Saturday, December 16, 2017

The Closing Bell

The Closing Bell

12/16/17

I am leaving you again.  Our daughter and her family arrive today for Christmas.  And the day after Christmas, we leave for the beach.  I will be back 1/2/18; but if anything unusual occurs, I will be in touch.  Have a happy holiday season.

Statistical Summary

   Current Economic Forecast
                       
2016 actual

Real Growth in Gross Domestic Product                          1.6%
Inflation (revised)                                                              1.6%                     
Corporate Profits (revised)                                                     4.2%

2017 estimates (revised)

Real Growth in Gross Domestic Product                      -1.25-+0.5%
                        Inflation                                                                         +.0.5-1.5%
                        Corporate Profits                                                            -15-0%

2018 estimates (revised)

Real Growth in Gross Domestic Product                          1.5-2.5%
                        Inflation                                                                          +1.5-2%
                        Corporate Profits                                                                5-10%


   Current Market Forecast
           
            Dow Jones Industrial Average

                                    Current Trend (revised):  
                                    Short Term Uptrend                                 22143-24879
Intermediate Term Uptrend                     19516-26847
Long Term Uptrend                                  5751-24198
                                               
                        2016    Year End Fair Value                                   12600-12800

                        2017     Year End Fair Value                                   13100-13300

2018     Year End Fair Value                                   13800-14000

            Standard & Poor’s 500

                                    Current Trend (revised):
                                    Short Term Uptrend                                     2586-2860
                                    Intermediate Term Uptrend                         2339-3101
                                    Long Term Uptrend                                     905-2763
                                               
                        2016   Year End Fair Value                                      1560-1580
                       
2017 Year End Fair Value                                       1620-1640         

2018 Year End Fair Value                                       1700-1720         


Percentage Cash in Our Portfolios

Dividend Growth Portfolio                          59%
            High Yield Portfolio                                     55%
            Aggressive Growth Portfolio                        55%

Economics/Politics
           
The Trump economy is providing a higher upward bias to equity valuations.   The data flow this week was mixed: above estimates: weekly jobless claims, November retail sales, month to date retail chains store sales, the November small business optimism index, October business inventories/sales; below estimates: weekly mortgage and purchase applications, the December composite PMI, November PPI, the November budget deficit; in line with estimates: October/November industrial production and capacity utilization, the December NY Fed manufacturing index, November CPI and November export/import prices.
           
The primary indicators were slightly upbeat: November retail sales (+) and October/November industrial production (0).  The call is positive (though just barely): Score: in the last 114 weeks, thirty-eight were positive, fifty-six negative and twenty neutral.

The trend over the last two months has clearly been upbeat.  Whether this spurt is the last hoorah of an eight year below average expansion or the sudden liftoff to a new and glorious growth phase in the economy is the big question. 

My vote is the former because (1) as noted this expansion is already long in the tooth; and while it has been below average in magnitude, it is still reaching historical end of cycle markers, like unemployment and profit margins and (2) in my opinion, this latest spurt in activity is more related to improving investor psychology as a result of the anticipated tax reform and the confidence that the Fed will pursue its tightening process only so long as it is not disruptive to the Markets.  So I can envision a very short term cyclical period of growth, However, I think it more related to the period immediately after the Trump election when psychology turned upbeat and the economic data suddenly improved only to fizzle out after a couple of months.  Therefore, I don’t believe it a reason to assume that the economy is returning to its long term secular growth rate.

On the other hand, this recovery has been below average; so perhaps there remains sufficient underutilized capacity to extend the expansion for another couple of years.  This is a key point on which my forecast will be proven correct or not; and we will likely know the answer by mid first quarter 2018.

Overseas, the pattern remains the same: strength in Europe which is likely contributing to a pick in growth here; not so much in the rest of the globe. Indeed, the Chinese data has shown a marked deterioration since the conclusion of the Chinese Communist Party Congress; and that will likely be aggravated by the recent tightening in standards for the financial industry which are being implemented to halt the excessive use of debt.

In fiscal policy, tax reform appears to be a short hair a way from passage; and indeed, I think that it will be enacted.  That said, my opinion is that it is not simpler (adds 20,000 new pages to the tax code), fairer (most of the cuts to corporations and the wealthy) and will not stimulate growth ($1.5 trillion in new debt will impede not promote economic growth). 

