Wednesday, December 7, 2016

The Morning Call--Defining deregulation

The Morning Call

12/7/16

The Market
         
    Technical

The indices (DJIA 19251, S&P 2212) continued their latest move up.  Volume was once again huge; breadth weakened a tad, but remains at overbought levels.  The VIX (11.8) was off another 3%, keeping it below its 200 day moving average (now resistance) below its 100 day moving average (now resistance) and within a short term downtrend.  It moved closer to the lower boundary of its intermediate term trading range (10.38).

The Dow ended [a] above on its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] in a short term uptrend {18127-20187}, [c] in an intermediate term uptrend {11597-24447} and [d] in a long term uptrend {5541-20148}.

The S&P finished [a] above its 100 day moving average , now support, [b] above its 200 day moving average, now support, [c] within a short term uptrend {2113-2455}, [d] in an intermediate uptrend {1998-2600} and [e] in a long term uptrend {881-2419}. 

The long Treasury (119.4) fell fractionally, closing below its 100 day moving average (now resistance), below its 200 day moving average (now resistance), below a key Fibonacci level and in a very short term downtrend.  It remains poised to challenge the lower boundary of its short term trading range (117.3) and the lower boundary of its intermediate term trading range (115.3).  However, it does seem to be trying to stabilize.

GLD also declined slightly, ending below its 100 day moving average (now resistance), below its 200 day moving average (now resistance), below a key Fibonacci level and below the lower boundary of its short term downtrend.  

The dollar recovered modestly, but remained below the upper boundary of its short term trading range.  It would appear that its recent challenge of that boundary is over for the time being.  However, it is still in a strong very short term uptrend and well above its 100 and 200 day moving averages.

Bottom line: the rally continues; once again on incredible volume.  I remain amazed that prices haven’t reacted even more positively than they have; although some slight weakness could be seen in the breadth numbers.  Historically, modestly higher prices on huge volume and a weakening in breadth is not a positive indicator of even higher prices, especially given the overbought condition in the Market.  That said, the Market strength continues to astound me; so there is no reason for it to stop now.

TLT appears to be trying to find a base; that notion is supported by much improved performance in other sectors of the fixed income market.  That could explain the loss of upward momentum in the dollar---which would be helpful if it continues, given the negative impact of a strong dollar on the foreign earnings of US corporations.
           
    Fundamental

       Headlines

            Yesterday’s economic data was mixed to negative: revised third quarter nonfarm productivity slightly less than anticipated while unit labor costs were well ahead on estimates, the October trade deficit was fractionally higher than expected, month to date retail chain store sales grew less than in the prior week and October factory orders were in line.

            Overseas, the news was also mixed: the IMF and EU finance ministers failed to reach agreement on a Greek bailout; November German industrial orders grew rapidly.

            ***overnight the European Commission fined three major banks, one of which is JP Morgan, E485 million in a Euribor rate price fixing; UK industrial production declined the most in eight months; China’s foreign exchange reserves fell for the fifth straight month..

            Also capturing headlines:

(1)   apropos of next week’s FOMC meeting, several regional Fed presidents made comments suggesting that the rate of monetary normalization will depend on fiscal policy (medium):

(2)   the consequences of the Italian referendum continues to be analyzed.  Here is a really good summation of the issues and likely after-effects (medium):

                  Fitch cuts outlook for Italian banks (medium):

***overnight, Italy announced that it is preparing to make a E2 billion investment in Monti Paschi, hoping this will lure other investors.

(3)   Trump was back at it again; this time going after Boeing on its contract to build the next generation of Air Force One.  As you know, I have opined that many of the fiscal/regulatory promises that he/GOP made during the campaign would be pluses to the US economy.  ‘Promises’ being the operative word.  However, right now, we are witnessing actions, to wit, taking on one company after another [Carrier, now Boeing] in how they run their businesses. 

Yes, keeping jobs in the US is good.  And yes, worrying about how the taxpayers’ money is being spent is good especially in light of the just released Pentagon study [see below].  But saying that you are going to deregulate the business environment and then attacking businesses because you don’t like a specific action is confusing at best.  To be clear, I don’t have a problem with a push to cut government waste.  But I am suggesting that Trump maybe defining deregulation a lot more narrowly than all the broad happy assumptions the Market has made about how great it will be for the economy.

Bottom line: actions have always spoken louder than words (promises); and the actions coming out of the president-elect are not quite what seems to being discounted in the Market.  As I point out above, the Donald said he was for deregulation, but he actions with Boeing means that it may not be for everyone (which just to be clear, I don’t have a problem with).  He said that he wants to cut America’s exposure to regional conflicts; but he just placed three hard ass neocons in national security roles and stuck his finger in China’s eye. 

Not to be repetitious, my point is what the Donald and GOP have said may be much different than what the Market seem to have assumed that they do; but at least for the moment, it remains fixated on what they have said.  Beware of Greeks bearing gifts.

            The latest from Bill Gross (medium):

            Sugar pills (short):

            What is good for workers tends to be bad for investors (medium):

            My thought for the day: one of the harmful biases that investors bring to the process is termed ‘anchoring and adjustment’.  It means initial information unduly influences decisions by shaping the view of subsequent information.  Once the ‘anchor’ or initial information is set, there exists a bias for interpreting other information around the anchor.  Think Trumponomics.  See above.

       Investing for Survival
   
            The probability distribution of the future (excellent read).

    News on Stocks in Our Portfolios
 
Brown-Forman (NYSE:BF.B): FQ2 EPS of $0.50 in-line.
Revenue of $830M (-2.8% Y/Y) misses by $6.65M
MasterCard (NYSE:MA) approved a new share repurchase program of up to $4B worth of stock

MasterCard (NYSE:MA) declares $0.22/share quarterly dividend, 15.8% increase from prior dividend of $0.19.

Economics

   This Week’s Data

            Month to date retail chain store sales rose at a much slower pace than in the prior week.

            October factory orders were up 2.7%, in line.

            Weekly mortgage applications fell 0.7% while purchase applications rose 0.4%.

   Other

            Yesterday, I linked to a release discussing the latest Fed labor market conditions index.  Here is a thorough analysis of what it might mean (medium):
           
Politics

  Domestic

Pentagon buries study showing $125 billion in waste (medium):

  International

            Pat Buchanan on Trump’s call with the Taiwanese president (medium):


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