Wednesday, August 24, 2016

The Morning Call--Waiting on Yellen

The Morning Call


The Market

The indices (DJIA 18547, S&P 2186) rose yesterday, closing near highs.  Volume was down; breadth improved slightly.  The VIX rose 1%, finishing below its 100 day moving average, within a short term downtrend and still close to the lower boundary of its intermediate term trading range (support). 

The Dow ended [a] above rising 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] within a short term uptrend {17681-19415}, [c] in an intermediate term uptrend {11333-24160} 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 {2074-2313}, [d] in an intermediate uptrend {1923-2525} and [e] in a long term uptrend {862-2400}. 

The long Treasury was fractionally higher, closing above its 100 day moving average and well within very short term, short term, intermediate term and long term uptrends.  However, it has been stalled since late June.

GLD fell slightly, but ended above its 100 day moving average and within short term and intermediate term uptrends.  Like TLT, it has gone nowhere since late June.  Plus I remain concerned about its failure at its second try to surmount a key Fibonacci level, then its negating a very short term uptrend. 

Bottom line: the Averages are still trading in a very narrow range of the last two weeks.  That they are directionless at this point is understandable in as much as everyone is awaiting the Yellen speech on Friday and no one wants to lay down any big bets prior to that.  So in the absence of some exogenous event or the release of her prepared speech, stocks are likely to stay in that narrow trading range until Friday.


            Lots of economic data released yesterday.  In the US, the August Markit PMI was below expectations, the August Richmond Fed manufacturing index was terrible, month to date retail chain store sales were flat and July new home sales were unbelievably positive---which certainly carried the most weight since it is a primary indicator.

Overseas, the data was mixed, the August EU flash composite and services PMI’s came in better than expected, while the EU manufacturing PMI and the German flash composite PMI were worse; the August Japanese manufacturing PMI was slightly better than estimates though it remains in negative territory.
            Yellen’s Friday speech remains center stage in the current investment narrative and will likely remain so until she speaks.  I still think that she will sound dovish; but others disagree.  Here is a reading list providing various points of view


            Harsh words for central bankers (medium):

            In July Fed discount rate meeting 8 of 12 regional Fed presidents voted for raising rates; so the pressure in on Janet.  Perhaps she will be a bit more hawkish than I have been expecting (medium):

            On the other hand, the bond market has generally been a much better indicator of Fed policy than the stock market.  It says Janet will be dovish (short):

             I have been dwelling on the problems that are arising in the short term credit markets.  Here is another: Rising Libor rates causing Japanese bank funding problems (medium):

            Finally, if you are depending on a defined pension plan to provide for your retirement, don’t read this (medium):

Bottom line: No question that the July new home sales was a major plus; however, the rest of the data hardly makes you want to jump for joy.  There needs to be a lot more readings like this to suggest any kind of turnaround in an otherwise lethargic US/global economy. 

Meanwhile, the stats are playing second fiddle to the Fed as investors everywhere await Yellen’s pronouncement with bated breath.  The reason, of course, is that the Fed has had the power (to date) to make investors immune to worrying about the numbers---and will continue to do so until it either starts to normalize monetary policy or it loses all credibility (or even worse, both). 

Right now, the smart money (bond investors) is betting that the Fed will remain dovish and continue anesthetize investors to the gross mispricing and misallocation of assets.   If so, then the indices are likely to challenge the upper boundaries on their long term uptrends.   

On the other hand, the stock boys seem to have bought into the main stream narrative that the economy is improving to the extent that the Fed is going to begin that process of tightening money.  If you believe that, then you should be scared sh*tless if you are fully invested.  As I have repeatedly opined: QE did nothing for the economy, so it absence will not likely matter; however, it has led to extreme asset valuations and its absence will likely unwind that process.

            My thought for the day: smart does not mean wise.  When I worked at Scudder, Stevens and Clark, we had an analyst who virtually everyone in the firm agreed was the smartest guy around.  Unfortunately, he had no common sense and blew the firm’s performance to pieces with gems like Automatic Sprinkler and TWA.  So the next time someone tells you to buy a stock because the guy/gal recommending it is really smart, ask for three of his/her prior recommendations.

       Subscriber Alert

            As you know, Medivation (MDVN-$80) is being acquired by Pfizer.  The stock in currently selling at $80 which provides a decent risk arbitrage spread from the deal price of $81.50.  Ordinarily with that kind of spread, I would hold on until the deal closed; but my concern about the Market is such that I am going to opt for ‘takin’ the money and run’.  At the open this morning, the Aggressive Growth Portfolio will Sell its position in MDVN.

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   This Week’s Data

            Month to date retail chain store sales progressed at the same slow pace as the prior week.

            The August Markit manufacturing PMI came in at 52.1 versus forecasts of 53.2.

            July new home sales soared 12.3% versus expectations of a 2% decline.

            The August Richmond Fed manufacturing index was reported at -11 versus +10 recorded in July.

                Weekly mortgage applications fell 2.1% while purchase applications declined 0.3%.




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