Tuesday, August 20, 2019

The Morning Call--What will Powell do?

The Morning Call


The Market

The Averages (26135, 2923) had another good day.  Volume was down again; though breadth improved.   The Dow ended below its 100 DMA (now resistance) and above its 200 DMA (now support; voiding Wednesday’s break). The S&P ended back above its 100 DMA once again.  This is the sixth time it has crossed this level in the last eleven trading days.  I thought this see saw action was over; clearly, I was wrong.  So, I am again withholding a support/resistance call.  It finished above its 200 DMA (now support).  Both of the indices ended above the upper boundaries of their developing very short term downtrends.  If they remain there through the close today, those downtrends will be voided.

The VIX fell another 8 ½ %, but still finished above both MA’s (now support).  However, it finished below the lower boundary of it very short term uptrend; if it remains there through the close today, that trend will be voided.

The long bond was down 1 ½  %, but remained above both MA’s, in uptrends across all timeframes.  It continues to be overextended, though it did manage to close one of its gap up opens.

The dollar rose ¼%, ending in short and long term uptrends and above both MA’s. 
Gold declined 1 ¼ %, but closed within very short term and short term uptrends and above both MA’s.  However, it still has the gap up open from two weeks ago which needs to be closed.  And like TLT, it remains overbought.

            Bottom line: long term, the Averages are in uptrends across all timeframes; so, the assumption is that they will continue to advance.  Short term, they are challenging several resistance level.  If successful, that would point to further gains on the upside.

           The pin action in the long bond, the dollar and gold continues to point at the need for a safety trade.

            Monday in the charts.



            No US data releases.  Overseas, there were two stats: the July Japanese trade deficit and the July EU CPI were disappointing.

            Investor attention yesterday was focused on:

(1)    weekend developments [Trump delayed penalties on Huawei, Germany prepared stimulus measures and China lowered interest rates].  I covered these items in yesterday’s Morning Call,

The trade war is over; Trump just doesn’t realize it yet.

***overnight, Markets underwhelmed with Bank of China’s rate reduction.

      ***overnight, Trump approves F-16 sales to Taiwan.

(2)   Fed driven headlines this week:

[a] the minutes from the last FOMC meeting will be released on Wednesday,

[b] the Jackson Hole meeting and Powell speech later in the week.

            New Fed ‘buffer tool’ is a joke.

            Bottom line: both the Trump ‘put’ (generating positive economic/trade headlines) and the Fed ‘put’ (promising ever more easy monetary policy) will receive more tests this week.  Last week’s lack of follow through to the Trump announcement to the delay in imposing tariffs is a hint that Trump ‘put’ could be losing its humph. And as you know, I have been suggesting that the recent pin action in bond, dollar and gold markets are calling the latter into question.  Notice I am not making that call (‘hint’, ‘suggesting’).  But the risk of those two ‘puts’ losing their effect is rising; and if it does, the stock market will have a problem.

            The latest from Morgan Stanley.

            A transportation recession has already arrived.

    News on Stocks in Our Portfolios
Medtronic (NYSE:MDT): Q1 Non-GAAP EPS of $1.26 beats by $0.07; GAAP EPS of $0.64 misses by $0.24.
Revenue of $7.5B (+1.5% Y/Y) beats by $100M.

Home Depot (NYSE:HD): Q2 GAAP EPS of $3.17 beats by $0.09.
Revenue of $30.84B (+1.2% Y/Y) misses by $140M.

Genuine Parts (NYSE:GPC) declares 0.7625/share quarterly dividend, in line with previous.


   This Week’s Data



            June EU construction output rose 1.0% versus consensus of +1.8%.

            July German PPI was +0.1% versus estimates of 0.0%

            August UK industrial orders index was -13 versus forecasts of -23.

            The probability of recession by August 2020.

            Notes from Cap Kotok.

            The failed promises of the 2017 Tax Cut and Jobs Act.

What I am reading today

            One of the most watched women of the world.

            Struggling for retirement.

            The building blocks of success.

