Tuesday, June 14, 2016

The Morning Call---Brexit now gaining center stage

The Morning Call

The Market

The indices (DJIA 17732, S&P 2079) followed last Friday’s lead, declining sharply and thus creating another down Friday, down Monday pattern. Volume increased.  Breadth weakened.  The VIX was up another 24%, finishing well above its 100 day moving average.  If it remains there through the close on Wednesday, it revert from resistance to support---not a positive for stocks. 

The Dow closed [a] above its rising 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] within a short term trading range {17498-18726}, [c] in an intermediate term trading range {15842-18295} and [d] in a long term uptrend {5541-19413}.

The S&P finished [a] above its rising 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] below the lower boundary of the recently reset short term uptrend {2083-2306}.  Last Friday as well as yesterday, I raised the question about which was the head fake (1) the break out above the short term trading range or the plunge one day after the reset?  I think yesterday’s pin action gave us the answer, to wit, I have returned the short term trend to a trading range {2037-2110}, [d] in an intermediate term trading range {1867-2134} and [e] in a long term uptrend {830-2218}. 

The long Treasury was up again, ending above the upper boundary of its intermediate term trading range for the third day; if it remains there through the close today, the intermediate trend will reset to up.  Given the poor performance of other US fixed income securities, I am assuming this action reflects primarily TLT’s function as a safe haven. 

GLD (122.6) was up.  It is now well above the lower boundary of its short term trading range and its 100 day moving average and is nearing the upper boundary of its short term trading range (124.2).  Resting right above that boundary is the upper boundary of its intermediate term trading range.  So clearly, GLD has a lot resistance to overcome near term.  If it breaks above these boundaries, it is apt to either take a lot of work or a significant unexpected negative event.

Bottom line: in the aftermath of Friday and Monday’s pin action, I returned the S&P short term trend to a trading range---the thesis being that it simply took one day longer than usual to unsuccessfully challenge that trend.  That doesn’t mean that it still won’t make another challenge that would ultimately be successful; but this time it is a no go. 

The TLT is in the midst of a challenge of its intermediate term trading range.  If successful, it would clearly point to higher prices/lower yields.  I had wondered out loud whether the bond guys were betting on a weak US economy or events that would make the US a safe haven.  Yesterday’s price decline/rising yields in other US fixed income sectors suggest the latter alternative.


            There were no US stat releases yesterday, though this will a big week for data.  There were some international numbers reported: May Chinese industrial production was in line while fixed investment and retail sales were below expectations. Fitch lowered the Japanese government credit outlook (not the rating but the outlook for the rating) from stable to negative.  Need I say, more of the same?

            It is also another week in which the central banks will again be in the news: the FOMC meets today and tomorrow and the Bank of Japan meets on Thursday.  Heretofore, that has generally been a plus for the Markets.  I noted last week that central banks monetary policies were being disparaged by some pretty heavy hitters and wondered if that meant that, what has become the ‘everything is awesome’ reflect reaction by investors, was about to change.  I am not smart enough to know whether it has or not; but it probably pays to be a bit more cautious until we know if the recent round of criticism is gaining traction.

            $12 trillion in QE and this is what we get (medium and a must read):

More collateral damage from zero interest rates (medium):

            Another blistering critique on the Fed from David Stockman (medium):

            The other event that will likely remain in the forefront of investor consciousness is the upcoming Brexit vote, scheduled for June 23.  Right now, the polls aren’t going so well for the ‘remainers’ and that is prompting more harangues from that crowd about the dire consequences if the ‘leavers’ win.  It will likely only get worse as the vote approaches.  I have no clue about the magnitude of any economic impact of a Brexit and likely neither does anyone else.  But the horror stories will continue and that seems likely to put a governor on bullish enthusiasm at the very least.

            One observer’s reason for a ‘leave’ vote (medium):

            Why a ‘leave’ vote may not lead to a Brexit (medium):

Bottom line: it is still too soon to know if central bank credibility is starting to slip; but we should have a better idea by the end of the week as to whether this thesis holds any water.  I am not making any bets on the outcome.

            My thought for the day: I have harped and harped in these pages on the mispricing of assets caused by QE and negative interest rates.  Most of that criticism has been from a macroeconomic perspective. 

So I want to take it down to the individual investor level.  In this case, it involves individuals reaching for yield, i.e. incurring extra risk in order to achieve a higher dividend/interest payment.  This tendency is made all the worse in today’s Market because of those aforementioned zero/negative interest rate policies conducted by the central banks.   

            What investor wouldn’t be tempted to invest in higher yielding securities when safe investments are providing virtually no return at all?  Unfortunately, while available low risk securities have disappeared, the laws of economic haven’t; and one such law is you don’t get something for nothing.  And, in this case, the ‘something’ is yield and its price is higher risk.

            If you don’t think that the risks aren’t higher, ask the guys who chased yield by buying those mortgage backed securities back in 2006.  Also remember the math.  If you buy a riskier security that pays a 3% yield instead of staying with a quality investment that yields 1%, how much price depreciation does that 3% yielding security have to experience before that incremental yield is wiped out by loss of principal?  Before engaging in yield chasing you better understand the exact risks you are taking, and what that might mean when, as and if things go awry.

            Speaking of which (short):

       Investing for Survival
            What is risk?

    News on Stocks in Our Portfolios

   This Week’s Data

            The May small business optimism index was reported at 93.8 versus expectations of 93.5.

            May retail sales rose 0.5% versus estimates of up 0.3%; ex auto, they were up 0.4%, in line.

            May import prices were up 1.4% versus forecasts of up 0.8%; export prices were up 1.1% versus consensus of up 0.2%.  Will this make the Fed happy?


            Mortgage fabrication is alive and well (medium):

                Update on student loans (short):



Saudi Arabia and Hillary (medium):

Quote of the day (short):

17 facts about the Orlando bomber (medium):

  International War Against Radical Islam

            Thoughts from a former CIA terror expert (medium):

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