Thursday, November 10, 2016

The Morning Call--A big pot of love stew

The Morning Call


The Market

After being limit down in overnight trading, the indices (DJIA 18589, S&P 2163) staged a moonshot. Volume rose.  Breadth improved and is now in overbought territory.  The VIX plunged 23%, closing within a short term downtrend, below its 100 day moving average (now support; if it remains there through the close on Friday, it will revert to resistance) but still above its 200 day moving average (now support) and in a very short term uptrend.

The Dow ended [a] above on its 100 day moving average for the second day, now resistance; if it remains there through the close on today, it will revert to support, [b] above its 200 day moving average, now support, [c] within a short term trading range {17092-18693}, [c] in an intermediate term uptrend {11544-24389} and [d] in a long term uptrend {5541-19431}. It is now approaching its all-time high; so a challenge of that boundary is likely.

The S&P finished [a] above its 100 day moving average, now resistance; if it remains there through the close on Friday, it will revert to support, [b] above its 200 day moving average, now support, [c] within a short term trading range {1995-2193}, [d] in an intermediate uptrend {1978-2580} and [e] in a long term uptrend {862-2400}.  However, it still has a way to go before it challenges its all-time high.

The long Treasury plunged on huge volume, closing below its 100 day moving average (now resistance), below its 200 day moving average (now resistance), below a key Fibonacci level, in a developing a very short term downtrend and below the lower boundaries of its short term uptrend (if it remains there through the close on Friday, it will reset to a trading range) and its intermediate term uptrend (if it remains there through the close next Monday, it will reset to a trading range.

GLD was down again, closing below its 100 day moving average (now resistance), below its 200 day moving average for the second day (now support; if it remains there through the close on Friday, it will revert to resistance), below the lower boundary of a very short term uptrend and in a short term downtrend.  This chart continues to deteriorate.

Bottom line: the Averages staged a huge intraday move, ultimately judging the Trump victory a major positive.  It now looks like a challenge is coming to the indices’ all-time highs.  I continue to doubt that neither those levels nor the upper boundaries of their long term uptrends will be surpassed.



            Yesterday was another yawner as far as dataflow goes: weekly mortgage applications were down while purchase applications were up and September wholesale inventories grew less than anticipated though sales improved.  Expect this for the rest of the week.  Overseas, October Chinese PPI came in hotter than estimates.

            The news, of course, was

(1)   the surprise Trump victory.  I commented on this in yesterday’s Morning Call, but to expand a bit:

[a] if Trump does ‘what he said he would do’ with respect to economic policy, then his election will almost certainly have an initial ‘positive impact’ on the economy.  I stress ‘what he said he would do’ because he has been woefully short on specifics,

[b] I also stress the ‘positive impact’ for the economy because one of the things he said that he would do was revamp the US trade policy.  Again short on details; but too hard a line on trade would only exacerbate global economic weakness.  His has also said he wants to cut taxes and raise spending, i.e. increase the deficit and national debt.  This on top of the trillions fritter away by Bush and Obama.  This will only push the US to the brink theorized by Reinhart/Rogoff in which too much debt inhibits growth---like we need that.  It could also likely prove inflationary, which would push the Fed even harder to tighten monetary policy,

[c] finally, while it was all hugs and kisses yesterday as Ryan, Clinton, McConnell, Obama and Trump himself pledged cooperation, the rubber hasn’t hit the road yet.  First of all is the question is, can this group of massive egos actually sit down and cooperate?  Secondly, let’s not forget that Trump has vowed to put Hillary in jail and the republican house to commence numerous investigation of her alleged wrongdoings.  How long do think this big pot of love stew is going to simmer in that atmosphere?  Finally, if you haven’t checked the overnight news, Hillary’s supporters aren’t being quite as gracious as she was, as riots have broken out all across the US.  Hugs and kisses indeed.

[d] don’t get me wrong, strictly from the economic point of view, Trump was by far the better choice and I have little doubt that measures won’t be enacted that should stimulate the economy.  I am simply pointing out that it may not be as easy as many think and there are consequences to these actions not all of which are positive.                    

(2)   the swing in equity prices from being down in overnight trading to up big in the regular session.

[a] I guess I am going to have to retire my rhetorical question on whether Trump is the catalyst for mean reversion.  I have asked it twice, and been slapped down both times.  That doesn’t mean that mean reversion won’t occur, it just means that Trump apparently isn’t the trigger,

[b] while investors are clearly getting jiggy with the elimination of a big uncertainty, I wonder what that certainty has bought them.  By that I mean that while Trump may be good for the economy, the economy is not nor has it ever been the problem in equity pricing.  Yes, it has struggled to grow; but it has still made progress. 

However, as I have noted repeatedly in these comments that because of the way our Economic Model handles growth that the current assumptions in our Valuation Model are for a better secular economic and corporate profit growth rate than has actually occurred. So any pickup in growth that could happen under a new Trump fiscal policy is at least partially reflected already in our Year Fair Values.  That versus investors currently pricing stocks at Nirvana levels.

The Market’s problem is not growth, it is the absence of real price discovery, i.e. asset mispricing and misallocation, brought on by a totally irresponsible monetary policy. One of the major things a stronger fiscal policy will do is allow the Fed to normalize monetary policy, i.e. raise rates and sell the trillions of dollars of bonds on its balance sheet. Plus if that fiscal policy reignites inflation, it will only push the Fed harder and that, in turn should reintroduce price discovery.  Once real price discovery returns to the bond markets, stocks are not likely far behind.

All that said, historically a republican president in combo with a republican congress has been great for the Market.

Bottom line: at first blush, the Trump election certainly appears to be a positive for the economy.  That is the good news.  However, long interest rates got hammered.  To be clear, normally, in an improving economy stock prices and bond yield can rise together.  So on the surface there is nothing unusual or sinister in this pin action.  But these are not normal times.  Price discovery in the fixed income market has been distorted by QE, ZIRP etc.; and Trump has made it clear that he views that as a negative.  So if monetary policy in headed for normalization and the Fed gets out of the way of interest rate price discovery, no one knows what is going to happen because no one has ever been in this situation before.  This has been a potential negative that I have emphasized continuously over the last four years. 
            A post-election thought from Barry Ritholtz (medium):

            My thought for the day: when I was very young (late 20’s), I obsessed about making a lot of money.  Now I wonder what I was thinking about.  I soon realized that I was a terrible employee and that working for myself was the only way to really enjoy my work.  Yes, there were tough financial times; but I was free and I was happy.  The good news was that the happier I was, the more money I made.
       Investing for Survival
            The lack of independent judgment.
    News on Stocks in Our Portfolios

   This Week’s Data

            September wholesale inventories rose 0.1% versus expectations of a 0.2% increase while sales grew 0.2%

            Weekly jobless claims fell 11,000 versus estimates of down 2,000.


            GM slashes jobs on declining sales (short):

            Chinese yuan is crashing (short):

            And China is dumping US Treasuries (short):



Oh, the horror of it all (short):

  International War Against Radical Islam

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