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.
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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