Friday, June 23, 2017

The Morning Call--One teeny weeny step for mankind

The Morning Call

6/23/17

Our daughter and her family arrive this afternoon for a weekend visit.  So no Closing Bell.

The Market
         
    Technical

The indices (DJIA 21397, S&P 2434) drifted down in another slow day.  They retain their upward momentum as defined by their 100 and 200 day moving averages and uptrends across all timeframes.  At the moment, I see nothing, technically speaking, to inhibit the Averages’ challenge of the upper boundaries of their long term uptrends---now circa 24198/2763.  Volume declined; breadth continued to weaken.

The VIX (10.5) was off 2 ¾ %, leaving it between the lower boundaries of its intermediate and long term trading ranges on the downside and its 100 and 200 day moving averages on the upside.

The long Treasury was strong again, finishing above its 100 and 200 day moving averages (now support) and in a short term trading range---continuing to reflect bond investors’ doubts about a strong economy/rising inflation.


The dollar rose slightly ($0.01), ending in a very short term downtrend and below its 100 and 200 day moving averages---also lending little support to the strong economy/rising inflation scenario.

GLD was up, closing below the upper boundary of its short term trading range, back above its 100 day moving average (if it remains there through the close Monday, it will revert to support) and above its 200 day moving average.  Its price action around the moving average seems to indicate that some level of support has been found. 

Bottom line: the Averages meandered through another day, either apparently unimpressed with the pin action in bonds and the dollar, the implications of falling oil prices, another step in achieving fiscal reforms or suggesting that these factors are already discounted.  Whatever the reason, technically speaking, the indices seem set to challenge the upper boundaries of their long term uptrends.

            Please be aware that today is Russell rebalancing day (the company rebalances the weightings of each stock in all its indices).  That historically has meant a day of huge volume and some volatility.

    Fundamental

       Headlines

            Yesterday’s economic data was mixed: both weekly jobless claims and the May leading economic indicators were reported in line with consensus while the June Kansas City Fed manufacturing index was ahead of expectations. 

            Nothing overseas.  However, there was several events that bear comment: 

(1)   the decline in oil prices remain a matter of concern to investors (medium):

Though Citi is a bit more hopeful for an end to the pain (medium):

And the ongoing strife in the Middle East could quickly change that picture (medium):


(2)   the senate revealed its version of healthcare reform.  To be clear, this proposed legislation isn’t even out of committee, so it has to do that, then get approved by the full senate ,then get reconciled with the house version.  So the timing and final shape of this potential reform remains uncertain.
           
Here is a good summary of the major provisions of the legislation along with the complete text---if you want to spend the rest of your summer doing so (medium):

                But there is GOP opposition (medium):

                All that said.

[a] it is clear that in spite of all the Trump/Comey/Russia/emolument’s clause distractions, the GOP is still attempting to push through the dems delay and postpone tactics.  To be sure, this news was greeted with the usual DOA remarks from both parties as well as the media.  Indeed, I have been skeptical that the GOP could ultimately be successful in implementing its fiscal program.  That said, I voiced my doubts when the house repeal and replace legislation was introduced; and look what happened---it managed to produce a bill.  So it is not unreasonable to assume that the same may occur in the senate.  No doubt the reconciliation process will be just as difficult.  But as Rick Santelli said, passing a major piece of reform legislation is like passing a kidney stone---it’s painful but it happens.  In short, the fact that progress continues in spite of distractions is a positive,
                       
[b] as I read the narrative on this bill, it sounds more reasonable to me than the house version.  So, my takeaway is that time has improved the product.  That hopefully means that the final senate version and reconciled end product will be even better---the operative word being ‘hopefully’.  To be clear, I am not tiptoeing through the tulips; but credit where credit is due.  

(3)   the Fed released the first phase of its latest stress test.  The results showed that all major banks passed and their capital was comfortably above minimum levels.  As you know, one of the risks to the economy that I have focused on regularly in the Closing Bells is a vulnerable global banking system.  However, over time as US regulators took firmer control of the financial system, the odds of any weakness occurring in our banks have diminished and with it the dangers of a 2008/2009 type financial crisis.  The same can’t be said for most of the rest of the globe, so the risk remains.  But the magnitude of any potential negative impact on the US banking system has lessened considerably.

Bottom line: I thought yesterday was a positive one in terms of the long term outlook for the economy.  We received further assurance that our banksters aren’t the risk to the economy that they were ten years ago---now if the political class can resist the bank lobbying effort for a major overhaul to Dodd Frank.  But just to be clear, this does nothing to improve the growth prospects of the economy; it means that when the pain comes, it will not likely be as intense as experienced in 2008/2009.

