The Morning Call
6/14/18
The
Market
Technical
After trading on
a flat line for most of the day, the Averages (DJIA 25201, S&P 2775) closed
down. Volume rose; breadth deteriorated---which
is not surprising given its overbought condition. 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 was up 4 ¾ %. It still ended below its 100 and 200 day
moving averages (now resistance) but above the upper boundary of its short term
downtrend (if it remains there through the close on Friday, it will reset to a
trading range).
The long
Treasury declined. 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, in a short term downtrend and continues to
develop a very short term downtrend. So
current momentum is the downside (higher yields).
The dollar fell
slightly, closing well above both moving averages and in a short term uptrend.
GLD rose ¼ %. It remained below its 100 and 200 day moving
averages but in a short term trading range.
Bottom
line: the indicators turned in a mixed as
well as confusing performance yesterday.
Given the more hawkish FOMC statement, I can understand weakness in the
bond market. But part of that statement
was the economy is improving which would suggest higher equity prices, a strong
dollar and weaker gold---none of which happened. Of course, there is always a lot of trading
noise in any given day’s pin action. Plus
as I noted previously, the stock market was overbought on a technical
basis. So follow through should clarify
the confusion. I see no reason to
question the assumption that the indices are headed for their all-time highs
(26656/2874).
Fundamental
Headlines
Yesterday’s
economic stats were negative: weekly mortgage and purchase applications were
down and May PPI was hotter than expected.
As I pointed out yesterday, changes in PPI historically tend to
anticipate changes in CPI which (1) is not good for most of us and (2) is an
indicator that the Fed uses to judge the pace of tightening.
And
speaking of the Fed, yesterday’s headline news was the completion of the FOMC
meeting and the subsequent narrative in its official statement and news
conference. Bottom line: it raised the
Fed Funds rate another ¼ %, pointed to two more rate hikes this year and stated
that its QE unwind continued---a slightly more hawkish tone than had been
anticipated. This is a great summary of
the high points and includes the dot plot as well as the red line version of
the official statement (medium):
https://www.zerohedge.com/news/2018-06-13/fomc-hikes-rates-expected-signals-two-more-rate-hikes-2018
Of
course, the Fed continues to misread the economic data both here and abroad
(short):
The
yield curve flattened (short):
And
emerging markets got whacked---higher rates and strong dollar are not good for them
(medium):
***overnight,
the ECB (1) left rates unchanged and said that it would keep them there at
least through the summer of 2019 and (2) it would scale back its bond purchase
program in September 2018 and end it in December 2018 but will continue to
reinvest the proceeds from maturing securities.
Markets
interpreted this dovishly based on the delay in raising rates. However, I think the more important item was
the unwind of EU QE because it will join the US in shrinking the level of massive
global liquidity which drove whole mispricing and misallocation of assets.
The
ECB also lowered its GDP forecast for 2018.
Meanwhile,
the Bank of China unexpectedly did not raise rate apparently out of concerns
about slowing economic growth.
However,
the Fed meeting didn’t entirely push debate on the consequences of the G7 and
Singapore meetings off the front page.
Trump’s
creative destruction of the world order (medium):
Why
the G7 is a zero (medium):
Trump reportedly ready to
slap additional tariffs on China (medium):
Five
takeaways from the Singapore summit (medium):
Bottom line: the
Fed was more hawkish than anticipated.
As you might expect, I think that is good news in the sense that it
moves monetary policy further along the path of unwinding QE. But as you also know, while I don’t see this
as a negative to the economy, I believe that it will ultimately be painful for
the Markets as the mispricing and misallocation of assets corrects. To be sure, many believe that the Fed will
back off its rate rises if the Markets become unsettled. And it may; indeed, it has given every sign
that it would. But it doesn’t control
long rates. If those rates rise because
of the increasing supply and decreasing quality of fixed income paper being generated
by mounting debts worldwide, there is nothing the Fed can do to stop the
repricing of risk. In short, it has once
again waited too long to normalize monetary policy.
News on Stocks in Our Portfolios
Caterpillar (NYSE:CAT) declares $0.86/share quarterly dividend, up 10.2% from
$0.78/share previously.
Economics
This Week’s Data
US
May
retail sales jumped 0.8% versus expectations of up 0.4%; ex autos, they were up
0.9% versus estimates of up 0.5%.
Weekly
unemployment claims were down 4,000 versus forecasts of up 3,000.
May import prices rose
0.6% versus consensus of up 0.5%; export prices were up 0.6% versus estimates
of up 0.3%.
International
May
Chinese industrial output rose 6.8% versus forecasts of up 6.1%, fixed asset
investment was up 6.1% versus expectations of up 7.0% and retail sales were up
8.5% versus estimates of up 9.6%.
Other
My
favorite optimist on the Fed (medium):
What
I am reading today
Why humility is such a
virtue (medium):
The Iranian deal was only going to
get worse (medium):
Update on bitcoin problems (medium):
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