The Morning Call
10/18/18
The
Market
Technical
The Averages
(DJIA 25706, S&P 2809) retreated modestly (the S&P was down
fractionally) yesterday. Volume fell and
breadth was mixed. The Dow ended above
its 100 DMA for a second day (now resistance; if it remains there through the
close today, it will revert to support).
The S&P finished solidly above its 200 DMA.
The VIX fell 1 ½
%, but retains its positive chart---meaning it is a negative for stocks.
The long bond was
down ½ %, remaining in short term and very short term downtrends and below both
moving averages. Still a negative
technical picture.
The dollar was up
½ % and continues to have a positive technical standing. Though failing to challenge its August high
is a bit of a negative. However, I
continue to believe that UUP will move higher as long as the dollar funding
problem persists.
GLD was down one
cent. Intraday it again touched its 100
DMA (now resistance) and fell back (for a second day in a row), suggesting that
its recent strength may have limited power.
Bottom line: with the S&P have
failed the challenge of its 200 day moving average (a big plus), it still needs
to push through its 100 DMA (now resistance), the upper boundary of a very
short term downtrend and its early October high to get back on track for a run
at the upper boundary of its long term uptrend.
None of these levels are particularly formidable; so barring another
retest of its 200 DMA, I see few reasons why that challenge won’t happen---although
that is not back in my forecast just yet.
Aiding it are (1)
stocks have traditionally traded higher in the months of November and December (2)
this earnings season is off to a very upbeat start; if that continues, it
should provide additional buoyancy to stock prices.
The long bond
and the dollar both seemed to react to the hawkish FOMC minutes (see below). Gold remains in never, never land.
Wednesday in the
charts.
Chinese stock
market plunging.
Fundamental
Headlines
Yesterday’s
stats all spelled bad news for the housing industry: weekly mortgage and
purchase applications fell, September housing starts missed forecasts and
building permits were really not good.
Update on big
four economic indicators.
There
were several macro-economic developments, all positive.
The
minutes from the last FOMC meeting were released. There were no real surprises: (1) the Fed in
not concerned about inflation, (2) the economy will continue to grow moderately
though the rate of increase will gradually slow, (3) the Fed will continue to
tighten. As you well know, I consider
the latter to be of prime importance for the economy, i.e. the unwinding of QE
to reestablish price discovery; but it is likely not a plus for the Market. At the moment, equity investors appear unconcerned
by the prospect; and they might be right.
But I think not. Here are the
minutes:
In
support. (must read).
Trump’s attacks on the Fed make no
economic sense.
Trump abandoned the shipping
treaty with China which allowed China to ship small packages at deeply
discounted rates.
At a cabinet meeting, Trump
ordered each department to cut its FY2019 budget by 5%. You can only imagine how well that sat with
me---assuming that it is actually done and there are no accounting
gimmicks. It is makes so much sense to
address excessive government spending by simply making an across the board
cut. Businesses do this all the time to
achieve greater efficiency and profitability.
There is no reason in the world why government can’t do it---and not
just once, but every year for at least four or five years.
To be clear, a
5% cut in the discretionary budget will only slow the rate of increase in the deficit/debt---the
nondiscretionary (i.e. entitlements) part of the budget is where the real
problems exist. However, this is a great
first step to getting spending under control which I will applaud if it
happens.
Federal tax receipts in FY2018 were up
slightly even with the tax cut. The
culprit in the deficit appears to be increased spending.
Bottom line: I am not sure I could write a more positive
Bottom line viz a viz my big beefs with the economy/ruling class.
The Fed
continued to point to the unwind of QE.
Not particularly great for the economy, but not a negative. Not a plus for the Market short term but a
big positive for the long term health of the capital markets---which is one of
the things that has made this country the center of the global financial
system.
The president
instructed a 5% reduction in government spending. If this can work like his mandate to cut
regulation, this would be the most practical, sensible fiscal directive in a
generation. ‘If’ is the operative
word. But a reduction in the
deficit/growth of debt from current levels would certainly work to remove the
constraint that excessive debt imposes on economic growth. Clearly, it is way too soon to be altering an
economic forecast; but this is an encouraging development.
However, not to
rain on my own parade, the constructive conclusion of both moves
have a long time horizon. Short term, they don’t ameliorate the
overvaluation of equities.
What is your financial tipping point?
News on Stocks in Our Portfolios
Economics
This Week’s Data
US
Weekly
jobless claims fell 8,000 versus expectations of a 1,000 rise.
The
October Philadelphia Fed manufacturing index came in at 22.2 versus consensus
of 20.0.
International
August
UK unemployment was 4.0%, in line: September retail sales fell 0.3% versus
estimates of +0.3%.
September
EU auto sales down 23%.
Other
More
on student loans.
A credit slowdown in
China.
EU rejects Italy’s
budget plan.
Italians moving their
savings out of Italy.
What
I am reading today
How to retire with $1
million.
Nouriel Roubini
on cryptocurrencies.
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