Wednesday, October 18, 2017

The Morning Call--Watch the bond market

The Morning Call

10/18/17

The Market
         
    Technical

The indices (DJIA 22997, S&P 2559) were up again, with the Dow closing in on 23000 (it traded above that level intraday).  Volume was up slightly and breadth continued strong.  Both remain above their 100 and 200 day moving averages and are in uptrends across all time frames. 

Retail investors are now all-in (medium):

The VIX (10.3) was up 3 ½ %, but is still below the upper boundary of its short term downtrend, below its 100 and 200 day moving averages, back above the lower boundary of its long term trading range.  In addition, it closed above the upper boundary of a very short term downtrend and has now made a second higher low.  So far, it failed to make a new low and has to all the appearances has made a higher bottom.

The long Treasury rose, finishing above its 100 and 200 day moving averages (support) and the lower boundaries of its short term trading range and its long term uptrend.  It has also broken a very short term downtrend.  On the other hand, short rates continue to rise, flattening the yield curve.  That suggests investor concern about a near term rate rise but also a weak economy---not a healthy combination.

The dollar rose slightly, but remained in its short term downtrend and below its 100 and 200 day moving averages. Last week, it is successfully challenged a developing very short term uptrend.
           
GLD fell, ending above its 100 and 200 day moving averages (support) and the lower boundary of a short term uptrend.  Last week, it successfully challenged a developing very short term downtrend.

 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. 

Trading in UUP, GLD and the front end of the yield curve are pointing at a rise in the Fed Funds rate; but the long bond is suggesting that the economy is not as strong as equity investors seem to think.

I remain uncomfortable with the overall technical picture.

    Fundamental

       Headlines

            Yesterday’s US economic data was generally upbeat: month to date retail chain store sales, September industrial production and the October housing market index were all better than anticipated.

            Overseas, the stats were a bit more mixed: the September UK inflation rate hit a five year high; October German investor sentiment rose slightly; September EU car sales declined.

            ***overnight, the September UK jobless rate hit a 42 year low; BOE head Carney raised the problem of the continuity of derivative contracts as a result of Brexit (medium):

                In addition, the Chinese Communist Congress convened to create its new five year plan for economic growth; the US Treasury declined to name any country a currency manipulator, including China.

            Again, stock prices were investors’ focus of the day, much of it obsessing over the Dow trading above the landmark 23000 level. 

            And again, there were other news items that held investment significance:

(1)   the Iraqi’s and Kurds quickly resolved their boundary dispute, lessening the risk of disruptions in oil coming out of Iraq,

(2)   congress is scrambling to extend healthcare insurance payments that Trump ordered terminated last week---though he indicated a willingness to compromise (short):

(3)   the third round of NAFTA negotiations end ‘successfully’; though behind the scenes Mexico and Canada are not happy dudes (short):

            ***overnight, Mnuchin admitted that tax reform was unlikely to get done this year (short):

            Bottom line: yesterday’s economic numbers notwithstanding, the economy is not that strong.  Yet the Fed is talking up rate hikes.  The bond market is describing exactly that scenario.  As you know, I am not worried about the economic impact of a tighter Fed; but I do believe that unwinding QE will lead to an unwind of the gross mispricing and misallocation of assets.

            I continue to lighten up on holdings that have reached their Sell Half Range and believe that cash is currently a valuable asset.

            My thought for the day:  in investing, humility is paramount. As Nate Silver emphasizes in his book, “The Signal and the Noise,” we readily overestimate the degree of predictability in complex systems. We need to promise less and expect less. Things are still not likely to turn out the way we hope, expect or claim, but at least our embarrassment will be less when they don't---when life happens.
           
       Investing for Survival
   
14 mistakes that can wreck your retirement.
                       
    News on Stocks in Our Portfolios
 
W.W. Grainger (NYSE:GWW): Q3 EPS of $2.90 beats by $0.34.
Revenue of $2.64B (+1.5% Y/Y) misses by $10M.

International Business Machines (NYSE:IBM): Q3 EPS of $3.30 beats by $0.02.
Revenue of $19.15B (-0.4% Y/Y) beats by $550M.

Economics

   This Week’s Data

            Month to date retail chain store sales grew at a faster pace than the prior week.

            September industrial production rose 0.3% versus expectations of +0.2%; capacity utilization came in at 76.0 versus estimates of 76.2.

            The October housing market index was reported at 68 versus forecasts of 64.

            Weekly mortgage applications rose 3.6% while purchase applications were up 4.0%.

            September housing starts fell 4.7% versus estimates of a 1.0% decline; building permits dropped 4.5% versus projections of -4.7%.

   Other

            Update on big four economic indicators (medium):

            Bernanke is worried.  So? (medium and a must read):

                        Here is another rip at the Fed (medium):

            Thought for the day (short):

Politics

  Domestic

Presented with no comment (medium):

CIA urges delay in the release of Kennedy assassination documents (medium):

  International War Against Radical Islam

            Is Trump making the same mistake with Iran that Bush made with Iraq? (medium and a good read):

               

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