Tuesday, January 23, 2018

The Morning Call--Will Trump's move lead to a trade war?

The Morning Call

1/23/18

The Market
         
    Technical

The indices (DJIA 26214, S&P 2832) had another great day.  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 (medium):

The VIX declined another 2%, trading in its normal inverse relationship with stock prices for the second day. It is now below the lower boundary of the recently reset short term trading range; if it remains there through the close on tomorrow, it will revert back to a downtrend.  A little more of this and it will look like the ‘short the VIX’ crowd is back in control.
 
The long Treasury was up fractionally, but remained below its 200 day moving average for a second day; if it remains there through the close tomorrow, 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 managed another meager up day, but this does little to alter 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, though it is still challenging the lower boundary of its very short term uptrend. 

Bottom line: The current weight of technical evidence is that stocks appear likely to go higher.  But the further the current ‘melt up’ goes, the more tenuous that assumption becomes.  

I remain uncomfortable with the overall technical picture.
           

    Fundamental

       Headlines

            Three developments yesterday.

(1)   the senate passed a continuing resolution, the house followed suit and Trump signed the bill which will allow the government to re-open; but it only lasts for three weeks which means more fodder for the evening news shows in coming days.  It helps the electorate just barely.

(2)   the White House released outline of a $1 trillion infrastructure bill---‘outline’ being the operative word.  You know my thoughts: another $1 trillion in government spending is, in my  opinion, not a big plus for the long term secular growth rate of the economy (short):

                  The tax cuts and the current account deficit (medium):

                 And the deficit/debt just keeps on growing (medium):

                 And so does the debt service (medium):

(3)   Trump fired the first short in a potential trade war, imposing tariffs on washing machines and solar panels.  As you know, I think there was a fine line between what is necessary and what could trigger a trade war in which there are no winners.  So far, the reaction of South Korea and China [the main suppliers of washing machines and solar panels] has been muted.  But it is only day one.  Let’s see what happens next. 

Bottom line:  if the recent corporate investing and hiring moves become common then the long term secular economic growth rate will rise.  The issue is one of magnitude and for our purposes how the economic improvement gets valued.   On that point, my opinion is that under the best scenario that I can imagine, equities remain overvalued. 

On the other hand, if you have been reading the articles in the Technical section that I have linked to, the pundits are fairly unanimous that there is no evidence of investor uncertainty.  As long as that is the case, valuation will not be particularly relevant.  Still, I think it wise to own some cash for your own protection.  As you know, I am 50% invested and sleeping well.
           
            Morgan Stanley says tax reform is now priced in (medium):

            More on valuations from an optimist (medium):

            The pin that pricks the bubble (medium):

            Goldman: the risk appetite has never been higher (short):

    News on Stocks in Our Portfolios
 
Becton, Dickinson (NYSE:BDX) declares $0.75 quarterly dividend, in line with previous.

Kimberly-Clark (NYSE:KMB): Q4 EPS of $1.57 beats by $0.02.
Revenue of $4.58B (+0.9% Y/Y) misses by $20M.

Procter & Gamble (NYSE:PG): Q2 EPS of $1.19 beats by $0.05.
Revenue of $17.4B (+3.2% Y/Y) in-line.

Johnson & Johnson (NYSE:JNJ): Q4 EPS of $1.74 beats by $0.02.
Revenue of $20.2B (+11.5% Y/Y) beats by $130M.

Economics

   This Week’s Data

     US

     International

            January German investor sentiment soared.

            The Bank of Japan left monetary policy (QE) unchanged.

   Other

           

            Taking the ‘over’ on inflation and growth (medium):

What I am reading today

            Preparing financially for becoming a widow/widower (medium):
           
            Nassim Taleb thinks bitcoin is a good idea (medium):

            Quote of the day (short):

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