Saturday, October 21, 2017

The Closing Bell

The Closing Bell

10/21/17

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%



   Current Market Forecast
           
            Dow Jones Industrial Average

                                    Current Trend (revised):  
                                    Short Term Uptrend                                 21494-24200
Intermediate Term Uptrend                     19094-26425
Long Term Uptrend                                  5751-24198
                                               
                        2016    Year End Fair Value                                   12600-12800

                        2017     Year End Fair Value                                   13100-13300

            Standard & Poor’s 500

                                    Current Trend (revised):
                                    Short Term Uptrend     (?)                           2511-2786
                                    Intermediate Term Uptrend                         2276-3050
                                    Long Term Uptrend                                     905-2763
                                               
                        2016   Year End Fair Value                                      1560-1580
                       
2017 Year End Fair Value                                       1620-1640         

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 marginally higher upward bias to equity valuations.   The data flow this week was positive: above estimates: weekly mortgage and purchase applications, the October housing market index, September existing home sales, month to date retail chain store sales, weekly jobless claims, the October Philadelphia Fed business outlook index, September industrial production, the October NY Fed manufacturing index; below estimates: September housing starts, September import/export prices, the September leading economic indicators; in line with estimates: none.

On the other hand, the primary indicators were mixed:   September industrial production (+), September existing home sales (+), September housing starts (-) and September leading economic indicators (-).  Given the majority of the stats were positive, the call is a plus.  Score: in the last 105 weeks, thirty-one were positive, fifty-six negative and eighteen neutral. 

The Fed released its latest Beige Book this week which showed growth in all regions along with relatively mild inflation pressures.  What struck me about this survey was that the numbers from those Fed regions that were impacted by Harvey, Irma and Maria were up along with the rest of the country.  That seemed so absurd that I had to read it twice just to be sure. 

To be clear, this has nothing to do with the accounting for a major disaster (i.e. not recognizing the loss of lives, assets, etc. but reflecting the economic activity of replacement).  My problem is that somehow all the lost wages, production and sales were somehow offset by growth in other areas.  Of course, it could be that the real data simply hasn’t shown up in the reported data---though that is not the way it was characterized in the Beige Book narrative.  The point being that I believe that this report is worse than worthless.

Overseas, the numbers were mixed, with China reporting the best data.  I wonder if that has anything to do with the convening of the Communist Party Congress.  Net, net, I continue to believe that Europe has begun growing again while China and Japan are still mired in the same struggle as the US to improve growth.

                On the fiscal front, with the senate’s passage of a FY 2018 budget, congress took a concrete step towards tax reform.  Not that we are there yet.  Plus, in their current form, if enacted, I believe that both the budget and the tax reform measures would be more a negative than a positive because they would continue to push the deficit and debt to higher levels. 

Bottom line: this week’s US economic stats were positive; though that is tempered somewhat by mixed primary indicators.  I remain open to the notion that the data could be signaling the long awaited improvement in economic growth.  However, this week’s numbers were hardly strong evidence of such.  The international data was mixed, leaving our forecast with Europe no longer ‘muddling through’ but the rest of the world still stuck in that rut.

Longer term, with the national debt now larger than GDP, I am less confident in my upgrading our long term secular growth rate assumption by 25 to 50 basis points based on Trump’s deregulation efforts.  The latest senate version of the FY2018 budget proposal simply adds to that concern as does the tax reform measure in its current form. Thus, any further increase in that long term secular economic growth rate assumption stemming from enactment of the Trump/GOP fiscal policy is up to question. 

Our (new and improved) forecast:

A now questionable pick up in the long term secular economic growth rate based on less government regulation.  This hoped for increase in growth could be further augmented by pro-growth fiscal policies including repeal of Obamacare and enactment of tax reform and infrastructure spending; though the odds of that are uncertain.  Unfortunately, any expected increase in the secular rate of economic growth could be rendered moot if tax reform (assuming its passes) increases the national debt and the deficit.

Short term, the economy is struggling and will likely continue to do so; though the improving global economy may at some point have an impact.
                       
       The negatives:

(1)   a vulnerable global banking system.  This week, I linked to several articles expressing concern about the derivative holdings on bank balance sheets.  As you know, this has been a worry of mine since the financial crisis.  To be sure, US regulatory authorities have forced banks to fortify their balance sheets via capital increases.  However, [a] the same can’t be said for the EU banks and [b] because during the financial crisis, the US banks were allowed to carry derivative contracts at book value, we have no idea the magnitude of the risk they now pose to bank solvency.

