The Morning Call
9/21/17
The
Market
Technical
The indices
(DJIA 22412, S&P 2508) had a somewhat volatile day, most of it around the
initial news on the latest FOMC moves (much more below), and ended modestly up,
closing again on all-time highs. Volume rose;
breadth continued strong. Both remain
above their 100 and 200 day moving averages and are in uptrends across all time
frames.
The VIX (9.8)
was clipped by 4%, leaving it below the upper boundary of its short term
downtrend, below its 100 day moving average (now resistance) and below its 200
day moving average (now resistance). It
is now below the lower boundary of its long term trading range, drawing near
its former all-time low. The question as
to whether or not the VIX has bottomed is about to be answered.
Even though
short term interest rates rose on the FOMC statement, the long Treasury yield
declined, suggesting the bond investors believe that the impact of a slowing
economy will have a greater effect on long rates than a rise in short term
rates. TLT finished above its 100 and 200
day moving averages (both support) and the lower boundaries of its short term
trading range and its long term uptrend.
The dollar rose,
but remained in short term and very short term downtrends and below its 100 and
200 day moving averages and in a series of seven lower highs.
GLD got whacked,
ending above its 100 and 200 day moving averages (both support) and the lower boundary
of a short term uptrend.
Bottom line:
long term, the indices remain strong viz a viz their moving averages and
uptrends across all timeframes. Short term, they closed above the resistance
level marked by their August highs, meaning that there is no resistance between
current price levels and the upper boundaries of the Averages long term
uptrends.
On the other
hand, all those gap openings among the major indices still need to be
closed.
Finally, the
FOMC’s statement had the expected effect on GLD (down) and the dollar (up). TLT’s pin action suggested bond investors are
not as convinced as the Fed that the economy is strengthening. And equity investors’ initial response seemed
to indicate that the Fed action had been well discounted.
I remain
uncomfortable with the overall technical picture.
Fundamental
Headlines
The
sole US stat of the day was August existing home sales which were
disappointing. Overseas, August UK
retail sales and August Japanese exports were well above expectations; August
German PPI was in line.
***overnight,
the Bank of Japan left monetary policy unchanged: Moody’s downgrades China’s
credit rating due to soaring debt growth.
Of
course, the major focus of investors was the FOMC statement and the subsequent
Yellen press conference. I should start
by saying that I was wrong about Fed actions.
What
were the important points?
(1)
left the Fed Funds rate unchanged. Ok, I thought that
would happen,
(2)
suggested strongly that a Fed Funds rate hike would
occur in December. I had doubted that,
(3)
most important, it laid out the schedule for unwinding
QE which [a] will start next month and [b] most importantly, Yellen said that
it would be adhered to irrespective of short term economic developments. I did not believe it would lay out a firm
schedule and certainly didn’t think it would emphasize the lack of flexibility
in unwinding its balance sheet. The
importance of this latter point is that if the FOMC has decided that it is now
time to tighten, the risk is that it will continue with that policy for far too
long just as it did with easing,
(4)
also of importance, forecasts of future growth and
inflation [its dot plot that registers each FOMC member’s individual specific estimates
and then calculates the median forecast] has a usually wide spread of expected
outcomes, especially in the out years.
That indicates that there is wide disagreement among the members, or
dare I say uncertainty/confusion. Of course, we already know this because this
group has proven beyond a reasonable doubt that it couldn’t forecast its way
out of a wet paper bag. Indeed, in
Yellen’s press conference, she admitted that the Fed had no idea why inflation
was as low as it is. The points here are
[a] the Fed’s economic model is broken; the numbers have never matched up to
the real economy; so why would they now?
[b] in other words, the Fed’s new found confidence in the economy is
meaningless. Unwinding QE was never about
the economy anyway; it was about the Fed’s fear of disrupting the markets. In short, the economy hasn’t improved to the
degree that the Fed would have you believe; the Fed has just decided that it
can’t hold off normalizing any longer.
Here is the red lined version of
the FOMC statement and the dot plot along with some analysis.
More from Goldman
and Deutschebank (medium):
What
does this mean aside from the stated obvious?
On the assumption that Yellen et al aren’t jerking us around (again), it
means my Fed thesis (QE did little to help the economy so its removal will do
little to hurt it; but it spawned the egregious mispricing and misallocation of
assets and the destruction of price discovery, all of which will be reversed) is
about to be tested---proven right or wrong.
To
be clear, I thought that the Fed should have started the normalization of
monetary policy years ago. Indeed if
there is one thing that I have made clear is that the Fed has never made that
transition correctly in all of history and this time, it had waited far too
long. So while it has done what ultimately
had to be done, I believe that it just did it too late and now the piper needs
to be paid. When exactly that occurs is
open is question, but, in my opinion, the fuse has now been lit.
How
fast it may burn (assuming that it does) could depend on a couple of factors
that I have discussed before; but as a reminder:
(1)
the likelihood that any fiscal stimulus will impact
economic growth is questionable. It
certainly is no reason for the Fed to start tightening. I have mentioned the
Reinhart/Rogoff study numerous times; but if their conclusions are correct, tax
reform and infrastructure are not apt to have much impact on growth. Indeed, to the extent that they further raise
the national debt/budget deficit, they will only further negatively impact economic
growth and further aggravate Treasury financing problems,
(2)
speaking of which, the debt ceiling has been raised
which means the Treasury is going to be coming to market for new money. Further, any additional deficit spending resulting
from the Trump/GOP tax reform/infrastructure agenda will create the need for
more new financing. The Fed not be
reinvesting funds will only add to that need.
On the other hand, the Fed has been a non-price
sensitive buyer of Treasuries [i.e. its motive for buying was not to earn a
return but to pump money into the financial system]. Meaning that the new buyers will be more
price conscious [read lower bidders].
This sudden change in supply/demand plus the alteration of the buy side’s
price objectives is something the market hasn’t experienced in eight years and
we don’t know how it will react. It may
be totally unaffected. I don’t believe
that will occur; but we just don’t know.
Of
course, the bottom line as to whether I am right or wrong on my QE unwind/ down
Market thesis is how stocks perform. In
the end, nothing else matters.
How
many warnings do you need (medium):
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value investing is so difficult.
News on Stocks in Our Portfolios
Economics
This Week’s Data
August
existing home sales fell 1.7% versus a slight anticipated rise.
Weekly
jobless claims fell 23,000 versus expectations of a 19,000 increase.
The
September Philadelphia Fed manufacturing index came in at 23.0 versus estimates
of 18.0.
Other
Quote
of the day (short):
Politics
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International War Against Radical
Islam
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