Thursday, January 11, 2018

The Morning Call--Fake news

The Morning Call


The Market

The indices (DJIA 25369, S&P 2748) paused again---though an early sell off faded into a minor down close. Much of this pin action as well as a reversal of Tuesday’s big move in bonds suggest that the fear of inflation and spiking interest rates may have been a one day phenomena.  Though it does apparently indicate that investors are sensitive to the notion that the end of QE may be around the corner. 

The VIX also reversed its price action of the prior three days (up on an up Market day) and declined on Wednesday’s down day---again suggesting that the recent turmoil may be short lived.  However, one thing Tuesday’s trading does point out is that all news is not good news.  Specifically, any evidence that QE is ending (or an indication that it could be---like rising inflation) may lead to an increase VIX activity.  The point being that since QE may be coming to an end, however timid it may be, that suggests that the extended period of subdued volatility may also be coming to an end.

Volume rose while breadth was mixed.  Long term, the Averages remain strong 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 the Averages long term uptrends. The technical assumption has to be that stocks are going higher. 

Tuesday’s doomsday bond market scenario quickly reversed.  While TLT sold off heavily in early trading, it gained back most of the losses by day’s end, as concern over the Chinese reducing their US Treasury holdings faded and a Treasury 10 year auction that was well received.  I said yesterday that it was too soon to assume that rates were about to spike (the importance of follow through).  And I will say today, it is too soon to assume that they won’t.  To be sure, believing that all news is good news is a ten year investment strategy that has worked consistently.  So it is not surprising that a one day sell off on some bad headlines would be quickly reversed when that bad news is dispelled.  However, QE may be coming to an end; and investors’ apparent heightened awareness of that fact may keep pressure on the price of the long bond.

The other indicators followed TLT’s lead---GLD up, the dollar down.  But their price moves were much more muted, just as they were on Tuesday.  Although I have to note that the upside move in GLD was on huge volume.

I remain uncomfortable with the overall technical picture.



            Yesterday, the Donald suggested, in the interest of getting compromise in congress, that it bring back earmarks---those pesky pork add-ons that fund local projects in order to secure a congressman/senator’s vote.  That is not what this country needs at a time when the national debt/deficit are already at record highs and spiraling upwards.  It would reinforce my thesis that the debt/deficit are at a level that inhibits growth.  Let’s hope this is just more of Trump’s loose lips rhetoric.

            Speaking of which, here are some updates on the threats of trade wars:

(1)   I reported yesterday that China is considering reducing its holdings of US Treasuries, partially in response to Trump’s trade threats.  Here a deeper look into China’s real alternatives with respect to those potential sales---which appear to be quite limited.  That doesn’t mean, they won’t pursue other avenues; but if is their best shot, then there appears to be little about which to be concerned on this front,

***overnight, Chinese officials said that they policy to ‘diversifying’ their  reserves due to the decline in Treasury yields---which has the same end result as selling Treasuries because they are pissed about Trump’s trade rhetoric. 

(2)   a little bit more concerning were rumors that the US is about to pull out of NAFTA.  While these may be just part of the ‘art of the deal’ negotiations, in my opinion, such an action would be detrimental to US economic growth,

                 ***overnight, US and Canadian officials dismissed those rumors as false.

Finally, the Pakistanis apparently aren’t going to put up with the Trump twitter bombast criticizing their reliability and have upped the ante, suspending military and intelligence cooperation with the US.  This will not help us in Afghanistan where we have already wasted far too many lives and too much treasure.

            And it pushes Pakistan into the waiting arms of the Chinese and Iranians.  Don’t forget Pakistan has nukes (medium):

            Bottom line: the Market is overvalued.  To the extent that you are invested, that is good news.  But if volatility increases that may be a less comforting position than it has been for the last year.  I think it wise to own some cash for your own protection.  As you know, I am 50% invested and sleeping well.

The rise of investor optimism (medium):


   This Week’s Data


November wholesale inventories rose 0.8%; even better sales were up 1.5%.

            Weekly jobless claims rose 11,000 versus expectations of a 5,000 decline.

            December PPI fell 0.1% versus forecasts of up 0.2%; ex food and energy, it also declined 0.1% versus consensus of up 0.2%.  This ought to have investors wee weeing in their pants.


            2017 German FDP rose 2.2%, the fastest growth rate in six years.

            A Chinese official said that 2017 Chinese GDP grew at a faster rate than expected---‘said’ being the operative word.


            Heavy truck sales are up (medium):

            Moody’s warns Washington that US credit rating is at risk (short):

What I am reading today

            Thoughts on inflation and how it could impact your portfolio (medium):

            Thursday morning humor:

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