Tuesday, August 9, 2016

The Morning Call--Trumps first meaningful stab at fiscal policy

The Morning Call


The Market

The indices (DJIA 18529, S&P 2180) couldn’t muster any follow through from Friday’s strong performance.  Volume was very low and breadth was weak.  The VIX rose 1%, closing below the lower boundary of its former short term trading range for the third day---which typically would warrant a resetting of a trend.  However, the last time this happened (mid-July), it bounced back over the short term lower boundary on the next day and then proceeded to see saw around that boundary for the next two weeks. You will pardon me if I remain on the fence on this directional call. 

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 {17508-19244}, [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 {2051-2290}, [d] in an intermediate uptrend {1917-2519} and [e] in a long term uptrend {862-2246}. 

The long Treasury was up slightly, ending above its 100 day moving average and well within very short term, short term, intermediate term and long term uptrends.  However, it also finished within a developing pennant formation (lower highs and higher lows).

GLD fell slightly, finishing above its 100 day moving average and within short term and intermediate term uptrends, but reset to a very short term trading range.

Bottom line:  having been unable to generate any follow through from last Monday’s sell off, the indices couldn’t build on Friday’s strong rally.  That leaves them in a very narrow trading range dating back to mid-July.  That suggests a bull/bear battle at current levels, though no indication as to who will win.  I continue to assume the Market direction is up until proven otherwise; although I remain bothered by the simultaneous volatility in the VIX and the bond, gold, oil and currency markets. 

            Yesterday was pretty quiet.  No US economic data.  Overseas, the July Chinese trade numbers were awful while June German industrial production came in better than expected.

            ***overnight, July Chinese consumer inflation slowed while industrial inflation contracted; the Bank of India left key rates unchanged; June Italian bad loans grew another 1%; June UK industrial production rose 0.1%, in line.

            Perhaps the most significant event of the day was Trump’s first detailed remarks on his economic platform which included lower taxes and less regulation---favorite themes of mine.  Unfortunately, not much was said about less government spending, without which our fiscal problems don’t get resolved.  Still two out of three ain’t bad.

            His plan scored (medium):

            Trump also pledged to renegotiate NAFTA and withdraw from the TTI.  As an advocate of free trade, his positions have always given me pause.  However, to be fair, one of the problems of the trade treaties that our government has negotiated in the past is that they contain no ‘recourse’ provisions if one of the parties cheat.  For instance, a commonly addressed issue in most trade treaties is import duties which are generally lowered or eliminated.  But many countries simply lower their import duties than raise the value added tax on the same goods thereby thwarting the intent of the treaty.  Now there is no recourse to this action.  While Trump hasn’t been specific about the issues to be addressed in the treaties he wants renegotiated, my guess is that recourse is likely one of them.  If so, his intent is not as malevolent as I had originally thought.

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.’

            Eventually, valuations will matter (short):

            Buffett exits his entire credit default swap position (medium):

            My thought for the day: In both investing and in life, it is not a failing to not know something; it is a failing to not know that you don’t know it.  Equally, it is a failing to think that you know something just because someone else said that it is so.

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   This Week’s Data

            The July small business optimism index came in at 94.6 versus estimates of 94.5.

            Second quarter nonfarm productivity fell 0.5% versus expectations of a 0.5% rise; unit labor costs rose 2.0% versus forecasts of up 1.8% but the first quarter reading was revised from +4.5% to -0.2%.


            A more positive take on Fed policy (medium):

            Jim Grant on negative interest rates (medium):

                        What, me worry? (short):



Caution.  This may be offensive to certain audiences (medium):

More politically correct absurdity (short):

  International War Against Radical Islam

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