(2)   fiscal/regulatory policy. 

The major development this week was the senate’s passage of its version of the FY2018 budget.  The house still needs to pass its version and the two have to be reconciled.  But if successful, it would pave the way for tax reform.  Unfortunately, as it relates to anything remotely associated with reality, the senate measure could just as easily been written by my three year old granddaughter.  I linked to the math involved in Friday’s Morning Call; net effect being our senators are in dream land and we should expect ever higher budget deficits and national debt if it is enacted in its current form.

Just as unfortunate, the tax reform measure, in its current form, will just do more of the same.  In these pages, I have dwelled on the impact on economic growth of a country’s national debt once it has reached a certain level---which the US has already attained.  The point being that a tax reform bill, however simpler or fairer it makes the tax code, ceases to be stimulative if it pushes the deficit/debt to the point where all the benefits of any reforms are consumed servicing that increased deficit/debt they cause.

In trade, the third round of NAFTA negotiations ended.  The fact that there was agreement for another round was a better result than many had expected.  On the other hand, Mexico and Canada expressed displeasure with the results so far.  Frankly, I take that as a positive---the US is pressing for more favorable terms but not hard enough to make Mexico and Canada walk away.   That doesn’t mean that they won’t.  But so far, so good.

What happens if the negotiations fail (medium):

Further, the Treasury declined to name any country a currency manipulator.  As you know, for years this has been a major bone of contention between the US and China.  So its absence has to be a plus.  Of course, it could be more related to North Korea than to trade.  Even if it is, it is a sign that the two parties are working on their issues.

           
(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.  

The news, what there was of it, included:

[a] continued speculation over who will be the next Fed chair.  Rumors now have Powell as the leading candidate.  This guy is a dove, so should he get the nod, I wouldn’t expect monetary policy to change dramatically.  Meaning an agonizingly slow retreat from QE.

[b] release of the latest Fed Beige Book which I found less than helpful {see above},

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:  Domestic issues held the headlines this week, but tensions between the US and North Korea, Iran and Russia remain high.  Add to that the secession movement in Catalonia that is causing heartburn in Spain at the moment.

***overnight, Spain suspends Catalan government (medium):

None of these issues has been resolved; and there remains a decent probability of an unpleasant outcome in any one of them. 

The one bit of good news was the resolution of a boundary dispute between the Iraqi government and the country’s Kurdish minority.  Any outbreak in hostilities could have driven oil prices higher.  That risk has apparently been eliminated.

(5)   economic difficulties around the globe.  This week:

[a] the September UK inflation rate hit a five year high while its jobless rate fell to a 42 year low; September UK retail sales were well below estimates; October German investor sentiment improved slightly; September EU car sales declined,

[b] the September Chinese CPI was in line but PPI was well above expectations; third quarter GDP was also in line although retail sales, industrial output and fixed asset investment were slightly above forecasts. Finally, the Communist Congress convened and will pass a new five year economic/social agenda; that should produce some news,

[c] the August Japanese all activity index was below forecasts.


So mixed overall; but I am not sure of the credibility of the upbeat Chinese data.  In short, Europe appears out of the woods; but the Japanese and Chinese stats continue to be far too erratic to draw any conclusions.

            Bottom line:  our near term forecast is that the US economy is stagnate though there is a possibility that the improved regulatory outlook and a now growing EU economy may be stimulative.  If Trump/GOP were to pull off a (near) revenue neutral healthcare reform, tax reform and infrastructure spending on a reasonably timely basis, I would suspect that sentiment driven increases in business and consumer spending would return.  However, the senate version of the FY2018 budget as well as tax reform in its current form suggest more of the same fiscal irresponsibility we have come to know and love from our ruling class.

To be sure, Trump’s drive for deregulation and improved bureaucratic efficiency is and will remain a plus.  As you know, I inched up my estimate of the long term secular growth rate of the economy because of it.  But I fear that this positive could be reversed if the congress passes a FY2018 budget and/or tax reform that raise the deficit/debt---however, simpler and fairer the tax reform may be.

The Market-Disciplined Investing
         
  Technical

The indices (DJIA 23328, S&P 2575) turned in another stellar day.  Volume was up (but largely impacted by option expiration) and breadth continued strong (indeed, it is now well into overbought territory).  Both remain above their 100 and 200 day moving averages and are in uptrends across all time frames. 

