Thursday, December 1, 2016

The Morning Call--Trump nominees add to upbeat scenario

The Morning Call


The Market

The indices (DJIA 19123, S&P 2198) again traded in a narrow range yesterday (Dow up, S&P down), with the S&P giving up the 2200 level.  Volume rose markedly; breadth weakened but remained at very overbought levels.  The VIX rose 3%, but still finished solidly below its 100 and 200 day moving averages, within a short term downtrend and below the lower boundary of its former very short term uptrend.
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 {18093-20153}, [c] in an intermediate term uptrend {11568-24418} 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 {2108-2452}, [d] in an intermediate uptrend {1993-2595} and [e] in a long term uptrend {881-2419}. 

The long Treasury took a big hit (-1.5%) on big 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 very short term downtrend, in a short term trading range and in an intermediate term trading range.  

GLD also got smacked (-1.5%), ending below its 100 day moving average (now resistance), below its 200 day moving average (now resistance), below another Fibonacci retracement level and below the lower boundary of its short term downtrend.  

The dollar popped, finishing back above the upper boundary of its former short term trading range (it had reset on Monday, then fell back below it Tuesday), suggesting that the reset to an uptrend was valid.  However, I am waiting one more day to make that call.

Bottom line: based on the trading patterns of the last two weeks (i.e. stocks up, the dollar up, bonds down, gold down), everything made sense yesterday except stocks.  Of course, the Averages remain overbought which could easily explain their divergence from the prior pattern---though the S&P closing below the 2200 level is a little concerning.  Still barring some extreme whackage, I continue to believe that the indices will at least make a stab at challenging their long term uptrends.



            Yesterday’s US economic data was mixed: the November ADP private payrolls report was well above estimates, the November Chicago PMI smoked expectations, October personal income beat forecasts but personal spending fell short of projections, weekly mortgage and purchase applications and October pending home sales were all disappointing.

            The Fed released its latest Beige Book.  While still positive, it was less so than the prior edition---a little surprising given the dataflow of the last month.  Also of note, several regional banks pointed to the rising dollar as a drag on economic activity in their areas.

            Overseas, November EU inflation rose but is still increasing below the 2% goal.

            ***overnight, November Chinese Markit manufacturing and services PMI’s came in better than expected; the November EU Markit manufacturing PMI was in line; the November UK Markit manufacturing PMI was below estimates.

In other news, ahead of this weekend’s crucial Italian referendum, the ECB reported that one third of all EU nonperforming loans are held by Italian banks---which could be adversely impacted by the outcome of this vote.  In addition, three major UK banks failed the latest ‘stress test’.
            Of course, the main headline of the day was the OPEC agreement on a production cut (OK, I was wrong)---the most important aspect of which was the usual obfuscation of the facts (but not so wrong).  There was a lot of sleight of hand in the math of the ‘cut’, suggesting these guys haven’t changed their stripes.  So it is not unreasonable to assume that there will almost assured be cheating.  Plus any meaningful sustained increase in the price of oil will likely bring out more supply from non OPEC producers.  
            The OPEC production cut math (short):

            The Russian production cut math (short):

            Also, two of new Trump nominees (Treasury and Commerce) were on the air waves suggesting policy changes (lower taxes, lower regulation) that would be beneficial to the economy.  Not to be repetitious, nothing has been done yet; however, the more players that are on record committing to change, the more likely it is to occur.
Bottom line: it would appear that lower oil prices are now in the rear view mirror, at least for a time.  That should give a boost to investor psychology.  In addition, the more we get comments like the aforementioned, the higher the odds rise that many of the promised reforms will get enacted in one form or another.  I am not saying that a new millinium has arrived.  But I am saying that the more steps Trump takes in the direction of fulfilling his promises (like appointing heavy weights to help carry the load) the more likely they are to occur. 

Having said that, I want to again distinguish between the economy and equity valuation.  ‘ ….if I assume that the ‘Trump revolution’ will lead to a higher secular growth rate of the economy, I can’t get equity valuations even close to current levels.  If I were a trader (which I am not), I might buy an equity Market ETF, using a very tight stop.  But I would under no circumstances buy stocks on the thesis that ‘this time is different’ and stocks are going to sustain some new higher level valuation.  I am much better off being wrong in the short term than being wrong in the long term.’  

A December to remember (medium):

            My thought for the day: an investor who has all the answers doesn’t understand all the questions.  As you know, I spend a great deal of time worrying about all the things that I don’t know.  In doing so, it keeps me (1) from me from being in a position to be 100% wrong, (2) diversified, (3) focused on doing my homework, (4) willing to change my mind if the evidence suggests it, (5) learning from my mistakes.

       Investing for Survival
            Don’t try to get rich twice.
    News on Stocks in Our Portfolios
Donaldson (NYSE:DCI): FQ1 EPS of $0.38 beats by $0.03.
·         Revenue of $553M (+2.8% Y/Y) beats by $18.92M.

·         Microsoft (NASDAQ:MSFT) declares $0.39/share quarterly dividend, in line with previous.

  •      BlackRock (NYSE:BLK) declares $2.29/share quarterly dividend , in line with     previous.


   This Week’s Data

            The November Chicago PMI came in at 57.6 versus expectations of 52.0.

            October pending home sales rose 0.1% versus estimates of +0.8%.
                        Weekly jobless claims rose 17,000 versus forecasts of up 2,000.


            The Atlanta Fed slashes its fourth quarter GDP estimate (short):

            Update on big four economic indicators.

            The latest NY Fed quarterly report on household debt and credit (medium):



Thursday morning humor.

  International War Against Radical Islam

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