnecessarily hostile rhetoric is conducive to accomplishing his objectives.  To be clear, I have no disagreement with most of his goals.  In just seems to me that they can be more easily achieved without getting into a public pissing contest, especially with foreign leaders. An unstable international environment tends not to be good for stock prices---and that is what we are concerned with here.

This week’s international stats were positive, increasing the likelihood of a change in international segment of our economic forecast.  I still need more data.  In the meantime, I am worried about a number of major problems (Brexit, currency problems, free trade issues) looming out there.

All that being said, you know that my negative outlook for stocks has little to do with the progress or lack thereof for the economy/corporate profits and is directly related to the irresponsibly aggressive global central bank monetary policy which has led to the gross misallocation and mispricing of assets.  The Fed has $4 trillion on its balance sheet which it has no clue how to get rid of.  And Draghi just said that EU QE isn’t going away anytime soon. 

As you know, my thesis all along has been that since the economy was little helped by QE/ZIRP, then it could do just fine in the face of a reversal of those policies.  On the other hand, since the Markets were the primary beneficiaries of Fed largesse, it would be they who suffered when the Fed began to tighten.

Net, net, my biggest concern for the Market is the unwinding of the gross mispricing and misallocation of assets caused by the Fed’s (and the rest of the world’s central banks) wildly unsuccessful, experimental QE policy.  In addition, while I am encouraged about the potential changes coming in fiscal/regulatory policy, I caution investors not to get too jiggy about the rate of any accompanying acceleration in economic growth and corporate profitability until we have a better idea of what, when and how new policies will be implemented.  Finally, whatever happens, stocks are at or near historical extremes in valuation and there is no reason to assume that mean reversion no longer occurs.

Bottom line: the assumptions in our Economic Model may very well improve as we learn about the new fiscal/regulatory policies and their magnitude.  However, unless they lead to explosive growth, they do little to alter the assumptions in our Models.  That suggests that Street models will undoubtedly remain more optimistic than our own which means that ultimately they will have to take their consensus Fair Value down for equities. 

Our Valuation Model could also change if I raise our long term secular growth rate assumption.  This would, in turn, lift the ‘E’ component of Valuations; but there is an equally good probability that this could be at least partially offset by a lower discount factor brought on by higher interest rates/inflation and/or the reversal of seven years of asset mispricing and misallocation.  In any case, at least according to the math in our Valuation Model, equities are way overpriced.

                As a long term investor, with equity valuations at historical highs, I would use the current price strength to sell a portion of your winners and all of your losers.  If I were a trader, I would consider buying a Market ETF (VIG, VYM), using a very tight stop.

DJIA             S&P

Current 2017 Year End Fair Value*              13200             1630
Fair Value as of 2/28/17                                  12782            1580
Close this week                                               20821            2367

Over Valuation vs. 2/28 Close
              5% overvalued                                13421                1659
            10% overvalued                                14060               1738 
            15% overvalued                                14699               1817
            20% overvalued                                15338                1896   
            25% overvalued                                  15977              1975
            30% overvalued                                  16616              2054
            35% overvalued                                  17255              2133
            40% overvalued                                  17894              2212
            45% overvalued                                  18533              2291
            50% overvalued                                  19173              2370
            55%overvalued                                   19812              2449
            60%overvalued                                   20451              2528
            65%overvalued                                   21090              2607
Under Valuation vs. 2/28 Close
            5% undervalued                             12142                    1501
10%undervalued                            11503                   1422   
15%undervalued                            10864                   1343



* Just a reminder that the Year End Fair Value number is based on the long term secular growth of the earning power of productive capacity of the US economy not the near term   cyclical influences.  The model is now accounting for somewhat below average secular growth for the next 3 to 5 years. 

The Portfolios and Buy Lists are up to date.


Steve Cook received his education in investments from Harvard, where he earned an MBA, New York University, where he did post graduate work in economics and financial analysis and the CFA Institute, where he earned the Chartered Financial Analysts designation in 1973.  His 47 years of investment experience includes institutional portfolio management at Scudder. Stevens and Clark and Bear Stearns, managing a risk arbitrage hedge fund and an investment banking boutique specializing in funding second stage private companies.  Through his involvement with Strategic Stock Investments, Steve hopes that his experience can help other investors build their wealth while avoiding tough lessons that he learned the hard way.








Friday, February 24, 2017

The Morning Call--Priced for perfection but with nothing concrete to discount

The Morning Call

2/24/17

The Market
         
    Technical

The indices (DJIA 20810, S&P 2363) lifted modestly---again, the Market seems to be taking a breather as it works off an overbought condition.  Volume fell (for the fifth day in a row), but remained at a high level; breadth was strong but did weaken a bit.   The VIX (11.7) was down slightly, finishing below its 100 and 200 day moving averages (now resistance) and in a short term downtrend but is near the lower boundary of its intermediate term trading range (10.3)---leaving complacency at a near record high level.
               
