The Morning Call
6/15/18
The
Market
Technical
The Averages
(DJIA 25175, S&P 2782) see sawed up and down for most of the day and ended
mixed (Dow down, S&P up). Volume rose;
breadth was flat. 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 declined 6 ½ %, ending
below its 100 and 200 day moving averages (now resistance) and back below the
upper boundary of its short term downtrend voiding Wednesday’s upside break.
The long
Treasury jumped ¾ %, finishing above its 100 day moving average and the lower boundary
of its long term uptrend and closed above the upper boundary of a developing
very short term downtrend. It remained
below its 200 day moving average and in a short term downtrend.
So far junk bond
investors don’t care---which suggests more upside in stocks (medium):
The dollar rose
1 ¼ % on huge volume, closing well above both moving averages, in a short term
uptrend and above the upper boundary of a developing very short term downtrend.
GLD was up
again. It remained below its 100 and
200 day moving averages (though it is nearing the latter) but in a short term
trading range.
Bottom
line: the ECB’s unexpected failure to
raise rates sent the euro down/dollar up materially with TLT moving up in sympathy. GLD continues to confuse by trading up on a
day when it should logically be down (strong dollar). Equities’ pin action also reflected some
uncertainty---turning in a volatile day with a mixed close. Of course, there
was more than just flat ECB rates to consider: the ECB’s continuing move toward
unwinding QE and the steady stream of negative rhetoric on trade. Still the Market has absorbed a lot of big news
of late, much of it unfavorable and managed to work its way higher. Until that paradigm changes, the assumption
has to remain that stock prices are going higher.
There
is little chance of any major downturn as long as the small cap stocks continue
to roar (short):
Fundamental
Headlines
Yesterday’s
US economic data was upbeat: weekly jobless claims fell, May retail sales were
a blowout number and April business inventories/sales were strong. The only possible disappointment was higher
than expected import/export prices---that really depends on whether you look at
inflation as a plus or a minus at this point in the economic cycle.
The
new headlines were the results of the meetings of the ECB and the Bank of
China. I addressed both items in
yesterday’s Morning Call, so I won’t be repetitive except for the bottom line: (1)
the ECB left rates unchanged which the Market viewed as a plus; but it is
continuing the wind down of its bond buying program which I consider more
important and a negative and (2) the Bank of China left rates unchanged due to concern
over slowing economic growth.
***overnight, the
Bank of Japan met, leaving rates unchanged and making no comment on its bond
buying program.
Meanwhile, the
news flow of trade is getting worse:
The
politics of a NAFTA agreement (medium):
Trump
expected to impose tariffs on 900 Chinese products (medium):
China
warns of immediate retaliation (short):
EU
preparing to impose tariffs on US goods (short):
Another problem
with imposing tariffs (medium):
Bottom line: there
are two points here: The first is trade which
is very much tied to the prospects for secular economic growth or the lack
thereof. Given the current aggressive tariff
rhetoric, prospects for higher growth do look all that great. To be sure, the threatened tariffs are small relative
to gross trade. And as you know, I have been optimistic that the stream of trade
war threats are all part of the ‘art of the deal’ negotiating style of Trump. However,
if the various parties keep lobbing tariff grenades at each other, pretty soon
we are going to be talking about serious money. We are not there yet; but this
is, in my opinion, a growing risk to global economic growth--- even as
investors ignore it and get jiggy about likelihood of an improving US economic growth
rate.
Central bank
policy is about asset pricing (the Market).
I know, the central bankers yak about economic growth rates,
unemployment, inflation, etc. like they have the power to control those
numbers. But that it all it
is---yakking. As I have endlessly
pointed out (except for QEI), Fed policy hasn’t achieved its stated economic goals
for a decade. All that it has done is to
up the QE ante in its failed attempts. So
I don’t buy any narrative that has the Fed as a major determinant of economic
growth.
On the other
hand, what it has been massively successful at is the gross mispricing and
misallocation of assets. As I continue
to point out, Fed policy has been the primary factor in the pricing of
risk. And that price is now being
impacted by the unwinding global QE at a time of increased debt issuance. In short, it boils down to a supply
(accelerating issuance of new debt and the run off of QE)/demand issue---which
is being exacerbated by (1) the effect of the rising dollar on the funding
costs of any country with large amount of dollar denominated debt whose
currency is declining versus the dollar and (2) the growing amount of junk bond
offerings. It sure looks to me like we
are nearing the point at which long rates are going to rise whatever central
bank policy and that will likely lead investors to realize that they have
mispriced risk.
Stocks
aren’t getting less risky (medium):
News on Stocks in Our Portfolios
Economics
This Week’s Data
US
April
business inventories rose 0.3%, in line; while sales were up 0.4%.
The
June NY Fed manufacturing index was reported at 25.0 versus estimates of 19.1.
International
Other
There
is a new sheriff in town (medium):
Risk
of recession rises slightly (short):
Update
on big four economic indicators (medium):
LA port traffic
rises in May (short):
What
I am reading today
Why bitcoin is falling
(short):
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