The VIX (10.0) was down slightly, despite having declined substantially intraday.  It remained below the upper boundary of its short term downtrend and below its 100 and 200 day moving averages.  However, it is above the lower boundary of its long term trading range and continues to develop a very short term uptrend.  At the moment, it appears that the July low was the bottom.

The long Treasury plunged 1%, finishing below its 100 day moving average (if it remains there through the close on Tuesday, it will revert to resistance) and the lower boundary of a developing very short term uptrend.  However, it continued to trade above its 200 day moving averages (support) and the lower boundaries of its short term trading range and its long term uptrend. 

The dollar rose, but ended in its short term downtrend and below its 100 and 200 day moving averages. However, it closed above the lower boundary of a developing very short term downtrend.  If it remains there through the close on Monday, it will void that trend.


GLD was down, but finished above its 100 and 200 day moving averages (support) and the lower boundary of a short term uptrend.  However, it moved below the lower boundary of its very short term uptrend.

 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.  Their advance has been relentless and will stay that way until it does not.  ‘When’ is the question to which I have no answer.

Friday’s trading in UUP, GLD and TLT reversed what had appeared to be another reversal.  In other words, their short term price movements have lost all informative directional value.

I remain uncomfortable with the overall technical picture.

Institutions continue to sell to the public (medium):


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 could lead to improvement in the historically low long term secular growth rate of the economy (depending on the validity of Reinhart/Rogoff); but it still reflects the elements of a botched Fed transition from easy to tight money and a ‘muddle through’ scenario in Japan and China.

The US economic stats continue to reflect sluggish to little growth---although there have been signs of late of some improvement; just not enough for me to consider changing our forecast.  Overseas, the story is the same---anemic growth with the exception being Europe.

Nevertheless, stock prices are rising as investors are seemly willing to make, or at least begin to make, the bet that the economic growth rate will soon pick up.  I think that if equities were more reasonably priced that would make sense.  However, with stocks at all-time high valuations, it seems that nirvana is being discounted.  So the current meteoric rise seems to be double counting, even if the economic growth rate increases.

On the fiscal front, congress is toiling in the trenches to pass a budget bill which is a precursor to tax reform.  While the former seems likely out of pure necessity, the latter remains in question.  Unfortunately in their current forms, both will add to the deficit/debt---and I believe that is a negative for growth.  To be sure, a simpler, fairer (?) tax code is a plus and may add marginally to the secular growth rate.  However, I remain convinced that, given the magnitude of the current national debt, the present proposal will not provide the impetus to economic growth many hope for. 

As a result, even if passage is achieved, I believe that Street estimates for economic and corporate profit growth are too optimistic based on the improving economy, fiscal reform narrative.  And when it wakes up from this fairy tale that could, in turn, lead to declining growth expectations as well as 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. 

That thesis is about to get tested with the Fed announcing the unwind of its balance sheet and other central banks are making noises like they could follow suit.  That said, the appointment of a new Fed chair could impact this process, perhaps either accelerating the unwind or slowing it down depending on which candidate is selected.

Bottom line: the assumptions on long term secular growth in our Economic Model may be beginning to improve as we learn about the new regulatory policies and their magnitude.  Plus, there is a ray of hope 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.

                As a long term investor, with equity valuations at historical highs, I would want to own cash in my Portfolio and would use the current price strength to sell a portion of your winners and all of your losers.
               
                Kyle Bass makes a great point: with all the money flowing into ETF’s all the Market risk is being assumed by those who don’t know how to take risk (medium):



DJIA             S&P

Current 2017 Year End Fair Value*              13200             1630
Fair Value as of 10/31/17                                13116            1620
Close this week                                               23328            2575

Over Valuation vs. 10/31
             
55%overvalued                                   20329              2511
            60%overvalued                                   20985              2592
            65%overvalued                                   21641              2673
            70%overvalued                                   22297              2754


* 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, October 20, 2017

The Morning Call--The knowing suspension of common sense

The Morning Call

10/20/17

The Market
         
    Technical

The indices (DJIA 23163, S&P 2562) were up again, despite a big down opening.  Volume was up and breadth continued strong.  Both remain above their 100 and 200 day moving averages and are in uptrends across all time frames. 

The VIX (10.0) was fractionally lower, remaining below the upper boundary of its short term downtrend and below its 100 and 200 day moving averages.  However, it remained above the lower boundary of its long term trading range.  As I noted yesterday, it has made a second higher low; so it is starting to develop a very short term uptrend.  At the moment, it appears that the July low was the bottom.

