Friday, June 3, 2016

The Morning Call---Forget about yesterday. What happens after the lousy nonfarm payroll number?

The Morning Call


The Market

The indices (DJIA 17838, S&P 2105) continued their pattern of an early sell off followed by an intraday recovery.  Like Wednesday, they finished on a plus note.  Volume was flat, breadth mixed.   The VIX fell 4%, which was a lot bigger than would normally be case on an up five point S&P day.  However, it remained between the lower boundary of its short term trading range and the 100 day moving average.

The Dow closed [a] above its 100 day moving average, now support and is also rising, [b] above its 200 day moving average, now support, [c] within a short term trading range {17498-18736}, [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 100 day moving average, now support, [b] above its 200 day moving average, now support, also rising, [c] in a short term trading range {2039-2110}, [d] in an intermediate term trading range {1867-2134} and [e] in a long term uptrend {830-2218}. 

The long Treasury was up again, pushing through the upper boundary of a very short term downtrend; a close above that boundary today would negate it.  Since it is already well above the lower boundary of its short term uptrend and its 100 day moving average, if it holds above that very short term downtrend, then the upper boundary of its intermediate term trading becomes a target on the upside.

GLD fell, ending below the level of its 100 day moving average for the second day; if it closes there today, it would be revert to resistance. It remained above the lower boundary of its short term trading range; but if this level breaks, our Aggressive Growth Portfolio will take profits in GDX. 

Bottom line: the Averages continue to act like it wants to go higher.  The upper boundaries of their short term trading ranges are not that far away; so at the very least, it is highly likely that they will be challenged.  If that is successful, then the upper boundaries of their intermediate term trading ranges and their long term uptrends become the next resistance levels.  I continue to believe that those intermediate term trading ranges are not likely to be broken and the long term uptrends are highly unlikely to be broken.

Election year seasonal pattern update (short):

A confirmed break in GLD below its 100 day moving average and the lower boundary of its short term trading range will likely lead to a paring of the Aggressive Growth  Portfolio’s position in GDX.



Yesterday witnessed only a couple US economic releases, none of which were that important: the May ADP private payroll report showed job gains slightly less than anticipated, weekly jobless claims fell a tad but were in line and monthly retail chain store sales were down marginally on a year over year basis.

            The more significant news came from overseas in which (1) the ECB left rates unchanged but boosted its corporate bond purchase program---hardly a ringing endorsement of the health of the EU economy and (2) OPEC failed to reach any kind of agreement on production quotas---which I had expected and assumed that everyone did also.  The oil gurus did note that Saudi Arabia sounded a bit more conciliatory than in the past; so I guess hope (for production quotes) will continue to spring eternal.  Nevertheless, oil sold off after the meeting which means anyone foolish enough to bet on what this crowd is going to do, got what they deserved.

OPEC fails to impose production quotas

            Fed policy, or more properly said, the likelihood of a June/July rate hike continues in the forefront of investors’ minds.  That was helped by yet another Fed official extolling the virtues of an increase in the Fed Funds rate.

            My skepticism notwithstanding, the Fed is sure giving the firm impression that a second hike is in the offing.  I can come up with any number of reasons why it would not: (1) the economy is not awesome, (2) inflation is no threat, (3) the Brexit is coming, the Brexit is coming and (4) the global economy is a mess and getting messier.  Unfortunately, the only real reason for raising rates is that it is the right thing to do and, indeed, should have been done two or three years ago.  But then why let the right thing to do get in the way of an elite bureaucracy’s hubris assuming that it knows better than the free markets how to solve an economic problem.

            The Fed’s rate hike (or not) (medium):

            One third of all global government debt is now at negative rates (medium and a must read):

            The latest from Bill Gross (medium):

Bottom line: the data this week have been fairly balanced; though today will witness a bevy of new stats.  Their results will determine how I score the week.  Still, the fact that this week could be upbeat to neutral would make this the fourth such week in a row.  To be sure, this circumstance (a run of positive data weeks) has occurred several times over the past three years, only to later falter.  But it could be different this time; and we need to take that into account as we look forward.  At the moment, the end of the slide in growth is just a gleam in my eye.  Unfortunately, whether or not this more positive economic performance will continue is somewhat dependent on what is happening overseas.  And on that point, there are no doubts.  The stats have been, are and there is no sign that they will be anything but negative. 
Even if the best case scenario were to develop, stocks are still overvalued. I continue to believe that every portfolio should own more than a token cash position.

            The latest from Doug Kass (medium):
                B of A now looking for a correction (short):

            Update on valuation (medium):

            Asset returns and the global economy (medium):
            My thought for the day: the financial service industry spends a lot of money trying to convince us to save more.  The primary reason is not to insure that we have enough money on which to retire; but to induce us spend more money on their products, many of which come with significant fees.  In short, retirement is a big profitable business.  Consider this: (1) most of the financial advisers are nothing but salesman.  They get paid on volume not performance, (2) fees have a corrosive effect on your portfolio’s performance; the larger the fee, the more corrosive the effect.  So be careful what you buy, make the effort to determine not only the sales fee (commission) but also the asset management fee.  Remember that over the long term, the average annual return from the stock market is around 7-8%; and that is a number calculated with no fees included.  So the math is simple: you start with 7-8%, subtract the fees and that will be your return---assuming that the manager can earn an average return.  Unfortunately, the statistics show most managers don’t earn an average return.

       Investing for Survival
            Thoughts on the Fed Model (for equity valuation).
    News on Stocks in Our Portfolios

   This Week’s Data

            Monthly retail chain store sales fell slightly on a year over year basis.

            May nonfarm payrolls grew 38,000 versus expectations of 158,000; in addition, the April number was revised down from 160,000 to 123,000.  That ought to tighten some sphincters at the Fed.

            The April trade deficit came in at $37.4 billion versus estimates of $41.0 billion.


            The Organization for Economic Cooperation and Development on a Brexit and the global economy.  Every EU advocate is talking trash about a Brexit, so you need to take this with a healthy dose of criticism---the OECD is talking its book.  That said, the initial Market response could very well reflect the dire consequences trumpeted by anti-Brexit cabal (medium):


            I hesitate to call this Friday morning humor; but it is funny.  Unfortunately, it is a commentary on the sorry state of the US education system (short):

            Hard as it is to believe; here is more Friday morning humor and it too relates to our education system (short):

ACLU official quits over restroom debate (short):

  International War Against Radical Islam

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