Thursday, June 28, 2018

The Morning Call---Art of the deal Chapter 3?


The Morning Call

6/28/18

The Market
         
    Technical

The Averages (DJIA 24117, S&P 2699) had another rough day on higher volume.  But breadth remained mixed---a bit unusual for a big down day.  The Dow finished below its 100 day moving average (now resistance) and the S&P closed right on its MA (now support).  The DJIA ended below its 200 day moving average (now support; if it remains there through the close on Monday, it will revert to resistance) while the S&P remains above its MA (now support).  The Dow is in a short term trading range, the S&P in a short term uptrend. 

                Stock buybacks continue (short):

                The VIX jumped 12 ½ %, closing above its 100 day moving average (now resistance; if it remains there through the close on Friday, it will revert to support), above its 200 day moving average for a third day (now resistance; if it remains through the close today, it will revert to support.  Remember it has see sawed above and below this MA over the last three weeks) and within a short term trading range.  It looks like it bottomed in early June. 

The long Treasury was up 1%, ending above its 100 day moving average, the lower boundary of its long term uptrend and now its 200 day moving average (now resistance; if it remains there through the close on Monday, it will revert to support) and remained in a short term downtrend.  It is clearly challenging the trading area bounded by the 100 DMA and the lower boundary of its long term uptrend and the 200 DMA and the upper boundary of its short term downtrend.

The dollar was up another ½ %, finishing above the lower boundary of its very short term uptrend, both moving averages and within a short term uptrend.

Gold was down another ½ %, ending below its 100 and 200 day moving averages and in a short term downtrend.
               
Bottom line: the pin action is getting even more sloppy.  Both indices are challenging support levels.  To be sure, the Dow is way ahead of the S&P in its down move; so before thinking about getting negative, the S&P needs to catch down.  Even if that occurs, the S&P still needs to successfully challenge its short term uptrend, before considering becoming a bear. 

Bonds and the dollar remain on the same page, if you view them as a safety trade.  Gold, which is normally a safety trade, continues to be just a lousy trade.

            Yesterday in charts (medium):

    Fundamental

       Headlines

            The economic releases yesterday were again negative: weekly mortgage and purchase applications, May durable goods/ex transportation (primary indicator) and May pending home sales were below forecasts while the May trade deficit was better than anticipated (that should help Q2 GDP).

            Trade again dominated the headlines; and the operative word was confusion.  After the overnight news that Trump was backing off trade pressures against China, the administration ran out five advisors each with a different perspective---not the least of which was Larry Kudlow, chief economic advisor, who said that Trump had not changed his tough stance on China trade.  By the time this show was over, I had no idea what these guys were thinking or doing---but maybe that is all part of the art of the deal. 

            To be clear, my position remains that (1) I agree with what Trump is professing to want to accomplish---re-setting the global trade paradigm and (2) if he is successful, it would a be plus for the economy, (3) but the reverse is also true. 

I also recognize that his negotiating strategy is disconcerting to all parties including those in the US; but if the premise is right (that the trading regime needs to change), then using the negotiating strategies that created the current inequities in the first place probably isn’t going to work.  So Trump is going about it in another way.  I personally am prepared to let him do it; if for no other reason that if he really screws up, congress and/or the electorate will ultimately overrule him.

In the meantime, as long as everyone thinks that the ‘art of the deal’ involves more bark than bite, no one, including our trading partners, are going to take his bark seriously.  In other words, for his strategy to work, there has to be a bite.  How hard that has to be in order to get attention is an unknown. 

Bottom line: almost nothing has happened yet; and even if all the threats that have been made actually take place, the volume of trade involved is extremely small.  In addition, we don’t have an inkling of how these negotiations are going to turn out.   So I repeat my earlier observation---I don’t see trade worries changing the direction of the Market.  Volatility yes; a bear market no
  
            However, if you want something to worry about: the level of consumer, corporate and government debt continues to grow, the emerging markets, including China, are starting to have dollar funding problems for their own stratospheric dollar denominated debt levels, the Fed is unwinding QE, the economy is not nearly as strong (in my opinion) as dreamweavers think and the yield curve is flattening---all of which seem lost on the media and those hyperventilating over trade.
           

Asset prices are divorced from economic reality (medium):

    News on Stocks in Our Portfolios
 
Paychex (NASDAQ:PAYX): Q4 EPS of $0.61 misses by $0.01.
Revenue of $871.1M (+9.1% Y/Y) beats by $2.14M.
           
Accenture (NYSE:ACN): Q3 EPS of $1.79 beats by $0.07.
Revenue of $10.31B (+16.2% Y/Y) beats by $270M.

Economics

   This Week’s Data

      US

            May pending home sales fell 0.5% versus estimates of +0.6%.

            Weekly jobless claims rose 9,000 versus forecasts of +2,000.

            The third estimate of first quarter GDP was showed growth of 2.0% versus consensus of up 2.2%; after tax profits increased 2.7% versus 2017 4Q’s reading of up 0.1%.

     International

    Other

            The Bank of Japan now owns 42% of all government bonds and is a top tem shareholder in 40% of Japanese companies.  Tell me this won’t end badly.  (medium and a must read):

What I am reading today

            How to retire without a nest egg (medium):

           

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