Thursday, January 19, 2017

The Morning Call--Yellen more hawkish?

The Morning Call


The Market

The indices (DJIA 19804, S&P 2271) had another slow day, with the Dow falling and the S&P rising.  Volume declined but remained at a high level; breadth was negative.   The VIX (12.5) was up 5%, but still closed below its 200 day moving average (now resistance), below its 100 day moving average (now resistance), within a short term downtrend and is pulling away from the lower boundary of its intermediate term trading range (10.3)---having failed to challenge it (a mild negative for stocks).  
The Dow ended [a] above its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] in a short term uptrend {18492-20532}, [c] in an intermediate term uptrend {11690-24540} and [d] in a long term uptrend {5730-20318}.

The S&P finished [a] above its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] within a short term uptrend {2160-2503}, [d] in an intermediate uptrend {2024-2625} and [e] in a long term uptrend {881-2435}. 

The long Treasury fell 1 ¼ %, remaining in a very short term downtrend, in a short term trading range and below the 100 day moving average (now resistance), falling further below its 200 day moving average (now resistance). 

GLD declined, ending in a short term downtrend and below its 100 day moving average (now resistance) which continues to push further below its 200 day moving average (now resistance)---but also finished in a very short term uptrend.

The dollar jumped 1% on high volume, continuing its pattern of acting in reverse of GLD and TLT, finishing considerably above multiple support levels---so it can fall a lot and not challenge its 100 or 200 day moving averages (now support) or its short term uptrend.   

Bottom line: the Average traded calmly yesterday, remaining within very tight trading ranges dating back to mid-December.  That kind of tight consolidation in which key support levels are not being challenged, suggests that investor enthusiasm is only taking a rest.  The only potential sign of trouble is the rise in the VIX.  My assumption that they will challenge the 20000/2300 level remains intact.

For the first time in recent trading, GLD, TLT and UUP supported the current optimistic scenario reflect in stock prices---most of it due to some comments by Yellen (see below).  Let’s see if this continues.


            Yesterday’s US economic data were generally negative: month to date retail chain store sales growth was well below the prior week’s, the January housing market index was below estimates, weekly mortgage applications were barely positive while the more important purchase applications were down, December industrial production was above estimates but the lowered November revisions more than wiped out the difference and CPI was in line. 

In addition, the latest Fed Beige Book released yesterday was about as boring as any I have seen of late---the bottom line being that the economy is improving and inflation is picking up. 

As a cherry on top, Yellen gave a speech explaining the goals of monetary policy.  While I thought she gave us yet another dose of Fed cluelessness, Market consensus is that she was a bit more hawkish.  Of course, that has been her MO for the last year---a week after a hawkish tone, she sounds a bit more dovish and vice versa.  I have opined that this simply reflects her recognition that the Fed has screwed up and doesn’t know how to correct the problem.  It could also be a (political?) response to the Donald’s comments on the dollar being too strong.  Whatever the reason, I believe that it has zero information/prediction value.

Overseas, Chinese home prices rose less than anticipated.

***overnight, the ECB left rates unchanged also keeping its bond purchase program at current levels.

Bottom line: the Donald took a tweeting break yesterday which served to lower the heat in the headlines.  However, there is likely more of this coming and you never know what his next target will be.  Not that Washington isn’t a target rich environment.  It is just that not all Trump pronouncements fit into the current upbeat economic narrative---trade (tariffs) and currency (dollar too high) being the most notable.  In addition, as I mention every day, he has been conspicuously silent on the most important elements (taxes and infrastructure spending) of the aforementioned current upbeat economic narrative.

 As you know, on balance, I am positive about the economic changes coming from a new Trump administration, the above notwithstanding.  I am just not as enthused as most investors, even acknowledging that many of his comments are just initial negotiating positions and the end result will be more positive than implied those remarks. 

However, even when I plug in many of the optimists’ assumptions about the impact of Trump policies on corporate earnings, our Valuation Model wouldn’t produce a Fair Value that comes close to current price levels. Hence, I will continue to Sell Half of any stock that reaches its Sell Half Price and any company that fails to meet the minimum fundamental criteria for inclusion in our Universe.

            The latest from Doug Kass (medium):

            My thought for the day: don’t get too wrapped up in predicting the future.  On the day before the November election, there were almost no pundits including Fox news that gave Trump a snowball’s chance in hell of being elected.  The future is always filled with surprises.  Having an investment process that can adjust to change is much more important than predicting it.

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            Simple rules of capitalism.

    News on Stocks in Our Portfolios

   This Week’s Data

            Growth in month to date retail chain store sales was considerably less than in the prior week.

            December industrial production rose 0.8% versus expectations of up 0.6%; however, the November reading was revised from -0.4% to -0.7%.

            The January housing market index came in at 67 versus estimates of 69.

            December housing starts rose 11.2% versus forecasts of up 110.1%; building permits fell slightly versus consensus of up slightly.

            Weekly jobless claims fell 15,000 versus projections of an 8,000 increase.

            The January Philadelphia Fed manufacturing index came in at 23.6 versus an anticipated reading of 16.0


            The latest Fed Beige Book reported that the economy continued to grow at a modest pace in all regions.

                Update on big four economic indicators. (medium):

                Yellen ‘explains’ the goals of monetary policy (medium):

            The fallacy of the ‘weak dollar’ argument (medium and a must read):



No one is talking about the high tariffs that already exist on Chinese steel imports (short):

Chelsea Manning and Russian hacking---compare and contrast (short):


            Jamie Dimon on the eurozone (short):

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