Wednesday, August 10, 2016

The Morning Call--Summer doldrums?

The Morning Call


The Market

The indices (DJIA 18533, S&P 2181) drifted marginally higher yesterday, with still no follow through from Friday’s strong performance.  Volume was very low and breadth weakened.  The VIX rose 1.3%, but closed below the lower boundary of its former short term trading range for the fourth day.  If it does so again today, I will return the short term trend to down. 

The Dow closed [a] above rising 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] within a short term uptrend {17517-19253}, [c] in an intermediate term uptrend {11312-24139} and [d] in a long term uptrend {5541-19431}.

The S&P finished [a] above its rising 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] within a short term uptrend {2053-2292}, [d] in an intermediate uptrend {1917-2519} and [e] in a long term uptrend {862-2246}. 

The long Treasury was up 1%, ending above its 100 day moving average and well within very short term, short term, intermediate term and long term uptrends.  However, it continues to trade within a developing pennant formation (breaking that pattern should provide directional guidance on bond prices).


GLD rose slightly, finishing above its 100 day moving average and within short term and intermediate term uptrends.

Bottom line:  having been unable to generate any follow through from last Monday’s sell off, the indices still can’t build on Friday’s strong rally.  That leaves them in a very narrow trading range dating back to mid-July.  That could suggest a bull/bear battle at current levels, though no indication as to who will win.  Or it could mean that everyone is on vacation and doesn’t care.  Certainly, the volume would indicate that is the case.  I continue to assume the Market direction is up until proven otherwise; although I remain bothered by the continuing volatility in the VIX and the bond, gold, oil and currency markets. 


            Yesterday’s economic data had something for everyone: the July small business optimism index rose fractionally, month to date retail chain store sales were better than the prior week, June wholesale inventories were up while sales smoked and, finally, second quarter nonfarm productivity and unit labor costs were really bad.  So the optimists can take heart from the wholesale inventories and sales figures while the pessimists can point to those productivity numbers.  That said, neither measure prompted action from investors.  I am going to assume this was largely a function of the summer doldrums.

            Overseas, there was also good news (June UK industrial production rose 0.1%, in line), bad news (June Italian bad loans grew another 1%---not something I wanted to see) and dealer’s choice (July Chinese consumer inflation slowed while industrial inflation contracted and the Bank of India left key rates unchanged).   

(1)   while the Bank of China and Bank of Japan’s newest QE bond buying programs are progressing on schedule, the Bank of England is having problems finding sellers,

(2)   the latest EU bank stress test notwithstanding, a German economic research institute found that Deutschebank had a capital shortfall greater than its market capitalization.

Bottom line: ‘stocks remain grossly overvalued and would be so even if our economic forecast called for solid growth.  I believe that easy central bank monetary policy is the key to explaining this phenomenon; but until investors recognize the damage QE, ZIRP have done (asset mispricing and misallocation), the Market will remain overvalued.  Investors should use this situation to take some money off the table, either selling a portion of the positions in their winners or all of their losers or both.’

            Update on profit margins (short):

            Update on valuations (medium):

            The new economy (short):

            My thought for the day: for the past two decades monetary and fiscal policies have been designed to promote spending rather than saving.  Our government runs deficits, spending resources on entitlements, wars and bulls**t shovel ready projects that are just another giveaway, none of which contributes to the capital stock (roads, bridges, water resources) of the country.  The Fed glorifies QE and stipulates that its purpose is to encourage spending and discourage savings. 

            The great growth periods in this country’s history were always times of high savings/investment---which is what funds new plants, new equipment, new technology (and jobs).  That happens because consumers save and businesses invest.  Now we have rising corporate debt to buy back stock and fund takeovers and a massive disincentive to save (no return) for those disciplined enough to save for retirement or a child’s education.

            I think that it is a mistake to assume that the US economy can return to its former secular growth rate in the absence of saving and investment.  In addition, I think it a mistake to assume that stocks can be valued as if the economy will return to that former secular growth rate.

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    News on Stocks in Our Portfolios
3M (NYSE:MMM) declares $1.11/share quarterly dividend, in line with previous.


   This Week’s Data

            Month to date retail chain store sales improved from the prior week.

            June wholesale inventories rose 0.3% versus expectations of 0.0%; wholesale sales rose 1.9%

            Weekly mortgage applications rose 7.1% while purchase applications were up 3.0%.


            Economists mystified by reaction to negative rates (medium and a must read):

            The need for the US Treasury to extend maturities (medium):

            Saudi economic problems (medium):

            The public pension Ponzi (medium):



  International War Against Radical Islam

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