The Morning Call
3/22/18
The
Market
Technical
The indices
(DJIA 24682, S&P 2711) underwent a see saw day, closing lower on a more
hawkish FOMC narrative (see below). Volume
was flat, and breadth was mixed. The indices
continue to trade above both moving averages and within uptrends across all
major timeframes; although the Dow closed right on its 100 day moving
average. Still the technical assumption remains
that long term stocks are going higher. On the other hand, the Averages are now in a
very short term downtrend. The key to
negating that trend would be the end of the current ‘sell the rips’ mentality---which
didn’t occur yesterday. Until that happens,
short term, it looks like lower prices. The
big question is, if there is more downside, will it be big enough to begin
successfully challenging those moving averages and uptrends?
And:
The VIX was off 1
¾ %, a little unusual for a down day. But
it still ended above its 100 and 200 day moving averages. The pin action of the past week would suggest
that the recent calm in the VIX is over.
On the other hand, it being down on a down day indicates otherwise. In short, the directional signal out of the
VIX is inconsistent.
Despite more
hawkish than expected verbiage out of the Fed, the long Treasury was up (yield
down) on big volume; though still finished below the upper boundary of its
former very short term downtrend for third day after negating it. More follow through on the downside is needed
before that very short term downtrend is reestablished. Whatever happens to the very short term
trend, the momentum in TLT is still lower.
The dollar got
popped, keeping in sync with bonds (yields down, UUP down). While it is struggling to stabilize, the
trend remains down.
GLD was up 1 ¾ %
on huge volume, pushing back above the lower boundary of its short term uptrend,
negating a second break and acting as it should on day with rates and the
dollar down. I said yesterday that ‘gold
appears to be at an important directional juncture’; it seems to have been
resolved.
Bottom line: the
technicals of the equity market point higher for the long term. On the other hand, the ‘sell the rips’
mentality held yesterday, suggesting that very short term the pin action be down. The big issue is will ‘down’ be big enough to
start taking out major support levels; and that issue is about to be tested
with the Dow sitting right on its 100 day moving average.
Notwithstanding
the Fed’s rate hike and the Street’s more hawkish interpretation of the outcome
of the FOMC meeting, TLT, UUP and GLD all traded like rates are down.
Fundamental
Headlines
Yesterday’s
economic stats were mixed: fourth quarter trade deficit was bigger than
anticipated, weekly mortgage (down) and purchase applications (up slightly)
were neutral and existing home sales very strong. But given that the latter is a primary
indicator, the weight is to the plus side.
Center
stage was the FOMC meeting. The action: it
raised the Fed Funds rate by 25 basis points and said that the unwind of its
balance sheet will continue as planned.
Its forecast portrayed an improving economy (what numbers are these guys
looking at?), declining unemployment, stable inflation (did someone say
Goldilocks?). Importantly, its outlook for rate hikes
included three in 2018 (it missed four increases by one vote), three for 2019
(up from prior estimate of two) and three for 2020 (up from one). This is the primary reason for the Street’s
hawkish reading. On the other hand, 2019
and 2020 are still long way away and lots can change; so I don’t see the need
to get too negative based on the forecast.
China follows suit (medium):
The central bank
bubble (medium):
Don’t
invert the yield curve (medium):
A
more concerning negative about rising interest rates is what is happening in LIBOR rates which roughly $350 trillion (yes
with a ‘T’) in global debt is tied to. I
have already linked to one article on this subject; but I believe that this is an
important enough development that it needs to be monitored (medium and a must
read):
More:
The
rhetoric continued on trade issues. Some
good, some bad. Though on the bad side, Trump is expected to release his tariff
proposals against China today.
China unveils
response to Trump tariff threat (medium):
The US/Canada
trade balance (short):
EU
unveils ‘digital’ tax proposal (medium):
How
protectionism backfires (medium):
Last but
certainly not least, last night, our ruling class passed a $1.3 trillion
spending bill. Somehow that is being interpreted as good
news, seemingly on the thought that more spending, larger deficits and more
debt are to be prized.
Bottom
line: the Fed moving forward on unwinding QE, perhaps at an even faster rate
than I had previously thought, is a plus.
Maybe not as big a plus as a more aggressive approach would be. But beggars can’t be choosers. But whatever occurs, it won’t alter the
outcome, just its timing, i.e. in my opinion, as QE unwinds, so does the
mispricing of assets. Further, as
suggested in the above article on LIBOR, the Fed may not even matter anymore. If the global credit markets are repricing
debt, then the Fed policy is probably irrelevant. If so, then the only issue in my mind is
whether or not this repricing is occurring in an already weakening economic
environment.
In
addition, the Trump/China tariff faceoff is coming to a head. It may be that this is just the final act in
an ‘art of the deal’ melodrama---certainly the developing outcomes of his NAFTA
and steel/aluminum tariff act would suggest so.
If not, the economy is likely in for a rough ride.
Finally,
our paragons of fiscal virtue have just loaded a sack of sh*t on the American
electorate. You know my mantra, more
debt at this point will only hamper economic growth.
Of
course, I could be dead wrong. The economy
could be improving, the increased government spending (mounting deficit) could
prolong the economic expansion, China and the US could kiss and make up and the
credit markets may prove impervious to rising debt and shrinking central bank
balance sheets.
Cash
is good.
Lies
and stories (medium):
News on Stocks in Our Portfolios
Revenue of $9.59B (+15.3% Y/Y) beats by $280M
Economics
This Week’s Data
US
February
existing home sales rose 2.9% versus expectations of up 0.7%.
Weekly jobless claims
rose 3,000 versus estimates of a 1,000 decline.
International
The
March EU Markit manufacturing PMI was 56.6 versus forecasts of 58.1, the
services PMI was 55.0 versus projections of 56.0 and the composite PMI was 55.3
versus consensus of 56.7
February
UK retail sales rose 1.5% versus expectations of up 1.4%.
Other
Architectural
billings remain positive (short):
What
I am reading today
Five tips for investing
in your 50’s (medium):
Tax rule changes
and stock prices (short):
Operation Iraqi Freedom---a failure
(medium):
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