Our (new and improved) forecast:

A pick up in the long term secular economic growth rate based on less government regulation.  As a result, I have raised our 2018 growth forecast. This increase in secular growth could be further augmented by pro-growth fiscal policies including repeal of Obamacare and enactment of (revenue neutral) tax reform and infrastructure spending.  However, any expected increase in the secular rate of economic growth would likely be rendered moot if tax reform (assuming its passes) increases the national debt and the deficit.

Finally, short term growth is improving, propelled by improved psychology and a pickup in international growth.  However, I have doubts that the former will lead to any permanent increase in the long term secular growth rate.
                       
       The negatives:

(1)   a vulnerable global banking system.  Nothing new.

(2)   fiscal/regulatory policy. 

The GOP continues to drive to the hoop on its tax reform measure.  I understand the political necessity of getting this done.  But as you know, I see little economic rationale.  As I have tried to document, the measure as it is currently configured is not simpler, fairer or economically stimulative.  The only possible positive outcome would be a boost to business and consumer sentiment that would itself create some added growth.  Along that line, remember that immediately following Trump’s election, the economy experienced a boost in sentiment driven activity only to have it fade after a couple of months. 

Here is last night’s release of the final compromise bill:

Welfare for the wealthy (short):

This from an optimist (medium):

You know my bottom line, too much debt stymies economic growth even if it partly comes from a tax cut.


(3)   the potential negative impact of central bank money printing:  The key point here is that [a] the Fed has inflated bank reserves far beyond any comparable level in history and [b] while this hasn’t been an economic problem to date, {i} it still has to withdraw all those reserves from the system without creating any disruptions---a task that I regularly point out it has proven inept at in the past and {ii} it has created or is creating asset bubbles in the stock market as well as in the auto, student and mortgage loan markets.  

This week, everybody got into the act:

[a] the Fed raised the Fed Funds rate a quarter of a point {as expected}, projected three more hikes in 2018 {as expected} and provided a very upbeat outlook for the economy.  That does raise the question, if things are so good, why would the Fed drag its feet in normalizing monetary policy?  The answer is, of course, that it is scared sh*tless that the Markets would look on such a move with displeasure. 

Which begs the other question, why is the Fed effecting policy that accounts for a mandate {Market stability} which it doesn’t have?  The answer is, because it has created a monster that it hopes and prays it can finesse out back into a cage and, not coincidentally, be held accountable for.  Along those lines, in Yellen’s subsequent news conference, she said that she saw no ‘red’ or even ‘orange’ flags on the horizon with respect to Market risk. 

I may be wrong; but I believe that this will go down as another of the stupidest remarks ever uttered by a Fed head,

[b] the ECB and the Bank of England also met this week and both left their respective monetary policies unchanged, which is to say, no increase in rates and no cutback in QE.  This despite the clear improvement in the EU economy.  About the only thing I can say is that these guys are making the Fed look like a bunch of tight money advocates.  But it is all relative.

[c] meanwhile, having gotten through the Communist Party Congress meeting without an economic mishap {at least none reported}, the Bank of China raised rates slightly this week---a sign that government may be tightening the monetary/fiscal screws in an attempt to flush out the weak companies and financial institutions that have grown up over the past ten years in an easy money environment.  Whether or not this leads to repercussions outside of China remains to be seen.
           

You know my bottom line: when QE starts to unwind, so does the mispricing and misallocation of assets.  That thesis is about to be tested.
           

(4)   geopolitical risks:  little to add.

Apropos of nothing, a bit of a history lesson (medium):

(5)   economic difficulties around the globe.  The stats this week were in line with recent trends.


[a] October EU industrial output plus its manufacturing and services PMI’s were above expectations; November UK unemployment fell, retail sales improved while CPI and PPI were in line,

[b] November Chinese industrial output and retail sales were below estimates

The bottom line remains the same: Europe gaining strength, Japan may be improving, China a big question.


            Bottom line:  the US economy growth rate appears to be improving as a result of a combination of the positive impact on its secular growth rate brought on by increasing deregulation, plus rising business and consumer sentiment stemming from the likely passage of tax reform and the better performance of the EU economy.  The issue is, will this pick in economic activity have any legs?  I remain skeptical because (1) the current recovery is already at record length and (2) the tax bill, in my opinion, will do little to stimulate growth.  There is the possibility that the current acceleration in economic activity is largely sentiment driven and that by itself could prove me wrong.  However, I believe that the more likely scenario is loss of business and consumer optimism when they realize the tax bill will do little to improve the economic well-being of this country.

