The Morning Call
11/27/17
The
Market
Technical
It
was a happy week in stock land, though the move in the S&P was much tamer
than we saw in the long bond, the dollar and the VIX. Still the Thanksgiving to Christmas period
tends to be upbeat for stock prices; so the positive pin action is not
surprising. The assumption remains that
stocks are going higher.
The
long bond continues to do well---now above its 100 and 200 day moving averages
(support), the lower boundaries of its short term trading range and long term
uptrend and has again developed a very short term uptrend. The link below offers an explanation for the
strong bid in the long treasury that is not related to a perceived weakening in
the economy or a delayed Fed rate hike. Although
after reading the latest Fed minutes (below), one has to wonder.
And
(medium):
And
turmoil continues in the Chinese fixed income market (medium):
The
dollar didn’t have such a good week, breaking below its 100 day moving averages
(if it remains there through the close today, it will revert to resistance),
remaining below its 200 day moving (now resistance) and within a short term
downtrend. This performance has little
to do with large purchases in TLT and more likely reflects the dovish comments
of the Fed. Certainly, it is not
suggestive of a strong economy.
Gold
continues to do well, though at a very plodding pace. It still seems to be unable to break the pull
of its 100 day moving average. However, it
is in a tight solid uptrend, which like TLT and UUP belie the notion of a
strong economy/higher interest rates.
As
you might expect, stock euphoria led to VIX hammering last week. The 100 and 200 day moving averages reversed
from support to resistance; and it is now two days away from taking out the
lower boundary of its long term trading range.
It even traded intraday below (8.5) its former all-time low of 8.8. It will be interesting to see just how low
the ‘short the VIX’ crowd can push it.
Fundamental
Headlines
The
economic data was mixed last week as were the primary indicators; so the call
is a neutral. Score: in the last 111
weeks, thirty-four were positive, fifty-six negative and twenty neutral. Hence, the trend of upbeat to neutral
readings continues. Probably not on the
order of magnitude that is being touted in the media; but still positive and
gives little doubt to the recent increase in our 2018 growth outlook.
Overseas
there was little data---one positive stat from Germany, one negative from the
UK; so nothing there. There were a
couple of articles on the Chinese recovery/economy that I thought worth review:
China cuts tariffs
on consumer goods (medium):
More
China’s debt sell off (medium):
The
big news item of the week was the release of the minutes from the last FOMC
meeting. Well maybe not so big; because
they were more of the same, ‘on the one hand’/’on the other hand’ narrative
which Fed uses as an excuse to do nothing.
And it was no different this time.
Forget unemployment has passed its third or fourth goalpost
shifting. Forget that asset pricing is
not part of the Fed’s mandate. Forget
that the Fed admits that it doesn’t have a clue why inflation is so low. It continues to wobble on how aggressive to
pursue monetary normalization---the primary thing for which it is responsible
and which is already long overdue. This is
a train wreck awaiting---just like it was every other time the Fed tried to
transition from easy to normalized monetary policy. Only this time the extremes are of a greater
magnitude. Here is a copy of the
minutes. Read them and weep.
Big senate vote
(hopefully) coming this week (medium):
Bottom
line: the economy seems to be gaining a
little life, helped along I am sure by hopes of a tax cut which will likely not
be simpler, fairer or stimulate growth or investment. Plus an improving EU economy along with less
regulation are making a contribution.
Nonetheless, in my opinion, none of this will lead to corporate profit growth
sufficient to justify current valuations.
However, the 900 pound gorilla in the room is the extreme asset
mispricing and misallocation that have arisen from the Fed that has grossly
overstepped the boundaries of its mandates.
When, as and if the price has to be paid, it will, I believe, be a dear
one.
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