The Morning Call
The Market
Technical
The
indices (DJIA 14700, S&P 1582) took a breather yesterday, but still closed
within all its major uptrends: short term (14227-14917, 1559-1653),
intermediate term (13816-18816, 1463-2057) and long term (4783-17500,
688-1750).
Volume
fell; breadth was negative. The VIX rose
but remains will within its short and intermediate term downtrends.
GLD
dropped, finishing within its intermediate term downtrend and its long term
uptrend.
Bottom line: the sell off yesterday was likely much more
related to the overbought condition of the Market versus any response to bad
news (which we got). It will take a lot
more than one down day to do any damage to the bid under the Market.
If any of our
stocks trade into their Sell Half
Ranges
More
charts on the Market (short):
Fundamental
Headlines
Lots
of data yesterday, much of it below expectations: weekly mortgage applications
were up but purchase applications were down; the ADP
private payrolls report and March construction were well below estimates; the
April ISM manufacturing index and April vehicle sales were slightly below
forecast. Not to fear though because as
usual the statement from the latest FOMC meeting assured all that the Fed would
be there if the economy weakened any further.
The
stats obviously didn’t make me feel better about our forecast. I have made the point that one or two days or
even a couple weeks of sub par economic data flow doesn’t necessarily mean the
economy is rolling over; and I am sticking with that thesis. That said, the numbers out of Europe
and China also
keep getting worse which in a sense could reinforce any temporary weakness here
and hasten/deepen any decline. In
addition, commodity prices are behaving atrociously; that too is not a
promising sign for growth. This is not a
lead in to a change in forecast but it does suggest that if the major global
economies are in sync and getting softer, it may not take a month or two of
lousy data to convince me that recession is at hand.
The potential problem of
a negative growth feed back loop in China
(medium):
If (the
operative word) indeed the global economy is rolling over, then on a shorter
term time horizon, a jacked up Fed policy aided and abetted by the Bank of
Japan and possibly the ECB (just in, ECB lowers rates) would seem increasingly
probable. A slowdown would also mean that the longer term problem of inflation would
retreat further into the future. It is
not going away because the Fed and other central banks will still be faced with
pulling all those reserves out of the financial system without pushing the
economy back into a third recession or hyping inflation. In short, the 12 to 24 month problem would go
from inflation to recession; but the threat of inflation longer term remains.
Not to be repetitious,
I am not altering our outlook. I am
saying that the flashing warning light may transition to red quicker than I
might have originally thought.
Bottom
line: the probability of global
recession seems to be growing; so the question is, if the global economy is
rolling over, what does that mean for stocks?
I can tell you what it would mean for our Valuation Model---lower Fair
Values. That said, while our earnings
assumptions would decline so would the impact of inflation on multiples. The net is that the spread between Fair Value
and the current altitude of stock prices would likely increase; just not by the
magnitude of the decline in earnings---which leaves stocks overvalued.
On a longer term
basis, the risks associated with the current extremes that central banks have
taken (and will take) monetary policy would not go away. They would just be postponed.
All that said,
this is, at the moment, a hypothetical.
We still need more data before our forecast is changed.
Update on
valuation (short):
Two
recession indicators (short):
Will
Germany save France
this time around (medium):
For
the traders---two underperforming sectors (short/medium):
Margin
debt approaches all time high (short):
The
Bank of Israel doubles down on stocks (medium):
Subscriber Alert
The
stock price of Nike (NKE -$63) has traded
into its Sell Half
Range
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