Thursday, March 17, 2016

The Morning Call--A central bank hat trick; but will it be a winner?

The Morning Call


The Market

The indices (DJIA 17325, S&P 2027) had a good Fed easy money day on better volume and breadth.  The VIX fell 11%, resetting to a very short term downtrend and nearing the lower boundary of its short term trading range.  

The Dow closed [a] above its 100 day moving average, now support, [b] above its 200 day moving average for the fourth day, thereby reverting to support, [c] above the lower boundary of a short term downtrend {16655-17386}, [c] in an intermediate term trading range {15842-18295}, [d] in a long term uptrend {5471-19343}, [e] and has made a third higher high and is working on a fourth.

The S&P finished [a] above its 100 day moving average, now support, [b] back  above its 200 day moving average, now resistance; if it remains there through the close next Monday, it will revert to support, [c] within a short term trading range {1867-2104}, [d] in an intermediate term trading range {1867-2134}, [e] in a long term uptrend {800-2161} and [f] has made a second higher high and is working on a third. 

The long Treasury continued to drift higher, ending right on a key Fibonacci retracement level but remaining in a very short term downtrend.  It was a very modest performance versus other sectors of the fixed income market, indicating risk-on and not surprising given the stock markets performance.

GLD soared 2 ¼% on good volume and closing back above the lower boundary of a very short term uptrend which it broke Tuesday.  I am putting that call on hold and awaiting follow through in either direction.  In the meantime, it remains well above the lower boundary of its short term uptrend, as well as its 100 moving average. 

World’s second largest reinsurer buys gold (medium and a must read):

Bottom line: investors clearly remain intoxicated by a dovish Fed.  As a result, the indices are almost done confirming the break above their 100 and 200 day moving averages.  Hence, I have to assume momentum has reignited to the upside.  The next targets are the upper boundaries of the indices’ intermediate term trading ranges which are within a couple of percent from current price levels.  So I am also assuming that they are highly likely to be challenged.  That said, the technicals appear overextended at yesterday’s close; two to three percent higher will only make them more so.

 I still believe that the bull market is likely over and that mean reversion is the principal risk right now.
            The latest from Doug Kass (medium):



            Yesterday’s economic data mirrored Tuesday’s quantitative and qualitative characteristics: weekly mortgage applications fell but purchase application finished slightly in the positive, February CPI was less than anticipated but ex food and energy, it was hotter, February housing starts were strong but building permits were weak and February industrial production was disappointing as was capacity utilization.  Today is yet another big data day though it needs to be very upbeat to take this week out of the lackluster column.

            There was no data from overseas.  But OPEC decided that, since it worked so well before, it would try jerking the world off again by announcing yet another OPEC meeting, this time in Qatar on April 17---but without the participation of Iran.  Maybe I am being too cynical, but I would not be chasing energy issues higher on anything this group had to say.

            ***overseas, the Swiss National Bank kept its key rates unchanged and lowered its inflation forecast; the Bank of Norway lowered its key rate further and indicated that they could soon move into negative territory; February Japanese exports fell 4% year over year while imports declined 14.2%

            Of course, the big news of the day was the wrap up of the two day Fed meeting.  In the accompanying statement, it (1) left rates unchanged, (2) lowered its expectations of four rate hikes in 2016 to two and (3) lowered its expectations for future levels of Fed Funds rate.  Net, net, pretty dovish.   Its rationale for this was (1) the US economy is fine, though it lowered its growth projections slightly, (2) but it is increasingly worried about the global economy and (3) it is less concerned about inflation.

                        Hilsenrath’s parsing (medium):

            Focusing on the last point, let’s remember that just this week, core inflation picked up.  So if anything, shouldn’t the Fed’s reaction be more concerned not less?  The answer is yes.  So what is happening is either (1) Mauldin is right [i.e. the Fed will be more rather than less dovish as a result of the Chinese threat to devalue the yuan] and/or (2) it really means it when it expresses concern about the global economy.  But in either case, the Fed is moving the goal post on inflation just like they did on economic growth---all in the name of holding on dearly to QE.  In short, ‘data dependency’ is bulls**t, just like we knew it was.

            My favorite optimist on the subject of inflation.  The only thing I disagree with is his statement that the Fed raising rates ‘might be’ too little too late. (short):

            My favorite pessimist on the economy and the Fed (medium):

Bottom line:   well, we got a central bank hat trick with the ECB,  the Bank of Japan and Fed (1) delivering the easy money policies that the Markets so adore and (2) keeping alive the long held conviction that QE will cure the globe’s economic woes and if it doesn’t then the answer has to be more QE.  I have no explanation for the logic of this thought process; but it is there.  And as long as it is, stocks seem destined to do well however poor their underlying earnings. 

But as I said yesterday, ‘However, I remain of the opinion that stocks won’t reach record valuations in a deteriorating economic environment in which every monetary trick known to man has been tried and failed and there remains little chance of fiscal stimulus in the next year, if at all---in the absence of some extraordinarily positive exogenous event.’ 

In my opinion, the current rally represents an excellent opportunity to raise cash reserves by selling either a portion of your profitable investments and/or sell your losers.

            Update on big four economic indicators (medium):


       Investing for Survival
            Dividends versus buybacks.

    News on Stocks in Our Portfolios

   This Week’s Data

            February industrial production fell 0.5% versus expectations of -0.2%; capacity utilization came in at 76.7 versus estimates of 76.9.

            Weekly jobless claims rose 7,000 versus forecasts of up 11,000.

            The March Philadelphia Fed manufacturing index was reported at 12.4 versus consensus of -1.4.

            The US fourth quarter trade deficit was $125.3 billion versus projections of $115.0 billion.




  International War Against Radical Islam

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