The Morning Call
The Market
Technical
The
indices (DJIA 13910, S&P 1501) rested again yesterday. As a result, the S&P closed back below
the upper boundary of its short term uptrend (1435-1504); while the Dow
remained above its comparable boundary (13203-13858). Both finished within their intermediate term
uptrends (13254-18254, 1400-1995).
The
good news is that the Averages did fairly well in the face of a rough headline GDP
number (see below). The bad news is that
the upper boundaries of the short term uptrends may have more power than first
appeared; hence, they may be acting as a governor on the rate of price advance.
Volume
was up slightly; breadth was poor. The
VIX rose 7%, but is still well within its intermediate term downtrend.
GLD moved up, closing
again above the lower boundary of that very short term uptrend. Although it remains within its short term
downtrend and intermediate term trading range.
I
am not buying a direct correlation, though certainly Chinese buying had an
impact on the price of gold.
Bottom
line: I remain of the opinion that the upward momentum in stock prices will
carry them to at least 14140/1576. That
said, the technical evidence continues to grow that this Market rise is getting
a bit long in the tooth. Our Portfolios
remain better Sellers.
Still
more on the January effect (short):
Fundamental
Headlines
Economics
dominated yesterday’s news cycle:
(1)
the data was a bit dismal: while the ADP
private payroll report was better than expected, mortgage and purchase
applications were disappointing and the initial fourth quarter GDP
number was a shocker.
It was the
latter that garnered most of the attention---coming in down 0.1% versus an
anticipated increase of 1.0%. However,
inside the data did not look so bad.
Housing, consumer spending and business investment spending were all
strong. The weakness came from:
[a] a draw down in inventories which is actually a long term positive {assuming
sales are strong---which they were},
[b] net exports which were down
as a result of the recent drought,
[c] lower government {defense} spending. I actually look at this as good news; after
all, I have been harping and harping on the necessity of reducing government
spending---and we got some. So, three
cheers. As important, the lower
government spending was accompanied by still healthy housing, consumer and
business investment figures---what more could we want? While it is far too early to tell, it does,
nonetheless, support the notion that cutting government spending will not
negatively impact the rest of the economy as many think and may in fact help
it.
It may also
address the fears that sequestration while reducing GDP
could also negatively affect housing, consumer spending and business investment. That this could produce the same fourth
quarter effect {lower government spending and higher private activity} may be
too much to hope for at this moment. But
I am very encouraged by this data.
But before getting too
jiggy, I need to see the impact on housing, consumption and investment of the
higher taxes implemented on January 1.
Plus God only knows what the reaction of ruling class will be to the
unexpected poor headline number. If it
gives them the excuse to skate on sequestration, then what I consider to be an
encouraging development could turn out to be a Pyrrhic victory.
The
latest from Ken Rogoff (medium):
More
analysis of the GDP number (medium):
And
(medium):
And
(medium):
(2)
the Fed finished its latest FMOC meeting followed by
the release of the current Fed policy statement---which wasn’t all that
different from the prior version although it did note a pause in economic and
employment growth. Weather and other
factors were blamed. It expressed concern
about downside risks; hence the Fed expects to continue its highly
accommodative stance for some time to come.
While I am
sure that investors are tickled pink that the presses will remain in high gear,
as you suspect, I think this the bad news for the day. Talk of a $4 trillion balance sheet by the
end of 2013 is now common; and ominously, interest rates continue to inch
upward. If the bond vigilantes are
starting to re-discover their cojones
and these moves anticipate higher rates, the Fed will be totally screwed---it
will have to print even more money not only to pay for the budget deficit but
also to pay for the higher interest costs as well as covering the capital
losses [from lower bond prices] in its own balance sheet.
And this says
nothing about what happens if a real global currency war breaks out.
More on the developing currency
war (medium):
And today’s must read on the
folly on our global central banks (medium):
Bottom line: if
yesterday’s GDP report is a preview to the
results of the sequester, then I have to be a lot more optimistic about our outlook than I was
two days ago. To be clear, I am not
saying that [a] the sequester {or any other subsequent cut in spending} will
happen or [b] if it does, that the extent of any reduction will be confined
solely to government spending. I am
saying that an example exists that if [a] happens, [b] could happen. And that is more than we had.
None of this
alters the assumptions in our Models today; but now we at least have a glimmer
of hope that if the political class will just do its part to return to fiscal
sanity, then the shorter term economic consequences of that action may not be
as painful as I thought.
If only.
The
latest on Italy
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