The Morning Call
1/17/18
The
Market
Technical
If first you don’t
succeed, try again. The indices (DJIA 26115,
S&P 2802) did and with great success.
They were up huge, with the Dow closing above the upper boundary of its
short term uptrend. And they did it on
big volume and strong breadth.
New
equity buyers are helping to lift prices (medium):
The only source
of cognitive dissonance was the VIX, which didn’t soar but was still up. It again closed above the upper boundary of
its short term downtrend; if it does so today, the short term trend will re-set
to a trading range. It continues to almost
entirely divorce itself from any (inverse) correlation with stocks. I think that means one of two things and
perhaps both: (1) somebody in stock land is doing serious hedging [of their equity
positions] and (2) volatility will likely be much higher going forward than it
was in 2017.
In any case, long term, the Averages remain robust
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
their long term uptrends. The technical assumption has to be that stocks are
going higher.
The long
Treasury again slipped fractionally. While
it remains below the upper boundary of a very short term downtrend, it closed
below its 100 day moving average.
Nonetheless, it remains in a directional no man’s land, closing above
its 200 day moving average and the lower boundaries of its short term trading
range and its long term uptrend.
The impact of
the Apple announcement (short):
The other indicators
that I follow pointed to higher interest rates/stronger economy---GLD down, the
dollar up. This is the first sign that their
investors could be considering that scenario; so again, follow through.
Bottom line: one
down day, then the ‘buy the dip’ mentality once again kicked in. That has been the dominant trading strategy
for the last year and a half; and it remains operative. The current weight of technical evidence is that
stocks appear likely to go higher. But
the further the current ‘melt up’ goes, the more tenuous that assumption
becomes. I remain uncomfortable with the overall
technical picture.
Fundamental
Headlines
The
very strong December industrial production number is clearly a positive sign
for the economy, supporting our improved growth forecast and going a long way
to offset last week’s disappointing dataflow.
Another
upbeat headline was Apple’s announcement that it would bring back its huge
horde of overseas cash and that it would increase its capital spending and
hiring. That fed right into the already
positive narrative on the impact of the tax bill---much of it the result of
actions by other major US companies, increasing pay and employment. To be honest, it certainly appears that at
least the initial actions of the business community are far more promising than
I had expected. And that is all to the
good.
I don’t want to
get too far out over my skis, so I am not going to alter my forecast with only
three weeks of experience following the tax bill. But if this trend continues then the economy
is likely to be stronger than my forecast indicates. What we need now is additional confirmation
of a broader participation in corporate America’s plans for increasing cap
spending and improving wages before making that change. But, as I said, it has only been three weeks
since the tax bill passed; so it seems reasonable to assume that more of the
same would be forthcoming. If so, then
my 2018 economic growth projection will rise.
As a result, two
issues would present themselves. Number
one, will this apparent change in corporate behavior lead to an improvement in
the long term secular growth rate of the economy? Certainly when combined with loosening in the
regulatory environment, it almost assuredly would. One
the other hand, a more restrictive trade policy, as is being threatened by the
Donald, would limit any increase in the secular growth rate. In addition, the current level of debt
service (which I harp on continuously) will restrict the amount of resources
that can be used for growth. And that
will only get worse if interest rates rise.
As a result, the magnitude of increase in the secular growth would still
be in question.
Number two is
Fed policy---it is hammer time. The
corner that it has painted itself into would get a lot smaller and offer the
age old dilemma that every other Fed has faced when it waited too long to
normalize monetary policy---choose the limp wristed wimp alternative and watch
inflation accelerate or choose the big boy alternative, doing what it should have
done years ago, and hit the brakes just at the point that economic growth is
starting meaningfully increase. Either
way, the economy will not be served well.
Again,
this is all speculation on my part. And since
I am not getting paid to make public forecasts, I won’t. At least not yet. But it certainly seems like change is in the
air; and that my forecast six months from now will not be the same as the
present.
Also
worth mentioning is that the Friday deadline for a budget deal approaches; and
it appears increasingly likely that the outcome will be a continuing resolution
with a new deadline in February. While
that may be an initial positive in that it avoids a government shutdown, it
just prolongs the agony. Furthermore, it
is not like there is a good versus bad alternative. We either get a shutdown or we get another
budget with yet a higher deficit. The
best result would be to do nothing forever; but we couldn’t get that lucky.
Bottom line: I am surprised by the recent positive steps
taken by corporate America in response to the tax cut. I would like more information before raising
my economic forecast; but if the first three weeks of experience is an
indication of things to come, I will.
The immediate issue
is the impact an increase in economic growth will have on our Valuation
Model. Without running the numbers, that
answer appears obvious. It will and to the positive. However, as I have noted a number of times, I
have already run ‘what if’ simulations assuming higher economic growth. The net result is that even in a ‘best case’
scenario, equities would just be less overvalued. Hence, I think it wise to own some cash for
your own protection. As you know, I am
50% invested and sleeping well.
Economics
This Week’s Data
US
Month
to date retail chain store sales grew slower than in the prior week.
December
industrial production surged ahead by 0.9% versus estimates of up 0.4%;
capacity utilization was 77.9 versus forecasts of 77.3.
The
January housing market index came in a 72 versus projections of 73.
The Fed released
its most recent Beige Book survey, the bottom line being that the economy
continues to grow and the labor market is tightening. Not exactly front page news; but it does
portray an economy that is NOT in need of QE.
December housing
starts fell 8.2% versus consensus of down 1.3%; building permits were in line.
Weekly
jobless claims fell 41,000 versus an anticipated decline of 11,000.
The
January Philadelphia Fed manufacturing index came in at 22.2 versus
expectations of 25.0
International
December
Chinese GDP was reported +6.8% versus expectations of +6.7%, industrial
production +6.2% versus 6.1%, retail sales +9.4% versus 10.2% and fixed asset
investment +7.2% versus 7.1%.
Other
A
trade war with China would backfire (medium):
Another
optimistic take on the tax bill (medium):
Update on big four
economic indicators (medium):
What
I am reading today
The
randomness on investment performance (medium):
What if diversity isn’t America’s
strength (medium):
Pentagon confirms existence of a
Russian underwater nuclear torpedo (medium):
Another example of how the US is
wasting treasure in the Middle East (medium):
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