Thursday, January 25, 2018

The Morning Call--The dollar is taking center stage and not in a good way

The Morning Call

1/25/18

The Market
         
    Technical

The indices (DJIA 26252, S&P 2837) turned in a mixed performance (Dow up, S&P down). Volume was up, breadth mixed.  Long term, they 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 rose 3%, putting it well above the lower boundary of its short term trading range.  I don’t think that its pin action did anything to clarify the issue before us: whether or not it is re-establishing its normal inverse relationship with stock prices.
           

The long Treasury got slammed.  It closed well below its 200 day moving average for a fourth day, reverting to resistance.  While TLT remains in a technical no man’s land, its recent pin action seems to be pointing to a resolution on the downside (higher rates, stronger economy). 

The dollar had an even worse day, falling 1% on volume.  I remain of the opinion that a declining dollar is not an economic positive---in that, ultimately it will require action by the Fed to defend it (i.e. higher interest rates).

GLD popped 1 ¼%.  That keeps it in line with the declining dollar but at odds with rising interest rates.

Bottom line: I am paying close attention to all the indicators (higher VIX, lower bonds, a terrible dollar and higher gold) that are suggesting problems for stocks.  That said, none of this seems to matter to the equity boys and until it does, the current weight of technical evidence is that stocks appear likely to go higher. 

I remain uncomfortable with the overall technical picture.
                       
            Stock market reversals can cause a recession (medium):

           
Gauging contemporary bubbles (short):

            Yesterday in charts: (short):

    Fundamental

       Headlines

            The bulk of the talk among the chattering class yesterday was focused on the news out of Davos.  Specifically, Mnuchin’s comments that a weak dollar was a plus for the US economy.  When I read that yesterday morning I was dumbfounded.  A US Treasury secretary just doesn’t address a world forum and tell them that a weak dollar is great.  First, it suggests anything but ‘make America great again’---global investors bailing out of the dollar because the government’s policy is to let it go lower does not indicate national economic strength.  Second, it is exactly what the US (including Trump, by the way) has been criticizing China of doing for the past ten years (weakening its currency to improve trade).  Third, while a weak dollar may be great for international corporations that do a lot of exporting, it hurts everyone else in the economy---not the least of which is the consumer (read, the electorate).  I brought up the potential problem of a weak dollar in last week’s Closing Bell.  I had no idea that our ruling class would throw gasoline on this fire so quickly.  

            Davos weak dollar and more tariffs talk (medium):

            Trump’s consumer ‘last’ trade policy (medium):

            Is a weak dollar really good for trade (medium)?

            Bottom line: I am not going to be repetitious on the adverse impact of a weak dollar and overly aggressive (protective) approach to trade relations.  Hopefully, all that we are seeing is ‘the art of deal’ played out on the international stage; and equally hopefully, Trump knows how not over play his hand (like he did in Pakistan).  Much good could come of this; if it is all bluff.  If it is not, not so much.

            More on valuation (medium):

    News on Stocks in Our Portfolios

Illinois Tool Works (NYSE:ITW): Q4 EPS of $1.70 beats by $0.08.
Revenue of $3.63B (+6.8% Y/Y) beats by $90M.

W.W. Grainger (NYSE:GWW): Q4 EPS of $2.94 beats by $0.74.
Revenue of $2.63B (+6.5% Y/Y) beats by $60M.

Sherwin Williams (NYSE:SHW): Q4 EPS of $2.95 misses by $0.17.
Revenue of $3.98B (+43.2% Y/Y) beats by $40M.

Praxair (NYSE:PX): Q4 EPS of $1.52 beats by $0.04.
Revenue of $2.95B (+11.7% Y/Y) beats by $120M.

Praxair (NYSE:PX) declares $0.825/share quarterly dividend, 4.8% increase from prior dividend of $0.7875.

3M (NYSE:MMM): Q4 EPS of $2.10 beats by $0.07.
Revenue of $7.99B (+9.0% Y/Y) beats by $110M.

3M (NYSE:MMM) declares $1.36/share quarterly dividend, 16.2% increase from prior dividend of $1.17.

Caterpillar (NYSE:CAT): Q4 EPS of $2.16 beats by $0.37.
Revenue of $12.9B (+34.8% Y/Y) beats by $920M.

Economics

   This Week’s Data

     US

            The January composite flash PMI came in at 53.8 versus expectations of 54.0; the manufacturing PMI was 55.5 versus 55.0; the services PMI was 53.3 versus 54.0.

            December existing home sales dropped 3.6% versus estimates of down 1.0%.

            Weekly jobless claims rose 17,000 versus consensus of up 20,000.

     International

            January German business confidence came in higher than forecasts.

   Other

            Savings rate the lowest in a decade while credit card debt soars (medium):

            LA port traffic increases (short):

            Financial conditions the easiest since 2000 (medium):

What I am reading today

            A change in US foreign policy (medium):



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