Friday, May 5, 2017

The Morning Call--So we are all from Missouri now?

The Morning Call


The Market

The indices (DJIA 20951, S&P 2389) barely moved yesterday; to the extent they did, they were mixed again (Dow down, S&P up).  Volume fell; breadth weakened.   Both remain above their 100 and 200 day moving averages and the lower boundaries of uptrends across all major time frames---all of which acts as support.  That clearly means that momentum remains to the upside.  So it is resistance that becomes important.  Immediate resistance now exists at their former highs (21228/2402) and ultimately at the upper boundaries of their long term uptrends (23390/2591). 

The VIX (10.5) was down, remaining below its 100 and 200 day moving averages.  However, it held above the lower boundaries of its short and intermediate term trading ranges---perhaps indicating that it has found support. 

The long Treasury and gold were down, the latter noticeably so.  The indication here is that investors believe rates could be going up.  But the dollar was also down, suggesting lower rates.  Likely, this mixed performance mirrors that of the Averages, reflecting investor uncertainty.

Bottom line: investors seem stuck on the sidelines---even after the house passage of repeal and replace.  I thought that there would be some return of positive sentiment even though we know this was just the first step in a long process.  I speculated Wednesday that they could be waiting for today’s jobs number or this weekend’s French elections.  Or perhaps there is rising trepidation based on the economic data or the drop in crude oil prices.  It would seem confusion/uncertainty has replaced euphoria.

Short term aside, the assumption remains that prices head higher, but remembering that there are two big gaps to fill lower down.

            Oil prices continue to get smacked (short):

            Along with other commodities (medium):



            The economic data was mixed again yesterday: weekly jobless claims fell more than expected and April chain store sales improved from March; on the other hand, first quarter nonfarm productivity and unit labor costs were very disappointing and March factory orders were below estimates.  What tips the scale is that the latter two are both primary indicators.

            Overseas, the April UK Markit services PMI hit a four month high, continuing the sustained improvement in the European economy.

            The big news of the day was the passage in the house of repeal and replace.  Here is a great and brief summary of the legislation’s major provisions:

This is what we also know: (1) there is a dispute on what these various provisions will mean to the insured and the taxpayer and (2) the senate will unquestionably change the bill which will have to be reconciled.  And don’t know: how much the bill’s provisions cost/save and, hence, its potential impact on the tax bill.  But we will know all this in good time.

            Still, this is a first step.  One that many doubted would ever occur; and for whatever the uncertainties, it was done with a lot more transparency than Obamacare.  Plus, because the freedom caucus is on board, I am assuming that some of the heavy handed, expensive, one size fits all aspects of Obamacare are gone or sufficiently modified to make the plan more workable and less expensive.  With that said, I give a polite applause but await a full vetting of the bill before getting jiggy.

            Bottom line: with all the post-election euphoric investor behavior anticipating a fiscal revolution encompassing repeal and replace, tax reform and infrastructure spending, I was surprised by the Market’s muted response yesterday.  Yes, house passage was just a first step; but everyone has known that from day one.  That said, maybe this means that all investors are now from Missouri---in which case, it is going to take another source of good news to drive stock prices higher: higher earnings? ---this season is already about as good as it can get; a great jobs report? ---could be but remember employment is a lagging indicator and the current trend in leading and coincident indicators are not encouraging; defeat of Le Pen?---given the rally after the first round of voting, this has to be largely in prices; lower oil prices?---remember the last time oil prices went down.

            Other’s reaction aside, I am encouraged by the house action.  Not because I believe that repeal and replace will occur; but because Ryan/Trump have shown they can put together a fractious GOP caucus to act on a very controversial issue.  That suggests to me that tax reform and infrastructure spending will likely get enacted because they should be easier issues on which to reach agreement.  To be clear, I am not suggesting big non-revenue neutral tax cuts or huge deficit enlarging infrastructure spending measures. But I do think that there is a clearer path to some reform which will still be a positive for the long term secular growth rate of the economy.

            My thought for the day:   a common ailment of investors is believing something is true only because other people think it is.  People like being associated with things that are winning, so winners build momentum not because they deserve it, but because they're winning. This is the foundation of all asset bubbles.

       Investing for Survival
            Number one rule in investing.

    News on Stocks in Our Portfolios

United Parcel Service (NYSE:UPS) declares $0.83/share quarterly dividend, in line with previous. 


   This Week’s Data

            March factory orders rose 0.2% versus expectations of a 0.4% increase.

            April chain store sales rose.

            April nonfarm payrolls were up 211,000 versus estimates of an 185,000 increase.



  International War Against Radical Islam

            ***overnight, Russia, Iran and Turkey have established four ‘safe zones’ in Syria, stipulating that US planes cannot fly over these territories.

            Saudi power struggle could bring additional fireworks to Middle East (medium):

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