The Market-Disciplined Investing
         
  Technical

The indices (DJIA 24651, S&P 2675) smoked yesterday as tax reform appeared closer than ever. Volume spiked (but it was option expiration); breadth was firm but not as strong as I would have expected.  The bottom line remains that both of the Averages continue to trade above their 100 and 200 day moving averages and are in uptrends across all time frames---with the assumption being that stock prices are going higher.
           
The VIX (9.4) plunged 10 ½ %, closing below its 100 and 200 day moving averages (both resistance) and back below the lower boundary of its long term trading range.

The long Treasury was up, ending above its 100 and 200 day moving averages and the lower boundaries of a very short term uptrend, its short term trading range and long term uptrend.   So bond investors are not worried about higher rates or they are looking for a safety trade.

The dollar was up slightly, finishing below its 200 day moving average (now resistance) but above its 100 day moving average (now support) and back above the upper boundary of its short term downtrend (if it remains there through the close next Tuesday, it will reset to a trading range. 

            Gold was up slightly, remaining below its 100 and 200 day moving averages, in a developing very short term downtrend and within a short term trading range. 

Bottom line: long term, the indices remain strong viz a viz their moving averages and uptrends across all timeframes. Short term, they are above the resistance level marked by their August highs, meaning that there is no resistance between current price levels and the upper boundaries of the Averages long term uptrends. The technical assumption has to be that stocks are going higher.  If you own enough cash to sleep at night, lay back and enjoy it.

                       
Trading in UUP, GLD and TLT continued to reflect an economy that is either less strong and/or has less upward pressure on interest rates. Stocks and the VIX reflect economic growth forever.  I remain confused and uncomfortable with the overall technical picture.
                       

Fundamental-A Dividend Growth Investment Strategy

The DJIA and the S&P are well above ‘Fair Value’ (as calculated by our Valuation Model).  However, ‘Fair Value’ could be rising based on a new set of regulatory policies which would lead to improvement in the historically low long term secular growth rate of the economy. 

In addition, that growth could be further augmented if the current tax bill delivers on its promises.  As you know, I have serious doubts about that occurring; but I have to be open to the possibility.  The more likely scenario is a brief pickup in growth brought on by better business and consumer sentiment over the pending tax bill followed by a return to more sluggish growth/stagnation when the realization sets in that the tax bill is a GOP puff piece designed for talking points in the 2018 elections.

To be clear, the US long term secular growth rate appears to have picked up a little steam as a result of an improved regulatory environment.  Consequently, I raised my 2018 GDP and corporate growth estimates.  However, I have serious doubts that the tax reform bill will do anything to improve the long term secular economic growth rate.  That said, I have to point out that a number very smart analysts for whom I have great respect disagree with this position.  We will probably know who is right sometime in early 2018.

In short, I believe that Street estimates for economic and corporate profit growth based on a stimulative tax reform are too optimistic.  As a result, if stocks fly on this notion, they will discount even more future growth that is either not there or so far in the future as to not be really relevant to today’s valuations.  And when it wakes up from this fairy tale that could, in turn, lead to declining valuations. 

That said, fiscal policy is a distant second where it comes to Market impact.  The 800 pound gorilla for equity valuations is central bank monetary policy based on the thesis that (1) QE did little to help the economy but led to extreme distortions in asset pricing and allocation and (2) hence, its unwinding will do little to hurt the economy but much to equities as the severe perversion of security valuations is undone. 

At this point, I couldn’t be more at odds with Market extremely positive sentiment grounded on the assumption that the Fed has the Market’s back and will pursue the unwinding of QE only to the extent that it does disrupt the Markets.  To be sure, the thesis has proven correct to date.  However, I believe that the monetary authorities have created huge asset price distortions just as they did in 2000 and 2008; and at some point those distortions will be corrected irrespective of how or even whether the Fed pursues monetary normalization.  To be sure, I have no clue what the trigger event will be; but I didn’t know what would affect the Market collapses in 2000 and 2008 either---yet they still occurred.  Finally, those distortions are so extreme that the subsequent price adjustments will be very painful.

