The Morning Call
12/18/15
Our daughter and her family
arrive this afternoon, starting the Christmas season. I am taking off the next two weeks; back on
January 4. As always I won’t be far from
my computer. So if Market impacting
events or extreme Market volatility occurs and warrants moves in our Portfolio,
I will be in touch. Happy Holidays.
The
Market
Technical
So much for post
Fed meeting euphoria. The indices (DJIA
17495, S&P 2041) retreated broadly yesterday. The Dow ended [a] above its 100 moving
average, which represents support, [b] back below its 200 day moving average,
now resistance; this negates Wednesday’s challenge, [c] within a short term
trading range {16919-18148}, [c] in an intermediate term trading range
{15842-18295}, [d] in a long term uptrend {5471-19343}, [e] and has now made
yet another lower high.
The S&P
finished [a] above its 100 moving average, which represents support, [b] back
below its 200 day moving average, now resistance; this negates Wednesday’s
challenge, [c] in a short term trading range {2016-2104}, [d] in an
intermediate term uptrend {1984-2777}, [e] a long term uptrend {800-2161}, [f] and
like the Dow has marked a new lower high.
Volume was down
as was breadth. The VIX (18.4) rose 6%,
ending [a] right on its 100 day moving
average, now support; this negates Wednesday’s challenge, [b] within short term,
intermediate term and long term trading ranges.
The long Treasury
jumped over 1%, closing back above its 100 day moving average, now support; this
negates Tuesday’s challenge. It is also
within very short term, short term and intermediate term trading ranges.
GLD plunged 2%,
finishing [a] below its 100 day moving average, now resistance and [b] within
short, intermediate and long term downtrends.
Bottom line: I said yesterday that it will probably be next
week before we fully know the Market’s reaction to the Fed rate hike. So just as I didn’t consider Wednesday’s moon
shot a true reflection of investors’ overwhelming approval of the hike, I don’t
think yesterday’s pin action was buyer’s regret. We still have to get through one of the
biggest options expiration ever today.
Even then, the bias of a Santa Claus rally will still likely have some
influence.
I continue to have
no feel for the short term direction of the Market. Longer term, (1) the numerous divergences
below the Market surface, (2) the turmoil in the high yield debt market which
historically has anticipated problems in the stock market, (3) my long held belief
that the end of QE will be bad for the stock market, (4) along with our
assessment that stocks are very richly valued I believe argues against a
successful challenge of the upper boundaries of the indices long term uptrends and
for a decline to significantly lower levels.
Fundamental
Headlines
By
way of a brief summary to this week:
(1)
the economic
data yesterday [November leading economic indicators {+}, weekly jobless claims
{0}, the Philly Fed index {-} and the third quarter US trade deficit {-}] and for
the week were once again negative. This
marks the thirteenth week out of the last sixteen that point to a slowing US economy. Further the international economic numbers
showed no improvement; and, importantly, China has been on a ten day
devaluation streak, suggesting that conditions there are not meeting ‘official’
guidelines. The possibility of recession
remains on the table, though I keep hoping those three weeks of positive to neutral
stats reflect a leveling of growth at a reduced level. I am leaving our forecast unchanged, but a
weakened global economy remains a major risk to our forecast,
***overnight, the fourth quarter Chinese ‘Beige Book’
reflected deteriorating economic conditions across broad geographic and
industrial sectors.
(2)
our elected official appear close to passing an omnibus
spending bill whose content in no way matches the rhetoric out of the GOP which
controls both houses. I see no reason
why fiscal policy won’t remain a drag on the economy whoever wins next November,
The
new budget is still a crap sandwich (medium):
(3)
the Fed finally did the dirty deed, raising the Fed
Funds rate by 25 basis points. I
continue to believe that [a] the unwind of QE should have started 18 months ago,
[b] this will be more of a plus than a negative for the economy but more of a
negative than a plus for the Markets---making Fed policy [or the lack thereof]
the second major risk bearing on the economy.
The Fed’s first
step in setting/maintaining the new higher interest rate (short):
This is a great analysis of the Fed’s (Yellen’s)
twisted reasoning for Wednesday’s rate hike.
However, I disagree on the cause of this lack of logic. The author alleges that the banks pressured the
Fed to raise rates in order to jack up their (the banks) profits---which is a
bit too conspiratorial for me. The
simpler explanation, at least to me, is that Fed made the same mistake it has
always made, to wit, waiting too long to transition from easy to tight money,
and now it is trying to bulls**t its way out of this mistake. (medium):
More on the rate hike decision
and what it could mean (medium):
SocGen: you are too late, Janet
(medium):
The latest St. Louis Fed financial
stress index (short but a must read):
One of the economic positives of
the rate hike (medium):
Living in the aftermath (medium):
http://www.zerohedge.com/news/2015-12-17/time-rate-cut-dollar-surge-sparks-stocks-credit-crude-purge
Bottom line: the most positive assumption about the economy
is that it is bumping along at a reduced rate of growth, Yellen’s comments
notwithstanding. Hopefully between the
recent three weeks of more upbeat data and the positive impact I think that
beginning of the end of QE can have, the US can avoid recession. Unfortunately, the economy is getting no help
from our ruling class in the form of a more growth oriented fiscal policy, from
the global economy which continues to deteriorate or from global central banks
which are in the midst of competitive valuations. In short, the US may avoid a recession but not
because of anything other than the ingenuity and hard work of American business
and labor.
That said, because
the Market has smoked under the QE regime, I continue to believe that it will
be negatively impacted by the demise of QE.
It may take some time; after all, the beginning of the end of QE is a
pretty pathetic attempt toward normalization.
Nevertheless, I think that the stock market is so overvalued and its internals
are so broken and that the high yield debt market has deteriorated too such an
extent that mean reversion will begin to weigh heavily on the stock
market.
I am not
suggesting that investors run for the hills.
I am suggesting that they use the Market strength to take some profits
in winners and/or eliminating investments that have been a disappointment.
Portfolio
advice (medium):
Bank
of America turns negative (medium):
Investing for Survival
The
danger of selective memory:
News on Stocks in Our Portfolios
Economics
This Week’s Data
November
leading economic indicators rose 0.4% versus expectations of up 0.2%.
Other
The
important role of recessions (medium and a must read):
Politics
Domestic
International War Against Radical
Islam
ISIS
latest action; this time in Sweden (medium):
More tough talk
from Putin (medium)
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