Friday, May 11, 2018

The Morning Call--The goldilocks scenario re-emerges


The Morning Call

5/11/18

The Market
         
    Technical

The indices (DJIA 24739, S&P 2737) had another good day. Breadth continued to improve but volume was down.   The most important thing was that the S&P confirmed its successful challenge of the four month long very short term downtrend and with a continuation of energy that I had anticipated.  It also ended above its 100 day moving average (now resistance; if it remains there through the close on Monday, it will revert to support).

The Dow remained below its 100 day moving averages (now resistance).  Both finished above their 200 day moving averages (now support).  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.  Both still need to push through their 100 day moving average before we can focus on the former all-time highs as the next resistance level; but that process has already begun.   Longer term, the assumption is that equity prices will continue to rise.

                The VIX was down, ending below its 100 day moving average as well as its 200 day moving average for the second day (now support; but if it remains there through the close on Monday, it will revert to resistance).  It also finished below the lower boundary of its short term trading range; if it remains there through the close on Monday, it will reset to a downtrend.  Clearly, the VIX is trading in line with a surging Market.

The long Treasury was up, bouncing off the lower boundary to its long term uptrend for the third time.   Multiple challenges are usually needed to break long term trends.  So, I don’t think that this unsuccessful attempt means that momentum is shifting to the upside.  On the other hand, I don’t mean to imply that a successful challenge will occur.  TLT is still facing serious overhead resistance from its 100 and 200 day moving averages and the upper boundary of a short term downtrend.

The dollar declined, but remained close to the upper boundary of its newly reset intermediate term trading range and above its 100 and 200 day moving averages (now support).
               
GLD rallied ½ %, finishing above its 200 day moving average (now support) and in a newly reset short term trading range.  In addition, it is approaching its 100 day moving average (now resistance).
               
Bottom line: the four and a half month long pennant formation has been voided to the upside.  Historically, that suggests further momentum higher.  Adding support to that notion, the S&P is now challenging its 100 day moving average; and it seems likely that this resistance level will also be surmounted.  I am now looking at its former highs (~26656/2871) as the next stopping point.

The other indicators that I follow aren’t breaking resistance (support) levels.  TLT backed off the lower boundary of its long term uptrend, the dollar felled back from the upper boundary of its intermediate term trading range. 

That continues to point to a narrative that includes an improving economy but with little inflationary pressure.  Goldilocks.
           
    Fundamental

       Headlines

            Yesterday’s economic data was upbeat: weekly jobless claims were better than expected.  April CPI was lower than estimates; and overseas, the April Chinese inflation numbers were equally encouraging.

            Certainly, the inflation stats are a positive especially when they are occurring among the dominant global economies.  It is good news for consumers; it is good news for the Fed, in that it lessens the pressure to tighten; and it is good news for investors as it confirms the growth without inflation narrative that seems to have taken over Market psychology.

            On a near term basis I don’t really have a problem with that narrative except as a matter of degree, i.e. I don’t believe that the economy is growing at the rate currently being assumed by investors.  As you know, I am not nor have not been saying that the economy isn’t growing.  It is just not growing at the rate most want it to.  I have spent the last year plus recording the almost continuous shortfall in the data versus what has been expected.  If you look at Street expectations on a given date, the subsequent numbers have not met estimates.  And this has happened time and time again. 

Just as important, I don’t see any reason why that will change based primarily on the notion that the national debt and current deficit are so onerous that the servicing costs will consume any funds that might otherwise be used to finance economic growth.  At some point, either the dreamweavers are going to have to be right or get real.  I just don’t know when that happens.

The other problem is the impact that disposition of $4 trillion sitting on the Fed’s balance will have on the Markets---notice I said Markets, not the economy.  As you know, my operating monetary policy thesis for the last five years has been that as the Fed unwinds QE, it will unwind the mispricing and misallocation of assets that were primary results of QE (not economic growth).

An update on the NY Fed’s inflation gauge (medium):


Bottom line: the economy is not progressing and will not progress at the rate the Street is currently forecasting.  Inflation may be dormant; but there is a reason for that---no economic pressure.  If the Fed continues to unwind QE at the current pace, it is going to cause heartburn first in the fixed income Market that will then spread to other asset classes.  If it slows the unwind of QE, it will likely be because it wakes up to the fact that its Keynesian model doesn’t work and the economy really isn’t as strong as it thinks.
      
            This an example of the kind of fuzzy, self-aggrandizing logic from a republican congressman that is typical of DC.  In it, he touts the fiscal responsibility of the GOP, not mentioning the $1.2 trillion deficit spending bill that he and his colleagues recently enacted and lavishes praise on the same group of clowns for proposing the rescission of $15 billion in spending which in mathematical terms is a wart on a goat’s ass in dealing with the debt and deficit problems.

                        Unicorns exist only when money is free (medium):

    News on Stocks in Our Portfolios
 
C.H. Robinson Worldwide (NASDAQ:CHRW) declares $0.46/share quarterly dividend, in line with previous.

Kimberly-Clark (NYSE:KMB)  $1.00/share quarterly dividend, in line with previous.

Nike (NYSE:NKE) declares $0.20/share quarterly dividend, in line with previous.

United Parcel Service (NYSE:UPS) declares $0.91/share quarterly dividend, in line with previous.

Economics

   This Week’s Data

      US

            April US import prices rose 0.3% versus estimates of +0.5%; export prices increased 0.6% versus forecasts of +0.3%.  The strong dollar undoubtedly influenced these numbers.

     International

    Other

            US business cycle chart book (medium):

            The US is not at full employment (medium):

What I am reading today

           

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