Tuesday, April 24, 2018

The Morning Call--All eyes on the bond market


The Morning Call

4/24/18

The Market
         
    Technical

The indices (DJIA 24448, S&P 2670) traded mixed (Dow down, S&P up) yesterday.  Volume declined; breadth was much weaker than implied by a flattish Market.    The S&P ended within a very short term downtrend while the Dow has negated its downtrend.  Both finished below their 100 and 200 day moving averages.  The DJIA closed in a short term trading range but in intermediate and long term uptrends.  The S&P is in uptrends across all timeframes. The short term technical picture remains cloudy.  Longer term, the assumption is that equity prices will continue to rise.
               
                The VIX was down slightly but remained above its 100 and 200 day moving averages (though not by much) and the lower boundary of its short term trading range.

Like equities, the long Treasury rested after a dramatic two day plunge.  It continues to trade below its 100 and 200 day moving averages and in a short term downtrend.  TLT is approaching the lower boundary of its long term uptrend with momentum to the downside.

            Paying attention to the long bond (medium):

            How important is the 3% yield barrier? (medium):

            The return of the bond vigilantes (medium):

The dollar is on a big three day run to the upside, finally responding to moves in the long bond.  It ended above the upper boundary of its intermediate term downtrend for the second day (if it remains there through the close on Wednesday, it will reset to a trading range and above its 100 day moving average (if it remains there through the close on Wednesday, it will revert to support).  UUP remains below its 200 day moving average but it is very close to challenging it.

GLD was down 1%, finishing below the lower boundary of its short term uptrend (if it remains there through the close on Wednesday it will reset to a trading range).  It remained above its 100 (though it is close) and 200 day moving averages. 
               
Bottom line: yesterday, I posed the question, was the dramatic change in direction last Thursday/Friday for most of the indicators a sign of a major shift in the economic/Market narrative or just noise.  Yesterday’s pin action did little to address that question; but clearly, there is going to be follow through in one direction or the other.
           
            ***the pin action overnight suggests the answer is noise.  Still follow through.

            More on rising oil prices (medium):

            Yesterday in charts (medium):

    Fundamental

       Headlines

            Yesterday’s economic data was positive: the April flash PMI’s were better than expected as was March existing home sales; though the March Chicago Fed national activity index was disappointing.

            Overseas, the EU flash PMI’s were also upbeat on balance.      

            The pin action in the bond market has sharpened investor focus on interest rates and Fed policy; and that is where most of the Market commentary both TV and written has been centered.  The concern being (1) rising interest rates make bonds more competitive with stocks, (2) and when accompanied by a flattening in the yield curve, portend recession, (3) especially at a time that [a] commodity prices are spiking {inflationary pressures} putting additional pressure on the Fed to keep raising rates and [b] the substantial amount of new funds will be required to finance our absurd budget deficit and pay for the Treasuries that the Fed is rolling out of {i.e. the end of QE}, (4) in the face of slowing economic activity. 

I am not saying that stagflation (slowing growth and higher inflation) is necessarily in our future.  However, I continue to point to the (1) decline in the rate of economic growth and (2) the huge schedule of Treasury financing requirements.  At this point the rest is speculation: a continuing rise in interest rates [whether induced by the Market or the Fed or both], an inverted yield curve and commodity price induced inflation.  At the moment, all I can do is sit back and watch the dataflow.  Although the chorus of economic/Fed skeptics is growing.

            Also in the background is the worry over a trade war with China.  As you know, I have always thought that Trump was just pursuing his ‘art of the deal’ strategy and ultimately, the China and US would reach a satisfactory resolution to their trade issues.  Of course, that is one man’s opinion and certainly there are many who disagree.  Hence, the undertone of trade/tariff concerns.

Bottom line: my fundamental unease is with the performance of the economy (which has not been awe inspiring of late), the direction of inflation (which commodity prices as well as the long bond are starting to point to the upside) and Fed policy (which is tightening).  That combo, historically, has not been great for stocks.  I am very comfortable with my cash position.

            Trumpian uncertainty (medium):

            The latest from Jeff Gundlach (medium):

     Subscriber Alert

            In my quarterly review of companies, IBM failed to meet the minimum financial strength criteria for inclusion in the Dividend Growth Universe and accordingly is being Removed.  It was once on the Dividend Growth Buy List, but no shares were ever purchased.          

    News on Stocks in Our Portfolios
 
Genuine Parts (NYSE:GPC) declares $0.72/share quarterly dividend, in line with previous.

Canadian National Railway (NYSE:CNI): Q1 EPS of C$1.00 in-line.
Revenue of C$3.19B (-0.6% Y/Y) beats by C$30M.

Canadian National Railway (NYSE:CNI) declares CAD 0.455/share quarterly dividend, in line with previous.

Becton, Dickinson (NYSE:BDX) declares $0.75/share quarterly dividend, in line with previous.

Economics

   This Week’s Data

      US

            The April Markit flash manufacturing PMI was 56.5 versus forecasts of 55.2, the services PMI 54.4 versus 54.5 and the composite PMI 54.8 versus 54.6.

            March existing home sales rose 1.1% versus consensus of a fractional decline.

     International

            The April German business climate index was reported at 102.1 versus expectations of 102.6.

    Other

            Recession odds low but rising (short):

                Rising entitlements are the problem with the budget (medium):

            John Mauldin on trade relations with China (medium):

            ECB capitulates on banking reform (medium):


     What I am reading today

            Wells Fargo fined another $1 billion; but still no one has gone to jail (medium):

                Trading one risk for another (medium):

                Casualties of your own success (medium):

            The pension crisis (medium):

            Update on developments in Bitcoin land (medium):

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