Friday, February 9, 2018

The Morning Call--Forget the election; just give the dems the keys

The Morning Call

2/9/18

The Market
         
    Technical

The indices (DJIA 23860, S&P 2501) took another body blow yesterday, raising the first real technical concern.  First, both ended below their 100 day moving averages; if they remain there through the close on Monday, they will revert to resistance.  Second, both closed below the lower boundaries of the very short term uptrends; a close there today will negate those trends.  Third, having made a lower high on Wednesday, they made a lower low yesterday, setting up a potential very short term downtrend, if they remain below Monday’s close.  Still the Averages remain above their 200 day moving averages as well as in uptrends across all timeframes.  Volume rose; breadth was weak and is now in oversold territory.  It is too soon to alter the technical assumption that stocks are going higher. 

The VIX was up 20%, remaining at elevated levels---continuing to exert a negative impact on the Market.

The long Treasury declined fractionally which was a bit surprising given the flow of headlines fearmongering higher interest rates/inflation.  However, it remains in a very short term downtrend, a short term downtrend and well below its 100 and 200 day moving averages. It continues in a technical no man’s land---but just barely.  The only remaining support level is the lower boundary of its long term uptrend.

            Mortgage rates rise to four year high (short):

The dollar was unchanged; also a little confusing in the face of the tumult in the stock market but not so much given the pin action in TLT.  While its chart remains ugly, it is starting to develop a very short term uptrend, undoubtedly helped along by rising rates (declining bond prices).
           
GLD was up slightly, like TLT and UUP not really demonstrating any emotional linkage to the equity market.  It continues to develop a very short term downtrend.

Bottom line: my question from yesterday (was Tuesday’s pin action just a pause in a downturn) was answered with a vengeance.  We now have a lower high and a lower low, so the short term technical assumption is that prices are going lower.  That said, until the major uptrends are successfully challenged, the long term assumption is that stocks are simply in a correction in a broader uptrend.

The whackage price action in the TLT, UUP and GLD continues to baffle me both as they relate to the equity market and to each other. 

            One chart:

            Biggest weekly outflow in mutual fund history (medium):

            How fast do stocks recover after a 4% down day? (short):

    Fundamental

       Headlines

            Yesterday’s economic stats were both positive: January retail chain store sales and weekly jobless claims.  But again, they were dwarfed by the Market as well as the three ring circus in Washington.

            The bad news is that overnight, both chambers passed the senate budget compromise legislation---which removes debt ceiling and adds billions to the budget deficit (medium):

                Meanwhile, the CBO scored the senate budget deal’s deficit larger  ($320 million)  than the senate’s own estimate ($300 million)---which is increasing investor anxiety over the growing deficit’s impact on interest rates (Treasury has to sell more bonds) and Fed policy (inflationary pressure to unwind QE).  (medium):
      
                And the Fed confirms that it is either clueless or trapped and in denial (medium):
      
            Bottom line: if ever there was an example of gross mismanagement by our ruling class, it is the current comedy being played out on Washington.  The congress (and perhaps more importantly the GOP) agreed to a spending increase and the elimination of the debt ceiling at exactly the time in the economic cycle in which the government should be running a surplus or at least shrinking the deficit. 

Just to put this in perspective, the addition to deficit from the combination of this bill along with the tax cut legislation will add $2 trillion (yes, that’s trillion) to the deficit; compare that to Obama’s $800 billion rescue spending following the financial crisis.  This is exactly what the GOP did when Bush 2 came to the white house, i.e. spend like drunken sailors (and the democrats).  The only difference is that national debt was much less.


I don’t want to get on a three or four paragraph rant here because you have heard it all before.  But the combination of an economy operating roughly at full capacity coupled with a huge increase in the deficit on top of a historically high national debt is a recipe for inflation and a potential nightmare for the Fed.

            Of course, it appears that I am wrong about the impact of the tax bill; so I could be equally wrong on this score.

            Buffett’s playbook for stock market corrections (medium):
           
            What the selloff may be telling us about portfolio allocation (medium):

            How to overcome your fear of bonds (medium):

    News on Stocks in Our Portfolios
 
            C.H. Robinson Worldwide (NASDAQ:CHRW) declares $0.46/share quarterly dividend, in line with previous.

            United Parcel Service (NYSE:UPS) declares $0.91/share quarterly dividend, 9.6% increase from prior dividend of $0.83.

Economics

   This Week’s Data

      US
           
January retail chain store sales grew at an accelerating rate.

     International

    Other

            A contrary look at the recent wage data (medium):

            Price changes from 1997 to 2017 (medium and a must read):

            Mortgage delinquency rates increased in the fourth quarter (medium):

            Leading index for commercial real estate falls in January (medium):

                Five rules for avoiding investment disaster (medium):

What I am reading today

            Is legal marijuana more potent? (medium):

            Here is some good news (short):

            The FISA court charade (medium):

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