Wednesday, August 29, 2018

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Friday, August 17, 2018

The Morning Call--Pardon my cynicism


The Morning Call

8/17/18

I am off to California for an extended Labor Day holiday. I will be back on September 4th. 

The Market
         
    Technical

As you know, I have assumed that the indices would close the gap down opening from last Friday; but not quite as dramatically as they did yesterday.  The Averages (DJIA 25558, S&P 2840) rallied hard presumably on news that the US/China trade negotiations would resume soon.  Volume was up.  Breadth improved though not as much as I would have thought; plus the flow of funds was flat. The indices remain strong technically; though closing that gap as they did, I wonder if there is much upside left short term. 

In addition, while the VIX sold off and negated Wednesday’s upside break of its 200 DMA, it didn’t sell off as much as I think normal for such a powerful up day in the indices.  Finally, the Dow’s 100 DMA continues to sit right on its 200 DMA.  A cross to the downside would be a negative signal. 

Evaluating market breadth (medium):

All that said, I believe that the Averages will challenge their all-time highs,


TLT’s battle with its long term uptrend’s lower boundary remains on hold as it has become a safety trade while investors try to digest the turmoil in the currency markets.  The question remains, is the Turkish/emerging markets crisis a short term problem (and the Market’s focus will return to the earlier dispute over the long term direction of interest rates) or is it a sign of more dollar funding problems for the global banking system (in which case it will remain a safety trade)? 

As witness to the concern over the dollar funding problem, the upcoming China/US trade negotiations, which got the equity boys all hot and bothered, did little to impress the bond market.  TLT continues to advance (though it was off one cent on the day) and is now above its 200 DMA for the second day (now resistance; if it remains there through the close next Monday, it will revert to support).  The pennant formation marked by the declining upper boundary of its short term downtrend and the lower boundary of its long term uptrend continues to narrow; TLT is nearing the top of that range. This story isn’t over.  Stay tuned.
                       
          The dollar was down two cents but remains very strong, likely reflecting its function as a safety trade---and like TLT was totally unmoved by the China news.  GLD continues to get hammered---I have to wonder if this is the result of those countries with dollar funding problems selling their gold reserves to raise money to defend their currencies.
               
            Bottom line: trade moved the Market yesterday; but as I read the news release, I am not sure it is worth 400 Dow points.  In the meantime, the currency problems in Turkey/emerging markets aren’t going away, at least as far as TLT and UUP are concerned.  This remains a very fluid situation whose outcome is highly uncertain.  To be clear, it could go either way.  But until there is some clarity, most of the indicators that I follow will likely continue to be effected by the need for safety.    

            Yesterday in the charts.

    Fundamental

       Headlines

            Yesterday’s stats were pretty dismal: July housing starts/permits were quite disappointing and the August Philadelphia Fed manufacturing index was half of expectations.  The bright spot was slightly better than anticipated weekly jobless claims.

            Overseas, the data was mixed: July UK retail sales were better than forecast while July Japanese exports declined dramatically.

            The six inch headline of the day was the scheduled restart of US/Chinese trade talks which investors apparently were thrilled with.  To be sure, the whole object of Trump’s strategy is to revise the current trade regime with China, so this is clearly good news.  That said, the Chinese are sending low level officials so the best we can likely hope for is an agreement to talk at a higher level.  So nothing concrete is going to occur near term.  And forgive my cynicism, but the Chinese are having major currency and capital flow problems all tied to the dollar and what better way to take the heat off than make nice with trade.

            In the meantime, Turkey’s lira continues to fall (medium):

            Turkey can’t sidestep the IMF for long (medium):
      
            Mohamed El Erian is not impressed with Turkeys’ move to support the lira (medium):

            Don’t forget Italy’s problems (medium):

            Bottom line: nothing would make me happier than to cut a trade deal with China; but I just can’t believe that the Chinese will make any concessions at least until the November elections are over.  So I think that investors may have gotten ahead of themselves yesterday. 

In the meanwhile, the Fed is tightening, so the dollar funding problems in the emerging markets are not going away.  Whether they become more widespread is the issue.  And I don’t know the answer; although for the moment, the problem seems contained.

            This isn’t over yet (medium):

            S&P 2018 earnings estimate (short):

            Is the Fed model a good valuation tool? (medium):

    News on Stocks in Our Portfolios
 
Tiffany (NYSE:TIF) declares $0.55/share quarterly dividend, in line with previous.
Home Depot (NYSE:HD) declares $1.03/share quarterly dividend, in line with previous.

