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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