Bottom line: the assumptions on long term secular growth in our Economic Model have improved as a result of a new regulatory regime.  Plus, there is a ray of hope (though fading) that fiscal policy could further increase that growth assumption though its timing and magnitude are unknown.  On the other hand, if it raises the deficit/debt, I believe that it would negate any potential positive. In any case, I continue to believe that the current Street narrative is overly optimistic---which means Street models will ultimately will have to lower their consensus of Fair Value for equities. 

Our Valuation Model assumptions may be changing depending on the aforementioned economic tradeoffs impacting our Economic Model.  However, even if tax reform proves to be a positive, the math in our Valuation Model still shows that equities are way overpriced.

Counterpoint:

From an optimist:

                As a long term investor, with equity valuations at historical highs, I would want to own some cash in my Portfolio and would use the current price strength to sell a portion of my winners and all of my losers.
               
DJIA             S&P

Current 2017 Year End Fair Value*              13200             1630
Fair Value as of 11/30/17                                13200            1630
Close this week                                               23358            2578

Over Valuation vs. 11/30
             
55%overvalued                                   20460              2526
            60%overvalued                                   21120              2608
            65%overvalued                                   21780              2680
            70%overvalued                                   22440              2771


* Just a reminder that the Year End Fair Value number is based on the long term secular growth of the earning power of productive capacity of the US economy not the near term   cyclical influences.  The model is now accounting for somewhat below average secular growth for the next 3 to 5 years. 

The Portfolios and Buy Lists are up to date.


Steve Cook received his education in investments from Harvard, where he earned an MBA, New York University, where he did post graduate work in economics and financial analysis and the CFA Institute, where he earned the Chartered Financial Analysts designation in 1973.  His 47 years of investment experience includes institutional portfolio management at Scudder. Stevens and Clark and Bear Stearns, managing a risk arbitrage hedge fund and an investment banking boutique specializing in funding second stage private companies.  Through his involvement with Strategic Stock Investments, Steve hopes that his experience can help other investors build their wealth while avoiding tough lessons that he learned the hard way.








Friday, December 15, 2017

The Morning Call--Don't worry, be happy

The Morning Call

12/15/17

The Market
         
    Technical

The indices (DJIA 24508, S&P 2652) gave a little of their recent gains back yesterday as a couple of GOP senators expressed objections to the tax bill in its current form.  Volume declined again; breadth weakened.  The bottom line remains that both of the Averages continue to trade above their 100 and 200 day moving averages and are in uptrends across all time frames---with the assumption being that stock prices are going higher.
           
The VIX (10.5) rose another 3%, closing below its 100 and 200 day moving averages (both resistance) but above the lower boundary of its long term trading range.

The long Treasury was up, ending above its 100 and 200 day moving averages and the lower boundaries of a very short term uptrend, its short term trading range and long term uptrend.   So bond investors are not worried about higher rates or they are looking for a safety trade.

The dollar rebounded a tad, but still finished below its 200 day moving average (now resistance) but above its 100 day moving average (now support) and below the upper boundary of its short term downtrend.  Dollar investors also aren’t anticipating higher rates/economic strength nor the need for a safety trade.

            Gold was down slightly, remaining below its 100 and 200 day moving averages and within a short term trading range. 

Bottom line: long term, the indices remain strong viz a viz their moving averages and uptrends across all timeframes. Short term, they are above the resistance level marked by their August highs, meaning that there is no resistance between current price levels and the upper boundaries of the Averages long term uptrends. The technical assumption has to be that stocks are going higher.  If you own enough cash to sleep at night, lay back and enjoy it.
           
Trading in UUP, GLD and TLT continued to reflect an economy that is less strong and/or less upward pressure on interest rates. The VIX seemed to be agreeing while stocks were more neutral in their response.  I remain confused and uncomfortable with the overall technical picture.
           
    Fundamental

       Headlines

            Yesterday’s economic data was largely upbeat: weekly jobless claims fell, November retail sales were very strong, October business inventories fell but sales were up big, November export/import prices were mixed and the December Markit Composite PMI was disappointing.

David Stockman on the current economy (medium):

            Overseas, November UK retail sales were better than anticipated; November Chinese industrial output and retail sales were below estimates.

