The Morning Call
5/10/17
The
Market
Technical
The indices
(DJIA 20975, S&P 2396) were generally quiet again yesterday, though they
were down. The S&P successfully challenged
its 2402 former higher intraday but failed to hold above it. Volume was flat; breadth was mixed. Both remain
above their 100 and 200 day moving averages and the lower boundaries of
uptrends across all major time frames---all of which act as support.
However, they
are both still hovering near their former highs (21228/2402). My assumption is that they will probably successfully
challenge those highs; though the longer they hang around current levels and
the more unsuccessful challenges they make of their former highs, the greater
the odds that the next move is down. However, I am not suggesting a Market
top. We will only know that when those
support levels start to get violated.
Attention
remains on the VIX (9.9) which moved up enough to close back above the lower boundary
of its long term trading range---voiding Monday’s break. However, it remained below the lower boundary
of its intermediate term trading range for the second day (if it remains there
through the close on Friday, it will reset to a downtrend)
My thought for the
day: in 1987, I was running a risk arb
desk at Bear Stearns. Right around the
corner from our desk was the cold call unit.
Stocks were soaring then and the trade de jour was to sell naked puts,
because…you know…the Market would go up forever and those put premiums were
easy money. Then on October 1st,
the Market fell almost 1000 points intraday.
In one day…one day… the entire book of business those guys had worked so
hard to build was destroyed. Today,
those same guys, or guys just like them, are shorting the VIX, because…you know…,
the Market will go up forever and money being made in the short is easy money. I have no idea when this story ends. But I do know one thing born of almost 50
years plus in this business: people….never….learn.
The long
Treasury and GLD were down, while the dollar was up. This is the first day in some time that all
three of these indicators pointed to higher interest rates---probably a
function of three more Fed heads’ hawkish comments.
Bottom line: investors
remain calm, probably relieved for the break from the trend in three inch domestic
and international headlines. As I suggested
above, the question right now is, are the indices resting in preparation for an
assault on their former highs or have they shot their wad? I think the answer is likely the former, but
we won’t know until it happens.
Fundamental
Headlines
There
were three economic releases yesterday: April small business optimism came
ahead of expectations while month to date retail chain store sales and March
wholesale inventories/sales were disappointing.
Overseas,
March German industrial production was better than expected while its trade
surplus was slightly less; March Japanese real wages were the lowest since 2015. In addition, commodities continue to slide in
China.
***overnight:
(1)
April Chinese CPI and PPI slowed---another sign of a
slowing economy brought on by tightening monetary policy,
(2)
March French and Italian industrial production were
stronger than anticipated,
(3)
it now appears certain that Greece will receive the
next round of bailout funds.
(4)
finally, as I am sure you are aware, Trump fired Comey
and the dems are exploding. I try to
avoid political comment; so I will stick to economics. I think that the only significant consequence
of this action is that will serve as a distraction from the Donald’s fiscal
agenda and possibly delay it. Not that
the dems would vote for any GOP measure.
But the time and energy that will have to be expended to address the
Comey firing issue is time and energy better spent on repeal and replace and
tax reform.
As
I noted above, three regional Fed chiefs spoke yesterday. All supported the narrative that came out of
the last FOMC meeting, i.e. rate hikes and balance sheet shrinkage is
coming. As you know, my thesis has been
and remains that the Fed would screw up a return to monetary normalcy---not so
much for the economy, since QE never really helped; but for the Markets. Supporting that notion:
Jeffrey
Snider on central bank policy (medium):
The risk of a
dollar shortage. Speaking of Jeffrey Snider,
he has been talking about this for over a year; now others are catching up
(medium):
I
talk endlessly about the below average secular growth rate of the economy and
the difficulties in regaining past glory.
This is as clear an explanation of the ‘why’ that you will find.
(medium):
Bottom
line: so far, this week’s US economic data is not improving. Overseas, European stats continue to come in ahead
of estimates while Japanese and Chinese economies are going in the other
direction. I remain perplexed what the
Fed sees (a healthy economy) that I (and others) don’t. But if those guys are as worried about the
Markets as they have been for the last nine years, I think that they are on a
nonoptimal course (tightening monetary policy).
The
latest from David Stockman (medium):
Investing for Survival
Four
things to consider before retiring,
News on Stocks in Our Portfolios
Economics
This Week’s Data
Month
to date retail chain store sales grew at a slower pace than in the prior week.
March
wholesale inventories rose 0.2%, in line; however, sales were flat.
Weekly
mortgage applications were up 2.4% while purchase applications were up 2.0%.
April
import prices were up 0.5% versus expectations of up 0.1%; export prices rose
0.2% versus estimates of up 0.1%.
Other
The
future of oil (medium):
Atlanta
Fed already lowering its second quarter GDP growth estimate (short):
Politics
Domestic
International War Against Radical
Islam
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