Economics

   This Week’s Data

      US

     International

July EU CPI was in line.

    Other

            The Fed remains on track to raise rates in September (medium):

            Update on big four economic indicators (medium):

            China’s problems could be worse than Turkey’s (medium):

What I am reading today

            The public pension clock (medium):

            Taking more risk does not guarantee more reward (medium and a must read):

            Quote of the day (short):

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Thursday, August 16, 2018

The Morning Call--Will trade talks solve the currency problem?


The Morning Call

8/16/18

The Market
         
    Technical

The Averages (DJIA 25162, S&P 2918) faded again yesterday as currency issues returned to center stage.  Volume was up; breadth deteriorated.  Nevertheless, they remain strong technically; and as I noted previously, last Friday’s gap down will almost surely be closed.  On the other hand, the VIX spiked back above its 200 DMA (now resistance; if it remains there through the close next Monday, it will revert to support) and  the Dow’s 100 DMA continues to sit right on its 200 DMA.  A cross to the downside would be a negative signal. 

TLT’s battle with its long term uptrend’s lower boundary remains on hold as it has become a safety trade while investors try to digest the turmoil in the currency markets.  The question remains, is the Turkish/emerging markets crisis a short term problem (and the Market’s focus will return to the earlier dispute over the long term direction of interest rates) or is it a sign of more dollar funding problems for the global banking system (in which case it will remain a safety trade)?  In the meantime, TLT continues to advance and is now above its 200 DMA (now resistance; if it remains there through the close next Monday, it will revert to support).  The gap (pennant formation) between the declining upper boundary of its short term downtrend and the lower boundary of its long term uptrend continues to narrow; TLT is nearing the top of that range. But this story isn’t over.  Stay tuned.
                       
          The dollar was unchanged but remains very strong, likely reflecting its function as a safety trade.  GLD continues to get hammered---I have to wonder if this is the result of those countries with dollar funding problems selling their gold reserves to raise money to defend their currencies.

            Bottom line: currency problems in Turkey/emerging markets returned to center stage.  This remains a very fluid situation whose outcome is highly uncertain.  To be clear, it could go either way.  But until there is some clarity, most of the indicators that I follow will likely continue to be effected by the need for safety.   On a shorter term basis, the downside gap in the Averages will likely be closed.
                 
             Yesterday in the charts.

    Fundamental

       Headlines

            Yesterday’s economic data was a bit confusing largely because the two primary indicators included major revisions: (1) July industrial production was lower than anticipated, but the June number was revised up, (2) July retail sales were quite strong, but June’s reading was revised down.  In addition, Q2 nonfarm productivity rose while capacity utilization fell significantly but the first quarter figure was revised equally so; and June business inventories were up slightly but sales were up much more.  The remaining datapoints were mixed: weekly mortgage/purchase applications declined, the July housing market index decreased while the August NY Fed manufacturing index was better than estimates.  In other words, a lot of information, some of it somewhat confusing but none of it pointing to an accelerating economy.

            As I noted above, Turkey/emerging markets currency problems returned as the center of investor attention.  As of the close, the news isn’t getting any better

            Turkey’s economy on a collision course with reality (medium):

                Turkey has more than a currency problem (medium):

                Hong Kong has a problem (medium):

                 Contagion spreads (short):

                ***overnight, China announced that trade talks with the US would resume.  Plus it barred banks from lending yuan offshore.  The two moves brought relief to the yuan,
                   
                 Bottom line: the issue remains as to whether or not the current dollar funding shortage is or soon will spread beyond a couple of small, poorly run countries.  I am not smart enough to know the answer.  But this is a potential problem that I have been focusing on for months; and it will probably only get worse, the tighter monetary policy becomes.  That said, it is way too soon to think ‘major crisis/major sell off’.

            Second quarter corporate results (medium and a must read):

            Counterpoint (also a must read):

    News on Stocks in Our Portfolios
 
           

Economics

   This Week’s Data

      US

            July industrial production was up 0.1% versus expectations of up 0.3%; however, June was revised from up 0.6% to +1.0%.

            June business inventories were up 0.1%, in line; but sales were up 0.3%.

            The August housing market index came in at 67 versus consensus of 68.

                        July housing starts were up 0.8% versus estimates of up 7.0%; building permits were up 1.0% versus forecasts of up 2.6%.

            Weekly jobless claims declined 2,000 versus projections of up 3,000.

            The Philadelphia Fed manufacturing index was 11.9 versus an anticipated 22.5.

