Wednesday, March 14, 2018

The Morning Call--Trump takes on the real trade injustice


The Morning Call

3/14/18

The Market
         
    Technical

The indices (DJIA 25007, S&P 2765) tried for a second day to challenge their prior highs and failed.  In the process, they have now made a second lower high; and that keeps the very short term momentum to the downside. Volume was up but remained at a low level.  Breadth was negative.  That said, the Averages 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. 

For the optimists (medium):

The VIX was up another 3 ½ %, but is still in its newly reset trading range.   Its recent pin action seemed to be anticipating a drop in volatility---until the last two days.  So maybe not.
               
The long Treasury rose another ½ %; quite a good performance on a second day of a large Treasury offering.  The momentum remains to the downside; though it is nearing the upper boundary of a very short term downtrend.

The dollar was off again, seemingly unimpressed with the positive Treasury offering.  It remains an ugly chart.
           
GLD was up.  Momentum remains to the upside, but it must still overcome a very short term downtrend.
               
Bottom line: the technicals of the equity market point higher for the long term; though the recent pin action suggests that the level of investor euphoria has subsided.  TLT, UUP and GLD seem to be confirming that.
                       
    Fundamental

       Headlines

Yesterday’s economic data releases were mixed: the February small business optimism index was better than forecast, February CPI was in line and month to date retail chain store sales grew slower than in the prior week.  The CPI was the most anticipated of the lot and it didn’t disappoint---which is to say there was no indication of higher inflation.
            Rationalizing peak cycle numbers (medium):

            Trump held the headlines:

(1) firing Secretary of State Tillerson, who is viewed by many as one of the more qualified of the Donald’s appointees.  That, in turn, raised concerns that [a] US foreign policy could become more erratic/aggressive than it already is and [b] given the way the firing was done {Tillerson found out from a Twitter post}, Trump may start to have problems attracting top notch personnel,

(2) finally deciding to take on the real injustice in trade---Chinese theft of US intellectual property.  Yesterday, Trump proposed $30 billion in tariffs plus visa restrictions and investment restrictions [nixed Broadcom’s {Singapore based company} proposed acquisition of Qualcomm].  To be sure, this needed to happen; and it is a problem that both political parties and most of the business sector agree needs to be addressed, though to date no one has had the balls to do it.  That said, the near term consequences could be a lot more stomach churning than the steel/aluminum tariffs. 
         
            Bottom line: it appears that the steel/aluminum tariffs were just a warm up for the main event---going after Chinese theft of US intellectual property.  Depending on how the Donald handles this, the consequences, at least near term, will certainly increase uncertainty.  To be sure, this could be following the steel/aluminum ‘art of the deal’ game plan---threaten, threaten, threaten then back off to something more reasonable.  On the other hand, this is a direct confrontation with a major global power, a major trading partner and one for which ‘face’ is extraordinarily important---increasing the odds of serious unintended consequences.  So my guess is that this round of trade negotiations will involve more investor heartburn than the first.
           
            Bond versus stock yields (medium):

            Goldilocks versus the bears (medium):

            Update on valuations (medium):

    News on Stocks in Our Portfolios
           
Economics

   This Week’s Data

      US

            Month to date retail chain store sales growth slowed last week.

            Weekly mortgage applications rose 0.4% while purchase applications were up 3.0%.

            February PPI came in +0.2%, in line; ex autos, it was up 0.2%, also in line.

            February retail sales fell 0.1% versus forecasts of up 0.4%; ex autos, they were up 0.2% versus consensus of up 0.4%.

     International

            February Chinese industrial output, fixed asset investment and retail sales were all strong and above estimates.

    Other

            The budget deficit and inflation (medium):

            Kudlow is usually wrong (medium):

            Corporate debt reaching record levels (medium):

What I am reading today

            Share buybacks work better in theory than in practice (medium):

            Know when to walk away, know when to run (medium):

            Making it look easy is hard work (medium):
           
            Authenticity is about living our truths not talking about them (short):

            Stay on script (medium):

            Five facts about the new CIA director (medium):

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