Thursday, June 14, 2018

The Morning Call--Lots to digest today


The Morning Call

6/14/18

The Market
         
    Technical

After trading on a flat line for most of the day, the Averages (DJIA 25201, S&P 2775) closed down.  Volume rose; breadth deteriorated---which is not surprising given its overbought condition.   Both finished above their 100 and 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 4 ¾ %.  It still ended below its 100 and 200 day moving averages (now resistance) but above the upper boundary of its short term downtrend (if it remains there through the close on Friday, it will reset to a trading range). 

The long Treasury declined.  It finished above its 100 day moving average and the lower boundary of its long term uptrend; but it is below its 200 day moving average, in a short term downtrend and continues to develop a very short term downtrend.  So current momentum is the downside (higher yields).

The dollar fell slightly, closing well above both moving averages and in a short term uptrend.

GLD rose ¼ %.  It remained below its 100 and 200 day moving averages but in a short term trading range.
               
Bottom line:  the indicators turned in a mixed as well as confusing performance yesterday.  Given the more hawkish FOMC statement, I can understand weakness in the bond market.  But part of that statement was the economy is improving which would suggest higher equity prices, a strong dollar and weaker gold---none of which happened.  Of course, there is always a lot of trading noise in any given day’s pin action.  Plus as I noted previously, the stock market was overbought on a technical basis.  So follow through should clarify the confusion.  I see no reason to question the assumption that the indices are headed for their all-time highs (26656/2874).

    Fundamental

       Headlines

            Yesterday’s economic stats were negative: weekly mortgage and purchase applications were down and May PPI was hotter than expected.   As I pointed out yesterday, changes in PPI historically tend to anticipate changes in CPI which (1) is not good for most of us and (2) is an indicator that the Fed uses to judge the pace of tightening.

            And speaking of the Fed, yesterday’s headline news was the completion of the FOMC meeting and the subsequent narrative in its official statement and news conference.  Bottom line: it raised the Fed Funds rate another ¼ %, pointed to two more rate hikes this year and stated that its QE unwind continued---a slightly more hawkish tone than had been anticipated.  This is a great summary of the high points and includes the dot plot as well as the red line version of the official statement (medium):

            Of course, the Fed continues to misread the economic data both here and abroad (short):

            The yield curve flattened (short):

            And emerging markets got whacked---higher rates and strong dollar are not good for them (medium):

***overnight, the ECB (1) left rates unchanged and said that it would keep them there at least through the summer of 2019 and (2) it would scale back its bond purchase program in September 2018 and end it in December 2018 but will continue to reinvest the proceeds from maturing securities.

            Markets interpreted this dovishly based on the delay in raising rates.  However, I think the more important item was the unwind of EU QE because it will join the US in shrinking the level of massive global liquidity which drove whole mispricing and misallocation of assets.

            The ECB also lowered its GDP forecast for 2018.

            Meanwhile, the Bank of China unexpectedly did not raise rate apparently out of concerns about slowing economic growth.

            However, the Fed meeting didn’t entirely push debate on the consequences of the G7 and Singapore meetings off the front page.

            Trump’s creative destruction of the world order (medium):

            Why the G7 is a zero (medium):
                 
            Trump reportedly ready to slap additional tariffs on China (medium):

            Five takeaways from the Singapore summit (medium):

Bottom line: the Fed was more hawkish than anticipated.  As you might expect, I think that is good news in the sense that it moves monetary policy further along the path of unwinding QE.  But as you also know, while I don’t see this as a negative to the economy, I believe that it will ultimately be painful for the Markets as the mispricing and misallocation of assets corrects.  To be sure, many believe that the Fed will back off its rate rises if the Markets become unsettled.  And it may; indeed, it has given every sign that it would.  But it doesn’t control long rates.  If those rates rise because of the increasing supply and decreasing quality of fixed income paper being generated by mounting debts worldwide, there is nothing the Fed can do to stop the repricing of risk.  In short, it has once again waited too long to normalize monetary policy.

    News on Stocks in Our Portfolios
 
Caterpillar (NYSE:CAT) declares $0.86/share quarterly dividend, up 10.2% from $0.78/share previously.
           
United Technologies (NYSE:UTX) declares $0.70/share quarterly dividend, in line with previous.

Microsoft (NASDAQ:MSFT) declares $0.42/share quarterly dividend, in line with previous.

Economics

   This Week’s Data

      US

            May retail sales jumped 0.8% versus expectations of up 0.4%; ex autos, they were up 0.9% versus estimates of up 0.5%.

            Weekly unemployment claims were down 4,000 versus forecasts of up 3,000.

                May import prices rose 0.6% versus consensus of up 0.5%; export prices were up 0.6% versus estimates of up 0.3%.

     International

            May Chinese industrial output rose 6.8% versus forecasts of up 6.1%, fixed asset investment was up 6.1% versus expectations of up 7.0% and retail sales were up 8.5% versus estimates of up 9.6%.

    Other

            My favorite optimist on the Fed (medium):

What I am reading today

            Why humility is such a virtue (medium):

            The Iranian deal was only going to get worse (medium):

            Update on bitcoin problems (medium):

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