The Morning Call
10/25/17
The
Market
Technical
The indices (DJIA
23441) exploded to the upside yesterday largely on the back of two stocks: CAT
and MMM. The S&P (2569) was also up
but on a much smaller order of magnitude.
Volume was down, but still high; breadth improved. Both remain above their 100 and 200 day
moving averages and are in uptrends across all time frames.
The VIX (11.2) was
up 1%---a bit of an anomaly on a very strong Market day. It remained below the upper boundary of its short
term downtrend and its 200 day moving average (but it is close). However, it is above the lower boundary of
its long term trading range, above its 100 day moving average for the second
day (if it remains there through the close today, it will revert to support)
and continues to develop a very short term uptrend. It still looks like the July low was the
bottom.
The long
Treasury was down, finishing below its 100 day moving average for the third
day, reverting to resistance. In
addition, it traded right on its 200 day moving average (support) and remains above
the lower boundaries of its short term trading range and its long term
uptrend.
The dollar rose,
ending within in its short term downtrend and below 200 day moving average. However,
it closed above its 100 day moving average (if it remains there through the
close on Thursday, it will revert to support).
GLD declined, finishing
above its 200 day moving average (support) and the lower boundary of a short
term uptrend. However, it ended right on
its 100 day moving average.
Bottom line: long term, the indices remain
strong viz a viz their moving averages and uptrends across all timeframes.
Short term, they are above the resistance level marked by their August highs,
meaning that there is no resistance between current price levels and the upper
boundaries of the Averages long term uptrends.
One day of
consolidation (Monday) hardly deserves to be called consolidation. However, along with the big bounce in the
Dow, it is evidence of just how strong the underlying momentum in the Market is.
Trading in UUP,
GLD and TLT remains inconsistent, although yesterday’s the pin action pointed
to higher rates.
I remain uncomfortable
with the overall technical picture.
For
the bulls (short):
Fundamental
Headlines
Yesterday’s
economic data was mixed: month to date
retail chain store sales growth and the October Richmond Fed manufacturing
index were below expectations while the October Markit flash manufacturing,
services and composite PMI’s beat estimates.
Overseas,
the October Markit flash manufacturing, services and composite PMI’s were above
projections.
***overnight,
third quarter UK GDP growth was above forecasts as was October German business
confidence.
The
headline of the day was the earnings beat of several industrial companies, the
most significant of which were Caterpillar and 3M. These two stocks accounted for a majority of
the Dow’s gain and explain why the S&P and NASDAQ trailed. I speculated in
yesterday’s Morning Call that these profit beats may indicate that the US
economy is much better than our forecast reflects. But on second thought, I had already raised
our economic outlook based on an improved regulatory environment. So maybe these better corporate results are simply
starting to reflect that. Certainly, a
couple of upbeat earnings reports are not cause to raise our outlook again.
I should also
note that most of these companies have a major international exposure; and I have
been saying for some time that the lift off in the EU economy could at some
point start effecting the US economy.
Again perhaps this factor along with a weaker dollar help explain the pickup
in these industrial companies’ profits.
To be clear, I am
hypothesizing an explanation for these earnings surprises one day after they
occurred. There may be other factors
that present themselves that I haven’t thought of. So I could be dead wrong on all of this. The good news is that (1) our Portfolios own the
stocks of every one of those reporting company.
So if I am wrong, at least I am making money anyway and (2) with more
information, the causes will become more obvious.
Tax
reform was also a lead story with Trump meeting with senate leaders and
McConnell stating in a post-meeting interview that congress will have a laser
focus on tax reform by year end. On the
other hand:
Plus
the Donald’s constant twitter battles with various GOP leaders aren’t helping
(medium):
Bottom
line: the big question is how much significance do we give to yesterday’s
earnings surprise? Whether we are seeing the results of either international or
domestic economic improvement or both, it is clear that strength exists
somewhere. Even though I forecast some improve
in the US economy based on a more business friendly regulatory environment and
suggested that the EU escaping the ‘muddle through’ scenario should be a
positive for the US, there has been a lack of any results to date, save for that
very upbeat week in economic data several weeks ago.
Even if we
assume that the aforementioned occurrences (one week of strong data and
yesterday’s earnings report) are connected and reflect the economic improvement
in our forecast, those positives are already in our Models.
Perhaps the
bigger question is, how will the central banks factor this data (again assuming
they are connected and portray an improving economy) into their models, in particular
as it relates to the speed and magnitude of monetary policy changes? If their answer is to push forward with the
unwind of QE, then the testing of my thesis draws ever closer: a return to
monetary normalization will have little impact on the economy but will trigger
the unwind of asset mispricing and misallocation.
More
on valuations (short):
My thought for the day: plan for the worst even if and as you hope for the best because
we discount future risk too much, so we need
to be particularly skeptical about our various estimates of results and
outcomes and ought to consider more carefully the consequences if things don't turn out as well as we planned. In addition, we should value the benefits of
guarantees (when available) more than the benefits of potential. Accordingly,
we should typically be concerned more about the costs of failure than about
opportunity costs.
Investing for Survival
Tips
for retirement.
News on Stocks in Our Portfolios
Revenue of C$3.22B (+7.0% Y/Y) misses by C$60M.
Revenue of $39.67B (-3.0% Y/Y) misses by $450M.
Revenue of $7.58B (-1.0% Y/Y) misses by $360M.
Revenue of $24.3B (+1.7% Y/Y) beats by $380M.
Revenue of $9.08B (-14.6% Y/Y) beats by $240M.
Economics
This Week’s Data
Month
to date retail chain store sales grew slower than in the prior week.
The
October Richmond Fed manufacturing index came in at 12 versus expectations of
20.
The
October Markit flash manufacturing PMI was reported at 54.5 versus estimates of
53.3; the services PMI was 55.9 versus forecasts of 55.2; the composite PMI was
55.7 versus consensus of 54.8.
Weekly
mortgage applications fell 4.6% while purchase applications were down 6.0%.
September
durable goods orders rose 2.2% versus consensus of +1.0%; ex transportation,
the number was up 0.7% versus projections of up 0.5%.
Other
Chemical
activity rises in October (short):
Thoughts
on the budget (medium):
And
the potential benefits of tax cuts (medium):
To
whom does the US government owe money (short):
Politics
Domestic
The new populism
(medium):
PC run amok
(medium):
Overtreatment in
the US healthcare system (medium):
International War Against Radical
Islam
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for Survival’s website (http://investingforsurvival.com/home)
to learn more about our Investment Strategy, Prices Disciplines and Subscriber
Service.
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