Tuesday, February 28, 2017

The Morning Call--Details

The Morning Call


The Market

The indices (DJIA 20837, S&P 2369) advanced modestly as it continues to work off an overbought condition.  Volume fell (for the seventh day in a row), but remained at a high level; breadth was strong.   The VIX (12.1) was up 5 ½%,  but still finished below its 100 and 200 day moving averages (now resistance), in a short term downtrend and in the trading range dating back to mid-January.  It continues to signal complacency at a near record high level.

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 {18839-21079}, [c] in an intermediate term uptrend {11788-24640} and [d] in a long term uptrend {5751-23298}.

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 {2204-2538}, [d] in an intermediate uptrend {2053-2657} and [e] in a long term uptrend {881-2561}.

The long Treasury declined, falling back within a developing pennant formation, and remained in a very short term downtrend, near the lower boundary of its short term trading range and below the 100 day moving average (now resistance), falling further below its 200 day moving average (now resistance). 

GLD was down, closing within a very short term uptrend and above its 100 day moving average (now support).  Intraday, it challenged its 200 day moving average (now resistance) but fell back and remained within a short term downtrend. 

The dollar was unchanged, ending above its 100 day moving average (now support), its 200 day moving averages (now support) and in a short term uptrend.  

Bottom line: the Averages continue to follow the model path, spiking higher then trading quietly as they work off an overbought condition.  At this point, there is little reason to doubt that they will ultimately challenger the upper boundaries of their long term uptrends. 



            The economic data started the week on a sour note: while the headline January durable goods order number was unchanged, the internal makeup was weak---primarily because transportation orders masked weakness elsewhere; January pending home sales were awful; and the February Dallas Fed manufacturing index was much better than anticipated.

Overseas, the Germans are continuing to play hardball with Greece on any bail out funding; and the EU February economic sentiment was basically flat with the January report.

            ***overnight, the French fourth quarter GDP was much better than anticipated.

            Monday with Trump:  This week started in a lively manner.  First, Trump let out part of his initial budget, indicating an increase in defense spending with offsetting cuts in nondefense spending.  While that would fulfill a campaign promise, those nondefense cuts have their advocates on Capitol Hill.  Once the details are out, those whose ox has been gored are going to fight.

            Winners and losers in the coming Trump budget (medium):

            Second, the Donald lamented about how difficult Obamacare reform is going to be.  That’s important, because it is becoming clear that tax reform will come only after healthcare reform.

            Nobody knew healthcare could be so complicated (short):

            So hold your fire on tax reform; but infrastructure spending will be big (medium):

            Finally, Mexico is starting to push back on NAFTA (medium):

Bottom line: my narrative in the last couple on Bottom lines is that we are waiting for an economic (tax an infrastructure) plan, an Obamacare repeal and replace plan, a possible re-do of Dodd Frank and multiple re-sets of trade treaties.  Broad concepts but with little detail.  I don’t know if you have noticed it, but the investors have been very happy dealing with this blue sky environment. 

Now we are the cusp of getting the details.  The first thing we learned is that there is no ‘phenomenal tax plan in two or three weeks’.  It is not coming until after the rewriting of one of the most controversial pieces of social legislation in our lifetime.  I am not saying it can’t happen in a day, a month or whatever.  I am suggesting that given the emotional content of the current political dialogue and the symbolism of Obamacare, it may take a while.  So hold your horses on tax reform.

Now we learn that a new great infrastructure bill is on the way.  Please remember the senate GOP has basically said that there will be no deficit spending.   Also remember the point that David Stockman made---on March 15, a firm debt ceiling goes into effect.  Meaning that every new project must to financed by tax increases or cuts in spending.  That is not an easy job.  For example, the one budget detail we do have is that defense spending is going up $54 billion and nondefense spending is going down by a comparable amount.  First of all, kudos for making a stab at budget reform; but $54 billion is a wart on a goat’s ass in the universe of government spending---Trump has talked $1 trillion in infrastructure spending.  Second, we have no detail on what is going to be cut; but you can be sure of the screams and gnashing of teeth from the rentiers associated with those cuts will be heard from coast to coast.   

My point has been and is, as long as investors can contemplate tax cuts and spending increases in vague terms, they can put any valuation they want on a stock.  But when the actual tax cut and spending details come out and the numbers start getting put to the results, that all goes poof. 

I don’t say this as criticism of Trump or his efforts at reform.  In fact, he is doing about as well as any could expect; and I believe that his new policies will have a positive impact on the economy.  The question before us is, how big an impact given the current levels of the federal debt and the budget deficit?  My answer is probably not what is currently being discounted in equity prices.  Not owning a decent cash position at this time, is, in my opinion, a huge mistake.

This an interesting article on valuations and their sustainability

            My thought for the day: it is easier to make up an opportunity cost than a loss.  In other words, you can miss a Facebook.  All that means is that you still have all of your money when Apple or Netflix comes along.   Remember, your portfolio doesn’t know what it doesn’t own.  But you can’t afford an Enron.  It leaves you with no chips to play the game.

    News on Stocks in Our Portfolios
Bank of Nova Scotia (NYSE:BNS) declares CAD 0.76/share quarterly dividend, 2.7% increase from prior dividend of CAD 0.74.

Bank of Nova Scotia (NYSE:BNS): FQ1 EPS of C$1.57 in-line.
Revenue of C$6.87B (+7.8% Y/Y)

EOG Resources (NYSE:EOG): Q4 EPS of -$0.01 beats by $0.13.
Revenue of $2.4B (+33.3% Y/Y) beats by $190M.


   This Week’s Data

            January pending home sales fell 2.8% versus estimates of a 1.1% increase.

            The February Dallas Fed manufacturing index came in at 16.7 versus the January reading of 11.9.

            Revised fourth quarter GDP was reported at +1.9% versus forecasts of +2.1%.

            The January US trade deficit was $69.2 billion versus projections of $66.0 billion.


            Spain prosecutes 65 bankers (medium):

            China cuts growth rate of money supply (medium):

            Update on student loans (medium):



  International War Against Radical Islam

            This would almost be humorous if it wasn’t so sick (short):

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