Wednesday, January 24, 2018

The Morning Call--Lots of relevant news yesterday

The Morning Call


The Market

The indices (DJIA 26210, S&P 2839) turned in a mixed performance amid inconsistent headlines. Volume was flat; breadth mildly positive.  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. 

            And investor cash level at lows (short):

The VIX rose on a do nothing day.  It did manage to close back above the lower boundary of its short term trading range, negating Monday’s break. So the issue of whether or not it is re-establishing its normal inverse relationship with stock prices remains in question.

Low volatility could go on for a long time (short):

The long Treasury was up fractionally, but remained below its 200 day moving average for a third day; if it remains there through the close today, it will revert 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 a bad day, resuming its downhill slide.  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 moved higher, regaining its very short term uptrend.  That puts it in line with the declining dollar but at odds with rising interest rates.

Bottom line: except for a few outlier technical signals, there is nothing to suggest price weakness other than normal backing and filling.  The current weight of technical evidence is that stocks appear likely to go higher. 

I remain uncomfortable with the overall technical picture.


            There was a mixed news flow yesterday.

            Dems appear to be backpedaling from an agreement with Trump on immigration, meaning the odds of another government shutdown just went up and with it the likelihood of a government default.  Historically, investors don’t get that bothered by the former but really don’t like the latter.  Plus it would not be supportive of the dollar which, as you know, I am becoming increasing concerned about.

            Trump: no wall, no DACA (medium):

            J.P. Morgan and Disney join the list of corporations investing in employees and capital spending.  As you know, this is one of the big developments that I am watching as a result of its potential positive impact on our long term secular economic growth rate.

                Monday, the Donald slapped tariffs on washing machines and solar panels, posing the risk that this action could be the precursor to a trade war.  Here is an analysis of the immediate impact.

                Then just to keep everyone on their toes, yesterday, the Donald noted that NAFTA negotiations were going well, taking some of the sting out of those tariff increases and, hopefully, indicating that this process is just part of the ‘art of the deal’ negotiation process. 

                ***but overnight, in Davos Mnuchin said that he thinks a weak dollar is great and Ross said that there are more tariffs to come.

Bottom line: every one of the aforementioned developments could potentially impact the economy in a meaningful way.  If no compromise can be reached on the budget/immigration standoff, then that will push any government shutdown toward the date when the debt ceiling needs to be lifted (April); and if it is not, the US technically defaults on its debt.  While that clearly is not an immediate threat, the rancor in DC is such that the ruling class could bicker until the last minute to reach some sort of compromise.  That will not help an already weak dollar.

The actions by Disney and Morgan support the notion that the tax cut will be much more pro-growth than I had imagined.  It is still too soon to be changing my forecast; but clearly, the more companies that increase hiring and cap spending, the more likely that I will.

Finally trade, free trade, is, in my opinion, a contributor to economic growth and its absence acts as a constraint.  As I noted, the headlines around tariffs and leaving NAFTA may just be part of Trump’s act; and nothing may come of this.  Indeed, if his ‘art of the deal’ style works, the results could be quite positive.  At the moment, we just don’t know the outcome.

            180 years of market drawdowns (medium):

            Slowing cash flow could be a concern (medium):

            Investing in an overpriced world (short):

    News on Stocks in Our Portfolios
Kimberly-Clark (NYSE:KMB) declares $1.00/share quarterly dividend, 3.1% increase from prior dividend of $0.97.

United Technologies (NYSE:UTX): Q4 EPS of $1.60 beats by $0.04.
Revenue of $15.68B (+7.0% Y/Y) beats by $280M.

Canadian National Railway (NYSE:CNI): Q4 EPS of C$1.20 misses by C$0.03.
Revenue of C$3.29B (+2.2% Y/Y) beats by C$10M.

Canadian National Railway (NYSE:CNI) declares CAD 0.455/share quarterly dividend, 10.3% increase from prior dividend of CAD 0.4125

General Dynamics (NYSE:GD): Q4 EPS of $2.50 beats by $0.12.
Revenue of $8.28B (+8.2% Y/Y) misses by $130M.

Qualcomm slapped with $1 billion fine (medium):


   This Week’s Data


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

            The January Richmond Fed manufacturing index was reported at 14 versus forecasts of 18.

                Weekly mortgage applications rose 4.5% while purchase applications were up 6.0%.


            The December Japanese trade deficit fell while its January composite flash PMI was the highest since 2104.

            The January EU composite and services flash PMI’s was better than expected while the manufacturing PMI was below estimates.


            An interview with Ken Rogoff (medium):

            Hayek’s work on monetary policy (medium):

                        World economic outlook update (medium):

            US business cycle risk report (medium):

            Chemical industry activity picked up in January (short):

            The other meaning of ECB corporate bond purchases (medium):

            Comments before congress by Fed nominee Goodfriend (short):

What I am reading today

            Honesty as a path to avoiding failure (medium):

            Sustaining retirement income in a low return world (medium):

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