Friday, February 16, 2018

The Morning Call--Apparently so

The Morning Call

2/16/18

The Market
         
    Technical

The indices (DJIA 25200, S&P 2731) again ignored/rejoiced over concerning economic datapoints and surged higher.  They remain above both moving averages and within uptrends across all major timeframes.    Volume fell and was still low; breadth improved.  The technical assumption is that long term stocks are going higher; though the Averages need to overcome their former highs before we have an all clear signal. 

The VIX was off only fractionally---not normal for a 300 point up day on the Dow.  It remains at an elevated level, suggesting that there is no end to the recent volatility.

The long Treasury inched higher, but still finished below both moving averages, in very short term and short term downtrends and very near the lower boundary of its long term uptrend, a breach of which would clearly intensify investors’ concern about rising interest rates/inflation

            PIMCO on the bond market (medium):

Counterpoint (medium):

The dollar continued its losing streak, ending below both moving averages and in an intermediate term downtrend. This remains an ugly chart.

GLD rose, continuing the bounce off a minor support level and leaving its chart in relatively good shape.

Bottom line: equity investors seem to have shaken off their concerns over higher inflation/interest rates, the poor PPI number notwithstanding.  Of course, the lousy industrial production data suggests that the economy is weaker than previously though; and hence, the Fed will stay accommodative.  Implicit in this assumption is that the pickup in CPI and PPI will be short lived or contained---which I could respect if not for the contrary behavior of TLT, UUP and GLD.  Their pin action notwithstanding, the technicals of the equity market point higher.

            Corrections almost always test their lows (medium):

    Fundamental

       Headlines

            The Market held center stage yesterday, failing to respond to more poor economic data and ignoring the clown show in DC, which featured the failure to reach an agreement on immigration and most of the ruling class giving a raspberry to the Donald’s proposal of an increase in the gasoline tax.

            The economic stats do bear mentioning: weekly jobless claims were slightly better than expected and the Philly Fed manufacturing index was positive; however, PPI, industrial production (primary indicator) and the NY Fed manufacturing were disappointing.  So like Wednesday, the numbers pointed at higher inflation and weaker economic growth. 

Bottom line: as I read the upbeat mood of equity investors, it seems to assume (1) an improvement in the economy due to the tax cut, (2) lack of concern about inflation and (3) that the near term string of poor economic data will be short lived.  

To which I respond:

(1)   corporate profitability may improve as a result of the tax cut.  But for that to translate into economic growth, those additional earnings must be invested in labor and capital.  We witnessed an initial surge in such announcements; but that has since tapered off and been replaced by the news of increasing dividend and stock buy backs.  So at this point, I am not at all sure that there will be much impact on long term earnings growth.  To be sure, earnings for 2018 will rise; but for the growth rate of corporate profitability to improve beyond 2018, some of those earnings need to be invested in increased productivity---and so far that seems limited,

(2)   it is clearly too soon to raise the threat of inflation; much more data is needed.  However, it seems foolish to ignore the reports we have because [a] the bond, dollar and gold markets certainly aren’t.  Not that they will be proven right; but at least, they are factoring in concerns and [b] the historical preconditions for inflation are in place: increased government spending in an economy already near capacity and an irresponsibly easy monetary policy, 

(3)   the trend in poor economic data is not new; as I have pointed out repeatedly in the Closing Bell, this has been going on for almost two months [with two upbeat weeks interspersed] and this week looks like it will be yet another lousy one.

In sum, I am not in denial that corporate earnings will improve this year. They almost certainly will and that will impact stock prices.  I am questioning the valuation of those higher earnings (1) if their growth rate will not be sustained and (2) in the midst of an expanding deficit/debt at a high in economic activity in combination with a Fed that has been too easy and is late to the tightening process.

            Infrastructure spending won’t transform America (medium):
               

    News on Stocks in Our Portfolios
 
Tiffany (NYSE:TIF) declares $0.50/share quarterly dividend, in line with previous.

Illinois Tool Works (NYSE:ITW) declares $0.78/share quarterly dividend, in line with previous.

Coca-Cola (NYSE:KO): Q4 EPS of $0.39 in-line.
Revenue of $7.5B (-20.0% Y/Y) beats by $140M.

Coca-Cola (NYSE:KO) declares $0.39/share quarterly dividend, 5.4% increase from prior dividend of $0.37.

V.F. (NYSE:VFC): Q4 EPS of $1.01 misses by $0.01.
Revenue of $3.65B (+20.1% Y/Y) misses by $10M.


Economics

   This Week’s Data

      US

            January industrial production fell 0.1% versus expectations of a rise of 0.2%.

            The February housing market index came in at 72, inline.

            January housing starts rose 9.6% versus estimates of +3.3%; building permits were up 7.0% versus forecasts of being flat.

            January import prices increased 1.0% versus consensus of +0.6%; export prices were up 0.8% versus projections of up 0.3%.

     International

    Other

            Update on big four economic indicators (medium):

            A European view of the fiscal/monetary/trade policies (medium):

            Club for Growth is against the gasoline tax (short):

            Latest on oil supply/demand (medium):

What I am reading today

            The demise of the Tea Party (medium):

            Twelve rules for life (medium):

            A thought on guns (short):
            https://www.pragcap.com/guns/

            The genius of Trump’s food stamp proposal (medium):

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