In addition, there was another step forward in the Trump/GOP fiscal reform, however small it may be.  This GOP fiscal program theme had faded into the background recently as the Washington third world political circus held center stage; many thought that the dems may be able to severely delay or dismantle the reform progress (including yours truly).  While I am sure their efforts will only redouble, I will take any step forward by the GOP as a plus.  I am not revising our long term secular growth rate assumption; but at least I can hold to the possibility that it could occur.  The bonus for the short term is that if (operative word) the reform effort can gain some momentum, the psychological effect on investors could contribute to a pickup in economic activity. 

But back to reality.  However positive an impact passage of the Trump/GOP agenda would be on the long term secular growth rate of this country, its complete enactment is more than adequately reflected in stock prices.  And I add the caveat that if its complete enactment were to mean higher national debt/deficits, then it would likely be a negative.

            Update on dividend cuts in Q2 2017 (short):

            My thought for the day: you don’t have to be an expert to be good investor.  But as Dirty Harry said, you have to know your limitations and develop an investment strategy that reflects those limitations.


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            Thinking through a change in asset allocation.

    News on Stocks in Our Portfolios
 
Economics

   This Week’s Data

            The May leading economic indicators were up 0.3%, in line.

            The June Kansas City Fed manufacturing index came in at 11 versus the May reading of 8.

   Other

            Dubious lending by the government (medium):

            More on Fed policy choices (medium):

                At the risk of appearing to ‘pile on’, here is further analysis of how the Fed has once again missed the opportunity to normalize monetary policy (medium):

            Chinese regulators cracking down on serial acquirers (medium):

Politics

  Domestic

  International War Against Radical Islam

           

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Thursday, June 22, 2017

The Morning Call--The Fed and the bond market

The Morning Call

6/22/17

The Market
         
    Technical

The indices (DJIA 21410, S&P 2435) were off again yesterday, though not by much.  However, it was enough to close Monday’s gap open---eliminating this factor as pressure to the downside.  They retain their upward momentum as defined by their 100 and 200 day moving averages and uptrends across all timeframes.  At the moment, I see nothing, technically speaking, to inhibit the Averages’ challenge of the upper boundaries of their long term uptrends---now circa 24198/2763.  Volume declined; breadth was weaker though it remains in a positive zone.

The VIX (10.8) was off fractionally, leaving it between the lower boundaries of its intermediate and long term trading ranges on the downside and its 100 and 200 day moving averages on the upside. (must read)

The long Treasury was strong again, finishing above its 100 and 200 day moving averages (now support) and in a short term trading range---continuing to reflect bond investors’ doubts about a strong economy/rising inflation.

The Fed versus the bond market (medium and today’s must read):

The dollar fell, ending in a very short term downtrend and below its 100 and 200 day moving averages and lending little support to the strong economy/rising inflation scenario.

GLD was up, closing below the upper boundary of its short term trading range, below its 100 day moving average for the third day, reverting to resistance but back above its 200 day moving average---a slight improvement to an ugly chart. 

Bottom line: the Averages satisfied the need to close Monday’s gap opening, removing about the only technical factor suggesting lower prices.  There seems little reason to be concerned about the long term, technically speaking, except for the troublesome decline in Treasury rates and the flattening yield curve.
           
    Fundamental

       Headlines

            Yesterday’s economic stats were upbeat: May existing home sales were much stronger than anticipated; weekly mortgage applications were up, though purchase applications were down.

            Overseas news was highlighted by a reversal of Tuesday’s news: (1) the BOE’s chief economist directing contradicted [rate increases needed] the comments of head of the bank made the prior day and (2) China attempted to un-invert its bond yield curve.
           
            Falling oil prices remain center stage (short):

            There was more at play than just supply/demand: a change in succession in Saudi Arabia (medium):

            What that means (medium):

Bottom line: the numbers so far this week have been upbeat, though not enough to get me jiggy.  Oil now has everyone’s attention, especially with respect to its implications for the economy.  While some pundits are still trying to sell the ‘unmitigated positive’ line, recent history suggests ‘wishful thinking’.  That said, if the rising geopolitical tensions in the Middle East lead to an escalation of violence, the price of oil could be the least of our worries. 

The rest of the news flow seems like white noise:  the deteriorating relations with Russia, the coming senate bill reforming Obamacare, the implications of the GOP win in Georgia. 

Investors remain in a joyous mood and there is no sign that state of mind is going to end anytime soon.  So enjoy the ride; but please exercise some discipline and take some profits.  The only way that you can buy low is to sell high.

            Update on valuations (medium):
           
            My thought for the day: losses are simply the cost of doing business; it is the price you pay for the chance to make winning investments.  The key is having the discipline to keep the losses small and knowing the price at which to take profits.  It is not about being right or wrong, it is about being agnostic about everything except not taking big losses and letting profits run.

