Friday, November 30, 2018

The Morning Call--Now Trump/Xi


The Morning Call

11/30/18

The Market
         
    Technical

Not surprisingly, the Averages (DJIA 25338, S&P 2727) gave back a little of Wednesday’s monster advance, leaving their charts broken on a short term basis.  Both are below their respective 100 DMA’s; both are now in a short term trading range; both continue to develop very short term downtrends; and both have now closed last Tuesday’s gap down open.  The S&P remains below its 200 DMA.

On the other hand, (1) the Dow traded above its 200 DMA for a second day [now resistance; if it remains there through the close next Monday, it will revert to support], (2) both indices remain solidly in intermediate and long term uptrends, (3) we are in a historically strong seasonal period for stock prices and (4) both made a higher low off the late October low.   

I think the technical key here is the 200 DMA’s: (1) they are the first major resistance point in this rally and (2) before being broken, they were a major source of support for both indices in the last year.  Typically, a support level which sustains multiple challenges, then breaks, will offer significant resistance on the way back up.  So before raising the odds of the Averages challenging their all-time highs or the upper boundaries of their long term uptrend, I need to see both successfully challenge their 200 DMA.

Volume declined and breadth was mixed.

The VIX was up 1 ½ %.  Its chart remains positive (bad for stocks): above both MA’s and within a short term uptrend.

The long bond rose slightly.  While it continues to build a base very short term, it still finished below both moving averages and in a short term downtrend; meaning that until some of these resistance levels are successfully challenged, the assumption is that bond prices are going lower.

The dollar was down fractionally but not enough to challenge even its very short term uptrend.  In short, the chart remains technically strong.  I continue to believe that UUP will move higher as long as the dollar funding problem persists. 

GLD rose, remaining above its 100 DMA.  While it seems to be attempting to build a base, the longer term chart is negative.

 Bottom line: a little profit taking is to be expected after a big up day.  However, there was still no follow through reaction to Wednesday’s price action in volume, breadth, the VIX, the dollar, bonds and gold.  They can, of course, respond later; and, indeed, may be awaiting the outcome of this weekend’s Trump/Xi trade summit.  But until I see that confirmation and/or the Averages successfully challenging their 200 DMA, my short term technical outlook remains unchanged: I don’t think a rally back to former highs is likely near term.
           
            Thursday in the charts.

    Fundamental

       Headlines

            Yesterday’s economic stats were mixed: weekly jobless claims rose, October pending home sales fell while October personal income and spending were ahead of estimates.  However, the latter is a primary indicator, so it clearly carries the most weight.

            The release yesterday of the minutes from the latest FOMC meeting was a bit anti-climactic after Powell’s Wednesday speech.  Somewhat surprising to me was the minutes were very similar to the dovish Clarida/Powell speeches earlier in the week.  I say ‘surprising’ because between the time of the FOMC meeting (when the dovish minutes were written) and Powell’s Wednesday dovish speech, Powell had made a very hawkish speech---which was at least partly responsible for the softness in the stock market. 

In Thursday’s Morning Call, I linked to an article suggesting that the first Powell speech had been a ‘rookie’ mistake and the second one simply corrected that error.  Whatever the reason, the bottom line is that the pace of increase in the Fed Funds rate appears to be slowing.  All that said, my opinion is that the movement in the Fed Funds rate is less important than the velocity of the Fed’s balance sheet run off---and we still have no clarity on that issue.

            Is the Fed’s change of direction too little, too late?

            The next big event is the Saturday Trump/Xi meeting.  Everyone is playing up the possibility of a favorable outcome.  The operative word is ‘favorable’.  Is a great photo op/ ‘we are all great friends’ bulls**t/we will continue to work on a possible agreement, a favorable outcome?  If it is, then we may get a favorable outcome.  If a NAFTA 2.0 solution is part of that, then the Market may think that it is favorable.  I won’t.  If the Chinese agree to halt the theft and forced transfer of intellectual property, then we got a favorable outcome.  But unless I am reading the Chinese completely wrong (which is a clear possibility), that is very unlikely to happen.

            Some doubt any meaningful agreement.

                Including Goldman.
      
            ***overnight, the US, Canada and Mexico signed the NAFTA 2.0 agreement and the house suspended its vote on a new tax bill..

            Bottom line: when I was in the Army, in the times when the commanding officers couldn’t figure out who was on first and had the rank and file hurrying up and waiting, we had a saying: ‘the wind blew, the s**t flew and I couldn’t see for a minute or two’.  I feel that way now.  The Fed says that it is full speed ahead on raising interest rates and then it’s not. And no mention of balance sheet unwind.  The Donald says that he going to correct the egregious trade practices of the Chinese (who, in my opinion, aren’t about to stop without serious pain being inflicted), then he says that he thinks a deal can be done.  I call bulls**t on that. 