The Dow ended [a] above its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] in a short term uptrend {18804-20862}, [c] in an intermediate term uptrend {11782-24634} and [d] in a long term uptrend {5751-23298}.

The S&P finished [a] above its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] within a short term uptrend {2202-2536}, [d] in an intermediate uptrend {2050-2651} and [e] in a long term uptrend {881-2561}.

The long Treasury rose, continuing the process of building a pennant formation, but remained in a very short term downtrend, near the lower boundary of its short term trading range and below the 100 day moving average (now resistance), falling further below its 200 day moving average (now resistance). 

GLD was up 1%, closing within a very short term uptrend and above its 100 day moving average (now support).  But it finished below its 200 day moving average (now resistance) and within a short term downtrend. 

The dollar fell, ending above its 100 day moving average (now support), its 200 day moving averages (now support) and in a short term uptrend.  

Bottom line: yesterday’s mild action by the Averages was normal as they consolidate a very overbought condition.  Remember that they did exactly the same thing the last time this occurred; that is, prices consolidated by going sideways in a very narrow range for a time instead declining.  That suggests to me that there remains underlying strength in the Market and that the assumption has to be that the Averages are on their way to challenging the upper boundaries of their long term uptrends. 
           
    Fundamental

       Headlines

            Yesterdays’ US economic data was mixed: weekly jobless claims were up but just barely and fractionally more than anticipated; the January Chicago Fed national activity index well below expectations while the February Kansas City Fed manufacturing index advanced nicely over its January reading.  So far, in a very slow week, statistically speaking, the numbers are evenly matched up and only two more are scheduled for today.  So if this week ends ups anything but neutral, it won’t be by much.

            Overseas, there was no release of statistics but there were reports that the EU and ECB are at odds over Monti Dei Paschi rescue while the IMF told Greece that it must make further structural changes before assistance can be provided.  Leaving these two problems unresolved is a lot worse news than a couple of poor datapoints.

            In Thursday with Trump, Treasury Secretary Mnuchin suggested that any tax bill will likely not be forthcoming until August and perhaps later.  He also referred to the proposal as tax reform not a tax cut.  I maybe reading more into the change in semantics, but certainly hints that the tax plan will be revenue neutral.  Later, in an interview, Trump said that he supports ‘some form of a border tax’.   Finally, late in the day, rumors circulated that infrastructure spending legislation was being put off until 2018.  I have no idea what all this means but it seems likely to create more uncertainty about key economic proposals.

Bottom line: we wait for an economic plan, an Obamacare repeal and replace plan, a possible re-do of Dodd Frank and multiple re-sets of trade treaties.  At this moment, investors are basing their buy/sell decisions on leaks, rumors and suppositions.   Not that possible positive outcomes shouldn’t be taken into consideration in valuing equities.  But at the moment, virtually nothing concrete has happened with respect to tax cuts, repeal of Obamacare and infrastructure spending and yet stocks are at all-time highs---suggesting that they are priced for perfection.  Not owning a decent cash position at this time, is, in my opinion, a huge mistake.

            Only blind faith works in this Market (medium):

            Update on dividend cuts (short):

            My thought for the day: Warren Buffett has famously said---be fearful when others are greedy and be greedy when others are fearful.   So I ask the question, were you greedy in 2009 and are you fearful today?  If the answer is no, then join the ranks of ‘others’.  The problem with most ‘others’ is that their expectations are based on what happened recently.  They should learn that hindsight is not foresight.  The better solution is to have a plan (model) that guides them irrespective of their greed or fear; a plan that can be put into action regardless of what happens in the Market tomorrow.

       Investing for Survival
   
            The myth of passive investing.
           
    News on Stocks in Our Portfolios
 
Economics

   This Week’s Data

            The February Kansas City Fed manufacturing index was reported at 14 versus January’s number of 9.

   Other

            Decline in gasoline demand maybe a problem (medium):

            And copper as well (short):

Politics

  Domestic

  International

            The latest from North Korea (medium):

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Thursday, February 23, 2017

The Morning Call--At least the Fed is consistent

The Morning Call

2/23/17

The Market
         
    Technical

The indices (DJIA 20775, S&P 2367) turned in a mixed day (Dow up, S&P down)---not that unusual for an overbought Market.  Volume fell, but remained at a high level; breadth was very strong.   The VIX (11.7) was up slightly, but finished below its 100 and 200 day moving averages (now resistance) and in a short term downtrend but is near the lower boundary of its intermediate term trading range (10.3)---leaving complacency at a near record high level.

The Dow ended [a] above its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] in a short term uptrend {18804-20862}, [c] in an intermediate term uptrend {11788-24632} and [d] in a long term uptrend {5751-23298}.

