The Morning Call
8/1/18
The
Market
Technical
The Averages
(DJIA 25415, S&P 2816) bounced yesterday. Volume was up; but breadth was
only mixed. The Dow continued to trade
above its 100 day moving average (now support), above its 200 day moving
average (now support), within a short term trading range and right on its June
high. The S&P ended above both
moving averages and in uptrends across all timeframes. The assumption remains that the indices are on
their way to challenging their all-time highs.
VIX fell 9% remaining
below its 100 day moving average (now resistance), retreated from its 200 day moving
average (now resistance) and within a narrow trading range near the lower
boundary of its short term trading range.
But it doesn’t seem to want to challenge that lower boundary.
The long
Treasury was up, but still finished below its 200 DMA (now resistance). However, it bounced off its 100 DMA (now
support; negating Monday’s break) as well as the lower boundary of its long
term uptrend---both very short term positive signs. Nonetheless, it continues
to lose momentum and the pennant formation marked by the upper boundary of its
short term downtrend and the lower boundary of its long term uptrend continues
to narrow. A successful challenge of the
long term uptrend would have significant technical and fundamental import.
The
dollar bounced, ending above both moving averages and in a short term uptrend. Further indications of strength are (1) its
100 DMA trading above its 200 DMA and (2) UUP has now made three higher lows.
Gold
managed a gain, but closed below both moving averages (its 100 day moving average
has now crossed below its 200 day moving average---not a technical plus) and in
a short term downtrend. Its pin action
suggests that it will challenge the lower boundary of its intermediate term
trading range (roughly 10 points lower).
Bottom
line: the Averages remain quite strong
technically speaking; and last night’s release of Apple’s upbeat earnings could
very well reverse the devastation experienced by the tech sector. The technical assumption remains that the
indices are going to challenge their all-time highs.
TLT
pulled back from the brink (lower boundary of its long term uptrend), at least
for a day. However, it remains much too
close to a potential break of trend.
Given the time and ink being wasted by the media debating the
implications of rising long rates/flattening yield curve, bonds’ pin action will
likely have a historically disproportionate impact on stock prices. Stay tuned.
Certainly,
GLD is already pointing convincingly at higher interest rates and a stronger
dollar. The dollar is trying though it
may be waiting a lead from TLT.
Yesterday
in the charts:
Fundamental
Headlines
Yesterday
was busy for economic releases, almost all positive: the second quarter
employment cost index, month to date retail chain store sales, the May Case
Shiller home price index, the July Chicago PMI, the June core price index and
July consumer confidence were better than anticipated; however, June personal
income and spending (primary indicators) were in line.
Overseas:
(1)
the Bank of Japan left rates unchanged and said that
its easy money policy would extend well into the future. However, it also made an adjustment that
would allow the long end of the yield curve to rise slightly. To its dismay I am sure, it also lowered its
inflation expectations for 2018-2020, https://www.zerohedge.com/news/2018-07-31/kuroda-tries-pull-draghi-he-tweaks-monetary-policy-fails
***overnight, bond investors tested the BOJ’s ‘adjustment’
and rates rose causing a margin call.
(2)
the EU reported second quarter GDP growth slowed while
CPI and CPI, ex food and energy came in hotter than forecast,
***overnight, the UK manufacturing PMI was below
estimates
(3)
the July Chinese manufacturing PMI came in below expectations
It
was also an active day for other economic developments:
(1)
the Donald announced that he is considering indexing
the capital gains tax to inflation.
While I think this a good move long term, [a] it would increase the
deficit/debt at a time when it is already spiraling out of control and [b] politically,
it makes little sense since it would not benefit his primary constituency
[middle class] and would simply add another controversy into the legislative
process [which would be used by the dems to delay a vote on Kavanaugh).
(2)
the Treasury raised its estimate for the US calendar
year budget deficit to $1.33 trillion (see above). Do I need to repeat my rant on the egregious fiscal
malfeasance of our ruling class?
(3)
China and the US announced that trade talks had resumed
(medium):
***but
overnight, things heated up again (medium):
https://www.zerohedge.com/news/2018-08-01/china-vows-retaliation-us-blackmail-if-trump-hikes-tariffs
Bottom line: while
yesterday was another good one for US dataflow, it was definitely not the sign
of a trend. On the other hand, the international
data clearly supported the thesis that ‘synchronized global growth’ is no
more. Further, in something of an ironic
twist, the Treasury announced this year’s record budget deficit on the same day
that Trump said he wanted a further $100 billion tax cut. I have dwelled on the heavy burden the
current deficit/debt lays on our economy to the point of nausea. I will only repeat my thesis that our ruling
class keeps expanding the national deficit and debt at exactly time they should
be shrinking it. The burden of servicing
that debt will usurp the savings that would otherwise go to future productivity
enhancing investment.
The Bank of Japan did
what it does best---issue a mealy mouthed statement that was initially
interpreted as dovish. But a funny thing
happened, bond investors didn’t exactly buy it, pushing rates higher and the
BOJ did not respond. Which throws into
question the original premise that the BOJ remains dedicated to QE.
The question is,
exactly what is the BOJ up to? Clearly,
no one knows but the BOJ and, if it is like the Fed, it may not even know. But I do know that the central banks
encumbered by massive hubris have implemented a monetary easing with no
precedent. I also know that the Fed has
never, ever successfully transitioned from easy to normal monetary policy without
the Markets getting hammered. This time
around the order of magnitude of its easing effort (QE) was so much larger than
on any previous occasion, I assume that the ‘hammering’ will be commensurate.
News on Stocks in Our Portfolios
Revenue
of $6.13B (+20.7% Y/Y) beats by $320M.
Revenue
of $16.5B (+2.6% Y/Y) misses by $40M.
International Business Machines (NYSE:IBM) declares $1.57/share quarterly dividend, in line with
previous.
Revenue
of $53.3B (+17.4% Y/Y) beats by $870M.
Revenue
of $4.28B (+15.4% Y/Y) beats by $100M.
Revenue
of $3.3B (+7.8% Y/Y) in-line
Economics
This Week’s Data
US
June personal
income rose 0.4%, in line; personal spending was up 0.4%, also in line; the
core price index increased 0.1% versus forecasts of +0.2%.
The
second quarter employment cost index was +0.6% versus estimates of +0.7%.
Month
to date retail chain store sales grew faster than in the prior week.
The
May Case Shiller home price index rose 0.2% versus expectations of up 0.3%.
The
July Chicago PMI came in at 65.5 versus consensus of 62.3.
July
consumer confidence was 127.4 versus projections of 127.0.
And:
Weekly mortgage
applications fell 2.5% while purchase applications declined 3.0%.
The
July ADP private payroll report showed an increase in jobs of 219,000 versus
forecasts of a 173,000 increase.
International
Other
QE
turns ten (medium and today’s must read from Stephen Roach):
What
causes the boom/bust cycle (short):
Thoughts
on the second quarter GDP report (short):
Update
on big four economic indicators (medium):
What
I am reading today
Don’t be a stock market hooligan
(medium):
Activity detected at North Korean
ICBM factory (medium):
How America uses its land (short):
Why are banks special? (medium):
Public employee pension plans are
doomed (medium):
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