The Morning Call
8/10/16
The
Market
Technical
The indices
(DJIA 18533, S&P 2181) drifted marginally higher yesterday, with still no
follow through from Friday’s strong performance. Volume was very low and breadth weakened. The VIX rose 1.3%, but closed below the lower
boundary of its former short term trading range for the fourth day. If it does so again today, I will return the
short term trend to down.
The Dow closed
[a] above rising 100 day moving average, now support, [b] above its 200 day
moving average, now support, [c] within a short term uptrend {17517-19253}, [c]
in an intermediate term uptrend {11312-24139} and [d] in a long term uptrend
{5541-19431}.
The S&P
finished [a] above its rising 100 day moving average, now support, [b] above
its 200 day moving average, now support, [c] within a short term uptrend {2053-2292},
[d] in an intermediate uptrend {1917-2519} and [e] in a long term uptrend
{862-2246}.
The long
Treasury was up 1%, ending above its 100 day moving average and well within
very short term, short term, intermediate term and long term uptrends. However, it continues to trade within a
developing pennant formation (breaking that pattern should provide directional
guidance on bond prices).
And:
GLD rose slightly,
finishing above its 100 day moving average and within short term and
intermediate term uptrends.
Bottom
line: having been unable to generate any
follow through from last Monday’s sell off, the indices still can’t build on
Friday’s strong rally. That leaves them
in a very narrow trading range dating back to mid-July. That could suggest a bull/bear battle at
current levels, though no indication as to who will win. Or it could mean that everyone is on vacation
and doesn’t care. Certainly, the volume
would indicate that is the case. I
continue to assume the Market direction is up until proven otherwise; although I
remain bothered by the continuing volatility in the VIX and the bond, gold, oil
and currency markets.
Fundamental
Headlines
Yesterday’s
economic data had something for everyone: the July small business optimism
index rose fractionally, month to date retail chain store sales were better
than the prior week, June wholesale inventories were up while sales smoked and,
finally, second quarter nonfarm productivity and unit labor costs were really
bad. So the optimists can take heart
from the wholesale inventories and sales figures while the pessimists can point
to those productivity numbers. That said,
neither measure prompted action from investors.
I am going to assume this was largely a function of the summer doldrums.
Overseas,
there was also good news (June UK industrial production rose 0.1%, in line),
bad news (June Italian bad loans grew another 1%---not something I wanted to
see) and dealer’s choice (July Chinese consumer inflation slowed while industrial
inflation contracted and the Bank of India left key rates unchanged).
***overnight:
(1)
while the Bank of China and Bank of Japan’s newest QE
bond buying programs are progressing on schedule, the Bank of England is having
problems finding sellers,
(2)
the latest EU bank stress test notwithstanding, a
German economic research institute found that Deutschebank had a capital
shortfall greater than its market capitalization.
Bottom line: ‘stocks remain grossly overvalued and would be
so even if our economic forecast called for solid growth. I believe that easy central bank monetary
policy is the key to explaining this phenomenon; but until investors recognize
the damage QE, ZIRP have done (asset mispricing and misallocation), the Market
will remain overvalued. Investors should
use this situation to take some money off the table, either selling a portion
of the positions in their winners or all of their losers or both.’
Update
on profit margins (short):
Update
on valuations (medium):
The
new economy (short):
My
thought for the day: for the past two decades monetary and fiscal policies have
been designed to promote spending rather than saving. Our government runs deficits, spending
resources on entitlements, wars and bulls**t shovel ready projects that are
just another giveaway, none of which contributes to the capital stock (roads,
bridges, water resources) of the country. The Fed glorifies QE and stipulates that its purpose
is to encourage spending and discourage savings.
The
great growth periods in this country’s history were always times of high
savings/investment---which is what funds new plants, new equipment, new
technology (and jobs). That happens
because consumers save and businesses invest. Now we have rising corporate debt to buy back
stock and fund takeovers and a massive disincentive to save (no return) for those
disciplined enough to save for retirement or a child’s education.
I
think that it is a mistake to assume that the US economy can return to its
former secular growth rate in the absence of saving and investment. In addition, I think it a mistake to assume that
stocks can be valued as if the economy will return to that former secular
growth rate.
Investing for Survival
Will
factor investing continue to work?
News on Stocks in Our Portfolios
Economics
This Week’s Data
Month
to date retail chain store sales improved from the prior week.
June
wholesale inventories rose 0.3% versus expectations of 0.0%; wholesale sales
rose 1.9%
Weekly
mortgage applications rose 7.1% while purchase applications were up 3.0%.
Other
Economists
mystified by reaction to negative rates (medium and a must read):
The
need for the US Treasury to extend maturities (medium):
Saudi
economic problems (medium):
The
public pension Ponzi (medium):
Politics
Domestic
International War Against Radical
Islam
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