The S&P finished [a] above its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] within a short term uptrend {2198-2541}, [d] in an intermediate uptrend {2050-2651} and [e] in a long term uptrend {881-2561}.

The long Treasury rose, continuing the process of building a pennant formation, but remained in a very short term downtrend, near the lower boundary of its short term trading range and below the 100 day moving average (now resistance), falling further below its 200 day moving average (now resistance). 

GLD was up fractionally, but closed within a very short term uptrend and above its 100 day moving average (now support).    It finished below its 200 day moving average (now resistance) and within a short term downtrend. 

The dollar fell, ending above its 100 day moving average (now support), its 200 day moving averages (now support) and in a short term uptrend.  

Bottom line: yesterday’s rest by the Averages was pretty benign in the midst of a very overbought condition.  Remember that they did exactly the same thing the last time this occurred; that is, prices consolidated by going sideways in a very narrow range for a time instead declining.  That suggests to me that there remains underlying strength in the Market and that the assumption has to be that the Averages are on their way to challenging the upper boundaries of their long term uptrends. 
           
            This week in charts (medium):

    Fundamental

       Headlines

            Yesterday’s US economic data releases were upbeat: January existing home sales were well ahead of forecast, month to date retail chain store sales growth was above the prior week but weekly mortgage and purchase applications were disappointing.

            Overseas, the stats are bouncing back from last week’s lousy numbers: fourth quarter UK GDP growth was revised higher; February German business confidence was better than expected; January EU inflation was less than anticipated.

            ***overnight, EU and ECB are at odds over Monti Dei Paschi rescue; IMF told Greece that it must make further structural changes before assistance can be provided.

            Under the Wednesday with Trump category, the Donald stated that the budget deficit was out of control.  While I wholeheartedly support that notion, it also reinforces the ‘math’ problem which I have been discussing for months, i.e. you can’t cut taxes, increase spending and reduce the deficit simultaneously.  There are, of course, ways of dealing with the issue like cutting taxes for one constituency while raising them for another (think border tax), reducing current government spending in order to pay for new spending measures or the time proven strategy of saying one thing (cutting taxes, increasing spending and balancing the budget) and doing another (pretend that you are cutting taxes and increasing spending but you don’t or cut taxes, increase spending and vastly expand the deficit).  Any combination of the above could happen but I don’t see the kind of positive economic results about which investors are so jiggy.  

            The minutes from the last FOMC minutes were released.  Again, the Fed did its usual masterful job of its ‘on the one hand, on the other hand’ dialectic but reaching no conclusion.  The media read those minutes as being more hawkish.  But those with money at stake had a different take: TLT was up, the dollar was down and gold was up---all indicative of lower not higher interest rates.  In short, no one with skin in the game believes a word out of the Fed because it has no idea what to do.  This is a good summary of the minutes:

Bottom line: we wait for an economic plan, an Obamacare repeal and replace plan, a possible re-do of Dodd Frank and multiple re-sets of trade treaties.  At this moment, investors are basing their buy/sell decisions on leaks, rumors and suppositions.   Not that possible positive outcomes shouldn’t be taken into consideration in valuing equities.  But stocks are at all-time highs, suggesting that they are priced for perfection.  Read the below links carefully.

            Mnuchin throws cold water on tax plan happy talk (short):

            Update on expected S&P earnings (short):
           
            The economy, earnings and stock prices---another must read from Jeffrey Snider (medium):

            My thought for the day: a stock doesn’t know you own it, any more than Jennifer Lawrence knows that you think that she is hot.  Successful investors maintain an emotional detachment from what they own.  If you love a stock, it will not love you back and will not reward you for loving it.  That is the whole point of having a Stop Loss Price for every stock in your portfolio---a specific price, written down on paper that you look at every day.

       Investing for Survival
  
            Consistency and self-delusion


    
    News on Stocks in Our Portfolios
 
Hormel Foods (NYSE:HRL): FQ1 EPS of $0.44 misses by $0.01.
Revenue of $2.28B (-0.4% Y/Y) in-line.


Economics

   This Week’s Data

            Weekly mortgage applications were down 2.0% while purchase applications fell 3%.

            January existing home sales rose 3.3% versus expectations of up 1.1%.

            Month to date retail chain store sales growth was slightly faster than in the prior week.

            Weekly jobless claims rose 6,000 versus forecasts of a 5,000 increase.

            The January Chicago Fed national activity index came in at -0.5 versus the December reading of +0.18.

   Other

            Lies, damn lies and statistics (short):

            Will China’s housing bubble pop? (medium):


                        The cost of a complete crackdown on immigration (short):

           
Politics

  Domestic

The Dodd Frank fiduciary rule (medium):

Why governments leak information (short):


  International War Against Radical Islam


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