Friday, September 14, 2018

The Morning Call--More central banks move toward tightening

The Morning Call


The Market

The Averages (DJIA 26145, S&P 2904) had a great day but on lower volume.  However, breadth improved.  They remain strong technically; and my assumption is that they will challenge the upper boundaries of their long term uptrends (29807, 3065).

The VIX was down another 6%, ending below its 200 DMA (now resistance) and back below its 100 DMA for a third day (reverting to resistance).  After making an attempt to trade into the upper values of its short term trading range, it is now heading for the lower level of this range.  That generally supports higher equity prices. 

TLT rallied weakly for a second day, but still finished below its 200 DMA (now resistance), its 100 DMA for a third day (reverting to resistance), and the lower boundary of its long term uptrend for a third day (if it remains there through the close next Monday, it will reset to a trading range).  Clearly, TLT is at a potentially critical level.  All I can do is wait for follow through---which so far has not been promising.

The dollar was down fractionally again, but remains technically strong---still closing above the last lower higher low.  Its pin action is not likely to change as long as dollar funding problems continue in the emerging markets.

           GLD was down after a big one day rally, having failed to trade above its last lower high.   Gold continues to have the ugliest chart on the block.
          Bottom line: the indices remain technically strong. I continue to believe that they will challenge the upper boundaries of their long term uptrends. 

The dollar will likely remain strong until the dollar funding problems are resolved. 

The pin action in TLT is my main focus because if the long term uptrend breaks, pointing to much higher rates, that will have implications in all the other Markets. 

            Yesterday in the charts.


            Yesterday’s data releases were upbeat: August CPI was lower than anticipated, weekly jobless claims were below expectations but the August budget deficit was well above estimates (confirming yesterday’s CBO revised forecast that the FY2018 deficit will surpass $1 trillion).

            The lead headlines for the day were the meetings of the Bank of England and ECB, both of which left rates unchanged.  The ECB reiterated that it will continue to decrease its bond purchases (QE) through the end of the year at which point it will cease them altogether.  

            Following the official statement, Draghi gave one of those classic central bank commentaries, (1) noting that the EU economy is solid [in spite of the lower growth expectations presented in the official statement] and (2) went on to make so many contradictory statements on inflation, I have no idea what he really thinks.

            While the rate decisions got the most attention, I think that the ECB’s continuing unwind of QE is the more important point.  After all the decline in global (dollar) liquidity is what is driving the emerging market dollar funding problem.  While clearly it is a dollar issue; but it is also a liquidity issue (if there are fewer euros being created, there is less of an opportunity to borrow cheap euros to buy dollars). 

            Emphasizing this point, the central bank of Turkey also met and raised its key interest rate by over 600 basis points.  That is about as strong a statement as a central bank can make that it is having severe liquidity problems (high interest rates attract investors).
            ***overnight, the Russian central bank raised rates in the face of a depreciating currency and rising inflation (medium,):

           Bottom line: in my opinion, the cessation of EU QE will contribute to emerging markets dollar funding problems.  It will also impact all the other areas of asset mispricing and misallocation.  Not the least of which is the US stock market.  With stocks are discounting a rosy future (in spite of the lower PPI and CPI reports [which suggest slow to no growth] and today’s retail sales number), I believe the risk/reward tradeoff weighs heavily on risk.  Accordingly, I want to own some cash when equities mean revert.

            The latest from David Tepper (medium):

    News on Stocks in Our Portfolios


   This Week’s Data


            The August US budget deficit rose to $214.1 billion versus expectations of $178.0 billion.
                 August retail sales were up 0.1% versus consensus of up 0.4%; ex autos they were up 0.3% versus projections of up 0.5%.

          August import prices declined 0.6% versus an anticipated -0.1%; export prices were off 0.1% versus expectations of +0.2%---an indication that US producers are eating some of the economic impact of a stronger dollar.


            August Chinese retail sales rose 9% versus estimates of 8.8%; industrial production was up 6.1%, in line; fixed asset investment increased 5.3% versus forecasts of up 5.6%.


            The distribution of income in the US (short):

            This article is reasonably balanced in poo pooing Trump’s claims that he and his efforts are responsible for the current state of the economy.  I do think that that not enough credit is given to his deregulation policies and his trade efforts weren’t even mentioned. (medium):

What I am reading today

            How to avoid scams that target the elderly (medium):
            The difference between Russia and China (medium):

            Should you buy a standby generator? (medium):

            Today’s lesson in public choice theory (short):

            How new ideas are perceived (medium and a great article):

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