The Morning Call
8/17/18
I am off to California for an
extended Labor Day holiday. I will be back on September 4th.
The
Market
Technical
As you know, I have
assumed that the indices would close the gap down opening from last Friday; but
not quite as dramatically as they did yesterday. The Averages (DJIA 25558, S&P 2840) rallied
hard presumably on news that the US/China trade negotiations would resume soon. Volume was up. Breadth improved though not as much as I would
have thought; plus the flow of funds was flat. The indices remain strong
technically; though closing that gap as they did, I wonder if there is much
upside left short term.
In addition,
while the VIX sold off and negated Wednesday’s upside break of its 200 DMA, it
didn’t sell off as much as I think normal for such a powerful up day in the
indices. Finally, the Dow’s 100 DMA
continues to sit right on its 200 DMA. A
cross to the downside would be a negative signal.
Evaluating market
breadth (medium):
All that said, I
believe that the Averages will challenge their all-time highs,
TLT’s battle
with its long term uptrend’s lower boundary remains on hold as it has become a
safety trade while investors try to digest the turmoil in the currency
markets. The question remains, is the
Turkish/emerging markets crisis a short term problem (and the Market’s focus will
return to the earlier dispute over the long term direction of interest rates)
or is it a sign of more dollar funding problems for the global banking system
(in which case it will remain a safety trade)?
As witness to
the concern over the dollar funding problem, the upcoming China/US trade
negotiations, which got the equity boys all hot and bothered, did little to
impress the bond market. TLT continues
to advance (though it was off one cent on the day) and is now above its 200 DMA
for the second day (now resistance; if it remains there through the close next
Monday, it will revert to support). The pennant
formation marked by the declining upper boundary of its short term downtrend
and the lower boundary of its long term uptrend continues to narrow; TLT is
nearing the top of that range. This story isn’t over. Stay tuned.
The dollar was down two cents
but remains very strong, likely reflecting its function as a safety trade---and
like TLT was totally unmoved by the China news.
GLD continues to get hammered---I have to wonder if this is the result
of those countries with dollar funding problems selling their gold reserves to
raise money to defend their currencies.
Bottom
line: trade moved the Market yesterday; but as I read the news release, I am
not sure it is worth 400 Dow points. In
the meantime, the currency problems in Turkey/emerging markets aren’t going
away, at least as far as TLT and UUP are concerned. This remains a very fluid situation whose
outcome is highly uncertain. To be
clear, it could go either way. But until
there is some clarity, most of the indicators that I follow will likely
continue to be effected by the need for safety.
Yesterday
in the charts.
Fundamental
Headlines
Yesterday’s
stats were pretty dismal: July housing starts/permits were quite disappointing and
the August Philadelphia Fed manufacturing index was half of expectations. The bright spot was slightly better than
anticipated weekly jobless claims.
Overseas,
the data was mixed: July UK retail sales were better than forecast while July
Japanese exports declined dramatically.
The
six inch headline of the day was the scheduled restart of US/Chinese trade
talks which investors apparently were thrilled with. To be sure, the whole object of Trump’s
strategy is to revise the current trade regime with China, so this is clearly
good news. That said, the Chinese are
sending low level officials so the best we can likely hope for is an agreement
to talk at a higher level. So nothing
concrete is going to occur near term.
And forgive my cynicism, but the Chinese are having major currency and
capital flow problems all tied to the dollar and what better way to take the
heat off than make nice with trade.
In
the meantime, Turkey’s lira continues to fall (medium):
Turkey
can’t sidestep the IMF for long (medium):
Mohamed
El Erian is not impressed with Turkeys’ move to support the lira (medium):
Don’t
forget Italy’s problems (medium):
Bottom
line: nothing would make me happier than to cut a trade deal with China; but I just
can’t believe that the Chinese will make any concessions at least until the
November elections are over. So I think
that investors may have gotten ahead of themselves yesterday.
In the
meanwhile, the Fed is tightening, so the dollar funding problems in the emerging
markets are not going away. Whether they
become more widespread is the issue. And
I don’t know the answer; although for the moment, the problem seems contained.
This
isn’t over yet (medium):
S&P
2018 earnings estimate (short):
Is
the Fed model a good valuation tool? (medium):
News on Stocks in Our Portfolios
Tiffany
(NYSE:TIF) declares $0.55/share quarterly dividend,
in line with previous.
Home
Depot (NYSE:HD) declares $1.03/share quarterly dividend,
in line with previous.
Economics
This Week’s Data
US
International
July EU CPI was
in line.
Other
The
Fed remains on track to raise rates in September (medium):
Update
on big four economic indicators (medium):
China’s
problems could be worse than Turkey’s (medium):
What
I am reading today
The public pension clock
(medium):
Taking more risk does not guarantee
more reward (medium and a must read):
Quote of the day (short):
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