The Morning Call
1/11/18
The
Market
Technical
The indices
(DJIA 25369, S&P 2748) paused again---though an early sell off faded into a
minor down close. Much of this pin action as well as a reversal of Tuesday’s
big move in bonds suggest that the fear of inflation and spiking interest rates
may have been a one day phenomena.
Though it does apparently indicate that investors are sensitive to the
notion that the end of QE may be around the corner.
The VIX also
reversed its price action of the prior three days (up on an up Market day) and
declined on Wednesday’s down day---again suggesting that the recent turmoil may
be short lived. However, one thing
Tuesday’s trading does point out is that all news is not good news. Specifically, any evidence that QE is ending
(or an indication that it could be---like rising inflation) may lead to an
increase VIX activity. The point being
that since QE may be coming to an end, however timid it may be, that suggests
that the extended period of subdued volatility may also be coming to an end.
Volume rose
while breadth was mixed. Long term, the
Averages 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. The technical
assumption has to be that stocks are going higher.
Tuesday’s
doomsday bond market scenario quickly reversed.
While TLT sold off heavily in early trading, it gained back most of the
losses by day’s end, as concern over the Chinese reducing their US Treasury
holdings faded and a Treasury 10 year auction that was well received. I said yesterday that it was too soon to
assume that rates were about to spike (the importance of follow through). And I will say today, it is too soon to
assume that they won’t. To be sure, believing
that all news is good news is a ten year investment strategy that has worked
consistently. So it is not surprising
that a one day sell off on some bad headlines would be quickly reversed when
that bad news is dispelled. However, QE may
be coming to an end; and investors’ apparent heightened awareness of that fact
may keep pressure on the price of the long bond.
The other
indicators followed TLT’s lead---GLD up, the dollar down. But their price moves were much more muted,
just as they were on Tuesday. Although I
have to note that the upside move in GLD was on huge volume.
I remain
uncomfortable with the overall technical picture.
Fundamental
Headlines
Yesterday,
the Donald suggested, in the interest of getting compromise in congress, that
it bring back earmarks---those pesky pork add-ons that fund local projects in
order to secure a congressman/senator’s vote.
That is not what this country needs at a time when the national
debt/deficit are already at record highs and spiraling upwards. It would reinforce my thesis that the
debt/deficit are at a level that inhibits growth. Let’s hope this is just more of Trump’s loose
lips rhetoric.
Speaking
of which, here are some updates on the threats of trade wars:
(1)
I reported yesterday that China is considering reducing
its holdings of US Treasuries, partially in response to Trump’s trade
threats. Here a deeper look into China’s
real alternatives with respect to those potential sales---which appear to be
quite limited. That doesn’t mean, they
won’t pursue other avenues; but if is their best shot, then there appears to be
little about which to be concerned on this front,
***overnight,
Chinese officials said that they policy to ‘diversifying’ their reserves due to the decline in Treasury yields---which
has the same end result as selling Treasuries because they are pissed about
Trump’s trade rhetoric.
(2)
a little bit more concerning were rumors that the US is
about to pull out of NAFTA. While these
may be just part of the ‘art of the deal’ negotiations, in my opinion, such an
action would be detrimental to US economic growth,
***overnight, US and Canadian officials
dismissed those rumors as false.
Finally, the Pakistanis
apparently aren’t going to put up with the Trump twitter bombast criticizing
their reliability and have upped the ante, suspending military and intelligence
cooperation with the US. This will not
help us in Afghanistan where we have already wasted far too many lives and too
much treasure.
https://www.zerohedge.com/news/2018-01-10/pakistan-suspends-military-and-intelligence-cooperation-us
And
it pushes Pakistan into the waiting arms of the Chinese and Iranians. Don’t forget Pakistan has nukes (medium):
Bottom
line: the Market is overvalued. To the
extent that you are invested, that is good news. But if volatility increases that may be a less
comforting position than it has been for the last year. I think it wise to own some cash for your own
protection. As you know, I am 50%
invested and sleeping well.
The rise of
investor optimism (medium):
Economics
This Week’s Data
US
November
wholesale inventories rose 0.8%; even better sales were up 1.5%.
Weekly
jobless claims rose 11,000 versus expectations of a 5,000 decline.
December
PPI fell 0.1% versus forecasts of up 0.2%; ex food and energy, it also declined
0.1% versus consensus of up 0.2%. This
ought to have investors wee weeing in their pants.
International
2017
German FDP rose 2.2%, the fastest growth rate in six years.
A
Chinese official said that 2017 Chinese GDP grew at a faster rate than
expected---‘said’ being the operative word.
Other
Heavy
truck sales are up (medium):
Moody’s
warns Washington that US credit rating is at risk (short):
What
I am reading today
Thoughts on inflation and
how it could impact your portfolio (medium):
Thursday
morning humor:
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