            ***overnight, the December EU manufacturing and services PMI’s were above forecasts.

            The only other headline was a couple of GOP senators suggesting that they might not be able to support the tax bill in its current form.  I don’t put a lot stock in the likelihood of any of these objections derailing the tax bill.  First, with the bill on the verge of going back to the house and senate, this is the point of max leverage for any legislator to try to extract an item on his/her agenda.  So all this is to be expected.  Second, the political necessity for passage is so powerful, I think the pressure will be intense to relinquish any personal agenda issue for the common (GOP) good.

Bottom line: stocks retreated yesterday on what I consider bogus headlines.  I continue believe that tax reform is coming (however, ineffective it may be).  Meanwhile, the global central bank monetary policies will keep the ‘everything is awesome’ dream alive.  In short, the major fundamental factors driving stocks higher remain in place, however outlandish current valuations may be. 

Enjoy the ride while it lasts, but be sure your portfolio has some protection like cash.
            https://www.pragcap.com/idgaf-fomo/

            Stocks no longer cheap relative to bonds (short):

       Investing for Survival
   
            Why now?

    News on Stocks in Our Portfolios
 
Oracle (NYSE:ORCL): Q2 EPS of $0.70 beats by $0.02.
Revenue of $9.63B (+6.2% Y/Y) beats by $60M.
           

Economics

   This Week’s Data

            The December Markit Composite PMI was reported at 53.0 versus expectations of 54.6.

            October business inventories fell 0.1%, in line; but sales rose 0.6%.

            The December NY Fed manufacturing index came in at 18.0, in line.

   Other

            Minsky and the Fed (medium):

            Odds of a recession (short):

            Student loan defaults accelerate (medium):


            Update on big four economic indicators (medium):

            Why a 2% inflation goal is so stupid (short):

                Fed stated policy and the money supply numbers (medium):

           
Politics

  Domestic

The FBI isn’t the only government ‘gang that can’t shoot straight’ (medium):


  International War Against Radical Islam


Visit Investing for Survival’s website (http://investingforsurvival.com/home) to learn more about our Investment Strategy, Prices Disciplines and Subscriber Service.




Thursday, December 14, 2017

The Morning Call--But CPI says inflation isn't rising and the Fed thinks that is OK

The Morning Call

12/14/17

The Market
         
    Technical

The indices (DJIA 24585, S&P 2663) turned in a muted version of ‘sell on the news’ yesterday, as the headlines were all upbeat but the Averages mixed (Dow up, S&P down).  Volume declined modestly while breadth remained strong.  The bottom line remains that both of the Averages continue to trade above their 100 and 200 day moving averages and are in uptrends across all time frames---with the assumption being that stock prices are going higher.
           
The VIX (10.3) rose 2 1/2 %, closing below its 100 and 200 day moving averages (both resistance) but finished above the lower boundary of its long term trading range.

The long Treasury was up big on volume, ending above its 100 and 200 day moving averages and the lower boundaries of a very short term uptrend, its short term trading range and long term uptrend.   So bond investors apparently viewed the FOMC statement as dovish.

The dollar was down big on volume, finishing below its 200 day moving average (now resistance) but above its 100 day moving average (now support) and back below the upper boundary of its short term downtrend (negating Tuesday’s break).  Dollar investors also aren’t that enthused with yesterday’s Fed (in) action.

            Gold was up big on volume, but remained below its 100 and 200 day moving averages and within a short term trading range.  GLD investors seemed to concur that the FOMC is filled with wimps. 

Bottom line: long term, the indices remain strong viz a viz their moving averages and uptrends across all timeframes. Short term, they are above the resistance level marked by their August highs, meaning that there is no resistance between current price levels and the upper boundaries of the Averages long term uptrends. The technical assumption has to be that stocks are going higher.  If you own enough cash to sleep at night, lay back and enjoy it.
           
Trading in UUP, GLD and TLT were back in sync reflecting an attitude of disdain for a weak wristed Fed.  The VIX seemed to be agreeing while stocks were more neutral in their response.  I remain confused and uncomfortable with the overall technical picture.