I know that investors are jiggy about an easier Fed (a lower Fed Funds rate doesn’t make interest rates go down, more liquidity does---and the economy may be facing less liquidity) and Trump and XI may go tip toeing through the tulips together (but that doesn’t correct theft of US IP).  I could be wrong on both counts; and I will acknowledge it when it happens.  If it happens.
               

    News on Stocks in Our Portfolios


Economics

   This Week’s Data

      US

            October pending homes sales fell 2.6% versus forecasts of unchanged.

     International

            The November Chinese composite PMI came in at 52.8 versus expectations of 53.1; the manufacturing PMI was 50.0 versus 50.2; and the nonmanufacturing PMI was 53.4 versus 53.8.

            November Japanese CPI was reported at +0.8% versus estimates of +1.1%; industrial production was up 2.9% versus consensus of up 1.2%.

            October EU unemployment was 8.1% versus projections of 8.0%.

            October German retail sales fell 0.3% versus forecasts of +0.4%.

    Other

            Update on big four economic indicators.

What I am reading today

            Five places where people slowdown the aging process.

                        Bad buybacks (another must read from Barry Ritholtz).

            What can investors do about overconfidence?


Visit Investing for Survival’s website (http://investingforsurvival.com/home) to learn more about our Investment Strategy, Prices Disciplines and Subscriber Service.




Thursday, November 29, 2018

The Morning Call--Trump 1, Powell 0; or a brilliant Machiavellian move?


The Morning Call

11/29/18

The Market
         
    Technical

The Averages (DJIA 25366, S&P 2743) did a moonshot yesterday following Fed Chair Powell’s comments (see below).  Despite this performance, their charts are still broken on a short term basis.  Both are below their respective 100 DMA; both are now in a short term trading range; both continue to develop very short term downtrends; and both have now closed last Tuesday’s gap down open.  The S&P remains below its 200 DMA.

On the other hand, (1) the Dow traded above its 200 DMA [now resistance; if it remains there through the close next Monday, it will revert to support], (2) both indices remain solidly in intermediate and long term uptrends, (3) we are in a historically strong seasonal period for stock prices and (4) both made a higher low off the late October low.   

I think the technical key here is the 200 DMA’s: (1) they are the first major resistance point in this rally and (2) before being broken, they were a major source of support for both indices in the last year.  Typically, a support level which sustains multiple challenges, then breaks, will offer significant resistance on the way back up.  So before raising the odds of the Averages challenging their all-time highs or the upper boundaries of their long term uptrend, I need to see both successfully challenge their 200 DMA.

Volume rose and breadth improved---but neither reflected the power of the price move in the indices.

The VIX was down 2 ¾ %, an astonishing small move on such a big up price move.  The chart remains positive (bad for stocks): above both MA’s and within a short term uptrend.

The long bond fell ½ % on volume---not what I would have expected on a day marked by a dovish Fed statement.  While it continues to build a base very short term, it still finished below both moving averages and in a short term downtrend; meaning that until some of these resistance levels are successfully challenged, the assumption is that bond prices are going lower.

The dollar was down ½ %.  To be expected on dovish comments from the Fed.  However, it was not enough to challenge even its very short term uptrend.  In short, the chart remains technically strong.  I continue to believe that UUP will move higher as long as the dollar funding problem persists. 

GLD was rose, remaining above its 100 DMA.  While it seems to be attempting to build a base, the longer term chart is negative.

 Bottom line: the price action in the Averages was clearly big but volume, breadth, the VIX and the performance of the dollar, bonds and gold all belied the euphoria in equities.  They can, of course, respond today.  But until I see that confirmation, I am going to curb expectations for a sustained rally.  Even with the Averages, the first major resistance level is their 200 DMA’s are still there yet to be successfully challenged.  That certainly could occur; but until it does, my short term technical outlook remains unchanged: I don’t think a rally back to former highs is likely near term.

As I noted above, if you only looked at yesterday’s performance of the dollar, bonds and gold, you would never know the Fed made dovish comments or the Dow was up 600 points.

            Wednesday in the charts.

    Fundamental

       Headlines

            There was a lot of data to digest yesterday: weekly mortgage and purchase applications were strong; the second estimate of third quarter GDP was unchanged from the prior reading, though corporate profits were lower; the October trade deficit, the November Richmond Fed manufacturing index and October new home sales were disappointing (new home sales is a primary indicator).  So the stats continue to point to an economy falling back to a below average long term secular growth rate.

