Thursday, March 15, 2018

The Morning Call--Just what we need: a larger deficit and less bank regulation


The Morning Call

3/15/18

The Market
         
    Technical

The indices (DJIA 24758, S&P 2749) made a third attempt to challenge their prior highs and failed again.  That keeps the very short term momentum to the downside.  Although both Averages are still making higher lows.  Volume was down and remained at a low level.  Breadth was negative.  That said, the indices are above both moving averages and within uptrends across all major timeframes. The technical assumption is that long term stocks are going higher.  However, the indices are now stuck in a narrowing range defined by lower highs and higher lows.  In addition, they need to overcome their former all-time highs before we have an all clear signal. 

            Yesterday in charts:

The VIX was up another 5 ½ %, but remained within its newly reset trading range.   I was surprised that it was not up more than it was, given the big down day; and I am even more surprised that it has remained a docile as it has in the past three days.  So it would seem that it is not anticipating a return to the early February levels.
               
The long Treasury rose another ¾ %, penetrating the upper boundary of its very short term downtrend; if it remains there through the close today, the trend will be negated.  I think that yesterday’s upbeat performance reflected the weak retail sales number (see below).  Longer term the momentum remains to the downside, but the whole economic growth/inflation scenario that the bond boys have been betting on of late maybe about the shift toward my slow growth forecast.  ‘Maybe’ being the operative word.  A lot more upside is needed to reflect such a change in attitude.

The dollar was up slightly, apparently unconcerned by the economic news or the pin action in stocks and bonds.  But it remains an ugly chart.
           
GLD was down fractionally, like the dollar, impervious to the going on’s in stocks and bonds.  Still momentum remains to the upside, though it is fighting a very short term downtrend.
               
Bottom line: the technicals of the equity market point higher for the long term; though very short term the pin action suggests some more downside.  Bond investors seemed to have reacted to the weaker retail sales data, while UUP and GLD didn’t care.

    Fundamental

       Headlines

            Yesterday’s stats were negative: weekly mortgage and purchase applications were up, February PPI was in line, February retail sales were very disappointing as were January business inventories/sales.  Plus the Atlanta Fed lowered its first quarter GDP growth estimate.  While the aforementioned numbers seem to confirm my concern that the tax bill did not provide the boost to economic growth many hoped for, the rest of the week will be data filled including several primary indicators.  So yesterday may prove to be a one off.  That said, it fits the pattern of the last eleven weeks.

            The other news was Trump’s referral to a second round of tax reform, the primary provision being to make the individual  tax rate reductions incorporated in the first bill permanent (they are now scheduled to expire in 2025).  That, of course, will just take the projected budget deficit/national debt up another notch barring a significant increase in economic growth that would ‘pay for’ those tax reductions.  As you know, I am very skeptical of such an outcome based primarily on the fact that there is already too much debt to service to allow any room for growth.  Certainly, I could be wrong.  But the math just doesn’t seem to work; so I am less than enthusiastic about this proposal than I would like to be.

                Finally, the senate passed the new improved Dodd Frank bill, rolling back some of the provisions that inhibited bank risk taking.  As you know, another round of bank insolvency has been on my list of major risks to the economy.  With passage of Dodd Frank I opined that the risk had lessened in the US but remained in the global banking system (EU, Japan and China).  Our ruling class now appears to be reintroducing bank balance sheet risk in the US.  As I observed last week, none of the players responsible for the 2007 financial crisis have been punished in any way; so why should we expect them to act any differently this time around?  The bad news is that while the house hasn’t acted on this measure yet, it wants an even more extensive revision of Dodd Frank.


            Bottom line: the economic data continue to belie the ‘global synchronized growth’ thesis.  It could always occur; but at this moment, it doesn’t seem to be.  That is not a positive for the economy especially if the Fed continues to insist that all is right.  Making matters worse, Trump/GOP want to further abandon the long held platform of keeping budget deficits within reason.  As you know, I believe that increasing the debt from the current historically high levels will hinder not help economic growth.  So I am not enthusiastic about this development, however well it may play in November.

            Cash is not a bad thing to own.

            Estimating future stock returns (short):

    News on Stocks in Our Portfolios
 
           

Economics

   This Week’s Data

      US

            January business inventories rose 0.6% versus expectations of up 0.5%; but sales fell 0.2%.

                Weekly jobless claims fell by 4,000 versus estimates of down 2,000.

            The March Philadelphia Fed manufacturing index came in at 22.3 versus forecasts of 23.0.

            The March NY Fed manufacturing index was reported at 22.5 versus consensus of 15.0.

            February import prices were up 0.4% versus projections of up 0.3%, while export prices were up 0.2% versus expectations of up 0.3%.

     International

    Other

            Atlanta Fed lowers first quarter real GDP growth estimate to 1.9% from 2.5%.

            Draghi/ECB tip toes toward ending QE (medium):

            Fourth quarter real household net worth (medium):

What I am reading today

            Hugh Hewitt on Tillerson’s firing (medium):

                        Game theory and the Un/Trump talks (short):

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