Thursday, September 22, 2016

The Morning Call---Markets are happy

The Morning Call


The Market

The indices (DJIA 18293, S&P 2163) popped yesterday on more QE mania.  Volume was up but not as much as I would have expected given the magnitude of Market’s move; breadth improved.  The VIX plunged 16 ½%, closing back below its 100 day moving average and in a short term downtrend.  The only kink in the armor is that it remains in a very short term uptrend. 

The Dow ended [a] above a rising 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] within a short term uptrend {17989-19723}, [c] in an intermediate term uptrend {11402-24229} 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 {2117-2353}, [d] in an intermediate uptrend {1943-2545} and [e] in a long term uptrend {862-2400}. 
The long Treasury was up on volume, finishing well within short term, intermediate term and long term uptrends.  It [a] closed right on its 100 day moving average, now resistance; if it trades above this MA, it would be a plus for lower interest rates and [b] remained above a key Fibonacci level. 

GLD was up 1 ½%, ending in a short term trading range but back above the lower boundary of its former short term uptrend.  This is only two days after confirming its break.    It is also finished above its 100 day moving average (support) and a key Fibonacci level.  This pin action is a plus for our GDX position.

Bottom line: investors are all atwitter again over a continuation of benign central bank policy.  However, the BOJ actions suggest that it knows that its easing has gone as far as it can.  I think that the FOMC’s message was somewhat similar.  Judging by the poor performance of the economy (the FOMC’s words notwithstanding), it is afraid to raise rates and will continue to find any excuse not to do so.  That, of course, makes the algos, carry traders and hedge funds all very happy---which has been the policy objective of the Fed all along. 



            Only one minor US economic datapoint was released yesterday: weekly mortgage and purchase applications were down.

            As the universe knows, the two big events were the meetings of the Bank of Japan and the FOMC.

            As to the former, the BOJ left rates unchanged though it did lay out some policy tweaks, the most important of which was to focus its attention of the Japanese government bond yield curve.  The purpose appears to be to insure a rising yield curve, i.e. longer maturities yielding higher than shorter ones---the point being to relieve pressure on the banking systems P&L.  As you know, banks make their money by borrowing short (at low rates) and lending long (at higher rates).  One of the main problems with QE across the global is that yield curves have remained relatively flat; meaning that bank profitability is adversely impacted when they can’t borrow low and lend high.

So it would seem that the purpose of this latest iteration of Japanese monetary policy is to attempt to keep rates low but make life a bit more tolerable for its banking and insurance industries.  In other words, the BOJ seems to recognize that (1) it has pushed QE to its logical extreme, (2) doesn’t want to give up on the dream that QE will somehow produce economic growth, (3) but realizes the damage that it is doing to its financial system and is trying to fix that without relinquishing that dream. 

Good luck with all that.

The shift in Japanese monetary policy

Goldman’s take (medium):

Back in the good, ol’ USA, the FOMC left rates unchanged (who woulda thunk?) but lots of other things changed:

(1)   it continued to insist that the economy is strengthening; though I have no clue what they are using as a basis for that statement,

(2)   indeed, rather than give us a hour’s worth of the usual ‘on the one hand, other the other hand’ narrative, which at least provides the rationale for sitting on the sidelines, the FOMC did none of that and simply said that it was waiting for further evidence before acting---meaning that it can’t point to a solid reason not to raise rates.  That, of course, begs the question, if there are no reasons for not raising rates, then why didn’t they?  Cowardice.

(3)   however, the FOMC’s forecasts for GDP growth in 2016, 2017 and 2018 were lowered.  It also reduced its interest rates outlook for those same years. 

And somewhat surprisingly, it reintroduced its employment goalpost as a matter of concern.  Remember that the Fed has been given two policy objectives: employment and inflation.  Throughout the entire QE process, it has set goals for these two factors to mark the beginning of policy normalization; but no sooner did they reach those objective, the Fed moved the goal post---as an excuse not to begin raising rates.  It did this several times. 

Then when unemployment fell below the last objective [5%], the Fed began to focus solely on its inflation goal, which hadn’t been reached, as an excuse not to begin to return monetary policy to normal.   In yesterday’s comments, the FOMC reinstated labor market conditions as a policy concern.  I can only assume that this means that it is re-creating another straw man which it can use as an excuse not to raise rates.

            My logic system says that this whole line is more Fed waffling because (1) it knows that its economic forecasts are absolute bullsh*t, (2) it is petrified of upsetting the Markets since the Markets are the only thing it has successfully influenced, and (3) it has not clue how to extricate itself from trap in which it has placed itself.

            Fed statement

            Bottom line: the BOJ and FOMC did roughly what I had expected; although judging by the pin action, others were clearly worried about a more hawkish tilt in policy.  QEForever remains the underlying investment theme; as such, the assumption has to be that stocks are going higher. 

That said, there is some cognitive dissonance starting to creep into this story.  (1) the BOJ all but admitted that its QE, NIRP and ZIRP haven’t produced the results that were anticipated, (2) the Fed’s ‘the economy is doing great’ narrative is not quite as solid as it has been because the Fed itself is producing forecasts that suggest that the economy is not doing so great, (3) even Fed supporters like CNBC’s Steve Liesman, are asking, ‘if the economy is so great, why aren’t you raising rates?’ and (4) the number of policy dissenters on the FOMC is growing.   

            Whether this is a temporary phenomenon or a sign of things to come is anyone’s guess.  I will say that I have maintained that this drunken Market binge will likely come to an end when either some major exogenous event reveals that the central bankers are naked or the cumulative evidence of central bankers’ hubris, poor judgement and lack of courage becomes obvious to all but themselves.  The above examples could be the first sign of the latter---emphasis on ‘could be’.

            The nonexistent ‘wealth effect’ (medium and a must read):

            Time to leave the dance floor (medium):

            My thought for the day: All too often educated people can't comprehend that lesser-educated people think and act differently from them or that simply too stupid to understand. Today central bankers are prime example of this, puking forth economic lingo and quoting ‘economic theory’ that generally has proven inaccurate or ineffective and dismissing those who dare to question them. This also explains why there's a wide gap between academic theory and real-world reality. Economists wrongly assume lay people will act like their models predict.  People act in their own best self-interest.

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            Chasing alpha.

    News on Stocks in Our Portfolios

   This Week’s Data

            Weekly jobless claims fell 8,000 versus expectations of a 1,000 increase.

            The August Chicago National Activity Index came in at -55 versus estimates of +15.




  International War Against Radical Islam

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