Thursday, September 27, 2018

The Morning Call--Powell's comments


The Morning Call

9/27/18

The Market
         
    Technical

After being on the plus side for most of the day, the Averages (DJIA 26385, S&P 2905) sold off near the close---probably due to Fed chair Powell’s comment that stock might be overvalued.  Volume was up fractionally and breadth continued to decline from its overbought condition.  However, the indices remain technically very strong.    My assumption is that they will challenge the upper boundaries of their long term uptrends (29807, 3065).

Update on margin debt.


The VIX was up on the day, seemingly getting back in sync with stock prices.  I have previously noted that the VIX had been trading in a confusing, atypical non-inverse relationship with stocks.  That may be coming to an end.  At the moment, it is still at the lower end of its short term trading range and that is something of a positive for equity prices.

The long bond rallied ¾ % on big volume---surprising to me given that stocks, the dollar and gold all seemed to interpret the Fed chairman Powell’s statement following the FOMC meeting as somewhat hawkish. 

The dollar has up ¼ %, which, as I noted above, continues my confusion regarding its performance viz a viz that of TLT. I have previously observed that a number of confusing or technically negative price movements are now taking place and that could be a sign that investors’ are re-jiggling their economic/Market models. 

           GLD was down ½% on heavy volume, remaining as the ugliest chart on the block---though it stay within a developing very short term trading range.
               
          Bottom line: the indices remain technically strong. I continue to believe that they will challenge the upper boundaries of their long term uptrends.

         The pin action in the long bond, the dollar, the VIX and gold are all acting somewhat atypical.  That doesn’t necessarily mean something negative is occurring.  It is just that a change seems to be in the air; and I think we need to be alert to it.

            Yesterday in the charts.

    Fundamental

       Headlines

            The economic stats were slightly positive: weekly mortgage and purchase applications were up while August new home sales were in line.

            The lead development of the day was the wrap up of the FOMC meeting.  It decided to raise rates another .25%.  That was expected.  Its description of the economy, the labor market and inflation was basically unchanged.  The one noticeable difference in the official statement released after the meeting was the removal of the word ‘accommodative’ as it relates to monetary policy.  However, in Chairman Powell’s press conference, he went out of his way to assure investors that the Fed was still being accommodative---which I assume means that the Fed is not easing but not tightening (?).
           
What may turn out to be the most important statement in the news conference is what I referred to above, i.e. Powell thinks that equities might be overvalued.  Important because (1) the prior Fed admitted that a major goal of QEII to QEInfinity was to raise asset prices; and, as I remind you endlessly, it succeeded spectacularly---to the point of destroying price discovery, (2) so if Powell’s comments mark an end to that process, then I would assume that means quantitative tightening will go on even in the face of a declining market---not something that investors have been counting on to protect them on the downside.

            That said, I don’t want to make too much of this at this point.  There could be any number of reasons for Powell’s comments, none of which would necessarily signal that the Fed no longer has the Market’s back.  However, it needs to be noted and we should be alert to further evidence that this change in Fed policy may be occurring.

            As far as the ‘dot plot’ forecasts, they did not materially change on economic growth, unemployment and inflation.  The numbers for growth in 2018 and inflation are higher than my own which I am not that concerned about because the longer term outlook matches mine, i.e. slowing growth in 2019 and 2020, reflecting the transitory impact of the tax cuts and the longer term problem of the rising deficit/debt.
      
            Why investors shouldn’t fear rising rates.

            This analyst just explained why the dollar funding problem will only get worse.
                       
            The latest salvo in the US/China trade dispute.

Bottom line: I continue to believe that the federal deficit/debt and the willful blindness of the Fed to its own ineffectiveness are the problems that investors have to contend with.  Though in all fairness, Powell did admit in his press conference that the Fed is less omniscient and omnipotent than his predecessors have contended.  Now if the Fed will just start acting that way.  What a refreshing positive change that would be.  That said, he is still stuck with unwinding the most irresponsible monetary policy experiment in this country’s history.
                         
            15 bullish assumptions.

    News on Stocks in Our Portfolios

Accenture (NYSE:ACN): Q4 GAAP EPS of $1.58 beats by $0.02.
Revenue of $10.15B (+10.9% Y/Y) beats by $140M.

Accenture (NYSE:ACN) declares $1.46/share quarterly dividend, 9.8% increase from prior dividend of $1.33.           

Economics

      US

            August new home sales rose 629,000, in line.

            August durable goods orders rose 4.5% versus expectations of up 2.2%.

            The final revised second quarter GDP came in at +4.2% versus projections of 4.3%; the PCE price deflator rose 2.0% versus the second reading of +1.9%; corporate profits were up 6.4% versus the prior report of +6.7%.

            Weekly jobless claims rose 13,000 versus in line.  The increase is likely due to the aftermath of Hurricane Florence.

            The August trade deficit was reported at $75.8 billion versus consensus of $70.8 billion.

     International

            September EU economic confidence came in at 110.9 versus 111.3.

            The Banks of Hong Kong, India and Philippines raised interest rates.

    Other

            Update on household net worth.

What I am reading today

            Investing in a market that is due for decline.
                       
                        John Steinbeck on what it means to be an American.

            Four important lessons in finance.

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