Tuesday, January 30, 2018

The Morning Call--Are the long bond and dollar about to force the Fed's hand?

The Morning Call


The Market

The indices (DJIA 26439, S&P 2853) got banged pretty hard yesterday---something new and different.  Still the Dow continued to trade above the upper boundary of its short term trading range; so there seems little to be concerned about, at least for the moment. Volume fell; breadth weakened.  Long term, the Averages remain robust viz a viz their moving averages and uptrends across all timeframes. Short term, they are above the resistance level marked by their August highs, meaning that there is no resistance between current price levels and the upper boundaries of their long term uptrends. The technical assumption has to be that stocks are going higher. 

The VIX skyrocketed 25%, clearly in line with its usual inverse relationship with stocks.  Though the magnitude of its rise is somewhat unusual.  Its pin action remains confusing.

The long Treasury declined ¾ %, continuing its downward trend and moving it near to the lower boundary of its short term trading range.  It would appear the recent question over follow through is being answered to the downside; though it remains in a technical no man’s land. 

The dollar was up fractionally, doing little to improve an otherwise sick chart.

GLD fell ½ %, trading below the lower boundary of its very short term uptrend.  If this trend is negated, it would be the first set back in over two months.  Follow through.

Bottom line: equity investors seemed to be focused on the declining bond market yesterday, worrying about higher interest rates and their impact on economic activity and on valuation measures.  The exploding VIX puts an exclamation on the concern, while GLD lent its support.  The dollar appeared unimpressed---perhaps meaning that dollar investors need to see a lot higher interest rates before they cease selling.  I remain uncomfortable with the overall technical picture.

            Global diversification (short):

            The honey badger market (medium):

            Yesterday in charts (short):



            Yesterday’s economic data was not that earth shaking.  The news was:

(1)    the selloff in the bond market.  As you know from the technical analysis, this is not just a single day’s poor pin action. TLT has been breaking support levels since early this month.  Not that this means that the bond yields are going a lot higher for a lot longer; but technically they are off to a good start.  And certainly as I have reiterated too many times to recall, there are fundamental forces [the unwinding of QE/weakening dollar] that could drive rates much higher. 

That said, I have not altered my own forecast to reflect a stronger economy [via the tax reform] since I am not yet completely convinced that the economy is about to lift off and force the Fed to tighten.  On the other hand, as I have said too many times in these pages, a weak dollar could force the Fed to tighten irrespective of the level of economic strength or inflation. 

The bad news could be that I could be right on slow economic growth but also right on the weak dollar, which would be the nightmare scenario for the Fed.   That is not a prediction; it is an alert.

(2)   more on trade.  The Donald was quoted in the overnight [Sunday night] saying the EU has taken unfair advantage of the US on trade issues and that needs to change.  There was no specifics and no follow through during the day.  So for the moment, I am not sure what that means.

On the other hand, NAFTA negotiators ended their latest meeting and chose not to issue joint statement following the latest round of discussions.  Not a good sign.  (short):

Bottom line: I am not going to beat the ‘trade war’ mule again, except to say that tariffs introduced last week, the seeming lack of comity in the NAFTA negotiations and the continuing tough language the Donald seems intent on using with our trading partner is a matter of concern.  I am prepared to give him the benefit of the doubt before the fact; but I am worried about after the fact.

It is too soon to know if the bond market is telling us something about the economy and/or Fed policy, but it has been pointing in the direction of higher rates long enough that we need to be taking it seriously.  And let me repeat, this is not about the economy, this is about the Market impact of the latest of the Fed’s many failed attempts to normalize monetary policy following a period of excessively easy money.

    News on Stocks in Our Portfolios
McDonald's (NYSE:MCD): Q4 EPS of $1.71 beats by $0.12.
Revenue of $5.34B (-11.4% Y/Y) beats by $110M.

McDonald's (NYSE:MCD) declares $1.01/share quarterly dividend, in line with previous.

T. Rowe Price (NASDAQ:TROW): Q4 EPS of $1.52 beats by $0.06.
Revenue of $1.29B (+18.3% Y/Y) beats by $20M.


   This Week’s Data


            The January Dallas Fed manufacturing index was reported at 16.8 versus December’s reading of 32.8.

            Month to date retail chain store sales grew slower than in the prior week.

            The November Case Shiller home price index rose 0.7% versus forecasts of up 0.6%.


            2017 EU GDP grew 2.5%, better than estimates.

            December Japanese retail sales rose 0.9% versus projections of -0.4%.


            Update on big four economic indicators (medium):

            The Fed will ignite the next crisis (medium):

            A survey on companies are spending their tax reform windfall (medium):

            Update on oil pricing (medium):

            ECB doubles down on its dovish comments (medium):

What I am reading today

            China’s rise is over (medium):

            Tuesday morning humor---the wisdom about bitcoin.
            More from Pakistan (medium):

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