     International

    Other

            Freight costs are on the rise (short):

            China has serious trade cards (medium):
                
            China not happy with new US defense budget (medium):

               Reflections on the small business optimism index (medium):

           How close is QE4? (medium):

What I am reading today

           

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Wednesday, August 15, 2018

The Morning Call---Getting jiggy with retail sales


The Morning Call

8/15/18

The Market
         
    Technical

The Averages (DJIA 25299, S&P 2839) got a bounce yesterday, though volume was flat and breadth just barely improved.  Nevertheless, they remain strong technically; and as I noted previously, last Friday’s gap down will almost surely be closed.  Another mildly positive sign is the retreat of the VIX which fell back below its 200 day moving average, negating Monday’s break.  On the other hand, the Dow’s 100 DMA continues to sit right on its 200 DMA.  A cross to the downside would be a negative signal. 

And this on the VIX.


TLT’s battle with its long term uptrend’s lower boundary remains on hold as it has become a safety trade while investors try to digest the turmoil in the currency markets.  The question remains, is the Turkish (emerging markets; see below) crisis a short term problem (and the Market’s focus will return to the earlier dispute over the long term direction of interest rates) or is it a sign of more dollar funding problems for the global banking system (in which case it will remain a safety trade)?  The Turkish lira did manage a bounce yesterday and TLT declined slightly in sympathy.  But this story isn’t over.  Stay tuned.
                       
          The dollar rose again likely reflecting its function as a safety trade (must read): 

          GLD managed a meek rally but continues in a solid downtrend.

            Bottom line: investors got some relief from the deteriorating currency problems in Turkey (emerging markets); though at this moment we don’t know if that was just a dead cat bounce or a sign that investors have decided that this is not such a big problem after all.  Until there is some clarity, most of the indicators that I follow will likely continue to be effected by the need for safety.   On a shorter term basis, the downside gap in the Averages will likely be closed.
           
            Yesterday in the charts.

    Fundamental

       Headlines

            The US economic indicators released yesterday were mildly upbeat: the June small business optimism index was ahead of forecasts, while both import and export prices were below expectations, export prices dramatically so---which makes little sense in a rising dollar environment.  On the other hand, month to date retail chain store sales grow slowed.

            Overseas, the reverse was true: July Chinese retail sales, industrial production and unemployment were all disappointing; as was June Japanese industrial production.  In the UK, unemployment was less than consensus, but home prices fell for the fifth month in a row.

            Turkey remained on investors’ minds yesterday; though clearly the rally in the lira relieved some anxiety. 

The other development worth mentioning was that the retail sector has started reporting second quarter earnings; and, so far, they have been positive.  While this data is clearly backward looking, it is still a sign that the consumer is healthy and spending.  (however, July retail sales were up; see below)  Given that consumer spending accounts for a large part of total GDP, this latest data is encouraging.  On the other hand, household debt is at record levels suggesting that the best in spending growth may be behind us.  Plus, we already know that most economists (including the CBO) are looking for slowdown in the second half of 2018, lasting at least into 2019.
           
Q2 household debt and credit report (medium and a must read):

            Bottom line: there is no question that a strong Q2 performance by the retail sector confirms the good GDP report.  This question is, is this a harbinger of things to come?  At the moment, I doubt it because (1) there are plenty of other datapoints indicating that GDP second quarter got a one-time boost from the tax cut and that is it, (2) the stats so far in the third quarter confirm that scenario, (3) as do economists in general, and (4) those household debt numbers.  Remember, I am not suggesting a recession.  I am simply saying that the second quarter retail earnings in retrospect will likely appear less positive than they do now.
           
            The issue remains as to whether or not the current dollar funding shortage is or soon will spread beyond a couple of small, poorly run countries.  I am not smart enough to know the answer.  But this is a potential problem that I have been focusing on for months; and it will probably only get worse, the tighter monetary policy becomes. 

    News on Stocks in Our Portfolios
 
Scotiabank (BNS +0.8%) agrees to acquire Banco Dominicano del Progreso, a bank with operations Dominican Republic
BNS's common equity tier one capital ratio will be impacted by ~10 bps; however the deal is not financially material to Scotiabank.
3M (NYSE:MMM) declares $1.36/share quarterly dividend, in line with previous.

Economics

   This Week’s Data

      US

            Month to date retail chain store sales grew slower than in the previous week.

            Weekly mortgage applications fell 0.2% while purchase applications declined 0.3%.

            July retail sales rose 0.5% versus expectations of +0.1%; however, the June report was revised from +0.5% to +0.2%.  Ex autos sales increased 0.6% versus forecasts of +0.4%; but again, June was revised from +0.4% to +0.2%.

