Wednesday, October 10, 2018

The Morning Call--Lower earnings guidance is not good for stocks

The Morning Call


The Market

The Averages (DJIA 26430, S&P 2880) were down modestly on the day.  Volume was up; breadth negative.  They remain technically strong.    My assumption is that they will challenge the upper boundaries of their long term uptrends (29807, 3065).
The VIX rose another 1 ½ %, ending above its 100 DMA (now support) and its 200 DMA for a third day (now resistance; if it remains there through the close today, it will revert to support).  As you know, it has not been following the normal script of late and is now at the upper end of its short term trading range---a negative for stocks. 

The long bond jumped 1%, but that was not sufficient to get even close to regaining the lower boundary of its intermediate term trading range, thereby resetting to a downtrend.     This does not bode well for the technical strength of TLT to say nothing of the implications fundamentally.

The dollar was down one cent, not really consistent with a strong day in bonds.  I continue to believe that UUP will move higher as long as the dollar funding problem persists. 

China now having dollar funding problems.

GLD rose slightly on continuing high volume.  The most positive thing I can say is that it is attempting to build a base in what has been a very painful decline; but it continues to trade below moving averages and in a short term downtrend.  It remains an ugly chart.

          Bottom line: the indices arer technically strong. I continue to believe that they will challenge the upper boundaries of their long term uptrends.
         The terrible pin action in the long bond appears to be signaling a huge change in bond investors economic/valuation model, having broken its long term uptrend and its intermediate term trading range.   The dollar is confirming a liquidity shortage.  GLD continues to act negative no matter what happens in stocks, bonds, oil, the dollar----I could go on.

            Tuesday in the charts.



            One minor datapoint was released yesterday: month to date retail chain store sales grew more rapidly than in the prior week.
            The biggest headline yesterday was lower earnings guidance from PPG and Proctor & Gamble.  Declining earnings guidance is a theme I have touched on previously.  And more companies seem to be joining the chorus. 

Bottom line: remember stock prices are determined by the P/E (discount rate) and earnings.  If profit growth is slowing and future projections are about to decline that is not going to help the earnings part of the stock price equation.

            The other segment of the equation (P/E) is in even worse shape.  (1) stocks are already generously valued (2) interest rates are rising---which have a negative impact on P/E and (3) Fed chair Powell’s recent hawkish comments suggest that rates are going still higher.  Indeed, as I have groused continually, the Fed has already waited too long to tighten monetary policy and the only way it will mute the impact of the coming inflationary wave brought on by labor shortages, increasing tariffs and profligate government spending is to keep the brakes on, i.e. continue to raise rates.

            Keeping recent stock performance in perspective.

            The next financial crisis is staring us in the face.

            Rising rates matter.


    News on Stocks in Our Portfolios
Cummins (NYSE:CMI) declares $1.14/share quarterly dividend, in line with previous.

Cummins (NYSE:CMI) has authorized the company to repurchase up to $2B in shares of common stock upon completion of its 2016 $1B share repurchase program.

Procter & Gamble (NYSE:PG) declares $0.7172/share quarterly dividend, in line with previous.


   This Week’s Data


            Month to date retail chain store sales grew faster than in the prior week.

            Weekly mortgage applications dropped 1.7% while purchase applications were down 1.0%.

            September PPI rose 0.2%, in line: ex food and energy, it was also up 0.2%, also in line.



            Surprising truths about the trade deficit (must read):

            Ron Paul on NAFTA 2.0.

            China and the US at loggerheads on trade.

What I am reading today

            Ten commandments of retirement.

            More evidence of Chinese manipulating chip hardware.

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