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    News on Stocks in Our Portfolios
 
Accenture (NYSE:ACN): Q3 EPS of $1.52 in-line.
Revenue of $8.87B (+5.2% Y/Y) beats by $40M.

Oracle (NYSE:ORCL): Q4 EPS of $0.89 beats by $0.11.
Revenue of $10.9B (+2.8% Y/Y) beats by $450M.

Check out my recent article on Gilead Sciences at Seeking Alpha

Economics

   This Week’s Data

            May existing home sales rose 1.1% versus expectations of a 0.3% decline.

                Weekly jobless claims rose by 3,000, in line.

   Other

            The tax data on wages and salaries (short):

            More on student loans (short):

            Does anyone know what is going on in the EU banks? (medium):

            Demography and economic growth (medium):

            The ECB updates its bond purchase program (medium):

            Clarity or confusion at the Fed (medium):

            The reason the Fed is hiking rates (medium):

Politics

  Domestic

US military running out of steam? (medium):

  International

            Tensions continue between the US and Russia (medium):

            State Department’s reply (short):

                Sabers keep rattling (medium):

            This article focuses on the EU involvement in Syria; but it applies equally to the US, in my opinion (medium and a must read):

            A little history on the US involvement in the affairs of other governments, in this case Iran (medium):

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Wednesday, June 21, 2017

The Morning Call--Just another day of unmitigated positives

The Morning Call

6/21/17

The Market
         
    Technical

The indices (DJIA 21467, S&P 24373) fell back yesterday, but not enough to close Monday’s gap open.  So we could see more weakness short term.  Nevertheless, they retain their upward momentum as defined by their 100 and 200 day moving averages and uptrends across all timeframes.  At the moment, I see nothing, technically speaking, to inhibit the Averages’ challenge of the upper boundaries of their long term uptrends---now circa 24198/2763.  Volume rose slightly but breadth weakened.

The VIX (10.9) was up 4 ¾ %, but remained between the lower boundaries of its intermediate and long term trading ranges on the downside and its 100 and 200 day moving averages on the upside.

The long Treasury spiked 1%, finished above its 100 and 200 day moving averages (now support) and in a short term trading range---continuing to reflect bond investors’ doubts about a strong economy/rising inflation.

The dollar was up but still ended in a very short term downtrend and below its 100 and 200 day moving averages. 

GLD was down again, closing below the upper boundary of its short term trading range and its 100 day moving average (if it remains there through the close today, it will revert to resistance) and right on its 200 day moving average.  This chart keeps getting uglier. 

Bottom line: a short term retreat is not unexpected, given the need to fill Monday’s gap open.  However, there seems little reason to be concerned about the long term, technically speaking, except for the troublesome decline in Treasury rates and the flattening yield curve.
           
            Yesterday in charts (short):

    Fundamental

       Headlines

            Two minor datapoints yesterday: the first quarter US trade deficit was less than forecast and the growth of month to date retail chain store sales rose from the prior week.

            Overseas, the news was not quite so positive: BOE chief said that now it is not the time to raise rates; Chinese yield curve inverts.

            ***overnight, the BOE is taking a page from the Fed’s playbook (on the one hand, on the other hand) as its chief economists says that it is time to raise rates.

            And China attempts to un-invert its bond yield curve,

            The only other mentionable item is the continuing fall in oil prices.  Given history, I can’t believe that people bought into the OPEC production cut/higher oil prices thesis in the first place; and perhaps that thesis will prevail.  But at the moment, it is suffering some severe heartburn.   Plus, it still belies the notion of lower oil prices = unmitigated positive. 

Bottom line: aside from the news of Amazon buying Whole Foods and its new ‘try before you buy’ concept which have the Market all atwitter, the economic and political news flow is not what I would call upbeat---particularly the geopolitical goings on in the Middle East and North Korea.  I have said this before; but at some point, bad news will be bad news.  Clearly, I have no idea when.

            My thought for the day: I know lots of investors who spend hours doing their homework; then instead of following their work, they chase ideas/tips from friends or brokers.  I probably don’t have to tell you which investments were the bigger winners.

       Investing for Survival
   
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Economics

   This Week’s Data

            Month to date retail chain store sales grew faster than in the prior week.

            Weekly mortgage applications rose 0.6% while purchase applications fell 1.0%.

   Other

            One calculation of the odds of a recession (short):

            Another sanguine look at the economy (medium):

            Citi on Fed policy (medium):

            More on the pension underfunding problem (short):

            And speaking of underfunding, Illinois is at the edge of crisis (medium):

Politics

  Domestic

  International War Against Radical Islam


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Tuesday, June 20, 2017

The Morning Call---More trouble in the Middle East

The Morning Call

6/20/17

The Market
         
    Technical

The indices (DJIA 21528, S&P 2453) had a great day.  They actually gapped up.  The last time this happened, the gap got closed within a week but there was no follow through to the downside.  They clearly retain their upward momentum as defined by their 100 and 200 day moving averages and uptrends across all timeframes.  At the moment, I see nothing, technically speaking, to inhibit the Averages’ challenge of the upper boundaries of their long term uptrends---now circa 24198/2763.  Volume fell but breadth was quite strong.