            Unless you were stuck in an elevator, you know the big news of the day.  Powell echoed Clarida’s comments on Tuesday, basically saying the current Fed Funds rate is nearing the ‘neutral rate’, i.e. the level at which the Fed stops raising rates.  Meaning the odds of multiple rate hikes in 2019 are declining.  In short, a dovish presentation; certainly not in line with his prior statement (i.e. rates are a distance from neutral and the Fed is no longer concerned about the Market’s reaction to policy).  Since the Market is totally focused on this one comment, I am not going to go over his entire presentation.  For those who are interested:

            Counterpoint.

Several comments:

(1)   was Powell responding to Market performance [like he said he wasn’t going to do], Trump’s criticism [which he shouldn’t do] or did he finally recognize that the Fed’s outlook for the economy was way too positive and, therefore, it was time for a little discretion?  I am going to defy history, give him the benefit of the doubt and say it was the latter.  If that is correct, then the Fed is probably not going to aggravate the decelerating forces in the economy---and that is good.

(2)   does ceasing to raise interest rates mean that the run off in the balance sheet will also slow?  This factor is what is critical in my Market outlook.  The Fed can stop raising its Fed Funds rate.  I don’t really care.  Indeed, as I said above, it would likely decrease the probability of a recession---which, as you know, isn’t in my forecast anyway.  My thesis has always been that the effect of unwinding of the Fed’s balance sheet would be the end the mispricing and misallocation of assets [price/risk discovery]---and that will cause the Market pain.  If the unwind continues, my Market expectations are unchanged.

Supporting the notion that rate hikes may be near an end but run off of the Fed’s balance is not, Mnuchin reportedly has been lobbying for slowing the rate of interest rate hikes but continuing to unwind the Fed’s balance sheet.  That has the advantage of getting Trump off the Fed’s back while still pursuing its most important objective.

(3)   just because the Fed holds short term rates at a certain level doesn’t mean long rates will stop rising.  Indeed, the more money the Fed takes out of the financial system [unwinding its balance sheet], the more expensive credit becomes.  Long rates can continue to go up no matter what short rates do if the supply of lendable funds is falling.

(4)   will the Powell led rally give Trump more negotiating room with the Chinese this weekend?  The world knows that one measure that Trump judges his success as president is the Market pin action.  If the world knows, then the Chinese know.  If the Donald goes into this weekend’s discussion with his scorecard showing nothing but birdies, he may think that he has more room to play hard ball. 

Or by taking Fed off the table as a potential Market negative [i.e. someone for Trump to blame], does it increase pressure on Trump to do a deal?  If no deal is done and the Market declines, the Donald has no one to blame but himself.

Or am I reading too much into what has just occurred?  We will know by Monday.
      
            Hiding in the weeds is the issue of funding for a border wall.  Trump wants $5 billion now so that it can’t be taken away in January when dems take control of the house.  Dems’ position is ‘no way, Melvin’.  The problem is that a deadline for the partial funding of government operations arrives on December 7th and the Donald has threatened to shut down the government.  He has said that he thinks that it is a great idea---though history suggests that he is wrong.   

            Bottom line: if the stock Market’s interpretation of Powell’s comments are correct, then a depressing factor (higher interest rates) to economic growth may have been lessened.  As you know, I never thought that unwinding QE would be a negative for the economy; but not pushing short term rates higher will likely be helpful. 

We still don’t know if slowing the rise in the Fed Funds rate also means a decline in the rate of run off of the Fed’s balance sheet.  That, in my opinion, is what will be critical for the Markets---if the liquidity continues to be drained from the global financial system, price discovery is on its way back.  That may be what the dollar, bonds and gold investors were telling us yesterday.  But, at this moment we don’t know.  Until we do, I wouldn’t be getting jiggy.  More to follow.

Now we await the outcome of this weekend’s Trump/Xi talks which may or may not be influenced by the Fed’s (Market’s) action.

    News on Stocks in Our Portfolios
 
            Microsoft (NASDAQ:MSFT) declares $0.46/share quarterly dividend, in line with previous.

Economics

   This Week’s Data

      US

            October new home sales fell 8.8% versus expectations of an increase of 3.9%.

            The November Richmond Fed manufacturing index came in at 14 versus consensus of 15.

                Weekly jobless claims rose 10,000 versus estimates of a 4,000 decline.

            October personal income was up 0.5% versus forecasts of up 0.4%; personal spending was up 0.6% versus projections of up 0.4%; the core PCE was up 0.1% versus an anticipated increase of 0.2%.

