The Morning Call
8/2/18
The
Market
Technical
The Averages
(DJIA 25333, S&P 2813) were off yesterday on higher volume and weaker breadth. They remain strong technically, but have a
few minor negatives (1) the Dow fell back below its June high and (2) VIX has
been range bound since mid-July between its 200 DMA and the lower boundary of
its short term trading---which is providing no directional information.
The major
technical story of the day was the drop of TLT (increase in interest rates) below
its 100 DMA (now support; if it remains there through the close on Friday, it
will revert to resistance) and, more importantly, the lower boundary of its
long term uptrend (if it remains there through the close next Wednesday, it will
reset to a trading range. While neither
of these challenges have yet proven successful, as I noted previously, a break
especially of the long term uptrend has major fundamental (much higher rates) as
well as technical significance.
The
dollar bounced, remains technically strong but certainly did not mirror the pin
action of TLT. On the other hand, GLD
was off ¾ %, still has the ugliest chart around and is pointing towards higher
rates.
Bottom
line: the Averages remain quite strong
technically speaking. The technical
assumption remains that they are going to challenge their all-time highs.
TLT’s
performance has potentially important negative fundamental as well as technical
implications. I want my time and
distance discipline to work itself out before assuming that the twenty year
bond bull market is over. Plus, I would remind
everyone that TLT successfully challenged the lower boundary of its long term
uptrend in mid-May and quickly reversed itself. On the other hand, since that mid-May break,
the dollar has continued to rise and GLD to fall, suggesting that they were
anticipating higher interest rates. Stay
tuned.
Yesterday
in the charts.
Fundamental
Headlines
Yesterday’s
economic data was somewhat negative: the ADP private payroll report was a
blowout number, the May/June construction spending stats were mixed and weekly
mortgage/purchase applications, July light vehicle sales, the July
manufacturing PMI and the July ISM manufacturing were disappointing.
Overseas,
the July UK manufacturing PMI was below consensus.
The
FOMC meeting concluded, leaving rates unchanged but upgrading its assessment of
the economy---in other words, the tone shifted slightly negative from the Markets
perspective (i.e. no pause in rate hikes or the unwinding of its balance
sheet). All the details plus the red
line statement are in the link below, so I won’t be repetitious. But this clearly will/is weigh heavily on the
bond market.
This
comes on top of the restlessness (I discussed in yesterday’s Morning Call) in
the Japanese bond market, as seller were hitting bids and the government was
not there for support.
***overnight
the BOJ stepped in to stabilize rates, but in a somewhat unconventional way---which
traders interpreted as a sign that it will allow rates to go higher but at a
more measured pace.
***overnight,
the Bank of England raised rates. Plus
the accompanying commentary was more hawkish than expected.
As
noted above, this all got reflected in the TLT pin action. We don’t know yet whether the global central
banks are now really tightening in unison (except for maybe the Chinese who are
easing) and their respective bond markets will end a long bond bull market. But we likely will in the next
fortnight. So it is too soon to be making
bets those outcomes.
Late
in the day, Trump extended the deadline for the imposition of additional
tariffs on Chinese goods to early September, apparently as an act of good faith
to the Chinese. However, he also
threatened to raise those additional tariffs from 10% to 25%. https://www.zerohedge.com/news/2018-08-01/stocks-yuan-bounce-trump-extends-china-tariff-comment-deadline-week
Bottom line: the
Fed’s opinion notwithstanding, the economy is not strong. It may not be weakening, but it is not
strong. As evidence all one has to look
at is last week’s dataflow and the readings on the primary indicators this
week. Further, as the above link
indicates, notable by its absence in the FOMC’s comment was anything on the housing
market where the numbers have definitely been waning (and housing is a leading
indicator).
Nonetheless, the
Fed maintains its path to normalization.
As you know, I applaud that. For the
economy to work right, we have to have price discovery and we will never have
it as long as QE disrupts the pricing and allocation of assets. However, generally stocks don’t like higher interest
rates especially if they are accompanied by a shrinking money supply. That has been my thesis for the last nine
years: the central banks encumbered by massive hubris have implemented a monetary
easing with no precedent. The Fed has
never, ever successfully transitioned from easy to normal monetary policy without
the Markets getting hammered. This time
around the order of magnitude of its easing effort (QE) was so much larger than
on any previous occasion, I assume that the ‘hammering’ will be commensurate.
All
that said, we do not yet know if global quantitative tightening has actually
begun. There are signs. But rates are unlikely to go a lot higher or
stocks lower until that occurs.
News on Stocks in Our Portfolios
Revenue of $4.28B (+40.8% Y/Y) beats by $40M.
BlackRock
TCP Capital Corp announced that BlackRock (BLK -4.2%) has completed
the acquisition of Tennenbaum Capital Partners, LLC.
In connection with the
transaction, the Company's name was changed from TCP Capital Corp. to BlackRock
TCP Capital Corp.
BlackRock TCP Capital Corp.
also announced today that Karyn L. Williams has been appointed to its
board of directors as an independent director.
Economics
This Week’s Data
US
The
July manufacturing PMI came in at 55.3 versus expectations of 55.5.
The
July ISM manufacturing index was 58.1 versus estimates of 59.5.
June
construction spending fell 1.1% versus forecasts of +0.3%; however, the May
number was revised from +0.4% to +1.3%.
July light vehicle sales
came in at 16.8 million units versus consensus of 17.1 million units.
Weekly jobless claims
rose by 1,000, in line.
International
The
July UK manufacturing PMI came in at 55.9 versus projections of 52.5.
Other
Are
stock buybacks hurting the economy? (medium):
https://www.theatlantic.com/business/archive/2018/07/are-stock-buybacks-starving-the-economy/566387/
What
I am reading today
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