Wednesday, July 25, 2018

The Morning Call--And one day later, he scores


The Morning Call

7/26/18

The Market
         
    Technical

The Averages (DJIA 25414, S&P 2820) spiked late in the day on US/EU trade news (see below) on slightly better breadth but lower volume.   The Dow continued to trade above its 100 day moving average (now support), above its 200 day moving average (now support) and within a short term trading range.  The S&P ended above both moving averages, in uptrends across all timeframes.  Some cognitive dissonance continues: (1) the Dow’s 100 day moving average is very close to crossing below its 200 day moving average and (2) the S&P has made a fifth successively higher high while the Dow failed---but is now challenging its June high.  The S&P is clearly on its way to its all-time high; will the Dow be far behind?

VIX fell another 1 ¾ %, but, like Tuesday’s pin action, was a surprisingly small decline given the indices’ performance.  It remains below both moving averages and in a narrow trading range near the lower boundary of its short term trading range.  It doesn’t seem to want to challenge that lower boundary.

The long Treasury was down fractionally.  It managed to close above its 100 day moving average (now support), but below its 200 day moving average for a third day (now support; if it remains there through the close today, it will revert to resistance).  It remains caught between the declining upper boundary of its short term downtrend and the rising lower boundary of its long term uptrend; though, at present, it is closer to the latter.  A break of this developing pennant pattern has directional import.
           
            The dollar was down ½ %, but still ended above both moving averages and in a short term uptrend but remains below its June high.
           
            Gold was up ½ %, likely reflecting investor reaction to the weaker dollar.  It finished below both moving averages (its 100 day moving average has now crossed below its 200 day moving average---not a technical plus) and in a short term downtrend.  Its pin action suggests that it will challenge the lower boundary of its intermediate term trading range (roughly 10 points lower).

            Bottom line:  though the indices were up, but investors didn’t have the benefit of a full understanding of the US/EU trade statement which wasn’t revealed until after the Market close.  So I think any comment about yesterday’s Market action would be meaningless.  We will know more about investor reaction by the close today.

Ditto with the price performances of TLT and UUP which will be impacted by any (potential) agreement. 

GLD bounced reflexively to the weaker dollar but again, let’s see what today brings.
           
            Yesterday in the charts:

    Fundamental

       Headlines
                 
             Yesterday’s economic releases did not make for good reading: weekly mortgage and purchase applications declined and June new home sales were well off the mark.

             Trade remains the Market’s focus.  The biggest news of the day was US/EU de-escalation of their current trade dispute which consisted primarily of a change to a less combative posture.  The feel good news conference between Trump and Juncker was filled with promises to pursue objectives that would lower tariffs and increase trade.  They included (1) working toward zero tariffs on industrial goods [no mention of autos], (2) resolving the aluminum/steel tariffs and retaliatory tariffs, (3) reforming the WTO to include measures against the theft of intellectual property and (4) the EU to buy more US LNG and soybeans.  In short, neither parties made concessions but a cease fire and the intention to negotiate has been announced. 

             Two questions occur to me,
                 
(1)  is this a victory for Trump (and the art of the deal strategy)?  And we have no way of judging that until we know the results.  My only observation is that Europeans are saying that they are now willing to consider altering the US/EU trade relations which is more than they have done in the past,

(2)  what effect, if any, will it have on negotiations with China and our NAFTA partners.  Given the size of the total US/EU economies viz a viz the rest of the world, no one is going want to be cut out of a new trade regime [if it happens].

             Much of investor attention prior to the US/EU announcement was on China, in particular, exactly what it is doing with respect of its currency and what impact that will have on its dispute with the US.  

             More on China’s currency war (medium):

                   And even more (medium):
    
            A weak dollar will not make America great again (medium):

            Trade war starting to impact earnings (medium):
                       
            The other good news for all you lovers of government spending/deficits/debt---the senate has apparently agreed on a combining two bills that would increase domestic and defense spending (medium):

            And a bonus link on the egregious earmarking of the GOP congress (medium):

            Bottom line: we know that Trump is likely going to be tweeting like crazy about the agreement with the EU being a big win.  And it may prove to be; but hopefully he will be circumspect and not make it look like he muscled them because that will probably only harden their position.  To be sure, nothing has been accomplished with respect to a fairer trade regime and the path there is likely to be a rough one.  So everything is not coming up roses.  On the other hand, the current tariffs seem likely to be reversed and the rhetoric toned down; and that is a plus.

            In the meantime, our political class continues to spend our money like drunken sailors.  Given the resources that will be usurped to service this growing level of debt, that is not a plus.

    News on Stocks in Our Portfolios
 
T. Rowe Price (NASDAQ:TROW): Q2 EPS of $1.87 beats by $0.09.
Revenue of $1.35B (+13.4% Y/Y) beats by $20M.

General Dynamics (NYSE:GD): Q2 EPS of $2.82 beats by $0.33.
Revenue of $9.19B (+19.8% Y/Y) beats by $120M.

Boeing (NYSE:BA): Q2 EPS of $3.33 beats by $0.06.
Revenue of $24.26B (+5.2% Y/Y) beats by $240M.

United Parcel Service (NYSE:UPS): Q2 EPS of $1.94 beats by $0.01.
Revenue of $17.46B (+9.6% Y/Y) beats by $130M.

Coca-Cola (NYSE:KO): Q2 EPS of $0.61 beats by $0.01.
Revenue of $8.9B (-8.3% Y/Y) beats by $360M.

Qualcomm (NASDAQ:QCOM): Q3 EPS of $1.01 beats by $0.30.
Revenue of $5.6B (+5.7% Y/Y) beats by $410M.

W.W. Grainger (NYSE:GWW) declares $1.36/share quarterly dividend, in line with previous.
           
Exxon Mobil (NYSE:XOM) declares $0.82/share quarterly dividend, in line with previous.

Economics

   This Week’s Data

      US
               
                Weekly mortgage applications fell 0.2% while purchase applications were down 1.0%.

                June new home sales fell 5.2% versus estimates of down 3.0%.

     International

           
    Other

            I talk a lot about the current monetary policy causing the mispricing and misallocation of assets.  Here is an economist’s explanation for this phenomena but in layman’s terms (medium and a must read):

            More on the BOJ purported tightening of monetary policy (medium):

            Pretty soon the BOJ will own Japan (short):

            Powell on cryptocurrencies (short):

                More on Brexit (medium):

                The potential impact on oil prices from an environmental regulation due to go into effect in 2020 (medium):

What I am reading today

           
            Every law is violent (short):

                Thoughts on being a millennial (short):

Thursday morning humor---ode to a student:

If you can self-define as something you’re not,
And crawl into victimhood, however well-bred
And spew out tendentious sub-teenage rot
And wear a vagina on top of your head,
And whine like a ninny, inside your safe space,
When the real world intrudes on the crap you’ve averred,
Then apply to our college – we’ll give you a place,
For about £30k). And you’ll get a third.

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