Thursday, May 21, 2015

The Morning Call--Is the Fed masking a rate hike?

The Morning Call


The Market

The indices (DJIA 18285, S&P 2125) had another dull barely down day.  Both closed above their 100 day moving average; but the Dow finished back below its all-time high while the S&P remained above its comparable level. 

Longer term, the indices remained well within their uptrends across all timeframes: short term (17214-20014, 2021-3000), intermediate term (17365-22493, 1823-2593 and long term (5369-19175, 797-2135).  

Volume fell; breadth was better.  The VIX edged lower, ending below its 100 day moving average and the upper boundary of a very short term downtrend---both positives for stocks.  I continue to think that at current price levels, it is attractive as portfolio insurance.

Investors failing to hedge (medium):

Traderfeed looks at breadth (short):

Update on sentiment (short):

The long Treasury was up fractionally, closing below its 100 day moving average, the upper boundary of a very short term downtrend and near the lower boundary of a short term downtrend.

GLD was up slightly but remained below its 100 day moving average and the neck line of the head and shoulders pattern. 

Oil rose slightly but still closed below the upper boundary of its recent short term trading range; while the dollar was also up a tad, leaving it above the lower boundary of its recently broken short term uptrend.

Bottom line: the Averages traded in a narrow range for most of the day, though the Dow closed back below its all-time high---a slight negative.  Their pin action of the last couple of days could be interpreted in two ways: a consolidation before a challenge of the upper boundaries of their long term uptrend or the buyers blowing their wad trying unsuccessfully to break materially higher.  As I said yesterday, having come this far, I can’t believe that the indices won’t attempt an assault on the upper boundaries of their long term uptrends.  On the other hand, I continue to believe they will be unable to successfully challenge to any meaningful extent.  So the risk/reward is not favorable on a technical basis.  I think that argues for caution.

            The long Treasury’s recent pin action continues to suggest either inflation or a re-evaluation by investors of the sustainability and/or efficacy of QE.  Both clearly run counter to the message to the stock market.  Plus the volatility in gold, oil and the dollar only add their own version of a confused message.  I have no clue what long rates are going to do; but I worry that about the ‘why’ of what they will do.

            The latest from Stock Traders’ Almanac (short):


            There was one secondary economic data release yesterday: weekly mortgage and purchase applications were down.  Probably no one cared given Tuesday’s housing starts number and everyone seemed to be awaiting the release of the minutes of the most recent FOMC meeting.

            To summarize what has become the pattern of Fed communications recently---confusing: the FOMC (1) thinks that the first quarter economic weakness was transitory, (2) but it is worried about the potential impact of the strong dollar, economic weakness in growth in China and the outcome of the Greek bailout negotiations, (3) gave little support for a rate hike in June, (4) but said that any decision will be data dependent and so it is not ruling out an increase in June, (5) is concerned about the effect of a rate hike on the markets,  in view of the increased role of high-frequency traders, decreased inventories of bonds held by broker-dealers, and elevated assets of bond funds---all of which are a result of Fed and/or other government agency regulatory policy.

            More (medium):

                        And what Fed whisperer Hilsenrath says that they said (medium):

            And what Goldman says that the Fed model says (medium):

            And what Martin Feldstein thinks (medium and must read):

            The Fed and bubbles (short):

            Mudding the waters even more, the Bureau of Economic Analysis is parroting the San Francisco Fed’s ‘first quarter seasonal adjustment factors are all screwed up’ thesis, suggesting that there will be indeed be some seasonal adjustments to the seasonal adjustments.  However, the caveat in this exercise is that whatever increase is applied to the first quarter seasonal adjustment may be taken from the subsequent quarters.  In short, the overall trend wouldn’t change, it would just be less volatile. 

On the international scene, first quarter Japanese GDP was reported up much more than anticipated.  That is the first good bit of economic news out of that country in a long time (though remember that they have been fibbing a lot lately).  In addition, the Bank of England kept key interest rates at record lows, adding a small boost to the QEInfinity scenario.

            ***overnight, the May EU composite flash manufacturing index was below forecasts, Japan’s was above and China’s was negative for the third month in a row.

            The bad news is that a Greek official said that his country would be unable to make the June 5 IMF debt payment and the ECB met to consider raising the discount it places on the collateral Greek banks use for loans.  Just to make matters worse, Moody’s warned of Greek deposit ‘freeze’ (medium):

Bottom line:

(1)   the FOMC minutes---as usual you need linguistics expert to decipher the message, assuming that the Fed even knows or is willing to admit what it really believes.  With the BEA apparently ready to adjust first quarter seasonal factors, the optimists can once again cease ignoring the economic data.  The question is, after all this jerking around with first quarter data, what happens if the second quarter isn’t materially better---which you will recall the Atlanta Fed has already forecast.

The most stunning part of those minutes was the Fed’s acknowledgement that its primary reasons for its concern with raising interest rates are largely the result of its own policies.  I am just not sure why the sudden baring of its soul: [a] admitting that it can’t increase rates is its own fault or [b] apologizing in advance for when it does.  Color me confused.

What the Fed hath wrought (medium):

(2)   the improvement in the Japanese GDP figure.  The key now is, like our own housing numbers, follow through.

(3)   Greece is one day closer to default and intensity of its food fight with the Troika only escalates.  I have said before that the euros are masters of pulling back from the brink; but so far, there is no evidence of that happening.     I remain cautious about the impact of the final outcome.

This is a pretty good assessment of the alternative outcomes (medium):

And then there were two: Portugal vows no more austerity (medium):

 I can’t emphasize strongly enough that I believe that the key investment strategy today is to take advantage of the current high prices to sell any stock that has been a disappointment or no longer fits your investment criteria and to trim the holding of any stock that has doubled or more in price.

Bear in mind, this is not a recommendation to run for the hills.  Our Portfolios are still 55-60% invested and their cash position is a function of individual stocks either hitting their Sell Half Prices or their underlying company failing to meet the requisite minimum financial criteria needed for inclusion in our Universe.

            Is Dr. Copper sending a message? (short):

            When what’s working no longer works (medium):

            Final earnings and sales ‘beat’ rate for the first quarter (short):

   This Week’s Data

            Weekly jobless claims rose 10,000 versus expectations of up 6,000.

            The April Chicago Fed national activity index came in at -.15 versus estimates of +.10.


            I normally look with skepticism on any ‘paper’ coming out of bureaucracies, like the IMF; and, hence, I should with this one also.  But the thesis it puts forth (the declining marginal value of more financial products) is intriguing and seems to reflect economic history since the 1990’s.  This is a good read and worth thinking about, whether you agree or not. (medium):

            This summary of a recent Chinese government economic outlook is a bit confusing when compared to its also recently announced QE; either that or the Chinese are just knowing making the same mistake as the rest of the world’s central bankers (medium):

            April architectural billings (short):

            Five banks including Citi, JP Morgan and Bank of America plead guilty to currency manipulation---but no one goes to jail (medium):

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