The Morning Call
11/10/16
The
Market
Technical
After being
limit down in overnight trading, the indices (DJIA 18589, S&P 2163) staged
a moonshot. Volume rose. Breadth
improved and is now in overbought territory.
The VIX plunged 23%, closing within a short term downtrend, below its
100 day moving average (now support; if it remains there through the close on
Friday, it will revert to resistance) but still above its 200 day moving
average (now support) and in a very short term uptrend.
The Dow ended
[a] above on its 100 day moving average for the second day, now resistance; if
it remains there through the close on today, it will revert to support, [b]
above its 200 day moving average, now support, [c] within a short term trading
range {17092-18693}, [c] in an intermediate term uptrend {11544-24389} and [d]
in a long term uptrend {5541-19431}. It is now approaching its all-time high;
so a challenge of that boundary is likely.
The S&P
finished [a] above its 100 day moving average, now resistance; if it remains
there through the close on Friday, it will revert to support, [b] above its 200
day moving average, now support, [c] within a short term trading range
{1995-2193}, [d] in an intermediate uptrend {1978-2580} and [e] in a long term
uptrend {862-2400}. However, it still
has a way to go before it challenges its all-time high.
The long
Treasury plunged on huge volume, closing below its 100 day moving average (now
resistance), below its 200 day moving average (now resistance), below a key
Fibonacci level, in a developing a very short term downtrend and below the
lower boundaries of its short term uptrend (if it remains there through the
close on Friday, it will reset to a trading range) and its intermediate term
uptrend (if it remains there through the close next Monday, it will reset to a
trading range.
GLD was down
again, closing below its 100 day moving average (now resistance), below its 200
day moving average for the second day (now support; if it remains there through
the close on Friday, it will revert to resistance), below the lower boundary of
a very short term uptrend and in a short term downtrend. This chart continues to deteriorate.
Bottom line: the
Averages staged a huge intraday move, ultimately judging the Trump victory a
major positive. It now looks like a
challenge is coming to the indices’ all-time highs. I continue to doubt that neither those levels
nor the upper boundaries of their long term uptrends will be surpassed.
Fundamental
Headlines
Yesterday
was another yawner as far as dataflow goes: weekly mortgage applications were
down while purchase applications were up and September wholesale inventories
grew less than anticipated though sales improved. Expect this for the rest of the week. Overseas, October Chinese PPI came in hotter
than estimates.
The
news, of course, was
(1)
the surprise Trump victory. I commented on this in yesterday’s Morning
Call, but to expand a bit:
[a] if Trump does ‘what he said he would do’ with
respect to economic policy, then his election will almost certainly have an
initial ‘positive impact’ on the economy.
I stress ‘what he said he would do’ because he has been woefully short
on specifics,
[b] I also stress the ‘positive impact’ for the
economy because one of the things he said that he would do was revamp the US trade
policy. Again short on details; but too
hard a line on trade would only exacerbate global economic weakness. His has also said he wants to cut taxes and
raise spending, i.e. increase the deficit and national debt. This on top of the trillions fritter away by
Bush and Obama. This will only push the
US to the brink theorized by Reinhart/Rogoff in which too much debt inhibits
growth---like we need that. It could
also likely prove inflationary, which would push the Fed even harder to tighten
monetary policy,
[c] finally, while it was all hugs and kisses yesterday as
Ryan, Clinton, McConnell, Obama and Trump himself pledged cooperation, the
rubber hasn’t hit the road yet. First of
all is the question is, can this group of massive egos actually sit down and
cooperate? Secondly, let’s not forget
that Trump has vowed to put Hillary in jail and the republican house to
commence numerous investigation of her alleged wrongdoings. How long do think this big pot of love stew
is going to simmer in that atmosphere?
Finally, if you haven’t checked the overnight news, Hillary’s supporters
aren’t being quite as gracious as she was, as riots have broken out all across
the US. Hugs and kisses indeed.
[d] don’t get
me wrong, strictly from the economic point of view, Trump was by far the better
choice and I have little doubt that measures won’t be enacted that should
stimulate the economy. I am simply
pointing out that it may not be as easy as many think and there are consequences
to these actions not all of which are positive.
(2)
the swing in equity prices from being down in overnight
trading to up big in the regular session.
[a] I guess I
am going to have to retire my rhetorical question on whether Trump is the
catalyst for mean reversion. I have
asked it twice, and been slapped down both times. That doesn’t mean that mean reversion won’t
occur, it just means that Trump apparently isn’t the trigger,
[b] while
investors are clearly getting jiggy with the elimination of a big uncertainty,
I wonder what that certainty has bought them.
By that I mean that while Trump may be good for the economy, the economy
is not nor has it ever been the problem in equity pricing. Yes, it has struggled to grow; but it has still
made progress.
However, as I
have noted repeatedly in these comments that because of the way our Economic
Model handles growth that the current assumptions in our Valuation Model are
for a better secular economic and corporate profit growth rate than has
actually occurred. So any pickup in growth that could happen under a new Trump
fiscal policy is at least partially reflected already in our Year Fair
Values. That versus investors currently
pricing stocks at Nirvana levels.
The Market’s problem
is not growth, it is the absence of real price discovery, i.e. asset mispricing
and misallocation, brought on by a totally irresponsible monetary policy. One
of the major things a stronger fiscal policy will do is allow the Fed to
normalize monetary policy, i.e. raise rates and sell the trillions of dollars
of bonds on its balance sheet. Plus if that fiscal policy reignites inflation,
it will only push the Fed harder and that, in turn should reintroduce price
discovery. Once real price discovery
returns to the bond markets, stocks are not likely far behind.
All that said,
historically a republican president in combo with a republican congress has
been great for the Market.
Bottom line: at
first blush, the Trump election certainly appears to be a positive for the
economy. That is the good news. However, long interest rates got
hammered. To be clear, normally, in an
improving economy stock prices and bond yield can rise together. So on the surface there is nothing unusual or
sinister in this pin action. But these
are not normal times. Price discovery in
the fixed income market has been distorted by QE, ZIRP etc.; and Trump has made
it clear that he views that as a negative.
So if monetary policy in headed for normalization and the Fed gets out
of the way of interest rate price discovery, no one knows what is going to
happen because no one has ever been in this situation before. This has been a potential negative that I
have emphasized continuously over the last four years.
A
post-election thought from Barry Ritholtz (medium):
My
thought for the day: when I was very young (late 20’s), I obsessed about making
a lot of money. Now I wonder what I was
thinking about. I soon realized that I
was a terrible employee and that working for myself was the only way to really
enjoy my work. Yes, there were tough
financial times; but I was free and I was happy. The good news was that the happier I was, the
more money I made.
Investing for Survival
The
lack of independent judgment.
News on Stocks in Our Portfolios
Economics
This Week’s
Data
September
wholesale inventories rose 0.1% versus expectations of a 0.2% increase while
sales grew 0.2%
Weekly
jobless claims fell 11,000 versus estimates of down 2,000.
Other
GM
slashes jobs on declining sales (short):
http://www.zerohedge.com/news/2016-11-09/gm-slashes-2000-jobs-suspends-3rd-shift-bloated-inventories
Chinese
yuan is crashing (short):
And
China is dumping US Treasuries (short):
Politics
Domestic
Oh, the horror
of it all (short):
International War Against Radical
Islam
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for Survival’s website (http://investingforsurvival.com/home)
to learn more about our Investment Strategy, Prices Disciplines and Subscriber
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