The Morning Call
The Market
Technical
The
indices (DJIA 14719, S&P 1579) had an amazingly good day, closing within
all major uptrends: short term (14121-14828, 1548-1622), intermediate term
(13769-18769, 1458-2052), and long term (4783-17500, 688-1750). The S&P finished above its prior all time
high (1576) for the second time. This
triggers our time and distance discipline which on the time element means that
a close above 1576 next Monday will confirm the break out and put the S&P
back in sync with the Dow.
Yesterday’s
pin action also played hell with the developing head and shoulders
pattern. If prices reverse down today
and head back toward the necklines, these formations will still be in tact. However, a continuing move to upside will
negate this developing formation.
Volume
was down (another up day on declining volume); breadth was quite positive. The VIX finished down and remains within its
short and intermediate term downtrends.
GLD
fell, leaving it well below the lower boundary of its short term downtrend and
a newly re-set intermediate term downtrend.
The bright spot is that it has not challenged the lower boundary of its
long term uptrend.
Bottom line: the spike yesterday got the red light flashing
on that head and shoulders formation.
Further upside will likely close out the possibility of the pattern
working to completion. In addition, we
now have the clock ticking on the confirmation by the S&P of a break to all
time highs. So we are clearly at an important
juncture, technically speaking.
The
historical performance of stocks in May (short):
‘Big’
money has never been so bullish (short):
Fundamental
Headlines
Yesterday’s
US economic data were mixed: weekly retail sales were OK, March housing starts
were up though just a tad below expectations and the Richmond Fed’s
manufacturing index was a big disappointment.
It is good to have a mixed day in the midst of what may be a developing
trend of more negative data flow. I will
take that when I can get it.
On
the other hand, the over night stats from the rest of the world were not so
hot. The manufacturing PMI ’s
from China , Germany
and the EU were not good. Perversely
enough (as has been the situation for some time), economic conditions are
looking so bad that the investor consensus seems to be that the eurocrats will
have to do something, like err, uh, joining the race for global money printing
champion. The ECB meets next week, so I
think much of yesterday’s buoyancy was anticipating lower rates, more money
creation, easier credit or all of the above.
As a result, the EU markets smoked and pulled the US
along.
CEO
of Saxobank looks at the EU’s future (medium):
I am left with two
problems:
(1) our Economic/Valuation
Models assume a ‘muddle through’ scenario in Europe
which as you know has become very much in question of late as economic
deterioration occurs across the continent.
Nevertheless, stocks have remained near all time highs. Assuming there will be new monetary policies
employed in the EU and assuming they halt the current march toward recession,
won’t that just insure our ‘muddle through’ scenario holds? And if the Market is already trading near all
time highs on a ‘muddle through’ scenario, why will it go higher simply because
the odds of that scenario improve?
(2) haven’t the
Fed and the BOJ proven beyond a shadow of a doubt that pumping money into an
overleveraged economy has limited impact?
Bottom line: as irrational
as the Market seems to me, I think I understand---stocks are smoking in the
face of mediocre global economic growth
because most central banks with a printing press and access to paper and
ink are dancing as fast as they can; and investors now seem convinced that those
banks are about to be joined by another big player---the ECB. In short, don’t fight the Fed.
But the US
economy is stumbling along. Many believe
that it is slipping back into recession---in spite of an $800 billion stimulus
package and a Fed that doesn’t know the meaning of the word ‘restraint’. Japan
has been through a decade of no growth while the federal government spent,
spent, spent. In other words, the Markets
may not be fighting easy money, but the real economies certainly aren’t
cooperating.
Now Europe, most
of whose sovereigns are woefully in debt
but are starting to show some stability after having endured the rigors of
austerity to rid themselves of inefficient labor, over regulation and bloated
bureaucracy, is seemingly toying with the idea of resurrecting policies that (1)
got the aforementioned sovereigns in trouble in the first place and (2) the US
and Japan have demonstrated are less than effective.
How long this disconnect between markets and
economies will last, I haven’t a clue.
But with or without EU participation, I think that risks of an unhappy
ending to the unbridled global expansion of liquidity are increasing.
I am
sufficiently concerned to hold an above average position in cash.
Corporate
excuses rise as earnings and revenues fall (medium):
Apropos of the
above discussion on unfettered central bank expansion, this article in defense
of the Fed was no one of my favorite websites (medium):
I think it
incorporates much of the confused thinking about how the unprecedented
explosion in liquidity is not a problem---to which I had to response in brief:
(1)
printing money increases the money supply---we know
that’s not correct. Printing money
increases bank reserves which some day have to be drawn down; and that is the
rub.
(2)
QE is pumping cash into the stock market. [a] the Fed
has to buy those $85 billion bonds per month from someone. They argue it is all from bond funds. In fact, it is not. The Fed is buying them from the Treasury to
finance the debt. [b] take a look at institutional cash holdings {usually
treasuries}; they are at near record lows. That means, by definition, stock
holdings are near record highs. [c] if
you think the big banks are sitting on all those reserves and not doing
anything with them {cough, prop trading, cough}, I have a bridge in Brooklyn
that I will sell you cheap.
(3)
QE will create runaway inflation. [a] we never said ‘runaway’, we said
high. There is a difference. [b] the MIT
survey shows higher prices, just not runaway. [c] have you been the grocery
store lately? [d] ‘yet’ ain’t here yet.
(4)
QE causes high oil prices. This has to be filler so they could get to
five reasons. Oil prices are down.
(5) QE has debased the dollar.
No, the Fed has debased the dollar.
Burns, Miller, Greenspan et al have been doing it for years---long
before anyone ever heard of Bernanke---he is just the worst; and by the way,
the book hasn’t been written on QE yet.
Subscriber Alert
In
my periodic review of Schwab (SCHW), it failed to meet the minimum quality and
growth criteria for inclusion in either the Dividend Growth or the Aggressive
Growth Universes. Accordingly, at the
open this morning, both the Dividend Growth and Aggressive Growth Portfolio
will Sell their holding of SCHW.
In
addition, CME Inc (CME )
failed to meet the minimum quality and growth criteria for inclusion in the
Aggressive Growth Universe. Hence, the
Aggressive Growth Portfolio will Sell its position in CME
at the Market open. CME
remains in the Dividend Growth Universe and Portfolio.
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