Thursday, July 13, 2017

The Morning Call--Making a scat back proud

The Morning Call

7/13/17

The Market
         
    Technical

The indices (DJIA 21532, S&P 2443) popped yesterday with the Dow (but not the S&P) near the upper end of its recent one month trading range.  The question is, this is a one day phenomena or a precursor to the resumption of their upward momentum.  Either way, they remain above their 100 and 200 day moving averages and in uptrends across all timeframes.  So, at the moment, I see nothing, technically speaking, to inhibit the Averages’ challenge of the upper boundaries of their long term uptrends---now circa 24198/2763.   Volume was up slightly off of a low level and breadth improved but remains weak.

The VIX (10.3) fell 5 ½ %, closing very near to the lower boundaries of its intermediate and long term trading ranges (10.2/9.9) which it has unsuccessfully challenged seven prior times.


The long Treasury was up, finishing above its 200 day moving average.  Like its very short term uptrend’s pin actin on Tuesday, it regained this level the day after it reverted in trend.  So like the very short term uptrend, I am putting the reversion call in abeyance subject to follow through in either direction.  While I am not ready to reestablish the positive calls in both trends, the last two days’ performance certainly suggests that TLT hit a bottom last Friday.

The dollar was unchanged, ending in a very short term downtrend and below its 100 and 200 day moving averages, supporting the notion that bonds could have found a bottom.

GLD was up, responding to lower rates but still has a sickly chart.

Bottom line: the Averages remain within a very tight one month trading range, though they appear to have been helped by a renewed dovish narrative from Yellen in her congressional testimony.  So the ‘everything is awesome’ trade is alive and well.  As I said yesterday, I could quote any number of headlines that would normally cause investor heartburn; but today all news is still good news.  I have no insight into how long this psychology will last; but it seems reasonable to assume that, technically speaking, the indices next big move will be to challenge the upper boundaries of their long term uptrends.

    Fundamental

       Headlines

            Only one minor datapoint was released yesterday: weekly mortgage and purchase applications were down.  I am sure that you know that the news was elsewhere:

            Yellen did it again.  After convincing almost everyone that the Fed was on a more hawkish policy path, she did a dipsy doodle that would make a scat back proud and turned dovish again.  Specifically questioning the need for aggressive rate hikes which suggests that we may get only one further rate hike this year and possibly none. 

Without getting too deep in the weeds, she theorized that ‘normal’ interest rates are lower today than they have been in the past, so the distance between current rates and the ‘normal’ rate is much narrower than many assumed and, hence, there is less reason to rush to higher rates.  Sound like more academic bullsh*t?  I think so.  More likely, the Fed has at last realized that it can no longer pretend that all is well with the economy and that its credibility is at stake if it doesn’t own up that fact. So its preferred response is to slow the rise in interest rates.

            The catch is that the economy is not the 800 pound gorilla in the room.  The massive mispricing and misallocation of assets (the Market) is.  And that mispricing/misallocation was much more a function of QE than lower interest rates.

Remember, the Fed lowered interest rates to keep the banks (which had very shaky balance sheets in 2009) solvent by allowing them to build back their profitability by earning the spread between the (essentially risk free) Fed Funds rate and (essentially risk free) Treasury yields.  True, the Fed hoped the banks would lend the money and believed that QE would increase the volume of that lending.  And that all was supposed to stimulate the economy and promote the wealth effect (drive up asset prices) in the hope that this would trickle down to the masses, stimulating growth.  However, the end result was the money didn’t go to industry and did little to improve the economy.  Rather, it went to speculators who ended up severely distorting asset prices and allocation.

But in her testimony, Yellen said that the program for winding down the Fed’s balance sheet would proceed as originally proposed.  (Not that its plan involves significant tightening.  But it is a start.) 

What I am essentially repeating here is my thesis that neither lower interest rates nor QE had much effect on the economy.  But QE had a huge impact on asset prices.  So keeping interest rates low is unlikely to help the economy but unwinding QE is apt to hurt the Markets.  In short, Yellen/the Fed seems to have once again zigged when it should be zagging.

            Yellen on rates and the Fed’s balance sheet

            Thursday morning humor:

            Draghi to address group at Jackson Hole (medium):

            But Yellen did make one point quite clear and that was the federal debt is out of control.  Thanks God for small favors. (medium):

            More on current debt levels (medium):

            In addition, the latest Fed Beige Book was released.  While it still had lots of ‘on the one hand/on the other hand’ commentary, its description of overall economic activity went from ‘modest to moderate’ to ‘slight to moderate’.  I dislike parsing the Fed’s words (but I will since that is what you have to do when reading/listening to its infinite stream of qualifiers to any statement it makes), but that sounds like even it recognizes that it can’t continue to ignore the constant barrage of disappointing numbers---and, at the risk of stating the obvious, probably contributed to the more dovish tone to Yellen’s congressional commentary.

                        Bottom line:  yesterday I said that ‘the economy continues to struggle (which it is) and the Fed seems to be ignoring it’.  It seems that changed with Yellen’s testimony.  I also said ‘it won’t change the fact that the Fed has mismanaged the transition from easy to normal monetary policy---again.’  That hasn’t changed.  Holding interest rates low won’t help the economy, in my opinion, since low rates have done little to stimulate growth.  Unwinding QE won’t hurt the economy because like low rates, it did little to help.  But, in my opinion, it will result in correcting the mispricing and misallocation of assets.

            Earnings and valuations (medium and a must read):

            More on valuations (medium):

            How structural changes impact the Market (medium):

            My thought for the day:  great article on achieving greatness.

       Investing for Survival
   
            The monetary benefits of sleep



    News on Stocks in Our Portfolios
 
Paychex (NASDAQ:PAYX) declares $0.50/share quarterly dividend, 8.7% increase from prior dividend of $0.46.

Economics

   This Week’s Data

            Weekly jobless claims declined by 3,000 versus estimates of down 2,000.

            June PPI rose 0.1% versus expectations that it would be flat; ex food and energy, it was up 0.1% versus forecasts of up 0.2%.

   Other

            Oil exports and the US trade deficit (short):

            More problems for OPEC (short):

Politics

  Domestic

Rand Paul on the new senate version of repeal and replace (medium):


  International

            US selling missiles to Romania.  Guess our ruling class forgot about the Cuban missile crisis. (medium):

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