The Morning Call
9/17/14
The Market
Technical
The
indices (DJIA 17131, S&P 1998) got jiggy with it yesterday. The S&P closed within uptrends across all
timeframes; short term (1944-2145), intermediate term (1915-2715) and long term
(762-2014); it also finished above its 50 day moving average. The Dow closed within its short term trading
range (16331-17158), its intermediate term trading range (15132-17158), its
long term uptrend (5101-18464) and above its 50 day moving average. Of note, intraday it challenged the upper boundaries
of its short and intermediate term trading ranges and failed to hold above
them.
Volume
was up slightly (and still at anemic levels); breadth improved. The VIX declined, closing back below its 50
day moving average (not surprising given the day’s pin action) and within short
and intermediate term downtrends.
Conflicting
technical signals (medium):
The
long Treasury fell, finishing near the closest of the potential candidates for
the lower boundary of its newly re-set short term trading range. It remained within its intermediate term trading
range and below its 50 day moving average.
Bonds continue to confuse. One
would have thought that if the Fed was going to remain easier, longer (see
below), that bond prices would have rallied along with the Averages. I continue to worry that this is a sign that something
is occurring beneath the surface and that I am not smart enough to figure out.
GLD
rose, but still closed below the lower boundary of its short term trading range
for the third day. That confirms the
break and re-sets GLD short term trend to down.
The intermediate term trend is already in a downtrend; and it finished
below its 50 day moving average.
Bottom line: the
Averages popped yesterday on renewed hope of QE forever. Clearly, the bid under the Market is still
there. On the other hand, there was not
enough momentum to push the Dow through the 17158 level (upper boundary of its
short and intermediate term trading ranges). At this point, I am not sure which is more
significant. If we get follow through to
the upside, then clearly momentum will remain the driving force. However, if prices can’t penetrate 17158,
then the Dow will setting up a reverse head and shoulders formation. We will likely have clarity by the close on
Friday.
Adding a little
murkiness to the technical picture is the pin action in TLT. I have said too many times that its performance
isn’t jiving with that of the stock market.
Unfortunately, I have also said that I have no idea why. This incongruence will work itself out over
time and we will all know the ‘why’. For
the moment, it suggests that the stock boys could be wrong, making this a time
for caution for all those heavily invested in equities.
Our strategy
remains to Sell stocks that are near or at their Sell Half Range or whose
underlying company’s fundamentals have deteriorated.
Fundamental
Headlines
Yesterday’s
US economic news was just so so: August PPI was in line, as was the ex food and
energy variant; weekly retail sales were mixed. Nothing here is disturb our outlook.
The
big news of the day---actually there were two big news events of the day:
(1) John
Hilsenrath, the Fed mouthpiece, commented that the anticipated change in Fed
language [suggesting a move up in the date interest rates would start to rise]
wasn’t going to happen---although he added that it may be ‘qualified’ in the
subsequent Yellen press conference.
Investors clearly focused on the ‘wasn’t going to happen’ part and
ignored the ‘qualified’ part. This
development [along with the other item discussed below] rejuvenated the QE
forever euphoria.
I am not
particularly surprised by this move. In
truth I thought with Europe, Japan and possibly China all slipping into
recession that the Fed would almost assuredly slow the tightening process down
until it had a better read of the global economy. So the real surprise for me was all the talk
about language changes and moving forward any interest rate increase in the
first place.
Not that I would
have complained. After all, there is
plenty of liquidity sloshing around the globe to accommodate any corporate or
consumer need if recessionary forces increase.
In fact, as long as the Fed continues to buy Treasuries [which is it],
that liquidity continues to grow---it is just growing at a lower rate. Add in the balls to wall BOJ monetary policy,
the enhanced funding scheme of the ECB and the Chinese move to accommodation
[see below], the world’s business and consumers have all the money they need IF
THEY NEED IT.
So I thought that
the tightening move a good one---because I believe that there is no reason to subject
the US economy to any additional long term risk of having to unwind what has
been a historically unprecedented expansion of the Fed balance sheet. That
said, as you know, I have always maintained that since the QE’s did little to
pull the US economy out of recession, that eliminating them would have little
negative impact on the economy. Indeed, I
have always believed that the real effect of monetary tightening would be on
the Markets not the economy.
And frankly, I think
that the Fed agrees. Hence, I think that
the reason that the Fed might be considering delaying bringing its own monetary
policy to more normal levels is because it is worried about the Markets not the
economy. Unfortunately, the most likely
consequence will be to drive asset prices even higher.
Of course, the
corollary to my thinking that tightening would hurt the Markets more than the
economy was that the Fed has never, ever been smart enough to transition from
easy to tight money successfully. And I doubt
this time will be any different. So my
bottom line here is that if the Fed does slow the transition to a normalized
monetary policy, whatever its fears, the most likely outcome that I see is that
assets will simply become more mispriced than they already are and consequently
when tightening does occur, the fall will be worse than it otherwise would have
been.
The bumpy road to normalization
(short):
(2) the
Bank of China announced an addition to one of its bank lending facilities, in
essence, an easing in monetary policy.
As you know, the economic data out of China has not been all that great of
late. This was undoubtedly a response to
those poor stats. That said, [a] Chinese
officials have made it clear that they are intent on removing the excessive
exuberance from real estate and securities markets {I know that they lie a lot}
and [b] a look at how this lending facility has been utilized in the past would
suggest that it is not an aggressive expansionary measure---more one suited for
fine tuning. So perhaps this step is
less a move to QE and more one of playing defense.
Here is a little background on
the lending facility itself (medium):
Goldman’s
take on the latest easing (short):
What
happened after the last Bank of China easing (short)?
Bottom line: the
buyers returned with a vengeance yesterday, pushing up not only stocks but also
the oil, gold and emerging markets. That
all makes sense, if the bet is an easy Fed, ECB, BOJ and Bank of China. What doesn’t make sense is a lower TLT. To be sure, there is a lot of cross currents
at work right now (FOMC meeting, actions by other central banks, Scottish secession
vote, the hyperventilating over the coming Alibaba offering), making it easy to
misread the Market. The good news is
that most of these will be resolved by Friday; so I am not at risk of remaining
too confused for too long.
That said, I am
not confused by valuations---which are at historically high levels on multiple
methods. As a result, I believe that a
major asset re-pricing is coming; our Portfolios are positioned for that
occurrence; but I have no idea when it happens.
My
bottom line is that for current prices to hold, it requires a perfect outcome
to the numerous problems facing the US and global economies AND investor
willingness to accept the compression of future potential returns into current
prices.
I can’t emphasize strongly enough that I
believe that the key investment strategy today is to take advantage of the
current high prices to sell any stock that has been a disappointment or no
longer fits your investment criteria and to trim the holding of any stock that
has doubled or more in price.
Bear
in mind, this is not a recommendation to run for the hills. Our Portfolios are still 55-60% invested and
their cash position is a function of individual stocks either hitting their
Sell Half Prices or their underlying company failing to meet the requisite
minimum financial criteria needed for inclusion in our Universe.
It
is a cautionary note not to chase this rally.
The
latest from John Hussman (medium):
CALPERS
exiting hedge funds (medium):
Third
quarter earnings season approaches (short):
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