Friday, April 13, 2018

The Morning Call--The most widely anticipated earnings season in a long time


The Morning Call

4/13/18

The Market
         
    Technical

The indices (DJIA 24483, S&P 2663) had a good day. Volume was up (again breaking the pattern of high volume on down days, lighter volume on up days); breadth was positive.  Both of the Averages still closed within very short term downtrends (having made a fourth lower high on Tuesday) 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 8 ½ %, 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 fell ¾ %, reversing Wednesday spike.  It 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.

            What worries this bond manager (medium and a must read):

The dollar was up ¼ % on heavy volume, 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 down 1 %, like bonds, reversing much of Wednesday’s move up.  It closed above the lower boundary of its short term uptrend and its 100 and 200 day moving averages. 
               
Bottom line: near term the direction of equity prices is in question.  As I noted yesterday, the indices are starting to get squeezed between their very short term downtrends and their 200 day moving averages---which they have already unsuccessfully challenged four times.  

History suggests that a break out of this narrowing pennant like formation will set the course of the Market in the direction of the break.  If it is to the upside then it would support the assumption that the stock prices remain in a long term uptrend.  If to the downside then it would weaken the bull case and set up a decline to the lower boundaries of the DJIA’s short term trading range and the S&P’s short term uptrend.  That said, the Averages have plenty of support at lower levels. 

The price movements yesterday in TLT, UUP and GLD suggested a stronger economy and higher interest rates.

            An historical perspective of Market corrections (medium):

    Fundamental

       Headlines

            Yesterday’s economic data was mixed: weekly jobless claims fell less than expected; March import prices were flat while export prices were in line; and March retail chain store sales were slightly better than anticipated.

            The trade news was mixed.  The day started with a statement from the Chinese saying that premier Xi’s recent supposedly conciliatory speech was nothing of the sort (bad news).  Then later in the day, the White House (1) said that Chinese trade talks were going well and (2) announced that it was reviewing its decision to have withdrawn from the Trans Pacific Partnership.  So Trump’s continues his unpredictable behavior in what I assume is an effort to shake up trade deals all around the world in order to improve the US competitive position---which seems to be a worthy objective.  True his tactics are certainly not what most of us consider mainstream, but the initial results have been positive.  I am not suggesting that we are all going to live happily ever after.  But as you know, I have never believed that the trade concerns were as big as did the Market and that Trump’s ‘art of the deal’ negotiating style would ultimately prove positive.

            The news out of Syria seemed to lose some steam as Trump back off of his ‘missile attack soon’ statement.  I have no idea what that means.  Hopefully, it is a sign that our leaders realize that Syria has little value to the US.  Of course, as long as Russia and the US are trying to prove who has the bigger cojones, an existential risk remains.

            Another view of the situation in Syria (medium):
   
            Finally, yesterday started first quarter earnings season.  To say that it is one of the most anticipated and publicized earnings season for a long time is an understatement.  For the last three months, pundit after pundit has opined that this will be one of the best ever---primarily the result of the tax cut.  So the Market narrative is that stocks will almost assuredly perform well over the reporting period.  However,

(1)   remember this is a one-time increase in operating earnings resulting from a one-time non-operating cause.  So all that has occurred is profits have shifted to a new level; but it says nothing of the future growth rate of earnings.  To be sure, analysts are assuring investors that the new capital will be put to uses that will accelerate earnings.   Sort of like they did with the repatriated billions from overseas.  So far that isn’t showing up in the numbers.  Maybe it will; but maybe we should wait and see,

(2)   if the aforementioned one-time increase in earnings hasn’t already been discounted by now, then I am in the wrong business,

(3)   what will likely be important about this earnings season is the forward guidance of EPS.  That could have an impact on stock prices because there is more uncertainty related to this factor than the happy talk about the numbers that will be reported.

Bottom line: the trade news seems to be improving (which it should and longer term could be a plus for the economy) and the Syrian situation has calmed at least a little.  Barring some bad news from the latter, earnings seems to be foremost in investors’ minds.  But as I suggest above, I am not sure their impact will be that significant on stock prices.

The important factors to me remain the performance of the economy (which is currently not that great), the direction of inflation (which has shown few signs of getting out of control, yet) and Fed policy (which is tightening).  That combo, historically, has not been great for stocks.

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

            The growth rate of dividends since 2000 (short):

    News on Stocks in Our Portfolios
 
           

Economics

   This Week’s Data

      US

            March retail chain store sales were slightly higher than anticipated.

     International

            China posts first trade deficit in over a year.


    Other

            US budget deficit hits $600 billion in first six months of FY2018 (medium and a must read):


            More on consumer inflation (short):

            And on business inflation (short):

            JP Morgan credit card charge off surge in first quarter (medium and a must read):

            Three more things to worry about (medium):

What I am reading today

            (Disappointing) fact of the day (short):

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