            The August NY Fed manufacturing index came in at 25.6 versus estimates of 20.0.

            Q2 nonfarm productivity was up 2.9% versus consensus of up 2.5%; unit labor costs fell -0.9% versus projections of -0.2%; however, Q1 was revised from +2.9% to +3.4%.

     International

    Other

           
                An economic cold war with China (medium):

                IMF says a hard Brexit would slow EU growth (short):
               

What I am reading today

            Layers of the brain (medium):

            The democratization of information (medium):

            Where in the world is it easiest to get rich (medium):

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Tuesday, August 14, 2018

The Morning Call---It will take more than Turkey


The Morning Call

8/14/18

The Market
         
    Technical

The Averages (DJIA 25187, S&P 2821) had another rough day on deteriorating breadth but lower volume.  However, they remain strong technically.  Plus as I noted previously, Friday’s gap down will almost surely be closed.  On the other hand, if the Averages continue to decline, the Dow’s 100 DMA will likely fall below its 200 DMA---and that is not a positive signal.  In addition, the VIX continues its bounce off the lower boundary of its short term trading range and has closed above its 200 DMA (now resistance; if it remains there through the close on Thursday, it will revert to support).

TLT’s battle with its long term uptrend’s lower boundary remains on hold as it has become a safety trade while investors try to digest the turmoil in the currency markets.  The question remains, is the Turkish (emerging markets; see below) crisis a short term problem (and the Market’s focus will return to the earlier dispute over the long term direction of interest rates) or is it a sign of more dollar funding problems for the global banking system (in which case it will remain a safety trade)?  Stay tuned.

          The dollar rose again likely reflecting its function as a safety trade.  GLD was once again hammered, apparently having lost all appeal as a safety trade.
           
            Bottom line: investors again focused on global currency problems as the dollar funding problem in Turkey appears to be spreading to other markets.  Until that issue fades in investors’ minds, most of the indicators that I follow will likely continue to be effected by the need for safety.  That said, it is way too soon to be drawing any long term conclusions.  On a shorter term basis, the downside gap in the Averages will likely be closed.

            Yesterday in the charts.

    Fundamental

       Headlines

            No economic releases yesterday, though this week will be more active than last.

            In the forefront of investors’ minds was the currency (dollar funding) problem being experienced by Turkey.

            In addition, contagion appears to be spreading to Latin America (medium):

            And China (medium):

            ***overnight, Trump signed the defense portion of the FY2019 budget---an eye popping $700 billion.  To be clear, I served in the Army, I am in favor of a strong defense and I believe the pay raise which was part of this bill is a plus.  But $700 billion?  At a time that the US needs to be watching its nickels and dimes.  Clearly, this is not going to help economic growth---remember, defense spending contributes nothing to increased productivity because all those goods and services are intended for destruction.

            Bottom line: I have no idea how long currency/dollar funding crisis will last.  I do believe that the central bankers have proven that they have no idea how to control it.  And I believe that the tighter monetary policy becomes, the more difficult it will be to control.  I also believe that equity markets are not priced to reflect the damage that could be done to the banking system should this problem get out of control.  On the other hand, Turkey’s problems by themselves are not big enough to do much harm to the global financial system.  It will only become an issue if the dollar funding shortage starts impacting the big boys in a meaningful way.

                Market risk update (medium):

            The latest from John Mauldin (medium):

    News on Stocks in Our Portfolios
 
Home Depot (NYSE:HD): Q2 EPS of $3.05 beats by $0.21.
Revenue of $30.46B (+8.4% Y/Y) beats by $450M.

Economics

   This Week’s Data

      US

            The July small business optimism index was reported at 107.9 versus estimates of 107.1.

            July import prices were flat versus forecasts of +0.1%; export prices were -0.5% versus consensus of +0.2%---the latter a bit surprising when the dollar is rising.

     International

            July Chinese retail sales and industrial production were below consensus while unemployment rose.

            June Japanese industrial production fell less than anticipated.

            June UK unemployment was less than expected, while home prices declined for the fifth month in a row.

    Other

            CBO downgrades growth forecast for the second half of 2018 and projects lower growth still in 2019.

            Larry Summers on Fed policy (a bit long but worth the read):


            Trump’s trade policy and corporate investment (medium):

           

What I am reading today

            Five ways to increase your retirement nest egg (medium):

            Private activity bonds as investments (medium):

           
            The latest from the ayatollah (medium):


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