The Morning Call
10/5/15
The
Market
Technical
Thursday
the S&P closed below the lower boundary of its intermediate term uptrend,
technically negating the trend. However,
it was less than a point away, so I postponed making the call. Then Friday, the futures up big before the
open---I thought OK, the test was unsuccessful.
Then the Market opened down big on a lousy nonfarm payroll number---I
thought OK, that uptrend is going to be broken.
Then the S&P made a big intraday reversal and closed well over that
lower boundary, confirming that the test was unsuccessful. Fundamentally, it suggests that a rate hike
is off the table.
Aside from giving
me a headache from the up and down action, an interday reversal this big tends
to portend a strong move in the direction of the close (up). So I think it likely that at a minimum the
S&P will go back to test the 1970 level; and it could go higher. While that is not my bias, if Friday’s action
was anything other than a vicious short covering rally, it looks like the
QEInfinity euphoria is alive and well.
While
the long Treasury remains in a short term trading range, it made steady
progress towards the upper boundary of that range. This move to higher prices (lower interest
rates) is consistent with a weak economic outlook.
GLD
spiked on Friday, lifting it off the lower boundary of its very short term
uptrend and pressing against the upper boundary of its short term downtrend. This pin action also suggests lower interest
rates.
The
VIX negated its short term uptrend Friday, re-setting to a trading range. However, it remains in the mid-20’s suggesting
additional volatility ahead.
Fundamental
Headlines
Last
week’s economic was again negative on balance: positives---personal spending,
consumer confidence, the ADP private payrolls report, the September Markit manufacturing
PMI, construction spending and light vehicle sales; negatives---personal
income, August pending home sales, the Dallas Fed manufacturing index, August factory
orders, the August trade balance, the Case Shiller home price index, weekly
mortgage and purchase applications, Chicago PMI, weekly jobless claims, September
nonfarm payrolls and the ISM manufacturing index.
The
primary indicators were personal spending (+), construction spending (+), personal
income (-), ISM manufacturing (-), nonfarm payrolls (-) and factory orders
(-). So they too were discouraging. If this trend continues this week, I will likely
lower our forecast, again, especially if we get no help from the rest of the
world.
The
80/20 rule is crushing the economy (medium):
Overseas,
the stats were almost universally poor: September EU CPI fell below 0 and its
unemployment was unchanged, Japanese unemployment rose, August German retail
sales dropped, September manufacturing data from Japan, China and the EU were
all disappointing. Plus the Indian
central bank lowered rates and capital continued to flee the yuan.
***overnight,
the EU services PMI, EU composite PMI and EU consumer confidence came in below
expectations; the World Bank reduced its growth forecast for China; Saudi cut
oil prices.
As
I noted above, Friday’s pin action in the face of really poor nonfarm payrolls
and factory orders suggests that the QEInfinity/no rate hike crowd retook the
initiative. I don’t doubt that these
numbers likely have the Fed chatting about changing the narrative from hike to
no hike. What I am a bit puzzled by is
that the growing prospects of a recession has got investors feeling all warm
and fuzzy. Of course, that’s me and I am
talking my book. But as long as
investors’ sole concern is that money supply remains easy, however,
economically ineffective it is, then stocks will go up. As Keynes famously said ‘markets can remain
irrational longer than you can remain solvent’. The good news is that our Portfolios have
lots of cash, so insolvency is not a worry.
Update
on valuation (medium):
The
latest from Jeff Gundlach (medium and a must read):
Economics
This Week’s Data
The
September Gallup consumer spending index was lower than its August reading.
Other
Too
much Fed power is the problem (medium):
More
from the optimist in chief (medium):
Politics
Domestic
International War Against Radical
Islam
The
war in Syria seems set to escalate (medium):
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