Wednesday, April 11, 2018

The Morning Call--Is China a done deal?


The Morning Call

4/11/18

The Market
         
    Technical

The indices (DJIA 24407, S&P 2656) spiked yesterday. Volume was down (continuing the pattern of high volume on down days, lighter volume on up days); breadth was positive.  However, both of the Averages still closed within very short term downtrends and below their 100 day moving averages (now resistance).  They both remain 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. The short term technical picture remains cloudy; but longer term, the assumption is that equity prices will continue to rise.

                The VIX was down 6 ¼ %  (unusually tame on a 400+ point Dow  up day), but still ended in a very short term uptrend, above its 100 and 200 day moving averages and the lower boundary of its short term trading range---reflecting the obvious fact that volatility hasn’t gone away. 

The long Treasury declined, but remained within its strong month long bounce (very short term uptrend) off the lower boundary of its long term uptrend.   On the other hand, it continues to trade below its 100 and 200 day moving averages and in a short term downtrend.  So its pin action is roughly the reverse of stocks---it is in a short term uptrend but longer term it is in a downtrend.

The dollar was also down, 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 again, closing above the lower boundary of its short term uptrend and its 100 and 200 day moving averages.  

Bottom line: the technicals of the equity market point higher for the long term.  Near term direction is in question; and yesterday’s pin action did little alter that assessment.  That said, the Averages have plenty of support at lower levels.    It will take a lot more technical damage before I question whether or not this bull market is over.  

The price movements in TLT, UUP and GLD continue to the trade in their normal correlation but did little to reflect yesterday’s equity euphoria.
           
    Fundamental

       Headlines

            Yesterday’s economic data was negative: the March small business optimism index and month to date retail sales were disappointing; March PPI was hotter than anticipated; and February wholesale inventories/sales were slightly less than expected. 

The important stat is the PPI, in that the nightmare economic scenario is the economy slowing and inflation rising---forcing a tightening by the Fed.  To be clear, that is not a prediction; at the moment, it is an observation.  But the first half of the above equation (slowing economy) appears to be occurring.  It will take more evidence of increasing inflationary pressures to generate a real threat.

The primary headline was the overnight speech by Chinese premier Xi which indicated that the Chinese were willing to make substantial concessions to avoid a trade war.  He didn’t address the pirating of US intellectual property which is the most egregious of the many Chinese violations of free trade.  As a result, the trade talks occurring between the US and China broke off on that very point.  I covered all of this yesterday to links detailing Xi’s speech and the suspension of trade talks.  So no need to be repetitious.

The point of reiterating the sequence of events is that the Market went nuts over Xi’s speech (words) and ignored the trade talks (actions).  That makes no sense to me unless there were other reasons for investor euphoria; and I didn’t see any of that.

            Was there any substance in Xi’s speech? (short):

            Bottom line: the economic numbers continue to disappoint; inflation may be moving higher; while Xi’s speech sounded conciliatory, remember these guys lie---consistently.  Even if a trade deal were to be struck with China (which, to be sure, would be a big plus), the economic impact is not enough to alter the gross mispricing of assets.

            ***overnight, US/Russia confrontation in Syria is on the front burner (short):
            https://www.zerohedge.com/news/2018-04-11/futures-rebound-after-trump-reverses-tweets-russia-needs-us-help-their-economy

            Speaking of valuations, I haven’t linked to any of John Hussman’s work lately because his theme is unchanging.  But as a reminder, here is his latest.  As usual it is a bit long.

            I continue to like how my portfolios are structured---half equities, half cash.

    News on Stocks in Our Portfolios
 
           

Economics

   This Week’s Data

      US

            Month to date retail chain store sales grow dropped dramatically from the prior week.

            February wholesale inventories advanced 1.0% versus expectations of up 1.1%; wholesale sales were also up 1.0%.

            Weekly mortgage applications fell 1.9% while purchase applications were down 2.0%.

            March CPI was down 0.1% versus estimates of being unchanged; ex food and energy, it was up 0.2%, in line

     International

            March Chinese PPI and CPI were below estimates.

            Global PMI plunges to a sixteen month low.

    Other

            Why trillion dollar deficits are a problem (medium):

            And why entitlements are only part of the problem (medium):

            New Fed head on the economy and monetary policy (medium):

            Fed vice-chairman on the slowing of long term economic growth (short):

            Soybeans and Chinese tariffs (short):

            A dive into post office economics and how they relate to Amazon (medium):

What I am reading today

            New discovery regarding global warming (medium):
           
            Imagination is more important than science (medium):

            Managing risk is not the same as taking less risk (short):

            Why bitcoin will never be a dominant form of money (medium):

            Reasons behind FBI raid on Trump’s lawyer’s office (medium):

            Iran threatens to restart nuclear enrichment efforts (medium):

                Massive geomagnetic storm to hit the earth this week (medium):

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