    Fundamental

       Headlines

            Yesterday’s economic stats were mixed: weekly mortgage and purchase applications fell while November CPI was in line---indeed portraying a much more benign picture of inflation than did the previous day’s PPI number.   I should note that PPI tends to lead CPI; but as long as the Fed’s favorite inflation indicator remains below its stated objective, there is little reason to assume that there is any pressure to speed up the normalization of monetary policy.
           
            ***overnight, November UK retail sales were better than anticipated; November Chinese industrial output and retail sales were below estimates.

            The lead items of the day were:

(1)   a second round of rumors on an agreement on the tax bill.  While the particulars were almost identical with the first set of rumors, it still provided another opportunity for investors to get jiggy.

Here is what we know so far (medium):

More on the exceeding low tax rate US corporations are now paying (medium):

                  Don’t expect an investment boom if corporate tax rates are cut (medium):


(2)   the conclusion of the December FOMC meeting, its policy actions and outlook.  All was pretty much in line with my assumptions: a quarter point rate hike [everyone expected this] and a bright and shining economic forecast---rising GDP growth, declining unemployment and inflation gradually reaching the Fed 2% objective.  Of course, that doesn’t occur until 2020, so it is nothing to be worried about today and far enough in the future to be rendered useless as a forecast.  As I noted above, most markets judged the action/statement as dovish---rising bond and gold prices and a lower dollar.  In short, the Fed is leaving not upsetting the markets [even though, as I have often observed, not upsetting the markets is not anywhere to be found in its policy mandate] as a priority to the timely unwinding of QE.

                        ***overnight, the ECB met and left rates and its QE program unchanged (short):

                        As did the Bank of England; also leaving policy unchanged (medium):

                        However, China raised rates slightly (medium):


Bottom line: the bulls had another goldilocks news day---tax reform is coming (however, ineffective it may be) and the Fed continues to have the Markets’ back.  At least some of the stock boys think so as did bond, dollar and gold investors.  In other words, buy everything except the dollar---because, you know, who wants to own the currency of a country whose ruling class is more concerned about short term effect of the headlines than their long term consequences. 

I have no idea how or when this ends.  As long as the headlines remain positive and the algos have a dollar left to push prices higher, all will be well.  But at some point, somebody or some event is going to point to the emperor and all the lemmings are going to realize that he has no clothes.  Until then, lay back and enjoy the ride.  However, I would have some cash for the aftermath.

            The latest from Doug Kass (medium):

       Investing for Survival
   
            The circle of competence.

    News on Stocks in Our Portfolios
 
            Caterpillar (NYSE:CAT) declares $0.78/share quarterly dividend, in line with previous.

Economics

   This Week’s Data

            Weekly mortgage applications fell 2.3% while purchase applications were down 1.0%.

            November CPI rose 0.4%, in line while ex food and energy, it was +0.1% versus expectations of up 0.2%

            Weekly jobless claims fell 11,000 versus estimates of a 3,000 increase.

            November retail sales were up 0.8% versus forecasts of up 0.3%; ex autos, they were up 0.8% versus projections of up 0.4%.

            November export prices increased 0.7%, in line; import prices were up 0.5% versus consensus of up 0.3%.
           
   Other

            Today’s bitcoin entries:

Politics

  Domestic

  International War Against Radical Islam


Visit Investing for Survival’s website (http://investingforsurvival.com/home) to learn more about our Investment Strategy, Prices Disciplines and Subscriber Service.




Wednesday, December 13, 2017

The Morning Call--Inflation is rising; will that have any impact on Fed policy?

The Morning Call

12/13/17

The Market
         
    Technical

The indices (DJIA 24504, S&P 2664) had another good day.  Volume was up; and breadth improved.  The bottom line remains that both of the Averages continue to trade above their 100 and 200 day moving averages and are in uptrends across all time frames---with the assumption being that stock prices are going higher.
           
The VIX (9.9) rose 6 ¼ %, closing below its 100 and 200 day moving averages (both resistance) but back above the lower boundary of its long term trading range.  Again, being up 6 ¼ % on a strong market day is a bit unusual.

The long Treasury was down fractionally for a second day, ending above its 100 and 200 day moving averages and the lower boundaries of a very short term uptrend, its short term trading range and long term uptrend.   So bond investors still don’t appear to be concerned about a Fed rate hike today.

The dollar was up, finishing below its 200 day moving average (now resistance) but above its 100 day moving average (now support) and above the upper boundary of its short term downtrend (if it remains there through the close on Thursday, it will reset to a trading range).