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Monday, August 19, 2019

Monday Morning Chartology

The Morning Call


The Market

            The S&P has been consolidating since late July.  It is now between its 100 DMA and 200 DMA and between the upper boundary of a developing very short term downtrend and the August 5th low which it has bounced off of twice.  So, there are multiple levels that will provide directional information. 

            On a long term basis, TLT remains in uptrends across all timeframes and is above both MA’s.  But shorter term, it has gotten overextended. Plus, it has two gap up opens that need be filled, neither of which would call into question the long bonds upward momentum.  Barring a financial crisis, some backing and filling would not be surprising.

            The dollar’s performance remains strong, ending above both MA’s and within short and long term uptrends.  However, it has not gotten overextended like TLT and GLD.  So, there is less technical pressure for a correction; although it still has a one gap up open that needs to be filled.

            Despite being off slightly on Friday, GLD is also getting overextended; though like TLT, there is no sign of a decrease in GLD’s upward momentum.  The only negative is all those gap up opens further down.  But also, like TLT, barring a crisis of some sort, expect some short term loss of momentum.  However, unlike TLT, GLD is nowhere near its all-time high.

            The VIX followed the see saw Market last week.  Note that it made a higher high and remained within a developing very short term uptrend---giving a slightly bias to the stock market




(1)   Trump makes another concession to Chinese, giving Huawei an additional 90 days to buy US made supplies.

(2)   Germany prepares stimulus in case of recession.

(3)   Bank of China initiates interest rate reforms designed to lower lending rates.

    News on Stocks in Our Portfolios


   This Week’s Data



            The July Japanese trade deficit was Y249.6 billion versus estimates of T200.0 billion.
            July EU CPI was -0.5% versus forecasts of -0.4%.


The role of offshoring in the decline in manufacturing employment.

            Mounting loan problems in the farm belt.

What I am reading today

            Massive Black Hole ‘wakes up’

            Comet plunges into the sun.

            Quote of the day.

            Soundness is not rate of return.

Saturday, August 17, 2019

The Closing Bell


Statistical Summary

   Current Economic Forecast
2018 estimates (revised)

Real Growth in Gross Domestic Product                          1.5-2.5%
                        Inflation                                                                          +1.5-2%
                        Corporate Profits                                                                10-15%


Real Growth in Gross Domestic Product                          1.5-2.5%
                        Inflation                                                                          +1.5-2.5%
                        Corporate Profits                                                                5-6%

   Current Market Forecast
            Dow Jones Industrial Average

                                    Current Trend (revised):  
                                    Short Term Uptrend                                 23490-33730
Intermediate Term Uptrend                     14513-30732 (?)
Long Term Uptrend                                  6849-30311(?)
2018     Year End Fair Value                                   13800-14000

                        2019     Year End Fair Value                                   14500-14700

            Standard & Poor’s 500

                                    Current Trend (revised):
                                    Short Term Uptrend                                     2569-3468
                                    Intermediate Term Uptrend                         1383-3193 (?)                                                    Long Term Uptrend                                     937-3217 (?)
2018 Year End Fair Value                                       1700-1720         
2019 Year End Fair Value                                     1790-1810

Percentage Cash in Our Portfolios

Dividend Growth Portfolio                           56%
            High Yield Portfolio                                     55%
            Aggressive Growth Portfolio                        56%

The Trump economy is a neutral for equity valuations.   The data this week was mixed: above estimates: weekly mortgage and purchase applications, the August housing market index, July retail sales, the August Philadelphia and NY Fed manufacturing indices, June business inventories/sales, preliminary Q2 nonfarm productivity and unit labor costs; below estimates: weekly jobless claims,  month to date retail chain store sales, August consumer sentiment, July industrial production, the July small business optimism index, July import/export prices, July core CPI; in line with estimates: July housing starts/building permits, the July budget deficit July CPI.

            However, the primary indicators  were  a plus: July retail sales (+), preliminary Q2 nonfarm productivity (+), July housing starts/building permits (0), July industrial production (-).  I am rating this week a positive.  Score: in the last 200 weeks, sixty-six positive, ninety negative and forty-four neutral. 

