The Morning Call
12/11/17
The
Market
Technical
Here
is even a longer term chart than I presented last week; but the point is the
same. The S&P is on a sizz. The assumption has to be that the upward momentum
will continue, though clearly it is nearing a powerful resistance at the upper
boundary of its long term uptrend.
Despite
some volatility, the long Treasury continues to move to the upside. It remains above both moving averages and the
lower boundaries of a very short term uptrend, a short term trading range and a
long term uptrend. In other words, the
weak long term rates or safety trade is holding in the face of the FOMC meeting
this week in which it is expected to raise rates.
The
dollar is now above its 100 day moving average and is on the cusp of
challenging its short term downtrend. If
successful, it would point to a stronger economy/higher interest rates or a
safety trade.
GLD
had a punk week, resetting its short term uptrend to a trading range and
reverting its 100 day moving average to resistance. That tends to indicate higher interest rates
and/or a retreat from a safety trade.
While
equity prices rose last week, the VIX was pounded to greater extent than commensurate
with the stock price advance. Indeed,
the VIX is closing in on another challenge of its July lows. Something seems off.
Bottom
line: the disparate performance of the indicators keeps me very uneasy with the
technical picture given the seeming inconsistency of the thinking/rationale of investors
in various markets.
Fundamental
Headlines
The data last
week was pretty evenly matched; although the primary indicators were a solid
plus. The call is a plus. Score: in the last 113 weeks, thirty-six were
positive, fifty-six negative and twenty neutral. However, as I noted last week, the recent
trend has been upbeat which I attribute to the Trump regulatory agenda, the increasing
growth in the EU economy and a rising level of consumer and business sentiment
as congress continues to make progress on the tax bill.
Overseas,
there was not many stats out of the EU while those from China were mixed and
the Japanese continues its positive trend.
That really doesn’t change the global economic picture: EU a plus, China
a negative, Japan attempting to demonstrate some consistent growth.
IMF
stress test of Chinese banks reveals serious shortage of equity capital
(medium):
The
ruling class kept us busy last week.
(1)
the senate passed its version of tax reform. The GOP is now driving to the hoop for
passage of a tax bill. I suspect the
odds are for success; though at the moment, the terms of the bill are still up
for question as political process evolves.
Whatever the details, it still appears that
[a] corporations will get the lion’s share of tax
reductions---which {i} I don’t believe is fair and {ii} they are receiving this
largess on the thesis that they will spend the extra cash from tax savings on
investment and creating jobs. There is
only one thing wrong with that notion---corporations already have a lot of free
cash flow and have to date used it buyback stock and grow their dividends. While they have every right to spend their money
as they see fit, I fail to see how lowering their tax rate, thereby increasing their
cash flow will alter their decision on how to spend cash.
[b] the legislation will still add $1.5 trillion to
the national debt. I have beat this
horse to death; but the bottom line is that at the US current level of debt,
adding another $1.5 trillion will be do more to hinder economic growth than
increase it.
That said, the big unknown is the psychological effect
a tax bill, however, flawed, will have on corporate investment decisions. To be sure, we witnessed a brief surge in
economic activity immediately following the Donald’s election, only to peter
out with the realization that one man wasn’t going to change how business got
done in DC. Will this time be
different? Certainly, an initial spurt
in economic activity is easy to imagine.
The question is, is it sustainable?
That is probably the biggest issue impacting the economy in 2018.
(2)
Congress managed to extent the spending authority of
the government by another two weeks.
While that is not exactly a moment for jubilation, it does indicate that
the GOP and dems can reach some kind of agreement in order to avoid a
government shutdown. True, the same
problem will again come to a head shortly; but with all the negotiations occurring
on multiple fronts, hopefully, our governing class can come up with a
compromise that keeps the government open.
On the other hand, keeping the government in business
at a negative run rate [deficit] at a time of unsustainable national debt isn’t
exactly a victory to cheer about.
(3)
the Donald has already started talking about an
infrastructure bill. We have no idea
what his proposal will contain, but here is what I am watching for: [a] how big
will it be. Early rumors have it a $200
billion; and that is relatively modest, [b]what projects will it entail? More Obama ‘shovel ready’ imaginary spending
or real ventures that improve America and produce jobs?
One other piece
of overseas news worth mentioning: the EU and UK inched closer to agreement on
Brexit. This is good news and lessens
any risks that would be associated with any economic disruptions that could
result from a contentious breakup.
Bottom line: the
economic data continues to improve; and I upgraded our 2018 growth forecast to
reflect that. To be sure, it wasn’t
wildly optimistic but it did portray an economy emerging from a near year long
bout with stagnation. Further, it may be
given an additional boost depending on the outcome of the tax bill and Trump’s
infrastructure spending plans. At the
moment, I am not all that hopeful regarding the former and I simply don’t know
enough to have any opinion of the latter.
That said, I think
that the big unknown is not what the terms of the aforementioned legislation
may be but how businesses and consumers react to it. So far, everybody is jiggy. However, the rubber has yet to meet the road.
Earnings
may not matter but dividends do (as in the present value of future cash flows):
Investing for Survival
The
death of equities, redux
News on Stocks in Our Portfolios
Economics
This Week’s Data
Other
The
latest thoughts from Bill Gross (medium):
A pentagon audit---it is
about time, if they really do it (medium):
Stockman on employment
and wages/income (medium):
Since bitcoin is now on everyone’s lips with few understanding it, I am going to start making regular entries of the subject. Here is the original paper done by the developer of bitcoin. Don’t worry, it is not that technical:
Today’s entries:
Politics
Domestic
International War Against Radical
Islam
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