Thursday, February 8, 2018

The Morning Call--A love stew of spending

The Morning Call

2/8/18

The Market
         
    Technical

The indices (DJIA 24893, S&P 2681) closed down for the day after another violent intraday roller coaster ride.  The Dow ended back below the lower boundary of its very short term uptrend, while the S&P held above its comparable level.  However, both remain solidly above their 100 and 200 day moving averages as well as in uptrends across all timeframes with the exception mentioned above.  Volume declined while breadth improved slightly.  The technical assumption remains that stocks are going higher. 

The VIX fell 7 ½ %, again trading in tandem with stock prices versus inversely.

The long Treasury declined 1% on volume.  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.

The dollar was up ¾ %.  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 dropped another ½ %, like the dollar, reacting to rising rates.  It has started to develop a very short term downtrend.

Bottom line: Monday, stocks set a very short term low.   Tuesday, they rallied off that bottom.  The technical question before us is, does Wednesday’s decline make Tuesday the next lower higher or will stocks rally and pusher higher today?  In other words, was Tuesday’s pin action just a pause in a downturn? 

The whackage in the bond and gold markets seem to be pointing to higher inflation (necessitating a tighter Fed)---not something the stock boys want to see.  On the other hand, the stronger dollar would indicate rising confidence in the US economy. 

In short, we have a pretty muddled technical picture which probably argues for more downside.  Of course, ‘muddled’ is the operative word, meaning that my opinion is just a wild ass guess.

    Fundamental

       Headlines

            Both economic stats reported yesterday were mixed: weekly mortgage and purchase applications and January consumer credit.

            We did get some clarity on the budget/continuing resolution/debt ceiling/immigration negotiations.  Following the house’s passage of a continuing resolution of Tuesday, the senate struck some kind of two year grand bargain to raise spending for defense, disaster relief, opioid treatment and a portion of Trump’s infrastructure wish list and hold an open debate on immigration next week.  The full senate votes on the measure today and then sends it to the house; where Pelosi vows to oppose it unless Ryan makes the same deal on an immigration debate as McConnell.

            If I am reading this correctly, the net effect is to suspend the debt ceiling, extend the continuing resolution to March 23 and further increase the budget deficit/national debt via $300 million in additional spending (it has already been done by lowering taxes).  I don’t have to tell you what I think the likely consequences are, assuming this love stew of spending gets passed.  My guess is that the bond market didn’t think very much of it either.

            ***overnight, the Bank of England met.  It left rates and QE unchanged, but the subsequent narrative was quite hawkish.

            Bottom line: the GOP, at least in the senate, is sticking it to the American electorate again---promising fiscal rectitude then joining the dems in an orgy of spending.  This at a time in the economic cycle in which the government should be running a surplus or at least shrinking the deficit.  If passed, it will be interesting to see the level of heartburn it causes for the Market and, perhaps more important, for the Fed.  The hope here is that it dies a horrible death.
      
            The latest from Jim Bianco (medium):

                The latest from Jeff Gundlach (medium)

                What happens in mean reversion (medium and a must read):


    News on Stocks in Our Portfolios
 
            FactSet Research Systems (NYSE:FDS) declares $0.56/share quarterly dividend, in line with previous.

Economics

   This Week’s Data

      US

            December consumer credit grew $18.4 billion verses expectations of a $20 billion increase; however, the November reading was revised up to $31.0 billion from $28 billion.

            Weekly jobless claims fell 9,000 versus estimates of a 5,000 increase.
           
     International

            China’s January trade surplus narrowed considerably as imports soared.

    Other

What I am reading today

            China’s militarization of the South China Sea (medium):

                Should you buy bitcoin? (medium):


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