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