Thursday, September 29, 2016

The Morning Call---OPEC surprises

The Morning Call

9/29/16

The Market
         
    Technical

The indices (DJIA 18339, S&P 2171) continued their advance yesterday.  Volume was up slightly and breadth improved.  The VIX dropped another 5%, closing below its 100 day moving average and ending in short term downtrend---which is supportive of stocks.  Nonetheless, it remains in a very short term uptrend. 

The Dow ended [a]  above its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] within a short term uptrend {18087-19821}, [c] in an intermediate term uptrend {11420-24247} 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 {2128-2364}, [d] in an intermediate uptrend {1946-2548} and [e] in a long term uptrend {862-2400}. 

The long Treasury declined slightly (though much of the fixed income complex was up) with volume remaining high and ended above its 100 day moving average and well within very short term, intermediate term and long term uptrends.  It remains in a very upbeat two week run in prices---suggesting that the odds of a December rate hike are shrinking. 

GLD fell, finishing below its 100 day moving average and within a short term trading range.  It has now made a fourth lower high---not a plus for our GDX holding, though it was up over 2%.
               
Bottom line: the Averages held to their upward momentum, closing positively viz a viz all key indicators.  The OPEC news was well received and could provide more fuel for the current uptrend.  Key levels to watch:  support exists at their 100 day moving averages and the lower boundaries of their short term uptrends, resistance at their recent highs (18668/2194).
                       
    Fundamental

       Headlines

            The economic stats continued their somewhat backhanded winning ways yesterday: weekly mortgage applications were down, but purchase applications were up; while August durable goods orders were flat versus negative estimates, but the July number was revised down substantially.  

            And this little tidbit from Yellen’s congressional testimony (short):

            Overseas, it was rumored that German financial officials are working on a plan to aid Deutschebank if it has difficulty raising capital to pay the $14 billion US fine.  And nothing says ‘having difficulty’ like multiple assurances that there is none, i.e. the bank’s CEO denied that the bank needs a bailout, Draghi claimed that his low interest rate policy was not responsible for Deutschebank’s pickle and Christine Lagarde promised that there was no need for government intervention to save the bank.  Well, I, for one, certainly feel better.

                ***overnight, EU economic sentiment improved but German unemployment rose.

            Of course, the big news of the day was the tentative OPEC decision to cut production.  To be clear, ‘tentative’ is the operative word, since a formal agreement won’t be complete until December.  However, it seems clear that increasingly dire economic problems in Saudi Arabia has prompted them to make concessions despite their intense dislike for the Iranians.  Nonetheless, the hard part of effecting this agreement still lies ahead, because there has been no allocation as yet as who has to absorb the cut and by how much.  The good news for the bulls is that whether or not an agreement is actually reached, the immediate favorable response in prices helps all oil producers.  The bad news for the bulls is that (1) even if an agreement is reached, OPEC members have a long history of cheating on the quotas and (2) there is a lot of non-OPEC producers in the world that will more than likely jack up production to fill the gap.


            Bottom line: the economic data improved yesterday, though as I noted, this has been a week where the positive news has been that things weren’t as negative as expected.  I am not saying that this is not a plus; but being less negative is different from more positive.

In addition, rumors of financial help for Deutschebank were turned upside down by disclaimers from all corners that no aid was needed.  History tells us that when the political class tells the unwashed masses that there is no problem, it is time to grab onto your shorts and head for cover. But my conclusion hasn’t changed: ‘there are too many variables bearing on this problem to make any dire predictions.  However, the bank’s financial position is weak enough that having some protection against a big negative event makes sense---especially given the current very generous stock valuations.’

            This situation was made all the worse as Germany’s second largest bank scraped its dividend and fired 20% of its workforce.

            The OPEC news is a potential major plus for the economy, though as I cautioned the OPEC is full of liars, cheats and thieves, so it probably makes sense to put a governor on the jigginess until the proposes cuts actually show up in the numbers. 

That said, investor psychology is still quite positive, making almost any news good news.  As long as that is the case, equity prices are going higher.  I continue to believe that the Market is giving investors a great opportunity to shift their asset allocation to a more conservative stance (like more cash).

            The latest from Lance Roberts (medium):

            Historic returns in stocks, bonds and bills (short):

            For the bulls (short):

    
       Investing for Survival
   
            Be careful what you wish for.

    News on Stocks in Our Portfolios
 
Paychex (NASDAQ:PAYX): FQ1 EPS of $0.60 beats by $0.03.
Revenue of $785.5M (+8.6% Y/Y) beats by $2.7M.






EOG Resources (NYSE:EOG) declares $0.1675/share quarterly dividend, in line with previous.

PepsiCo (NYSE:PEP): FQ3 EPS of $1.40 beats by $0.08.
Revenue of $16.03B (-1.8% Y/Y) beats by $200M


Economics

   This Week’s Data

            The final reading for second quarter GDP growth came in at +1.4% versus estimates of +1.3%; corporate profits fell 1.7% versus forecasts of -2.2%.

            The August US trade deficit was $58.4 billion versus expectations of $62.3 billion.

            Weekly jobless claims rose 3,000 versus projections of +8,000.

   Other

            A short history of Fed forecasts:

Politics

  Domestic

  International War Against Radical Islam

            Dutch MP speaks out against radical islam (medium):


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