Thursday, October 4, 2018

The Morning Call--How serious is he?


The Morning Call

10/4/18

The Market
         
    Technical

The Averages (DJIA 26828, S&P 2925) were up modestly on the day after roaring out of the chute in early trading.  Volume rose and breadth was slightly improved.  They remain technically very strong.    My assumption is that they will challenge the upper boundaries of their long term uptrends (29807, 3065).
           
The VIX was down, trading in (inverse sync) with stock for a change.   Let’s see if it can break the recent trend of trading in a confusing, atypical non-inverse relationship with stocks.  At the moment, it is still at the lower end of its short term trading range and that is something of a positive for equity prices.

The long bond was hammered on massive volume, closing below the lower boundary of its intermediate term trading range.  If it remains there through the close next Monday, it will reset to a downtrend.

            This from Bill Gross.

The dollar was up, continuing its march toward its August high.  I continue to believe that UUP will move higher as long as the dollar funding problem persists. 

GLD was down slightly, showing no inclination to trading up out of a developing very short term trading range.

          Bottom line: the indices remain technically strong. I continue to believe that they will challenge the upper boundaries of their long term uptrends.

         The pin action in the long bond, the dollar and gold were back in sync, though like the VIX with stocks they have not been in recent trading.  I still think that investors are re-gearing their economic/valuation models; I am just not sure where they end up.
           
            Wednesday in the charts.

    Fundamental

       Headlines

            Yesterday’s economic data was upbeat: the September ADP private payroll report, the September Markit services PMI and the September ISM nonmanufacturing index all beat forecasts handily.  The only other number was weekly mortgage applications which were flat and purchase applications which rose fractionally.

            A couple of FOMC members spoke yesterday, including Chairman Powel; and he delivered a fairly hawkish speech---which I assume accounts for the bond sell off.  The question now is, how serious is he?  Is he really going to execute the QE unwind irrespective of Market pin action?  Or will he chicken out when the things get ugly?

            More pundits weighed in on the US/Mexico/Canada trade agreement.  Here is one that is more sanguine than yesterday’s analysis; but note it was written by a Trump advisor.

            And this a bit more circumspect.
           
Bottom line: based on the additional analysis from yesterday, I haven’t changed my initial take---the US/Mexico/Canada trade agreement is marginally positive for the secular growth rate of the economy but its real importance is removing the uncertainty of a NAFTA trade war. 

That doesn’t mean opinions won’t become more upbeat as implementation takes place or that the agreement won’t lead to better deals with Japan, EU and China.  But for now, it looks like the first trade agreement won’t have much effect on the long term secular growth rate of the country. 

***overnight, this report was released concerning Chinese infiltration of the computer chip manufacturing process.  It is a must read.

Meanwhile the more important story, at least, for the Markets is the continuing decline in bond prices (rising interest rates).  The higher rates go, the more competition they present to equities; and tighter money supply gets the higher the likelihood of dislocations due to dollar funding problems or shadow banking illiquidity.

I like to remind you periodically that I am not negative on the economy; I just believe that investors are valuing that economy at an excessively high level. 

Cash reserves are good at this point in the Market (valuation) cycle.
           
            September dividends by the numbers.

    News on Stocks in Our Portfolios
 
           

Economics

   This Week’s Data

      US

            The September Markit services PMI came in at 53.5 versus expectations of 52.9.

            The September ISM nonmanufacturing index was reported at 61.6 versus estimates of 58.0.

            Weekly jobless claims were down 8,000 versus forecasts of down 1,000.

     International

    Other

More details on September light vehicle sales.

Third quarter GDP expectations.

Corporate America isn’t quite sure, as companies cut forward guidance.

OECD economist warns of trouble.


                    


What I am reading today

            The only benchmark that matters.

            Over optimism and over confidence.

            Low returns, high value.

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