The Morning Call
9/18/18
The
Market
Technical
The Averages
(DJIA 26062, S&P 2888) retreated yesterday on flat volume and mixed
breadth. However, they remain strong
technically; and my assumption is that they will challenge the upper boundaries
of their long term uptrends (29807, 3065).
The VIX spiked
13 ½ %---a lot more than normally expected on a day in which the Dow is down 100
points. In doing so, it ended back above
its 100 DMA (now resistance; if it remains there through the close on
Wednesday, it will revert to support) but remained below its 200 DMA (now
resistance). This see sawing around the middle of its short term trading range
as stock prices are rising is making it less valuable as a directional
indicator.
The long bond was
unchanged, finishing below its 200 DMA (now resistance), its 100 DMA (now
resistance), and the lower boundary of its long term uptrend for a fifth day,
resetting to trading range (at least officially). As I noted several times last week, TLT has
already challenged, some successfully, this boundary a number of times over the
last twelve months and subsequently regained the lower boundary of its long
term uptrend. Given this poor recent record
of marking the break of the TLT long term uptrend, my reset of trend call is a
weak one. I am waiting for a longer
follow through than normal before concluding that TLT’s long term uptrend is
over.
https://www.advisorperspectives.com/commentaries/2018/09/14/looking-for-risk-in-all-the-wrong-places
The dollar fell,
but remained above the second very short term higher. So it continues to be technically strong and. Its pin action is not likely to change as
long as dollar funding problems continue in the emerging markets.
GLD was up, but is still 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. Even though I am
being cautious in calling a break in its long term uptrend, it is still a
break. And if it is indeed marking the
end of the huge bull market (declining interest rates) in bonds, there are significant
implications in all the other Markets.
Yesterday
in the charts.
Fundamental
Headlines
We started the
week with a poor datapoint: the NY Fed’s September manufacturing index came in
well below estimates.
Investors remain
focused on the emerging markets dollar funding problem---here is a good
discussion of it happened: (medium):
As
had been anticipated, Trump upped the ante in the trade dispute with
China. Last night, he imposed tariffs on
$200 billion of imported Chinese goods.
Of note (1) the tariffs start at 10% but will rise to 25% in January
2019 if no progress is made. From a
macroeconomic point of view that would add only single digit tens of a percent
to CPI. So this is not a punishing move
for the US consumer, (2) about $180 million in imports were actually removed
from the original list, (3) Trump threatened to add another $267 billion in
tariffs if China retaliates and (4) the Chinese immediate response was fairly
calm.
Part
of the problem is the Chinese refusal to negotiate; most likely their motive is
to wait to see the mid-term election results---which could determine how strong
a hand Trump has to play (an expression of disapproval from the electorate
could not only result in a change of control in the house but weaken his moral
authority). So the ‘trade war’ with
China likely isn’t going anywhere until after November 7th.
Here is Goldman’s
take (medium):
Bottom line: we keep getting reminded
that the economy is not as strong as Market narrative portrays---that will
eventually show up is disappointing earnings. We keep getting reminded that the Fed’s
unwinding of QE is causing problems for weak credit borrowers as they struggle to
service loans that they shouldn’t have taken out in the first place---that
eventually will show up strained bank balance sheets/liquidity and slowing US
overseas sales. We keep getting reminded
that the trade issues are not going away anytime soon---that eventually will
show up in slower economic growth if not resolved. None of these circumstances need be ruinous
to the economy. But eventually they will
likely alert investors that they are paying too much for future earnings.
I believe the risk/reward tradeoff in
equity prices weighs heavily on risk.
Accordingly, I want to own some cash when equities mean revert.
A
recovery based debt funding isn’t a recovery at all (medium):
Stock
valuation hinges on interest rates and inflation (medium):
Today’s
look back at the financial crisis (medium):
The
latest from David Stockman (medium):
News on Stocks in Our Portfolios
Oracle (NYSE:ORCL):
Q1 Non-GAAP EPS of $0.71 beats by $0.02.
Revenue
of $9.19B (+1.0% Y/Y) misses by $120M.
Revenue
of $4.09B (+8.5% Y/Y) misses by $30M.
Economics
This Week’s Data
US
International
Other
The
latest on student loans (medium):
The
latest look at the big four economic indicators (medium):
Hotel occupancy
rates are declining (short):
What
I am reading today
Beware of those selling
private equity funds (medium):
Waffle House and risk management
(medium):
Quote of the day (short):
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