Wednesday, June 20, 2018

The Morning Call---Global chess match or Minnie Mouse Candy Land?


The Morning Call

6/20/18

The Market
         
    Technical

The Averages (DJIA 24700, S&P 2762) did a repeat of Monday, trading down big early, then spending the rest of the day trying to recover---which they did partially.  Volume was up; breadth improved.  The Dow finished right on its 100 day moving average while the S&P remained above (now support).  Both ended above their 200 day moving averages (now support).  The Dow is in a short term trading range, the S&P in a short term uptrend.  Longer term, the assumption is that stocks are moving higher.
               
                The VIX was up 8 ½ %, but still closed below its 100 and 200 day moving averages (now resistance).  However, it finished above the upper boundary of its short term downtrend for a second day; if it remains there through the close today, it will reset to a trading range (which would the second time in June)---suggesting that it is trying to find a bottom. 

The long Treasury was up ½ %, closing above its 100 day moving average and the lower boundary of its long term uptrend but below its 200 day moving average (though it is close to challenging it) and in a short term downtrend.  The turmoil in trade continues to drive investors to it as a safety trade.  

            Counterpoint:

The dollar was up ¼%, ending well above both moving averages and in a short term uptrend.  It has also reestablished a very short term uptrend.  Like TLT, it seems to be currently acting as a safety trade.

On the other hand, GLD, which has long been a safety trade, can’t get out of its own way.  Traditionally, it rises when interest rates decline (it hasn’t) but does fall when the dollar is strong.  So my confusion. Yesterday it was down (again) ending below its 100 and 200 day moving averages and has reset its short term trend to down.
               
Bottom line: trade worries continue to plague the Markets.  However, to date no major technical damage has been done to stocks.  Indeed, both indices remain in very short term uptrends.  So at this point, there is no reason to be concerned about the Market direction.  Of course, the tariff back and forth’s with China don’t seem like they are going to end any time soon; so the pin action could worsen.  On the other hand, a couple of conciliatory comments from either side could trigger a moonshot. 

To the contrary, bonds, the dollar and gold are being much more impacted.  I am not sure why the difference; though the temptation is to postulate that equity investors are tip toeing through the tulips.  But until they stop doing so, the assumption remains that stock prices are going higher.

            Emerging market contagion goes global (medium):

    Fundamental

       Headlines

            Yesterday’s economic data was somewhat negative: month to date retail chain store sales improved, May housing starts very much better than anticipated however, building permits were much worse.

            Trade remains the foremost factor in virtually every global market. The prime determining factor is Trump. I have made clear that I like what he is trying to accomplish; and if he is successful, it will improve the long term secular growth rate of the US economy.  The unknowns are (1) how long will it take our trading partners to recognize and accept [if at all] that a new political/trade paradigm is being formed and (2) the ultimate impact of Trump’s unpredictability and his inclination to exacerbate a disagreement by his cheap sh*t comments. 

I can’t believe that I am actually linking to a NY Times article; but here is an op ed on Trump trade policies (medium):

There are two alternative scenarios (1) I am wrong, that what is occurring is not a giant global chess game but the equivalent of my granddaughter’s Minnie Mouse Candy Land; and that after a brief period of bluster, Trump will eke out a couple of concessions from China (EU, NAFTA), declare victory and go on to find another cause for which he can make dramatic tweets and insult the opponents. (2) I am right, the Market agrees with me and is willing to look through the uncertainty.
           
Bottom line: I have no idea how long this prize fight can go on.  The good news is that all tariff action already taken will take some time to go into effect; so there is time to reach some an accommodative solution.  The bad news is that we are in chartered territory and we have no real idea how serious Trump is or how painful the renegotiation process can become. 

So far, at least, equity investors have remained reasonably sanguine about the outcome.  But if the process gets prolonged, then earnings estimates are going to start coming down and that usually is not a plus for stock prices.  It sure makes sense to me to have cash in one’s portfolio; and this is an excellent time to be raising it while prices are still in an uptrend.


           

           
           

    News on Stocks in Our Portfolios
 
Oracle (NYSE:ORCL): Q4 EPS of $0.99 beats by $0.05.
Revenue of $11.25B (+2.8% Y/Y) beats by $60M.

Oracle (NYSE:ORCL) declares $0.19/share quarterly dividend, in line with previous.

Economics

   This Week’s Data

      US

            Month to date retail chain store sales grew faster than in the prior week.

            Weekly mortgage applications rose 5.1% while purchase applications were up 4.0%.

            The first quarter trade deficit was $124.1 billion versus estimates of $129.3 billion.

     International

    Other

            Banking troubles in the eurozone (medium):

What I am reading today

            Why boring municipal bonds are exciting investors (medium):
            
            Social security myths (medium):

            More on unfunded pension liabilities (medium):


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