Friday, January 27, 2017

The Morning Call--Mexico, the test case for the art of making a deal

The Morning Call

1/27/17

The Market
         
    Technical

The indices (DJIA 20100, S&P 2296) paused in uneven trading (Dow up, S&P down).  Volume declined, but remains at elevated levels; breadth was mixed.   The VIX (10.6) fell 1 ½ %, closing below the upper boundary of a very short term downtrend, below its 100 and 200 day moving averages (now resistance), in a short term downtrend and is drawing ever nearer the lower boundary of its intermediate term trading range (10.3).
               
The Dow ended [a] above its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] in a short term uptrend {18560-20600}, [c] in an intermediate term uptrend {11708-24558} and [d] in a long term uptrend {5730-20736}.

The S&P finished [a] above its 100 day moving average, now support, [b] above its 200 day moving average, now support, [c] within a short term uptrend {2169-2512}, [d] in an intermediate uptrend {2032-2633} and [e] in a long term uptrend {881-2500}.

The long Treasury was up slightly, closing below the lower boundary of a five week uptrend, voiding that trend, in a very short term downtrend, in a short term trading range and below the 100 day moving average (now resistance), falling further below its 200 day moving average (now resistance).

GLD declined 1%, ending in a short term downtrend and below its 100 day moving average (now resistance) which continues to push further below its 200 day moving average (now resistance) and  finished below a very short term uptrend, negating that trend.

The dollar rose, finishing above its 100 or 200 day moving averages (now support) and in a short term uptrend.   However, it continues to develop a very short term downtrend and is near its 100 day moving average.

Bottom line: the Averages’ performance remain divergent with the Dow having successfully challenged 20000 but the S&P again falling short of 2300.  Consensus believes that the challenge is already over.  But it is not; and until the S&P tales out 2300, a move towards the upper boundaries of the indices long term uptrend remains in abeyance. They maybe header higher; but the S&P isn’t there yet. 

Both TLT and GLD have broken their counter trend rallies, pointing to further downside.

    Fundamental

       Headlines

            Yesterday’s US economic stats were mixed again: the December trade deficit and the leading economic indicators were flat, the January Markit flash services PMI and the January Kansas City Fed manufacturing index were better than expected, while weekly jobless claims and December new home sales were disappointing.

            Overseas, fourth quarter UK GDP rose 0.6% equal to the growth rate of the prior two quarters.

            ***overnight, December Japanese CPI fell 0.2%; Greece and its creditors failed to reached an agreement on the next step in its bailout.

            Thursday with Trump:

            Not much happening: a directive to investigate voter fraud---again with the social policy.

                Meanwhile, the tussle with Mexico escalates. 

            And Trump is now threatening a border tax to solve the problem.

            Club for Growth on the border tax (short):

            CafĂ© Hayek on the Mexican border tax (short):

Bottom line: the Donald slowed down his reforms yesterday but seemingly continued down the road toward more protectionism.  My hope is that this strategy is just the way he negotiates; but until we see the outcome, I think that it is appropriate to be concerned that he is headed in an anti-free trade direction.

I am not going to beat on the corporate intervention, talking the dollar down and free trade themes again.  But that doesn’t mean that they aren’t there.  Further…. the math of lower taxes and higher infrastructure spending doesn’t work with a federal debt and budget deficit of the current magnitude.  How Trump and the GOP address this issue will say more about the economy and corporate profits in the next five years than anything else that has or will be done. 

More on the math of a tax cut (short):

My best advice is to sit back and enjoy the ride; but get up every morning and remind yourself that the most optimistic earnings and discount factor numbers don’t get stocks to current valuations.  So caution is advisable for all but the nimble traders.

Here is the good news (medium):

            And the bad news (medium):

            How long will the celebration last?
            My thought for the day: the relationship between income and wealth is tenuous at best.  I know plenty of guys in the financial community that made great money and thought that it would last forever.  So they borrowed money to enhance their lifestyle even further.  And then the gravy train went off the tracks.  Now they will likely be forced to work well into their 70’s.  I also know guys that made 50K a year, saved regularly and are now retired comfortably on their own terms.  The difference was debt.
       Investing for Survival
   
            The most powerful force in the universe.
           
    News on Stocks in Our Portfolios
 
McDonald's (NYSE:MCD) declares $0.94/share quarterly dividend, in line with previous.

C. R. Bard (NYSE:BCR): Q4 EPS of $2.77 beats by $0.03.
Revenue of $967.1M (+11.1% Y/Y) beats by $11.64M.

Microsoft (NASDAQ:MSFT): FQ2 EPS of $0.83 beats by $0.04.
Revenue of $26.07B beats by $790M.

General Dynamics (NYSE:GD): Q4 EPS of $2.62 beats by $0.10.
Revenue of $8.23B (+5.4% Y/Y) misses by $60M.


Economics

   This Week’s Data

            The January Markit flash services PMI came in at 55.1 versus the prior reading of 53.4.

            December new home sales dropped 10.3% versus expectations of flat.

            December leading economic indicators were up 0.5% versus estimates of up 0.4%; the month was revised up 0.1%.

            The January Kansas City Fed manufacturing index came in at 9 versus the revised December reading of 9.

                December durable goods orders fell 0.4% versus projections of an increase of 2.6%; however, ex transportation the number was +0.5%, in line.

            The initial estimate of fourth quarter GDP came in at +1.9% versus forecasts on +2.2%.

   Other
           
            Will Trump’s energy directives push down the price of oil (medium)?

            China imposes more strict capital control (medium):

Politics

  Domestic

The State Department’s entire senior administrative team resigns (medium):

  International War Against Radical Islam


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