Tuesday, May 1, 2018

The Morning Call--Growth, interest rates and the unwinding of QE


The Morning Call

5/1/18

The Market
         
    Technical

The indices (DJIA 24165, S&P 2648) had another of those roller coaster days, yesterday opening up big then closing down big. Volume was up; breadth terrible.   Intraday, the S&P touched the upper boundary of its very short term downtrend and then fell back (though the Dow remained above the upper boundary of its former very short term downtrend).  That leaves the Averages out of sync with respect to this one indicator, meaning that there is little informational value on direction/momentum.  Both finished below their 100 day moving averages (now resistance) but 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. The short term technical picture remains cloudy.  Longer term, the assumption is that equity prices will continue to rise.
               
                The VIX rose 3 ½ %, but still ended below its 100 day moving average for a second day (if it remains there through the close today, it will revert to resistance).  It finished above its 200 day moving average and the lower boundary of its short term trading range.  Additional weakness would point to higher stock prices.
               
The long Treasury rallied for a third day, pushing further back above the lower boundary of its long term uptrend.  However, it remains below its 100 and 200 day moving averages and in a short term downtrend---indicating a lot of resistance to a further increase in prices (decline in rates). 


The dollar was up ½ %, remaining above the lower boundary of its newly reset intermediate term trading range, above its 100 day moving average (now support) and above its 200 day moving average for the third day (now resistance; if it remains there through the close today, it will revert to support).
               
GLD was pounded, falling below its 100 day moving average (now support; if it remains there through the close on Wednesday, it will revert to resistance), but finishing above its 200 day moving average (now support) and in a newly reset short term trading range.

Bottom line: as you know, I have been focused on the Averages’ pin action as they continue to bounce between the upper and lower boundaries of an ever shrinking range.  As I noted above, in yesterday’s trading, the S&P touched the upper boundary of its range and then reversed and headed back toward the lower boundary.   Sooner or later that range will be broken; history suggests a strong follow up move in the direction of the break. 

TLT investors appear to have backed off the thought of rising interest rates; although short rates continue to have an upward bias.  That explains the pin action in both the dollar and gold.  However, as I noted Saturday, the recent price action in all the indicators suggests a good deal of investor turmoil/confusion as multiple support/resistance levels are being challenged.

Price instability/uncertainty remains for the moment.  The question is duration.    Patience.  I love my cash.
                       
            Does ‘sell in May’ work (short):

    Fundamental

       Headlines

            Yesterday’s economic stats were mixed to negative.  The good news: the April Dallas Fed manufacturing index was strong.  The bad news: March pending home sales index and the April Chicago PMI were below forecasts.  The so/so news: March personal income was up less than expected, while personal spending was in line (consumers earning less but spending more).

            The early headlines covered several large mergers (Sprint/T Mobile; Marathon /Andeavor; J. Sainsbury/Asda)---something that always gets investors’ juices flowing.   Of course, I thought that corporations were going to spend their tax cut benefits on capital expenditures and new hiring.             

            Later in the day, Israeli PM Netanyahu disclosed ‘alleged’ secret files on the Iranian nuclear program, suggesting that they have been pushing full steam ahead developing nuclear warheads despite the treaty.  This is not apt lead to more stability in the Middle East.  (medium):

            Meanwhile in the background, the FOMC starts its May meeting today.  So we may have headlines tomorrow related to the substance and tone of the following statement tomorrow.

            ***overnight, Trump delayed the imposition of steel and aluminum tariffs on Canada, the EU and Mexico.

Bottom line: investors remain unimpressed by a very positive first quarter earnings season.  What seems to have their attention is the uncertainty around economic growth, Fed policy and interest rates.  About time, dare I say?  Of course, trade (China) and Iran are in the mix.  But ultimately, I believe that it will be growth, interest rates and the unwinding of QE that determines the value of assets.
           
            A warning from Goldman (short):

            How to trade the end of the biggest monetary experiment in history (medium):

            Bull markets do die of old age (medium):

    News on Stocks in Our Portfolios
 
Boeing (NYSE:BA) declares $1.71/share quarterly dividend, in line with previous.

United Technologies (NYSE:UTX) declares $0.70/share quarterly dividend, in line with previous.

McDonald's (NYSE:MCD): Q1 EPS of $1.79 beats by $0.12.
Revenue of $5.14B (-9.5% Y/Y) beats by $170M.

Cummins (NYSE:CMI): Q1 EPS of $3.30 (excl discreet tax charges and cost of a product campaign) beats by $0.38.
Revenue of $5.6B (+22.0% Y/Y) beats by $420M.

Emerson Electric (NYSE:EMR): Q1 EPS of $0.76 beats by $0.04.
Revenue of $4.25B (+19.0% Y/Y) beats by $40M.


Accenture (NYSE:ACNwill acquire Certus Solutions, a UK-based provider of Oracle Cloud implantation services. Terms not disclosed.
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Economics

   This Week’s Data

      US

            The April Chicago PMI was reported at 57.6 versus expectations of 57.8.

            March pending home sales rose 0.4% versus estimates of up 1.0%.

            The April Dallas Fed manufacturing index came in at 21.8 versus forecasts of 18.0.

     International

    Other

            Six charts on the economy (short):

            Rising rates puts pressure on the Fed (medium):

            So does the escalating Treasury financings (medium):

            April regional Fed manufacturing overview (medium):


What I am reading today

            Is book value irrelevant? (medium):

            Volatility in private investment funds (medium):

            Three steps to avoid running out of retirement funds (medium):
           
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