Friday, June 23, 2017

The Morning Call--One teeny weeny step for mankind

The Morning Call


Our daughter and her family arrive this afternoon for a weekend visit.  So no Closing Bell.

The Market

The indices (DJIA 21397, S&P 2434) drifted down in another slow day.  They retain their upward momentum 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 24198/2763.  Volume declined; breadth continued to weaken.

The VIX (10.5) was off 2 ¾ %, leaving it between the lower boundaries of its intermediate and long term trading ranges on the downside and its 100 and 200 day moving averages on the upside.

The long Treasury was strong again, finishing above its 100 and 200 day moving averages (now support) and in a short term trading range---continuing to reflect bond investors’ doubts about a strong economy/rising inflation.

The dollar rose slightly ($0.01), ending in a very short term downtrend and below its 100 and 200 day moving averages---also lending little support to the strong economy/rising inflation scenario.

GLD was up, closing below the upper boundary of its short term trading range, back above its 100 day moving average (if it remains there through the close Monday, it will revert to support) and above its 200 day moving average.  Its price action around the moving average seems to indicate that some level of support has been found. 

Bottom line: the Averages meandered through another day, either apparently unimpressed with the pin action in bonds and the dollar, the implications of falling oil prices, another step in achieving fiscal reforms or suggesting that these factors are already discounted.  Whatever the reason, technically speaking, the indices seem set to challenge the upper boundaries of their long term uptrends.

            Please be aware that today is Russell rebalancing day (the company rebalances the weightings of each stock in all its indices).  That historically has meant a day of huge volume and some volatility.



            Yesterday’s economic data was mixed: both weekly jobless claims and the May leading economic indicators were reported in line with consensus while the June Kansas City Fed manufacturing index was ahead of expectations. 

            Nothing overseas.  However, there was several events that bear comment: 

(1)   the decline in oil prices remain a matter of concern to investors (medium):

Though Citi is a bit more hopeful for an end to the pain (medium):

And the ongoing strife in the Middle East could quickly change that picture (medium):

(2)   the senate revealed its version of healthcare reform.  To be clear, this proposed legislation isn’t even out of committee, so it has to do that, then get approved by the full senate ,then get reconciled with the house version.  So the timing and final shape of this potential reform remains uncertain.
Here is a good summary of the major provisions of the legislation along with the complete text---if you want to spend the rest of your summer doing so (medium):

                But there is GOP opposition (medium):

                All that said.

[a] it is clear that in spite of all the Trump/Comey/Russia/emolument’s clause distractions, the GOP is still attempting to push through the dems delay and postpone tactics.  To be sure, this news was greeted with the usual DOA remarks from both parties as well as the media.  Indeed, I have been skeptical that the GOP could ultimately be successful in implementing its fiscal program.  That said, I voiced my doubts when the house repeal and replace legislation was introduced; and look what happened---it managed to produce a bill.  So it is not unreasonable to assume that the same may occur in the senate.  No doubt the reconciliation process will be just as difficult.  But as Rick Santelli said, passing a major piece of reform legislation is like passing a kidney stone---it’s painful but it happens.  In short, the fact that progress continues in spite of distractions is a positive,
[b] as I read the narrative on this bill, it sounds more reasonable to me than the house version.  So, my takeaway is that time has improved the product.  That hopefully means that the final senate version and reconciled end product will be even better---the operative word being ‘hopefully’.  To be clear, I am not tiptoeing through the tulips; but credit where credit is due.  

(3)   the Fed released the first phase of its latest stress test.  The results showed that all major banks passed and their capital was comfortably above minimum levels.  As you know, one of the risks to the economy that I have focused on regularly in the Closing Bells is a vulnerable global banking system.  However, over time as US regulators took firmer control of the financial system, the odds of any weakness occurring in our banks have diminished and with it the dangers of a 2008/2009 type financial crisis.  The same can’t be said for most of the rest of the globe, so the risk remains.  But the magnitude of any potential negative impact on the US banking system has lessened considerably.

Bottom line: I thought yesterday was a positive one in terms of the long term outlook for the economy.  We received further assurance that our banksters aren’t the risk to the economy that they were ten years ago---now if the political class can resist the bank lobbying effort for a major overhaul to Dodd Frank.  But just to be clear, this does nothing to improve the growth prospects of the economy; it means that when the pain comes, it will not likely be as intense as experienced in 2008/2009.

In addition, there was another step forward in the Trump/GOP fiscal reform, however small it may be.  This GOP fiscal program theme had faded into the background recently as the Washington third world political circus held center stage; many thought that the dems may be able to severely delay or dismantle the reform progress (including yours truly).  While I am sure their efforts will only redouble, I will take any step forward by the GOP as a plus.  I am not revising our long term secular growth rate assumption; but at least I can hold to the possibility that it could occur.  The bonus for the short term is that if (operative word) the reform effort can gain some momentum, the psychological effect on investors could contribute to a pickup in economic activity. 

But back to reality.  However positive an impact passage of the Trump/GOP agenda would be on the long term secular growth rate of this country, its complete enactment is more than adequately reflected in stock prices.  And I add the caveat that if its complete enactment were to mean higher national debt/deficits, then it would likely be a negative.

            Update on dividend cuts in Q2 2017 (short):

            My thought for the day: you don’t have to be an expert to be good investor.  But as Dirty Harry said, you have to know your limitations and develop an investment strategy that reflects those limitations.

       Investing for Survival
            Thinking through a change in asset allocation.

    News on Stocks in Our Portfolios

   This Week’s Data

            The May leading economic indicators were up 0.3%, in line.

            The June Kansas City Fed manufacturing index came in at 11 versus the May reading of 8.


            Dubious lending by the government (medium):

            More on Fed policy choices (medium):

                At the risk of appearing to ‘pile on’, here is further analysis of how the Fed has once again missed the opportunity to normalize monetary policy (medium):

            Chinese regulators cracking down on serial acquirers (medium):



  International War Against Radical Islam


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