Wednesday, June 13, 2018

The Morning Call--Bracing for a central bank trifecta

The Morning Call


The Market

The Averages (DJIA 25320, S&P 2785) were mixed (Dow down, S&P up) yesterday.  Volume declined; breadth deteriorated.   Both finished above their 100 and 200 day moving averages (now support).  The Dow is in a short term trading range, the S&P in a short term uptrend.  Longer term, the assumption is that stocks are moving higher.
                The VIX fell slightly, ending below its 100 and 200 day moving averages (now resistance) and below the upper boundary of its short term downtrend.  This continues to point to higher stock prices; though it is at a level at which institutions start buying it as portfolio insurance.

The long Treasury was up pennies.  It finished above its 100 day moving average and the lower boundary of its long term uptrend; but it is below its 200 day moving average, it a short term downtrend and is developing a very short term downtrend.  So current momentum is the downside (higher yields).

The dollar rose ¼ %.  It closed well above both moving averages and it is in a short term uptrend, confirming TLT’s message of higher rates.

GLD was down slightly, remaining below its 100 and 200 day moving averages.  However, it closed above the upper boundary of its short term downtrend for a third day, resetting to a trading range---but  the pattern in which it accomplished this feat (trading flat as the trend declined) was weak (as opposed to trading higher).
Bottom line:  the indices appear headed for their all-time highs (26656/2874) which I am assuming that they will at least challenge.  Both TLT and UUP are pointing at an improving economy and higher interest rates.  GLD isn’t really telling us much.



            The economic data yesterday was slightly positive: month to date retail chain store sales and the May small business optimism index were a plus, May CPI was in line and the May budget deficit negative.

            Overseas, June German investor sentiment was much worse than projected.

            I would characterize the day as debating the consequences of the G7 and Singapore meetings and anticipating the upcoming central bank meetings.

            Thoughts on the G7 meeting:

            Another way of viewing trade (medium):

            Thoughts on the North Korean summit:

                  Thoughts on the FOMC meeting:

            The Fed and inflation (medium):

Bottom line: so far this event filled week seems to have been well discounted.  We still face three central bank meetings in which the outcomes seem set (Fed raises rates but the ECB and BOJ do nothing).  Nevertheless, the subsequent narratives are important as they provide some guidance on future moves.  That said, the primary motive of all these guys is to do nothing that would disrupt the Markets.  So I believe that those narratives will be measured with a lot of caveats that provide an out for any further tightening.  However, ultimately, I think that asset mispricing and misallocation will be rectified with or without central bank consent.

            China continues to curtail ‘shadow bank’ lending (medium):

                        The ECB has an even larger asset mispricing and misallocation problem than the US (medium):

    News on Stocks in Our Portfolios


   This Week’s Data


            The May budget deficit was $146.8 billion versus consensus of $144.0 billion.  Don’t forget, we are supposed to be running surpluses or at least shrinking the deficit during periods of economic growth.
                Weekly mortgage applications fell 1.5% while pusrchase applications declined 2.0%.

            May PPI rose 0.5% versus estimates of up 0.3%; ex food and energy, it was up 0.3% versus consensus of +0.2%.  Remember PPI tends to lead CPI.


            The April EU industrial production fell 0.9% versus the March reading of +0.6%.

            May UK CPI hit a one year low.


            The world is headed for a cyclical slowdown (short):

            Update on auto loans (medium):

            Update on Brexit (medium):

What I am reading today

            SEC frets about corporate stock buybacks (medium and a must read):

                        Intangible assets and equity valuation (medium):

            Three social security myths (medium):

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