The long Treasury rose, finishing above its 100 and 200 day moving averages (support) and the lower boundaries of its short term trading range and its long term uptrend.  It has made a second higher low and, thus, is developing a very short term uptrend.

The dollar fell, remaining in its short term downtrend and below its 100 and 200 day moving averages. It has made a second lower high, so it developing a very short term downtrend.


GLD was up, ending above its 100 and 200 day moving averages (support) and the lower boundary of a short term uptrend.  It has made a second higher low, so it is developing a very short term uptrend.

 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.  Yesterday’s pin action (a big sell off at the open and finishing higher on the day) suggests that the bulls are still control of the board.

The recent trading in UUP, GLD and TLT appears to be attempting to re-establish the trends in place in July, i.e. reflecting a weaker economy and low interest rates.

I remain uncomfortable with the overall technical picture.

    Fundamental

       Headlines

            Yesterday’s economic stats were weighed to the positive side: weekly jobless claims were less than anticipated and the Philly Fed business index was stronger than estimates; on the other hand, the September leading economic indicators were much weaker than forecast.

            Overseas, the results were not quite as good.  Third quarter Chinese GDP was in line while retail sales, industrial output and fixed asset investment were slightly ahead of expectations.  However, with the Communist Party Congress now in session; so the numbers may have been fudged to insure no cognitive dissonance during the gathering.  On the other hand, UK September retail sales were well below estimates and the August Japanese all activity index was below forecasts.

            There were two other news events that bear mentioning:

(1)   a Bank of China official warned against Market optimism.  This really freaked the Asian equity markets and spilled over into early trading in the US (medium):
           
(2)   rumors circulated that Powell [dove] was now the leading candidate for Fed chair.  Clearly, the Market would love another easy money Fed chief; so that provided support for stocks.  On the other hand, a Yellen repeat would simply make the asset mispricing and misallocation problem all the worse (short):

            ***overnight, the Senate passed a FY2018 budget bill.  The good news is that if the house will now pass its version and the two can be reconciled, that will set up the GOP to pass tax reform with just a majority vote.  The bad news is that (1) the cost cutting assumptions in the budget all amount to a Grimes fairy tale.  Indeed under more realistic assumptions it will propel the debt/GDP ratio ever higher, and (2) the current version of the tax reform package is for cuts of $1.5 trillion.  For the results to be anywhere near revenue neutral requires the knowing suspension of common sense.  In short, our ruling class is digging an ever deeper debt hole which will require an ever larger share of national productivity to service.

             Bottom line: as I noted above, the bulls still rule no matter what the headlines.  As long as that is the case, lay back and enjoy it.  But I wouldn’t be fully invested; indeed, I want a decent cash position.  Our Portfolios are now ~50% in cash.

       Investing for Survival
   
            So few winners, so much dead weight.

           
    News on Stocks in Our Portfolios
 
Genuine Parts (NYSE:GPC): Q3 EPS of $1.16 misses by $0.12.
Revenue of $4.1B (+4.1% Y/Y) in-line.

Genuine Parts Company (NYSE:GPC) announces separate acquisitions within its Motion Industries subsidiary and U.S. automotive parts group.
The company acquired Apache Hose & Belting Company for the Motions Industries subsidiary. The Iowa-based company specializes in value-added fabrication of belts, hoses and cut and molded products used in a wide array of industries and applications. Genuine Parts expects Apache to generate estimated annual revenues of $100M.
Genuine Parts also acquired parts distributor Monroe Motor Products. The company says the addition of Monroe will fold into its U.S. Automotive operations and is expected to generate approximate annual revenues of $25M.
Schlumberger (NYSE:SLB): Q3 EPS of $0.42 in-line.
Revenue of $7.91B (+12.7% Y/Y) in-line.

Procter & Gamble (NYSE:PG): Q1 EPS of $1.09 beats by $0.01.
Revenue of $16.65B (+0.8% Y/Y) misses by $50M.

Coca-Cola (NYSE:KO) declares $0.37/share quarterly dividend, in line with previous.

Economics

   This Week’s Data

            The September leading economic indicators fell 0.2% versus expectations of a 0.1% decline.

   Other

            Central bankers don’t know how to do their job (medium):

           
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.




