Friday, March 31, 2017

The Morning Call--Trump seems more reasonable on NAFTA

The Morning Call


I will be out of town on family business this weekend.  No Closing Bell.  See you on Monday.

The Market

The indices (DJIA 20728, S&P 2368) had a decent day.  Volume rose slightly; breadth improved.   The VIX (11.5) was up 1 ½ %, ending back above the lower boundary of its very short term uptrend (voiding the break), below its 100 day moving average (now resistance), below its 200 day moving average (now resistance) and in a short term downtrend.  Its rebound leaves complacency on the table, barely.
The Dow closed [a] above its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] in a short term uptrend {19202-21498}, [c] in an intermediate term uptrend {11884-24736} 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 {2244-2577}, [d] in an intermediate uptrend {2077-2681} and [e] in a long term uptrend {905-2591}.

The long Treasury was down .75%, remaining above its 100 day moving average (now support), below its 200 day moving average (now resistance), below a minor resistance level, in a very short term downtrend and in a short term trading range.
GLD fell .75%, but still closed above its 100 day moving average (now support), below its 200 day moving average (now resistance) and within a short term downtrend. 

The dollar increased .5%, ending below its 100 day moving average (now resistance), above but near its 200 day moving averages (now support) and in a short term uptrend.

Oil has turned in three back to back to back strong daily price performances, though it remains in a very short term downtrend.  The driver seems to be comments that OPEC would extend its production cuts---which we already knew.

Bottom line: while the indices were up, they are still within very short term downtrends; so the question remains, was the recent downdraft part of a consolidation move or marked a change of direction.  Bonds, gold, oil and the dollar all supported the recent rebirth of the Trump (reflation) trade. 



            There were two economic datapoints released yesterday:  weekly jobless claims fell less than expected; by far the more important was the final fourth quarter GDP growth revision which came in slightly better than first stated. 

            ***overnight, the March EU CPI came in lower than anticipated; March Japanese industrial production was better than expected and March Chinese manufacturing and nonmanufacturing PMI were the highest in five years.

            Other developments worth mentioning:

(1)   the politics of fiscal policy don’t seem to be improving, notwithstanding Ryan’s recent encouraging comments.  Trump first expressed the willingness to negotiate with the dem’s---which could be tough given his prior inflammatory comments on that august body.  Ryan responded with ‘no way, Melvin’.  So the Donald has done the next worse thing---piss off the Freedom Caucus. 

                       And the response.

(2)   the CBO warned of the dangers of sustained debt growth.  Thanks.  But Reinhart and Rogoff already told us that several years ago.  Still if the problems with excessive deficits/debt are finally impinging on bureaucratic consciousness, then I guess that qualifies as plus. [medium]

                And the federal government is not the only entity with excessive debt (medium):

(3)   trade policy sneaked back into the headlines as the Donald is reportedly studying ways to penalize ‘currency manipulators’.  If he really follows through with this [another negotiating ploy? see below], it could undo so much of the good generated by deregulation.

On the other hand, the White House has also prepared a draft of a letter that would initiate discussions for changes in NAFTA.  Congress has to accede to the language.  But with that caveat, the major changes [at least as I understand them], that Trump is trying to implement are [a] to stop non NAFTA countries from sending their products through a NAFTA country to avoid tariffs and [b] to level the field on taxes---Mexico and Canada rebate VAT taxes on exports but the US has nothing to rebate, disadvantaging US companies.  Both of those issues seem perfectly reasonable to me (again assuming I have their intent correct); so this first step in amending NAFTA is less negative to trade than I had originally feared.  At least in this case, it appears that all that campaign rhetoric was a negotiating position.

Trump also signed two executive orders ordering a study of similar tax and tariff issues for all countries. (medium):

(4)   finally, as I noted yesterday, four Fed chiefs spoke yesterday.  Reading their comments, I would score two dovish and two hawkish, making this week’s aggregate Fed messages [so far] in perfect symmetry.  The tie could be broken today as two other speakers are scheduled; but it looks to me like business as usual---blow as much smoke as necessary to keep the unwashed masses confused and pray they don’t figure out you are just as confused.  It appears that the monetary policy factor that is driving the Trump reflation trade is more related to the very dovish comments out of the ECB as compared to the Fed’s actions [raising rates, however wimpy they may be].

                Bottom line: I read the above narrative three times and the only positive I can see is that Trump isn’t going to trash NAFTA.  On the other hand, he seems to be undermining his own agenda, the CBO stated the obvious, he is still pushing against China (THE currency manipulator according to Trump) and the Fed continues oblivious to its massive asset mispricing and misallocation policies. 

The Donald’s deregulatory efforts notwithstanding, I believe that the risk is that the economy underperforms expectations and could be made worse by the Fed raising rates as this disappointment become obvious.  And with stocks at historically high valuations, I want to have cash in my portfolio---under any economic scenario. 

            A subdued eighth birthday celebration (short):

            My thought for the day:  however much money you think you'll need for retirement, double it. Now you're closer to reality.
       Investing for Survival
            Lessons from the older generation.

    News on Stocks in Our Portfolios

   This Week’s Data

            February personal income rose 0.4%, in line; personal spending was up 0.1% versus expectations of up 0.2%


            Will tax reform boost economic growth? (medium):

            Update on Italy’s banking crisis (medium and a must read):



Tax reform not that simple (medium):

Update on Wells Fargo fraud case (medium):


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