            Gold rose slightly, but remained below its 100 and 200 day moving averages and within a short term trading range.  GLD investors are apparently more concerned about a rate rise than the bond guys; but part of its poor performance could be impacted by cryptocurrencies. 

Bottom line: long term, the indices remain strong viz a viz their moving averages and uptrends across all timeframes. Short term, they are above the resistance level marked by their August highs, meaning that there is no resistance between current price levels and the upper boundaries of the Averages long term uptrends. The technical assumption has to be that stocks are going higher.  If you own enough cash to sleep at night, lay back and enjoy it.
           
Trading in UUP, GLD and TLT are back out of sync with themselves (sluggish economy, weak interest rates) and with the VIX and stocks.  I remain confused and uncomfortable with the overall technical picture.
           
    Fundamental

       Headlines

            Yesterday’s economic data were mixed: the November small business optimism index and month to date retail chain store sales were pluses; the November budget deficit was disappointing (questions:  [a] how can the US government be running a larger than expected deficit at a time when everyone is wee weeing in their pants about improved GDP growth? and [b] how can net tax cuts be helpful to this situation?)  November PPI was also above expectations but that can interpreted differently depending on your perspective.  The bulls undoubtedly are happy because inflation is nearing the Fed’s 2% inflation objective which they believe to be valid. 

Me, I don’t understand why anyone wants a 2% inflation rate.  It robs you and me of our purchasing power year after year.  Further, it is another sign of that the Fed has again waited too long to begin the transition toward monetary normalization.  The issue here is the extent to which rising inflation will push the Fed to a more aggressive tightening stance than is now expected by the markets.  I don’t know the answer; but the risk is it just moves the goal posts on inflation like it did on growth.  However, in my opinion, if inflation continues to accelerate, so do the Fed’s problems.  Having said all of that, CPI gets reported today and it may portray a much more benign pricing environment.

            In addition, we get Yellen’s famous final scene today which will most likely be a hike in rates coupled with the promise to tighten as slowly as possible.

            David Stockman on the latest economic numbers (medium):

            ***overnight, October EU industrial output was above expectations; November UK unemployment rose while CPI and PPI were in line.

            The headline item of the day was Sen. Cornyn’s optimistic assessment that the tax bill will be out of conference soon.

            But the Europeans don’t like it; and that could lead to trade issues (medium):

                And many still aren’t buying the ‘dynamic scoring’ results (medium):
            Given the above, it appears that even if the final version of the tax reform is as described above, it will not have changed enough to alter the conclusion that the bill will not be simpler, fairer or sufficiently stimulative to warrant the assumption of another $1.5 trillion in national debt.

Bottom line: the bulls have very reason to be optimistic: (1) the economic data is improving [though the issue is whether this is the beginning or the end of an expansion], (2) the Fed is slow playing the normalization of monetary, even though the aforementioned economic numbers are meeting its objectives [though they were altered several times to allow the Fed to maintain monetary ease longer than its original guidelines], (3) the electorate is apt to get a big beautiful tax cut [to coin a  phrase] this year [though the only things that are big are {i} tax cuts for corporations and wealthy individuals and {ii} the increase in the deficit] and (4) there is now the likelihood of a infrastructure spending bill [though we have so few specific, it is hard to draw any conclusions about its potential impact on the economy]. 

To be sure, there are plenty of historical arguments on both sides as to whether the tax bill as it is currently structured will indeed be stimulative.  As you know, in my opinion, it will not.  That said, if it stimulates economic hopes of businesses and consumers, that in itself could prompt a change in behavior that could raise the level of investing and spending.  Whether that happens or not, I have no clue.  But I believe that current equity valuations reflect a goldilocks result---which may occur.  But I wouldn’t have all my assets riding on that bet.

            The latest from Jim Grant (medium):

       Investing for Survival
   
            What a complacent investor looks like.

    News on Stocks in Our Portfolios
 
           

Economics

   This Week’s Data

            Month to date retail chain store sales growth rose from the prior week.

            The November budget deficit was $138.5 billion versus consensus of $134.0 billion.

   Other

            Today’s bitcoin entries:

            On a related matter---the EU’s war on cash (medium):

Politics

  Domestic

  International War Against Radical Islam


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