Thursday, June 15, 2017

The Morning Call--The Market snoozes thru poor data and a rate hike; but bonds don't

The Morning Call


The Market

The indices (DJIA 21374, S&P 2437) had a mixed day (Dow up; S&P down).  Neither move was that dramatic considering it was a day of worse than expected data and a more hawkish Fed.  Nevertheless, both are in solid uptrends as defined by their 100 and 200 day moving averages and uptrends across all timeframes.  At the moment, I see nothing, technically speaking to inhibit the Averages challenge of the upper boundaries of their long term uptrends---now circa 24198/2753.  Volume declined and breadth improved.

The VIX (10.6) was up 1 ¾ %, remaining below its 100 and 200 day moving averages and above the lower boundaries of its intermediate and long term trading ranges.
The long Treasury spiked 1 ½ % on big volume, finishing above its 200 day moving average (if it remains there through the close on Tuesday, it will revert to support) and the upper boundary of its short term downtrend (if it remains there through the close on Monday, it will reset to a trading range; if it successfully challenges that boundary, it will also break out of the developing pennant formation---a positive, technically speaking). 

The dollar was down on volume, ending in a very short term downtrend and below its 100 and 200 day moving averages---increasing the ugliness of its chart.

GLD fell 0.5% on big volume, ending above its 100 and 200 day moving averages while the 100 day moving average crossed above its 200 day moving average (usually a positive technical signal). 

Oil got whacked again.

Bottom line: despite the new harmony of the Averages, the rest of the Market continued to trade out of sync with stocks.  Equity investors took yesterday’s news in stride with the indices closing mixed on low volume.  However, volume exploded in TLT, UUP and GLD.  Plus the pin action in TLT and UUP pointed definitively at a weaker economy/lower rates.  On the other hand, GLD trading suggested higher rates.  I am frankly unsure how to interpret all of this as it relates to fundamentals.  It could just be a lot of noise; or maybe investors just need more time to clarify their thoughts.

            Doug Kass on the impact of algos and AI on the market (medium and a must read):



            As expected, yesterday was a busy day news wise.  The data releases were negative: weekly mortgage applications were up but well below the level of the prior week, weekly purchase applications were down; both the May headline and ex food and energy CPI’s were below projections (while I would ordinarily rate a decline in CPI as a plus, it is probably not a good sign when recession is a risk); both the May headline and ex autos retail sales were below estimates.

Janet, you have a problem (short):

            A second event was the conclusion of the June FOMC meeting, its subsequent statement and the Yellen press conference.  The bottom line is that it raised the Fed Funds rate by another 0.25%, it expects to increase that rate four more times in the next two and a half years and to begin unwinding its balance sheet this year and, in general, carried a more hawkish tone than anticipated.  In short, it once again ignored the data as well as its own staff’s economic analysis and forecast a more positive outlook in order to justify the normalization of monetary policy.

            The problem with the Fed’s stated strategy (not reinvesting proceeds from short term maturities) of shrinking its balance sheet (medium and a must read):

            Not to be repetitious, I want to be clear on my thesis: (1) the economy is struggling and while it might avoid recession, it is nowhere near as robust as the Fed alleges, (2) ending QE will have little negative impact [i.e. it won’t make economic conditions any worse than it would be anyway] on the economy since its implementation did little; so I applaud the ongoing normalization, (3) however, given QE’s enormous positive effect on asset pricing and allocation, I believe that normalization will reverse that.

            I have linked to a redacted version of the FOMC statement, the members’ forecasts and Goldman’s analysis.

            The FOMC statement:

            And the ‘dot plot’:

            Goldman’s take (medium):

            China is also tightening monetary policy (medium and a must read):

Finally, with the dems Russia collusion case teetering on the brink of extinction, they have adopted a new strategy, bringing suit against Trump alleging his violation of the emoluments clause of the Constitution. This article was posted on my favorite liberal’s website (medium):

            Add to that the new obstruction of justice investigation by the special prosecutor (medium):

            Bottom line: while yesterday was a busy one, nothing occurred that changed anything in my forecast: the numbers continued weak, the Fed continues to do everything it can to try get out of its self-made disaster (QE), praying that its actions won’t disturb the mispricing and misallocation of assets it created, and its prayers will continue to be answered as long as all news is good news---‘as long as’ being the operative words.

            My thought for the day: yesterday I opined that good investors have a high regard for uncertainty---i.e. that anything can happen.  As a result, they integrate a Stop Loss function into their strategy.  Part and parcel of that part of their analysis is to focus more on the risk in an investment than they do on the reward.  One of the reasons that the average investor avoids risk assessment is because they want to believe that they know what is going to happen next. And if they recognize that they don’t know what is going to happen next, it would raise self doubt and potentially freeze the decision making process.  The consequence is that there is no discipline in defining risk/reward and hence, no real sense of an attractive Buy Price or a logical Price to take profits.

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            How to prepare for the end game.


    News on Stocks in Our Portfolios

   This Week’s Data

            April business inventories declined 0.2% versus expectations of down 0.1%.

            Weekly jobless claims fell 8,000 versus estimates of a 2,000 decline.

            The June Philadelphia Fed manufacturing index was reported at 27.6 versus consensus of 26.0.

            The June New York Fed manufacturing index came in at 19.8 versus projections of 5.0.

            May import prices fell 0.3% versus forecasts of -0.1%; export prices declined 0.7% versus expectations of +0.1%.


            Update on the commercial real estate market (short):

            More on student loans (medium):




Thoughts on the current political atmosphere (medium):

  International War Against Radical Islam

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