Wednesday, September 2, 2015

The Morning Call--What's the Fed to do?

The Morning Call


The Market

The indices (DJIA 16058, S&P 1913) got whacked hard again yesterday, though their intermediate term trends are still holding.  The Dow ended [a] below its 100 and 200 day moving averages, both of which represent resistance, [b] in a short term downtrend {17044-17959}, [c] in an intermediate term trading range {15842-18295}and [d] in a long term uptrend {5369-19175}.

The S&P finished [a] below its 100 and 200 day moving averages, both of which represent resistance, [b] below the upper boundary of a very short term downtrend, [c] in a short term downtrend {2026-2090, [d] within an intermediate term uptrend {1900-2673} and [e] a long term uptrend {797-2145}. 

Volume rose; breadth was negative.  The VIX was up another 10% closing [a] above its 100 day moving average, now support, [b] within a short term uptrend, [c] within an intermediate term trading range {it remains well above the upper boundary of its former intermediate term downtrend and [d] a long term trading range.

The long Treasury rose, ending [a] above its 100 day moving average, now support and [b] within short and intermediate term trading ranges.   The question remains, is the recent down move a function of heavy sales by the Chinese and emerging market central banks or a sign that the Fed will lift rates in September and/or the economy is improving?  You know my answer.

GLD rose again, remaining below its 100 day moving average, within short, intermediate and long term downtrends but it a very short term uptrend.    The odds of a bottom having been made continue to go up.

Oil was strong again, re-setting its short term trend from down to a trading range and ending below its 100 day moving average and within intermediate and long term downtrends.
The dollar fell, finishing below its 100 day moving average, now resistance, and within short and intermediate term trading ranges. 

Bottom line: the Averages are clearly re-testing their August lows.  On the plus side, they have yet to challenge their intermediate trends.  On the negative side, on the rally late last week, (1) neither index got remotely close to undoing the trends that had been previously broken, (2) the S&P pushed decisively below that 1970 level and (3) the VIX is going nuts.  Still my ultimate conclusion remains that as long as volatility continues at present extremes, it is almost impossible to make any meaningful comment on the Market’s direction.

            History points to a rough September (medium):

            More on margin debt (medium):



            Yesterday’s US economic data was weighed to the negative: August light vehicle sales were ahead of estimates, August Markit manufacturing PMI was in line and the month to date retail chain store sales, the August ISM manufacturing index and July construction spending were below estimates.

            Overseas, the news flow was like the Nightmare on Elm Street: two August Chinese manufacturing indices fell to the lowest levels in three years; the Chinese government continued its campaign to intimidate ‘sellers’ and manipulate its currency; EU August Markit PMI declined; South Korean exports declined the most in six years; Brazil sinks toward recession, raising speculation of a credit rating downgrade; and to put a cherry on top, Russian military forces at being deployed in Syria.

                        Leaving aside the geopolitical risks associated with a Russian physical presence in Syria, the above stats boil down to two points:

(1)   global economic growth continues to falter,

(2)   if you think that our government/central bankers demonstrate a hopelessly inadequate grasp of economics, just look at how the Chinese are mucking things up---but at least they have an excuse, i.e. they have never been exposed to the workings of a free market economy.  These guys are [a] trying to control what is in theory, at least, a free trading price discovery mechanism, [b] spending beau coup currency reserves defending their currency without apparently understanding that this a deflationary process, [c] while at the same time, doing everything possible to disguise a slowdown in economic growth which itself has recessionary/deflationary implications.  The Markets seem to be suggesting that this effort will not end well; I agree.

In China, conditions just got worse (medium):

                  Why China is finding it hard to buck the Market (medium):
                ***overnight, nine Chinese brokerages pledged thirty billion yuan to purchase stocks.

            Unfortunately, as I implied above, the Chinese aren’t the only bureaucrats whose collective weenies are flopping in the wind.  Our Fed is on the sidelines watching its QE efforts unravelling as the Chinese and emerging markets push long rates higher and money supply lower via Treasury sales---and its only defense is QEIV.  In other words, the Fed has done what we feared---put themselves in a position in which they have no good policy options.  I have believed that the QEInfinity program imposed on the US economy would not end well.  I still do.

            Central bankers’ new clothes (medium):

            The biggest risk to the Fed (medium):

            Goldman: expect more foreign reserve sales (medium):

            The odds of new QE’s now rising (medium):

Bottom line:  the fundamentals aren’t so hot; but then they have never have been that great since the current recovery began.  Plus, at least as measured by our Valuation Model they haven’t justified stock valuations since late 2013 based on the most positive assumptions that I could make.  Unfortunately, I have already had to lower our economic growth forecast once this year; and I may have to do it again.  So I am going to postulate that the valuation gap remains. 

What could be occurring now is that others are starting to revise their Valuation Models based on much less optimistic fundamental assumptions.  It could also be that their revised valuation gap is sufficiently large to prompt the recent aggressive selling.  Is that actually what is happening?  I don’t know. 

On the other hand, it does seem to me that the level of emotion has escalated to the point that no one is focusing on fundamentals. The point being that we are back at a position that the technicals are what matter the most---at least on a short term basis.  The key to watch is whether the indices will challenge their intermediate term trends and whether or not those challenges are successful. 

While we are waiting do nothing.

            A bull’s case (medium):

            Update on Market valuation (medium):


   This Week’s Data

            Month to date retail chain store sales grew less than in the prior week.

            The August Markit manufacturing PMI came in at 53.0, in line.

            The August ISM manufacturing index was reported at 51.1 versus expectations of 52.8.

            July construction spending was up 0.7% versus estimates of up 0.8%.

                August light vehicle sales were ahead of forecasts.

                Weekly mortgage applications rose 11.3%, while purchase applications were up 4.0%.

            The August ADP private payroll showed an increase of 190,000 jobs versus expectations of up 210,000; the July reading was revised down.

            Second quarter nonfarm productivity was up 3.3% versus consensus of up 2.8%; unit labor costs fell 1.4% versus estimates of -1.2%.




On the release of the latest batch of Clinton emails (medium):

  International War Against Radical Islam

            The Iranian nuke side deal (medium):

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