The Morning Call
2/28/17
The
Market
Technical
The indices
(DJIA 20837, S&P 2369) advanced modestly as it continues to work off an overbought
condition. Volume fell (for the seventh
day in a row), but remained at a high level; breadth was strong. The VIX (12.1) was up 5 ½%, but still finished below its 100 and 200 day
moving averages (now resistance), in a short term downtrend and in the trading
range dating back to mid-January. It continues
to signal complacency at a near record high level.
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 {18839-21079}, [c] in an
intermediate term uptrend {11788-24640} and [d] in a long term uptrend {5751-23298}.
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 {2204-2538},
[d] in an intermediate uptrend {2053-2657} and [e] in a long term uptrend
{881-2561}.
The long
Treasury declined, falling back within a developing pennant formation, and remained
in a very short term downtrend, near the lower boundary of its short term
trading range and below the 100 day moving average (now resistance), falling
further below its 200 day moving average (now resistance).
GLD was down, closing
within a very short term uptrend and above its 100 day moving average (now
support). Intraday, it challenged its 200
day moving average (now resistance) but fell back and remained within a short
term downtrend.
The dollar was
unchanged, ending above its 100 day moving average (now support), its 200 day
moving averages (now support) and in a short term uptrend.
Bottom line: the
Averages continue to follow the model path, spiking higher then trading quietly
as they work off an overbought condition.
At this point, there is little reason to doubt that they will ultimately
challenger the upper boundaries of their long term uptrends.
Fundamental
Headlines
The
economic data started the week on a sour note: while the headline January
durable goods order number was unchanged, the internal makeup was weak---primarily
because transportation orders masked weakness elsewhere; January pending home
sales were awful; and the February Dallas Fed manufacturing index was much
better than anticipated.
Overseas, the Germans
are continuing to play hardball with Greece on any bail out funding; and the EU
February economic sentiment was basically flat with the January report.
***overnight,
the French fourth quarter GDP was much better than anticipated.
Monday
with Trump: This week started in a
lively manner. First, Trump let out part
of his initial budget, indicating an increase in defense spending with
offsetting cuts in nondefense spending. While
that would fulfill a campaign promise, those nondefense cuts have their
advocates on Capitol Hill. Once the
details are out, those whose ox has been gored are going to fight.
Winners
and losers in the coming Trump budget (medium):
Second,
the Donald lamented about how difficult Obamacare reform is going to be. That’s important, because it is becoming
clear that tax reform will come only after healthcare reform.
Nobody
knew healthcare could be so complicated (short):
So
hold your fire on tax reform; but infrastructure spending will be big (medium):
Finally,
Mexico is starting to push back on NAFTA (medium):
Bottom line: my narrative
in the last couple on Bottom lines is that we are waiting for an economic (tax
an infrastructure) plan, an Obamacare repeal and replace plan, a possible re-do
of Dodd Frank and multiple re-sets of trade treaties. Broad concepts but with little detail. I don’t know if you have noticed it, but the
investors have been very happy dealing with this blue sky environment.
Now we are the
cusp of getting the details. The first
thing we learned is that there is no ‘phenomenal tax plan in two or three weeks’. It is not coming until after the rewriting of
one of the most controversial pieces of social legislation in our lifetime. I am not saying it can’t happen in a day, a
month or whatever. I am suggesting that
given the emotional content of the current political dialogue and the symbolism
of Obamacare, it may take a while. So
hold your horses on tax reform.
Now we learn
that a new great infrastructure bill is on the way. Please remember the senate GOP has basically said
that there will be no deficit spending.
Also remember the point that David Stockman made---on March 15, a firm
debt ceiling goes into effect. Meaning
that every new project must to financed by tax increases or cuts in spending. That is not an easy job. For example, the one budget detail we do have
is that defense spending is going up $54 billion and nondefense spending is
going down by a comparable amount. First
of all, kudos for making a stab at budget reform; but $54 billion is a wart on
a goat’s ass in the universe of government spending---Trump has talked $1
trillion in infrastructure spending. Second,
we have no detail on what is going to be cut; but you can be sure of the
screams and gnashing of teeth from the rentiers associated with those cuts will
be heard from coast to coast.
My point has
been and is, as long as investors can contemplate tax cuts and spending increases
in vague terms, they can put any valuation they want on a stock. But when the actual tax cut and spending details
come out and the numbers start getting put to the results, that all goes
poof.
I don’t say this
as criticism of Trump or his efforts at reform.
In fact, he is doing about as well as any could expect; and I believe
that his new policies will have a positive impact on the economy. The question before us is, how big an impact
given the current levels of the federal debt and the budget deficit? My answer is probably not what is currently
being discounted in equity prices. Not
owning a decent cash position at this time, is, in my opinion, a huge mistake.
This an interesting
article on valuations and their sustainability
My
thought for the day: it is easier to make up an opportunity cost than a
loss. In other words, you can miss a
Facebook. All that means is that you
still have all of your money when Apple or Netflix comes along. Remember, your portfolio doesn’t know what it
doesn’t own. But you can’t afford an
Enron. It leaves you with no chips to
play the game.
News on Stocks in Our Portfolios
Bank of Nova Scotia (NYSE:BNS) declares CAD 0.76/share quarterly dividend, 2.7%
increase from prior dividend of
CAD 0.74.
Bank of Nova Scotia (NYSE:BNS): FQ1 EPS of C$1.57 in-line.
Revenue of C$6.87B (+7.8%
Y/Y)
Revenue of $2.4B (+33.3%
Y/Y) beats by $190M.
Economics
This Week’s Data
January
pending home sales fell 2.8% versus estimates of a 1.1% increase.
The
February Dallas Fed manufacturing index came in at 16.7 versus the January
reading of 11.9.
Revised
fourth quarter GDP was reported at +1.9% versus forecasts of +2.1%.
The
January US trade deficit was $69.2 billion versus projections of $66.0 billion.
Other
Spain
prosecutes 65 bankers (medium):
China
cuts growth rate of money supply (medium):
Update
on student loans (medium):
Politics
Domestic
International War Against Radical
Islam
This would almost be humorous if it
wasn’t so sick (short):
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