            This is the second upbeat week in a row for the numbers---though admittedly both were just barely so. While not a trend yet, two more weeks of improvement and I will turn off the flashing yellow warning light.  Two notes:

(1)   as you know, much was made this week of the yield curve inversion and it implications for a recession.  However, there usually a long lead time between a yield curve inversion and the onset of a recession; and as some analysts have argued in this narrative’s links, there are instances of no recession.  So, if I turn off the flashing yellow light, I am just going with the dataflow which doesn’t mean that conditions won’t deteriorate later on,

(2)   nevertheless, the economy continues to grow, sluggish as it may be, in the face of the US/China trade war and the rest of world’s economies seemingly rolling over.  I have said before and I will say it again, the US economy possesses the best managers and hardest working labor force on the planet which have allowed it to slowly improve in spite of totally irresponsible monetary and fiscal policies.  Can it do the same with the aforementioned added burdens?  So far, so good.

Overseas, the stats continue to run negative though Europe was a bright spot---a 180 from last week.  Still, not that helpful for our own economy.

[a]  Q2 German flash GDP was in line but negative while July German CPI was in line but PPI was disappointing; Q2 UK productivity fell but was in line, May jobs growth and retail sales accelerated; July UK CPI, core CPI, PPI and core PPI were above forecasts; Q2 EU GDP growth was in line but employment rose less than consensus; June EU industrial production and August economic sentiment were below projections; the June EU trade balance was positive,

Is Germany about to commence deficit spending?

[b]  June Chinese vehicle sales, fixed asset investments, industrial production, retail sales and July outstanding loan growth were below estimates,

[c]  July Japanese machine tool orders were below expectations while machinery orders and industrial production were above; July PPI was lower than anticipated.
Developments this week that impact the economy:

(1)   trade: the main headline this week was Trump removing some products from the scheduled September ten percent tariff hike and delaying the increase for other items until December [Christmas related products].  I covered this development in Wednesday’s Morning Call, so I will only repeat my takeaways:

[a] the Chinese offered little in return, confirming my opinion that they will almost certainly make no serious concessions until after November 2020, if then.  To be fair, they did send some mixed messages on Thursday.  One saying that there would be no agreement, period; and the other suggesting that there might be some wiggle room to compromise on US treatment of Huawei.  This doesn’t alter my opinion,

[b] while I grudging agree with Trump’s action; he really just kicked the can down the road to save Christmas sales.  However, there is plenty of speculation that he was, at least in part, trying to halt the decline in the stock market, again demonstrating that he judges his success as president by the level of the Market---which, in and of itself, is not a wise measure.  That in turn suggests that he is much more likely to fold before the 2020 elections if the Market is not behaving positively---which would {i} leave the Chinese free to continue their unfair trade practices for the long term and {ii} make all the economic agony that the global economy has had to endure during the US/China trade dispute for naught.

[c]  whatever Trump ultimately does, negative headlines are in our future.  If he folds, the economy will improve short term but the long term economic growth prospects are negative.  If he hangs tough, the economy will continue to experience a short term drag on growth but the longer term outlook improves. 

That, of course, assumes that the Chinese won’t fold [which I believe that they won’t].  If they do, then both short and long term growth forecasts will be much brighter.
(2)   fiscal policy:  I haven’t ranted about our totally irresponsible fiscal policy of late; but this week’s release of the July budget deficit occasions me to remind you that the US is running $1 trillion plus annual budget deficits at, what appears to be, the peak of an economic cycle.  Furthermore, it  is increasing the national debt at a time when it already has a debt to GDP ratio in excess of 90%---which studies have marked as the point at which the debt becomes a burden to the economy, inhibiting its growth.
To whom does the US government owe money?

(3)   monetary policy: little of substance this week.  Though there appears to be a growing belief that the central banks have lost their control of interest rates to the Markets.  The risk of this becoming generally accepted is that the notion that the central banks/Fed have the Markets’ back becomes null and void.  While that may have little impact on economic growth [which I have maintained that they never had in the first place], it will almost surely affect the current central bank/Fed/Market co-dependency.

