Friday, January 15, 2016

The Morning Call--The Fed's disingenuous narrative

The Morning Call


The Market

The indices (DJIA 16370, S&P 1921) finally got the bounce out of oversold territory yesterday.  The Dow closed [a] below its 100 moving average, now resistance, [b] below its 200 day moving average, now resistance, [c] below the lower boundary of a short term downtrend {16903-17665}, [c] in an intermediate term trading range {15842-18295}, [d] in a long term uptrend {5471-19343}, [e] back above its August 2015 low and [f] and still within a series of lower highs.

The S&P finished [a] below its 100 moving average, now resistance, [b] below its 200 day moving average, now resistance [c] below the lower boundary of a short term downtrend {1940-2030}, [d] in an intermediate term trading range {1867-2134}, [e] a long term uptrend {800-2161} [f] back above its August 2015 low and [g] still within a series of lower highs. 

Volume was flat; breadth improved.  The VIX dropped 5% (a lot less than I would have expected on a big up day), ending [a] above its 100 day moving average, now support, [b] in short term, intermediate term and long term trading ranges. 

The long Treasury was down, closing above its 100 day moving average, now support and within very short term, short term and intermediate term trading ranges.

GLD fell ending [a] below its 100 day moving average, now resistance and [b] within short, intermediate and long term downtrends. 

Bottom line: the Averages finally got the bounce out of oversold territory that I have been expecting.  The key now is follow through and whether they can remain above their August 2015 lows.  On the plus side, they remain oversold.  On the other hand, they were not able to rise above several very short term resistance levels. Whatever occurs, it seems likely that they will at least challenge their August lows (15842/1867).


            Yesterday’s US economic news consisted of two secondary indicators: weekly jobless claims and December import/export prices---and both were negative.   Doesn’t help; but today we get six economic reports---as many as have already been released this week and include two primary indicators: December retail sales and industrial production.  So whether this week’s cumulative data are positive or negative will depend heavily on those results---and so far, they are not good (see below).

            Overseas, Japanese machinery orders declined precipitously and the yuan resumed its decline.

            ***overnight, December Chinese bank loans grew much less than anticipated and a Bank of Japan official said that any further QEInfinity would only cause problems.

            Nonetheless, what received most investor attention were comments from St. Louis Fed chief Bullard in which he said that commodities (especially oil) were negatively impacting the Fed’s inflation expectations  (I hate it when that happens).  Rightly or wrongly, it seems that investors are interpreting this as a walk back of the current happy horses**t economic narrative of the Fed and raised the hope that the Fed might be re-thinking its recent rate hike.   Gosh only knows that nothing has brought out the bulls in the past like an easy Fed.   And it could well be the case this time---especially if I am wrong about the potential loss of confidence in the Fed and investors ignore the fact that the Fed has once again been wrong.  

I found it odd that Bullard seemingly forgot to mention the Fed’s role in driving inflation (lower oil/commodity prices) down, to wit, by creating a surfeit of cheap money, it encouraged a rush to invest in the debt of low quality oil/mining companies (chasing yield/asset misallocation) which then contributed to oversupply, hence lower prices, hence low inflation.

Don’t get me wrong.  I love the geopolitical fact that the US had reached energy independence.  But it is a bit disingenuous of the Fed to whine about low inflation (oil prices) when it had a contributing role in creating it.  And even more amazing, its solution is to consider….drumroll….keeping plenty of money available at low prices.  Sooner or later, investors are going to figure that out.

Bottom line: the big question in my mind is, how much of yesterday’s rally was simply a natural rebound from a grossly oversold condition or an indication that investors still believe that the Fed can (and will) save the Market?  You notice I didn’t say save the economy.  As we all know, save for QE1, the Fed’s QEInfinity did little to juice the economy; indeed, it likely hampered it.  And as I noted above, it is a primary cause of that very inflation problem Bullard was bemoaning.   In short, the Fed has been, is and will continue to be the problem not the solution.  Thus the follow up question to the second part of the above, if the Fed does walk back its tightening and the economy continues to deteriorate, what happens to investor confidence?

My point here is that the Fed has backed itself into a corner from which there is no easy escape even if investors are foolish enough to fall for the assumed omnipotence of Fed policy one last time.  There is nothing the Fed can do to stop the decline in oil/commodity prices (inflation) as long as supply overwhelms demand---which by Bullard’s own admission is exactly what is occurring, at least partially as a  result of QEII-IV.  At some point, it becomes obvious that QE hasn’t, isn’t and won’t work and all the Fed has really done is encourage the misallocation and mispricing of assets.

I am not suggesting that investors run for the hills.  I am suggesting that on any rally that (1) they take some profits in winners that have held up during this decline and/or eliminate investments that have been a disappointment and (2) they lose the notion of ‘buying the dips’.

            Dividends and stock prices (short):

       Investing for Survival
            Do years of flat Market performance tell us anything about the coming year’s performance? (medium):

    News on Stocks in Our Portfolios
            Fastenal: Q4 EPS of $0.39 misses by $0.01.
Revenue of $922.79M (-0.4% Y/Y) in-line.
            BlackRock: Q4 EPS of $4.75 misses by $0.06.
Revenue of $2.86B (+2.9% Y/Y) beats by $20M


   This Week’s Data

            December PPI came in at -0.1 versus forecasts of 0.0.

            December retail sales were reported down 0.1% versus expectations of being flat; ex autos, they were -0.1% versus estimates of +0.2%.

            The January NY Fed manufacturing index reading was -19.37 versus consensus of -4.0.


            Explaining income inequality (medium and a must read):



  International War Against Radical Islam

No comments:

Post a Comment