Thursday, January 10, 2019

The Morning Call---FOMC minutes confirm Powell's retreat


The Morning Call

1/10/19

The Market
         
    Technical

The Averages (DJIA 23879, S&P 2584) continued their rally.  However, both indices finished below both moving averages.   The Dow finished in a very short-term downtrend and a short-term trading range. The S&P is in a short-term downtrend. So longer term, there remains a lot of work to be done to re-establish an uptrend.  For instance, the S&P would have to successfully challenge the upper boundary of its short-term downtrend (~2632) before it makes any sense to start thinking that the worst is over.

Volume was up slightly; breadth positive. 

The VIX fell another 2½ %, but still ended above both moving averages and in very short-term and short-term uptrends and remains relatively cheap.  So, this chart remains a negative for stocks.

The long bond was down slightly.  However, it closed above its 100 DMA (now support), above its 200 DMA (now support) and in short and intermediate-term trading ranges and in a very short-term uptrend.  Even though it has now been down four days in a row, no real technical damage has been done (in other words, no big bets are being made that rates are going to rise).

KKR cuts leveraged loan allocation to zero.

The dollar dropped 1% and finished below the lower end of its mid-November to present consolidation range and its 100 DMA (now support; if it remains there through the close on Friday, it will revert to resistance). However, it remains above its 200 DMA and in a short-term uptrend.

GLD was up, ending above both MA’s, within a very short-term uptrend and within a short-term trading range.  It remains a healthy chart.

 Bottom line: while the indices were up yesterday, given the positive news on both the US/China trade talks and Fed policy, I expected better pin action.  So, the relatively paltry gain suggests that investors have already discounted some sort of agreement in the trade talks and that the minutes from the FOMC meeting would confirm last Friday’s Powell monetary policy reversal (see below). I think that this supports the notion of another test of the December 26th low (2349) or, at least, the last higher low (2446).

 The long bond investors seemed to have believed all along that the Fed would become more dovish (lower rates).  Ditto for the gold bugs.  The dollar is now joining the parade.

            Wednesday in the charts.

    Fundamental

       Headlines

            Only one minor stat was released yesterday: weekly mortgage and purchase applications rose substantially---though seasonal factors explained much of the increase.

***overnight, Chinese auto sales fell to a twenty-year low, Ford joins GM in big layoffs and Macy’s gives poor forward guidance.

On the fiscal/monetary side:

(1)   the initial US comments on the outcome of the US/China trade talks were a bit vague but promising.  Of course, I think that most observers expected some kind of positive verbiage.  And while it sounded like the Chinese appear ready to be more accommodative on trade issue, there was little indication of any Chinese concessions on IP theft.  Unfortunately, the Chinese version of the results of the negotiations were even more ambiguous than our own.  To be sure, we don’t know any details yet---if there are any.  So, we can’t get too far ahead of ourselves in our assumptions,

(2)   the minutes of the last FOMC meeting pretty much confirmed the more dovish comments from Powell last week---the bottom line being that economic/Market conditions were such that the Fed could be patient about further rate hikes.  Not much was said about the balance sheet unwind which, as you know, I think considerably more important than the pricing of the Fed Funds rate.  Here are the minutes as well as a more detailed summary,


    In addition, three Fed hawks made speeches yesterday supporting the new more      
    dovish Fed policy.

Many pundits are opining that this action confirms the re-establishment of a Fed ‘put’---the Fed responding to agitated Markets with easier monetary policy. 

However, this author disagrees.  I hope that he is correct.  In the article, he argues that rather than creating a Fed/Powell ‘put’ [i.e. that it/he will loosen every time the Market throws a hissy fit], it/he is establishing a Fed/Powell call [i.e. that it/ he will tighten every time the Market gets too exuberant].  Clearly, it is just one man’s theory.  I watch [hope] for the evidence.

    Futures pricing in pause in Fed Funds rate hikes.

    Finally, Jeffery Snider’s take.

(3)   finally, Trump stormed out of a meeting with Pelosi and Schumer regarding the funding of ‘the wall’/the government shutdown.  Expect more fireworks which most likely will have more entertainment than economic value.


Bottom line: the economy is not getting any stronger, the constant happy talk notwithstanding.  The numbers simply aren’t there; and the recent anecdotal evidence (forward guidance) from corporations support that notion. 

It does appear that the Fed ‘put’ is back in place, which while having little impact on the economy, if true, will likely mean an upward bias to the Market.  The keys to watch for are (1) earnings season, which is upon us.  If earnings/guidance reflect a weaker economy than the pundits expect, that could turn the Market narrative on its head, i.e. the economy’s strong and the Fed is easy to the economy is weak and rates are already low.  On the other hand, if results are in line with expectations, then stock prices will probably go higher and (2) what happens with the Fed balance sheet.  If it continues to unwind, the Market is going nowhere.

Is China about to open the fiscal flood gates?

            Outlook for dividends in 2019.

    News on Stocks in Our Portfolios
 
           

Economics

   This Week’s Data

      US

            Weekly jobless claims fell by 17,000 versus consensus of a 7,000 decline.
                 
                 

     International

November Chinese PPI rose 0.9% versus expectations of +1.6%.

    Other

World Bank sees global growth slowing in 2019.

Visualizing global government debt.

What I am reading today

            The price of greed.

Thoughts on Tuesday nights shutdown rhetorical snoozefest.

Crypto pump and dump schemes.

Managing your losses.

Working hard is bad for your investments.

The case for intellectual humility.

Quote of the day.


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