Another must read from Jeffrey Snider.

(4)   global hotspots. the Middle East hostility remains contained but the buildup of military hardware in the Persian Gulf is not a plus.  The bad news is that the threat of violence remains which if it occurs could lead to severe economic consequences in a worst case scenario. Remember a large percentage of global oil supplies transits the Straits of Hormuz, which is bordered on one side by Iran.  Any military action that would choke off those supplies would be a negative for the global economy.

Unfortunately, the number of global trouble spots is growing:

[a] the unrest in Hong Kong; while ostensively a battle over Hong Kong government’s right to deport troublemakers to the Chinese mainland, it has become intermeshed with the US/China trade skirmish in that the Chinese are accusing the US of interference,

[b] Italy is again on the verge of political/economic collapse.  By itself, I don’t consider that a big problem; but to the extent that it would cause disruptions in the EU banking system, it could precipitate a much larger problem.  And  nothing says extra pressure like a hard ‘Brexit’,

[c] North Korea keeps firing off rockets.  Like Hong Kong, this is likely tied into the US/China standoff {China encourages Kim to make trouble} making the whole China trade, Hong Kong riots, North Korean missile testing just a big pot of love stew,

[d] Japan and South Korea are in their own version of a trade war,

[e] the Brexit deadline is approaching and it looks a like a no-deal Brexit is the highest probability outcome,

[f] Argentina appears to be headed back to Peronism which has precipitated a crash in its currency and bond markets.  By itself, any damage would likely be localized; but with global bond markets in flux, it is adding fuel to a growing level of uncertainty.

                Bottom line:  on a secular basis, the US economy is growing at an historically below average rate.  The principal cause of the restraint being totally irresponsible fiscal (running monstrous deficits at full employment adding to too much debt) and monetary (pushing liquidity into the financial system that has done little to help the economy but has led to the gross mispricing and misallocation of assets) policies. 

Cyclically, the US economy continues to limp along which is not surprising given the lethargic global economy and the continuing threat of trade wars.  Indeed, this progress is a miracle given all the aforementioned fiscal and monetary headwinds.  That said, the yellow warning light is still flashing.

The Market-Disciplined Investing

The Averages (25886, 2888)  made a strong follow through to Thursday’s bounce.  But volume was down and breadth was mixed---which reminds me that rallies can be quite strong in a down Market (both indices are building very short term downtrends).   The Dow ended below its 100 DMA (now resistance) and above its 200 DMA (now support; voiding Wednesday’s break). The S&P ended below its 100 DMA for a third day (I am now calling it resistance) and above its 200 DMA (now support).  Very short term, both indices intraday bounced off their August 5th low.  So that is a level to watch.  

The VIX fell 12 ¾ %, but still finished above both MA’s (now support) and continues to build a very short term uptrend.  So, it lends a negative bias to equities.

The long bond was down 7/8 %, but remained above both MA’s, in uptrends across all timeframes.  However, it is getting very overextended on a short term basis.  So, barring really bad economic/political news, a correction seems likely.
            Treasury considering issuing 50 to 100 year bonds.

            Forget the yield curve, it is the lack of liquidity that poses the problem (must read).

The dollar was up, ending in short and long term uptrends and above both MA’s. 
Gold fell 5/8%, but closed within very short term and short term uptrends and above both MA’s.  However, it still has last Friday’s gap up open which needs to be closed.  And like TLT, it is getting very overbought on a short term basis.

            Bottom line: long term, the Averages are in uptrends across all timeframes; so, the assumption is that they will continue to advance.  Short term, they are in a range between (1) their 100 DMA and 200 DMA and (2) the upper boundaries of developing very short term downtrends and their August 5th lows.  So, we now have multiple levels from which to derive directional information.  Still, they remain well above the lower boundary of their short term uptrends  (23490, 2568).  So, the indices could fall a lot further without breaking their long term upward momentum.

           The pin action in the long bond, the dollar and gold continues to point at the need for a safety trade.

           Friday in the charts.