Thursday, October 19, 2017

The Morning Call--The Beige Book is BS

The Morning Call

10/19/17

The Market
         
    Technical

The indices (DJIA 23157, S&P 2561) were up again, with the Dow closing above 23000.  Volume was flat and breadth continued strong.  Both remain above their 100 and 200 day moving averages and are in uptrends across all time frames. 

The VIX (10.1) was down 2 ¼ %, but is still below the upper boundary of its short term downtrend, below its 100 and 200 day moving averages.  However, it remained above the lower boundary of its long term trading range.  In addition, it closed above the upper boundary of a very short term downtrend and has now made a second higher low.  So far, it failed to make a new low and has to all the appearances has made a higher bottom.

The long Treasury declined, but finished above its 100 and 200 day moving averages (support) and the lower boundaries of its short term trading range and its long term uptrend.  It has also broken a very short term downtrend. 

The dollar fell, remaining in its short term downtrend and below its 100 and 200 day moving averages. Last week, it is successfully challenged a developing very short term uptrend.

GLD fell, ending above its 100 and 200 day moving averages (support) and the lower boundary of a short term uptrend.  Last week, it successfully challenged a developing very short term downtrend.

 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. 

Trading in UUP, GLD and TLT was inconsistent and of little informative value.

I remain uncomfortable with the overall technical picture.

    Fundamental

       Headlines

            Yesterday’s economic data releases were mixed: weekly mortgage and purchase applications were up but September housing starts were awful as were building permits---though they were slightly better than expected.

Overseas, the September UK jobless rate hit a 42 year low.

***overnight, third quarter Chinese GDP was in line while retail sales, industrial output and fixed asset investment were slightly ahead of expectations; UK September retail sales were well below estimates; the August Japanese all activity index was below forecasts.

In political developments, North Korea upped the ante, threatening the US; Spain moved forward with the process of suspending the Catalonian regional government.

There was also news from the central banks:

(1)   The Fed released its latest Beige Book which showed growth in all regions including those impacted by Harvey, Irma and Maria.  If that is true then the underlying growth in those areas has to have been explosive to adsorb those hits and still be up.  Color me skeptical.  The report also suggested some upward price pressure but nothing that it was concerned about.  That I believe.

(2)   BOE head Carney raised the problem of the continuity of derivative contracts as a result of Brexit.

Brexit isn’t the only risk to derivative contracts (medium):

Bottom line: yesterday’s economic stats remind us that the economy is still struggling.  The mystery is the Fed’s Beige Book statement that economic activity improved in the areas hit by hurricanes which means either the actual numbers haven’t caught up the reported numbers or the Fed is talking its book.  Either way, I believe that it lacks any credibility. 

Meanwhile, financial types at long last seem to be starting to focus on the enormous derivative portfolio on the global banking system’s balance sheet.  These contracts (failure) were a major contributing factor to the financial crash; and the only reason that they were even bigger was that accounting rules were changed so that they didn’t have to be marked to market.  Now they are once again being recognized as risk to bank solvency.

            I continue to lighten up on holdings that have reached their Sell Half Range and believe that cash is currently a valuable asset.

            More on valuations (medium):

       Investing for Survival
   
            Value investing.

    News on Stocks in Our Portfolios
 
Sherwin Williams (NYSE:SHW) declares $0.85/share quarterly dividend, in line with previous.

Johnson & Johnson's (NYSE:JNJ) German device unit Johnson & Johnson GmbH inks an agreement to acquire German software firm Surgical Process Institute (SPI), a specialist in standardizing and digitizing surgical workflows in the surgical theater. It has developed a way of standardizing surgery via a detailed step-by-step checklist that follows best-in-class standards.

Economics

   This Week’s Data

            Weekly jobless claims fell 22,000 versus consensus of down 3,000.

            The October Philadelphia Fed business outlook index was reported at 27.9 versus expectations of 20.2.

   Other

            More on the problem of unfunded state pension liabilities (medium):

Politics

  Domestic

Quote of the day (short):

  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, October 18, 2017

The Morning Call--Watch the bond market

The Morning Call

10/18/17

The Market
         
    Technical

The indices (DJIA 22997, S&P 2559) were up again, with the Dow closing in on 23000 (it traded above that level intraday).  Volume was up slightly and breadth continued strong.  Both remain above their 100 and 200 day moving averages and are in uptrends across all time frames. 

Retail investors are now all-in (medium):

The VIX (10.3) was up 3 ½ %, but is still below the upper boundary of its short term downtrend, below its 100 and 200 day moving averages, back above the lower boundary of its long term trading range.  In addition, it closed above the upper boundary of a very short term downtrend and has now made a second higher low.  So far, it failed to make a new low and has to all the appearances has made a higher bottom.

