Thursday, February 2, 2017

The Morning Call--The Fed remains on track to do nothing

The Morning Call


The Market

The indices (DJIA 19890, S&P 2279) bounced slightly yesterday.  Volume increased and remains at elevated levels; breadth improved, just barely.   After a very volatile day, the VIX (11.8) fell, touching the lower boundary of its intermediate term trading range (10.3) and then bouncing.  It remained below its 100 and 200 day moving averages (now resistance) and in a short term downtrend.

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 {18643-20683}, [c] in an intermediate term uptrend {11740-24592} and [d] in a long term uptrend {5730-20736}.

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 {2177-2520}, [d] in an intermediate uptrend {2034-2635} and [e] in a long term uptrend {881-2500}.

The long Treasury declined, remaining 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, 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). 

The dollar rebounded slightly, but finished above to its 100 day and 200 day moving averages (now support) and in a short term uptrend.   However, it continues to develop a very short term downtrend and is very near its 100 day moving average.

Bottom line: yesterday was a relatively quiet day for the Averages, finishing within their trading ranges dating back to mid-December but below the 20000/2300 levels.  I am waiting for a move below the aforementioned trading range or above 20000/2300 as an indication of Market direction.  Until then, patience.


            Yesterday US economic data was quite mixed: the January Markit manufacturing PMI and the January ISM manufacturing index were ahead of estimates; the January ADP private payroll showed very strong job growth; on the other hand, weekly mortgage and purchase applications declined, January light vehicle sales were less than anticipated and December construction spending was well below expectations.

            Overseas was a similar picture: January Chinese manufacturing PMI was slightly below forecast while the nonmanufacturing PMI was better; the January UK manufacturing PMI was in line.

            Wednesday with Trump:

(1)   issues warning to Iran.  Another red line?  I suspect that Iran wants to know that answer.

(2)   black balls CNN

(3)   introduces his nominee for the Supreme Court

            The FOMC completed its meeting yesterday, leaving interest rates and its balance sheet unchanged.  The language in the subsequent press release was almost identical to the previous one with the exception of a bit stronger tone on inflation.  However, it was not enough to make one think that a rate hike will occur near term.

                Street reaction (medium):
            And (short):

            ***overnight, the Bank of England left key interest rates unchanged and upgraded its economic outlook.

Bottom line:  still the same: ‘the economy is not providing a lot of upbeat data; and Trump’s early actions (corporate interventions, talking the dollar down, his anti-free trade policy proposals) or lack thereof (absence of any visibility of any tax and infrastructure plans) will likely not make conditions any better.  As I have said before, much of this early currency/trade maneuvering may just be establishing a negotiating position from which he intends to level a playing field that he believes has been unfairly tilted against the US.  Even assuming that he gets everything that he wants, the Market issue is how much damage gets done to the visibility of corporate profits in the interim.

Further, I have presented a lot of data that argues that the math is against any massive tax cuts or infrastructure spending measures---which were a primary reason for all the initial euphoria about the Trump economy.  Don’t get me wrong.  The tax code can be rationalized and made fairer; but without cutting total receipts dramatically.  In addition, many of Trump’s deregulation executive orders will undoubtedly reduce government spending which can then be reapplied to more economically beneficial infrastructure investments.  But the point here is that, in my opinion, given the huge federal budget deficit and debt, trillions of dollars in tax cuts and infrastructure spending is wishful thinking---and that too is apt to be less than positively received by investors.

***overnight, the Japanese government has decided to invest billions in US infrastructure projects.  If this pans out, it is like a wet dream becoming a real life experience.

 Finally, I worry about his name calling and other acts of incivility.  I can’t imagine that helps in making a deal or moving a controversial policy forward.  It certainly does not dignify the office.  Moreover, it tends to cloud those positive polices that he is implementing---again, not Market friendly. 

Small wonder that investors may be developing heartburn---and at valuation levels that leave little room for error. I would continue to sell a portion of my successful positions and get rid of my losers.’

            Update on valuation (medium):

            My thought for the day: never underestimate the irrationality of the investor herd.  Think Madoff, think tech stocks circa 2000, think mortgage backed securities circa 2008.  It may be easy to recognize folly but impossible to predict its depth and duration.  Think today.

       Investing for Survival
            Myths in investing #2:

    News on Stocks in Our Portfolios

Becton, Dickinson (NYSE:BDX): FQ1 EPS of $2.33 beats by $0.21.
Revenue of $2.92B (-2.3% Y/Y) beats by $60M.

   This Week’s Data

            The January manufacturing PMI was reported at 55.0 versus expectations of 54.3.

            The January ISM manufacturing index came in at 56.0 versus forecasts of 55.0.

            December construction spending fell 0.2% versus estimates of an increase of 0.2%.

            January light vehicle sales were slightly below projections.

                Weekly jobless claims fell 14,000 versus consensus of a 6,000 decrease.

            Fourth quarter nonfarm productivity rose 1.2% versus expectations of a 1.2% increase; unit labor costs were up 1.7% versus estimates of up 1.8%.


            Who pays for ‘the wall’ (short):

            Update on oil economics (medium):



  International War Against Radical Islam


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