Fundamental-A Dividend Growth Investment Strategy

The DJIA and the S&P are well above ‘Fair Value’ (as calculated by our Valuation Model), the improved regulatory environment and the potential pluses from trade notwithstanding.  At the moment, the important factors bearing on Fair Value (corporate profitability and the rate at which it is discounted) are:

(1)   the extent to which the economy is growing.  The economy continues to struggle forward against multiple headwinds.  As you know, the dataflow over the last couple of months has raised my concerns that it may ultimately succumb to these forces---to such an extent that I started the yellow warning light flashing.  Not helping matters is the recent surge in bond, dollar and gold prices; all of which point to a flight to safety.

On the other hand, the improvement in the dataflow over the last two weeks provides some hope that the US can skate through the current global malaise without a downturn.

My sluggish growth forecast is a neutral but that could change if the stats deteriorate further.

(2)   the [lack of] success of current trade negotiations.  If Trump can create a fairer political/trade regime, it would almost surely be constructive for secular earnings growth.  

However, that ain’t happenin’,  Indeed, the only progress to date has been Trump’s actions the week to reverse the scheduled imposition of tariffs on some items and delay them on [Christmas related] others. 

As you know, I believe that the Chinese will not even consider making any compromise before the 2020 elections, if ever.  So, the magnitude of this quarrel will likely continue to be determined by Trump’s actions.  If he wants to get more contentious, it will and vice versa.  To be clear, I still believe that what he is doing is the right course for the economic long term.  But short term, pain is the word.  The only question is how much.

The process of de-globalization (must read):

(3)   the resumption of QE by the global central banks.  That is now occurring worldwide.  This week, the ECB is made a lot of noise about a new big dose of QE; and the US bond market is pricing in multiple cuts in the Fed Funds rate this year.

I have maintained for some time that the key to the Market is monetary policy, more specifically, its co-dependency with the Fed.  But this week, investors appeared to begin to question their faith in the central banks’ ability to navigate the global economy through what is now a very trying economic climate.  While I am not suggesting a change the paradigm of central bank/stock market co-dependency, the risk is heightening that this could occur.

(4)   current valuations. I believe that Averages are grossly overvalued [as determined by my Valuation Model]. 

At the moment, [a] the US economic numbers are not that great, the global stats are worse and, absent a US/China trade deal, are not apt to get better---all of which augurs poorly for corporate profits; though to be fair, Q2 earnings season was better than expected, [b] long term interest rates are falling, suggesting that a weaker economy, and perhaps even recession, may be in our future, and yet [c] equity prices are a short hair away from their all-time highs. 

The only explanation that I have for this is in the context that the global central banks are all in on their support of equity markets. For the last decade, they have measured their success by the performance of the stock Market, acted accordingly and been victorious.  As long as that is the paradigm, fundamental economics and valuations will likely remain irrelevant.  But as I noted above, that may be changing. 

As prices continue to rise, I will be primarily focused on those stocks that trade into their Sell Half Range and act accordingly. However, there are certain segments of the economy/Market that have been punished severely (e.g. health care) with the stocks of the companies serving those industries down 30-70%.  I am compiling a list of potential Buy candidates that can be bought on any correction in the Market; even a minor one.  As you know, I recently added AbbVie to the Dividend Growth and High Yield Buy Lists.

Bottom line: fiscal policy is negatively impacting the E in P/E.  On the other hand, a new regulatory environment is a plus.  Any improvement in our trade regime with China should have a positive impact on secular growth and, hence, equity valuations---if it occurs.  More important, a global central bank ‘put’ has returned and, if history is any guide, will almost assuredly be a plus for stock prices. 

            As a reminder, my Portfolio’s cash position didn’t reach its current level as a result of the Valuation Models estimate of Fair Value for the Averages.  Rather I apply it to each stock in my Portfolio and when a stock reaches its Sell Half Range (overvalued), I reduce the size of that holding.  That forces me to recognize a portion of the profit of a successful investment and, just as important, build a reserve to buy stocks cheaply when the inevitable decline occurs.