The VIX (10.3) declined fractionally---a bit unusual for big up price move.  It would seem that the lower boundaries of its intermediate and long term trading ranges are providing decent support.  On the other hand, it remains below its 100 and 200 day moving averages.
               
The long Treasury fell slightly but still finished above its 200 day moving average for the fourth day, reverting to support and the upper boundary of its short term downtrend for the third day, resetting to a trading range.  In doing so, it also breaks out of the developing pennant formation---a positive, technically speaking.  I think that the initial objective is circa $139.

The dollar was up but still ended in a very short term downtrend and below its 100 and 200 day moving averages. 

GLD was off .75%, closing below the upper boundary of its short term trading range and its 100 day moving average (if it remains there through the close on Wednesday, it will revert to resistance).  However, it is still above its 200 day moving average---but just barely.  This chart keeps getting uglier. 

Bottom line: the euphoria in equities continues impervious to the news flow, valuations and cognitive dissonance coming from the pin action in the bond and dollar markets.  Enjoy it while it lasts; just be sure to take some money off the table, peeling back a portion of your biggest winners.

            Oil plunges back to its November low (medium):

    Fundamental

       Headlines

            There were no data releases yesterday, either here or abroad. 

            ***overnight, BOE chief said that now it is not the time to raise rates; Chinese yield curve inverts.

            We did get some hawkish comments from NY Fed head Dudley---to no lasting effect.  However, he is just the first of many this week. (medium):

                Though Mohamed El Erian thinks maybe the Market should be paying closer attention (medium):


                Plus there were lots going on in the Middle East---none of it good.

            Saudi’s foil an Iranian attack of offshore production facilities (medium):

            US and Russia now eyeball to eyeball.

            Israel funding Syrian rebels (medium):

                Bottom line: aside from the news of Amazon buying Whole Foods which has the Market all atwitter, the economic and political news flow is not what I would call upbeat.  I have said this before; but at some point, bad news will be bad news.  Clearly, I have no idea when.

            Lots of rationalizations/explanations for the Market strength.  Here is another one.  Any or all of these theories could be right.  I don’t think so; but I will continue to present them so that you can decide.

            On the other hand (short):

            My thought for the day: we are currently in one of those periods in which there is a reality gap between the results of fundamental analysis and ‘what is’ which makes those results of fundamental analysis difficult to exploit.

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            The formula behind buy low/sell high.


    

    News on Stocks in Our Portfolios
 
Economics

   This Week’s Data

            The first quarter US trade deficit was $116.8 billion versus expectations of $122.6 billion.

   Other

            How the financial system keeps skirting Dodd Frank (medium):

            The illusion of declining debt to income ratios (medium);

            Trump and the debt ceiling (medium):

            More on auto loans (medium):

Politics

  Domestic

  International War Against Radical Islam

           

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Monday, June 19, 2017

Monday Morning Chartology

The Morning Call

6/19/17

The Market
         
    Technical

            The S&P remains in a slow and steady short term uptrend dating back to early March and long term uptrend above its moving averages and within uptrends across all timeframes.  There no technical reason to believe that it won’t reach the upper boundary of its long term uptrend (2763).



            The long Treasury continues to do well. It finished Friday above its 200 day moving average for the third day (if it remains there through the close today, it will revert to support) and the upper boundary of its short term downtrend for the third day (if it remains there through the close today, it will reset to a trading range).  It seems bond investors don’t anticipate stronger economic growth/rising inflation.



            GLD’s recent pin action has not been that great.  Clearly the upper boundary of its short term trading range offers stiff resistance.  On the other hand, gold has made a series of higher lows; plus the 100 day moving average has crossed above the 200 day moving average---usually a positive technical sign.  Still in an environment of lower rates, a declining dollar and all modes of political turmoil both in the US and internationally, it ought to be much stronger.



            Despite a brief rally last week, the dollar’s generally soft performance continues.  Like TLT, it is pointing to a weak economy, low inflation and stable to lower interest rates.



            The VIX seems stuck between its 100 and 200 day moving averages and the lower boundaries of its intermediate and long term trading ranges.  That suggests a Market that continues to a nonvolatile drift---though that drift could be directional; in this case to the upside.



    Fundamental

       Headlines

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    News on Stocks in Our Portfolios
 
Economics

   This Week’s Data

   Other

            More problems in the Chinese financial system (medium):

Politics

  Domestic

More millennial snowflake madness (medium):

  International War Against Radical Islam

            The cost of appeasement (medium):

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