Tuesday, April 3, 2018

The Morning Call--The economy is the problem, not trade


The Morning Call

4/3/18

The Market
         
    Technical

The indices (DJIA 23644, S&P 2581) nosedived yesterday, though they finished well off of their lows.  Volume was up; breadth negative.  Both of the Averages closed within very short term downtrends, below their 100 day moving averages (now resistance).  The S&P ended below its 200 day moving average; if it remains there through the close on Thursday, it will revert to resistance.  The Dow remained above its 200 day moving average.  The DJIA finished in a short term trading range but in intermediate and long term uptrends.  The S&P is in uptrends across all timeframes.  In short, the short term technical picture is getting even cloudier; but longer term, the assumption is that equity prices will continue to rise.
               
Update on margin debt (medium):

                The VIX rose 17 ¼ %, closing in a very short term uptrend, above its 100 and 200 day moving averages and the lower boundary of its short term trading range---suggesting volatility will stay with us. 

The long Treasury was off fractionally on big volume, pausing its strong month long bounce off the lower boundary of its long term uptrend.  It is below its 100 (but near) and 200 day moving averages and in very short term and intermediate term downtrends.  I remain confused by what the fundamentals are behind the recent strong uptrend.  Possible choices---either the economy is weakening (lower interest rates) or there is a negative event coming (safety trade) or, as a trader friend suggests, there is a huge short squeeze going on.

The dollar was down slightly (again), finishing below its 100 and 200 day moving averages and in an intermediate term downtrend.  UUP continues to trade in a very tight range, which is not usual when bonds are moving big directionally.

GLD was up 1 1/8 %, bouncing off the lower boundary of its short term uptrend and remains above its 100 and 200 day moving averages.  While only a one day performance, it is, at least, acting as it should as interest rates fall
               
Bottom line: the technicals of the equity market point higher for the long term.  Near term direction is in question.  But the Averages have plenty of support at lower levels, though the S&P is now challenging another one of those support levels.  Still it will take a lot more technical damage before I question whether or not this bull market is over. 

The pin action in TLT, UUP and GLD remains confusing.
           
            Update on valuation (medium):


    Fundamental

       Headlines

            Yesterday’s new flow didn’t make for good reading:

(1)   February construction spending, the March Markit manufacturing PMI and the March ISM manufacturing index were all below expectations,

(2)   the March Japanese industrial outlook and the March Chinese manufacturing PMI were lower than estimates,

(3)   the Chinese unveiled the list of product on which it will impose tariffs [these are the products that are incorporated under the $3 billion tariff previously announced],

(4)   Trump kept up the heat on Amazon, which is part of the latest adverse news trend on the FANG stocks that started last week with Facebook.

Bottom line: the chattering class is worried about a trade war; and to be sure, it could occur.  However, I think Trump showed his hand with the South Korean deal, meaning that I don’t believe a trade war is as big a risk as many do.  That is the good news.

One more problem for NAFTA negotiations (short):

On the other hand, the notions that (1) the US economy is smoking and (2) the Japanese and Chinese economies are improving, took a hit yesterday.  If the reported stats were one off numbers that wouldn’t be disturbing; but they are not.  The global economy is not as strong as the dreamweavers would have us believe. 

One of the biggest sources of Market strength in the last two years has been the high tech stocks.  As a group, they have grown in price (1) to the point that they account for a significant portion to the S&P index and (2) many are selling at nosebleed valuations.  We saw this same situation in 2000 and when investors got more reasonable about earnings multiples---well we all know what happened.  That doesn’t mean that is happening now or will occur tomorrow. But, if history is a guide, it will.

So it would appear that the Market is approaching a point at which the growth rate of corporate earnings in general may be about to be reevaluated at the same time as the Market leaders stock prices.
           
            I like my cash position.

            Possible paradigm shift in the ‘risk parity’ trade (medium):

    News on Stocks in Our Portfolios
 
AT&T (NYSE:T) declares $0.50/share quarterly dividend, in line with previous.    

Economics

   This Week’s Data

      US

            February construction spending rose 0.1% versus expectations of up 0.5%.

            The March Markit manufacturing PMI came in at 55.6 versus estimates of 55.7.

            The March ISM manufacturing index was reported at 59.3 versus forecasts of 60.

     International

            March Japanese outlook was 20.0 versus projections of 22.0.

            The March Chinese manufacturing PMI was 51.0 versus consensus of 51.7.

                The March EU manufacturing PMI came in at 56.6 versus expectations of 58.6; German and French manufacturing PMI’s were also disappointing.

    Other

            Must read article by Carmen Reinhart (Reinhart & Rogoff) on debt and economic growth (medium):

                Another great article; this one on trade misconceptions (medium):

            Latest from John Mauldin (medium):

            Update on auto loans (medium):

            First quarter ‘off the grid’ economic indicators (medium):

What I am reading today

            Saudi crown prince admits that Saudis financed terrorist groups (medium):

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