The long Treasury rose, finishing above its 100 and 200 day moving averages (support) and the lower boundaries of its short term trading range and its long term uptrend.  It has also broken a very short term downtrend.  On the other hand, short rates continue to rise, flattening the yield curve.  That suggests investor concern about a near term rate rise but also a weak economy---not a healthy combination.

The dollar rose slightly, but remained in its short term downtrend and below its 100 and 200 day moving averages. Last week, it is successfully challenged a developing very short term uptrend.
           
GLD fell, ending above its 100 and 200 day moving averages (support) and the lower boundary of a short term uptrend.  Last week, it successfully challenged a developing very short term downtrend.

 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. 

Trading in UUP, GLD and the front end of the yield curve are pointing at a rise in the Fed Funds rate; but the long bond is suggesting that the economy is not as strong as equity investors seem to think.

I remain uncomfortable with the overall technical picture.

    Fundamental

       Headlines

            Yesterday’s US economic data was generally upbeat: month to date retail chain store sales, September industrial production and the October housing market index were all better than anticipated.

            Overseas, the stats were a bit more mixed: the September UK inflation rate hit a five year high; October German investor sentiment rose slightly; September EU car sales declined.

            ***overnight, the September UK jobless rate hit a 42 year low; BOE head Carney raised the problem of the continuity of derivative contracts as a result of Brexit (medium):

                In addition, the Chinese Communist Congress convened to create its new five year plan for economic growth; the US Treasury declined to name any country a currency manipulator, including China.

            Again, stock prices were investors’ focus of the day, much of it obsessing over the Dow trading above the landmark 23000 level. 

            And again, there were other news items that held investment significance:

(1)   the Iraqi’s and Kurds quickly resolved their boundary dispute, lessening the risk of disruptions in oil coming out of Iraq,

(2)   congress is scrambling to extend healthcare insurance payments that Trump ordered terminated last week---though he indicated a willingness to compromise (short):

(3)   the third round of NAFTA negotiations end ‘successfully’; though behind the scenes Mexico and Canada are not happy dudes (short):

            ***overnight, Mnuchin admitted that tax reform was unlikely to get done this year (short):

            Bottom line: yesterday’s economic numbers notwithstanding, the economy is not that strong.  Yet the Fed is talking up rate hikes.  The bond market is describing exactly that scenario.  As you know, I am not worried about the economic impact of a tighter Fed; but I do believe that unwinding QE will lead to an unwind of the gross mispricing and misallocation of assets.

            I continue to lighten up on holdings that have reached their Sell Half Range and believe that cash is currently a valuable asset.

            My thought for the day:  in investing, humility is paramount. As Nate Silver emphasizes in his book, “The Signal and the Noise,” we readily overestimate the degree of predictability in complex systems. We need to promise less and expect less. Things are still not likely to turn out the way we hope, expect or claim, but at least our embarrassment will be less when they don't---when life happens.
           
       Investing for Survival
   
14 mistakes that can wreck your retirement.
                       
    News on Stocks in Our Portfolios
 
W.W. Grainger (NYSE:GWW): Q3 EPS of $2.90 beats by $0.34.
Revenue of $2.64B (+1.5% Y/Y) misses by $10M.

International Business Machines (NYSE:IBM): Q3 EPS of $3.30 beats by $0.02.
Revenue of $19.15B (-0.4% Y/Y) beats by $550M.

Economics

   This Week’s Data

            Month to date retail chain store sales grew at a faster pace than the prior week.

            September industrial production rose 0.3% versus expectations of +0.2%; capacity utilization came in at 76.0 versus estimates of 76.2.

            The October housing market index was reported at 68 versus forecasts of 64.

            Weekly mortgage applications rose 3.6% while purchase applications were up 4.0%.

            September housing starts fell 4.7% versus estimates of a 1.0% decline; building permits dropped 4.5% versus projections of -4.7%.

   Other

            Update on big four economic indicators (medium):

            Bernanke is worried.  So? (medium and a must read):

                        Here is another rip at the Fed (medium):

            Thought for the day (short):

Politics

  Domestic

Presented with no comment (medium):

CIA urges delay in the release of Kennedy assassination documents (medium):

  International War Against Radical Islam

            Is Trump making the same mistake with Iran that Bush made with Iraq? (medium and a good read):

               

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