     International

    Other

            The tangled web of the GM/Trump dispute.

            Update on household debt.

            Russia reportedly accepts the need to reduce oil production.

What I am reading today

            Wisdom from Paul Volcker (must read).

                The stock market doesn’t care about you.

                Romaine and blockchain.

                Russia and NATO playing a dangerous game in Ukraine.

                Time use and happiness among millionaires.  This is a 50 page study so you only need to read the one page abstract.


Visit Investing for Survival’s website (http://investingforsurvival.com/home) to learn more about our Investment Strategy, Prices Disciplines and Subscriber Service.




Wednesday, November 28, 2018

The Morning Call---All eyes on Powell


The Morning Call

11/28/18

The Market
         
    Technical

The Averages (DJIA 24748, S&P 2682) were down in early trading but rallied into the close.  But their charts are still broken on a short term basis.  Both are below their respective 100 and 200 DMA’s and both are now in a short term trading range. In addition, intraday, the S&P closed last Tuesday’s gap open down---which removes that as a technical factor pulling prices higher.  The Dow has yet to fill its corresponding gap (~24840). 

On a more positive note (1) both indices remain solidly in intermediate and long term uptrends and (2) we are in a historically strong seasonal period for stock prices.   However, I believe that the odds of them challenging their all-time highs or the upper boundaries of their long term uptrend anytime soon is declining.

Volume rose and breadth improved.

The VIX was up ½ %, once again trading atypically (inverse) with the Market pin action.  The chart remains positive (bad for stocks): above both MA’s and within a short term uptrend.

The long bond rose, continuing to build a base very short term.  However, it still finished below both moving averages and in a short term downtrend; meaning that until some of these resistance levels are successfully challenged, the assumption is that bond prices are going lower.

The dollar was up ¼ % on above average volume, remaining technically strong.  I continue to believe that UUP will move higher as long as the dollar funding problem persists. 

GLD was down another ½% on good volume, ending near its 100 DMA.  While it seems to be attempting to build a base, the longer term chart is negative.

 Bottom line: the Averages continued their rally on what was an uneven news day---which is a plus.  If that is a sign that investors are less fearful, then I think that seasonal and calendar factors could provide some additional lift near term.  That said, a good deal of technical harm has been done; and history suggests that it will take some serious work for the indices to repair that damage.  In short, I don’t think a rally back to former highs is likely near term.

            UUP is benefitting from its role as a safety trade as well as the prospects for higher rates.  TLT investors seem torn between fears of rising rates and fear in general (safety trade).  GLD is trying to build a base, but not very hard.
           
            Tuesday in the charts.

    Fundamental

       Headlines

Yesterday’s stats were tertiary indicators and were mixed: month to date retail sales grew faster than in the prior week (but that is to be expected, given the season), the September Case Shiller home price index was in line and November consumer confidence was below estimates.

The optimistic take on the economy.

                Counterpoint.
            http://www.capitalspectator.com/another-downshift-expected-for-us-gdp-growth-in-q4/

                Morgan Stanley is not all that impressed either.

            As I noted yesterday, the two big economic issues that will be front and center this week are:

(1)   Fed policy.  In his speech yesterday, vice chair Clarida suggested that Fed policy may be closer to neutral than originally thought.  I thought that a bit dovish though many on the Street disagree.  Let’s see what Powell says today.

On the other hand, Trump again ripped the Fed/Powell for its current tightening policy.  In general, I am not a fan of the president criticizing an independent agency as vociferously as he has done.  If anything, it could influence that agency’s decision making process to lean against the criticism just to establish its independence---which gets in the way of good policy decision.  That said, I have no problem with the Fed’s quantitative tightening.  So if Trump’s comments strengthens the Fed’s commitment to continue QT, all the better.

The optimistic take on Fed policy.

(2)   trade.  The Donald lobbed more tariff threats at China yesterday.  To be sure, this is just part of his saturation bombing approach to upcoming negotiations; but I can’t help thinking that it will not work as well with the Chinese as others, given their psychic attachment to ‘saving face’.  If I am right, that suggests little progress unless Trump settles for a NAFTA 2.0 type agreement, which, in my opinion, would be worse than no agreement at all.

                 The optimistic take on the US/China trade conflict.

                 On the other hand:  the latest out of the administration.

            Overseas:

            Update on the Italy/EU standoff.

            Update on Brexit.

            Bottom line: Whatever occurs, the facts remain that (1) the Fed has wrecked the price discovery function of the Markets---that either gets corrected or the economy continues to allocate capital inefficiently---and (2) the Chinese will continue to steal our intellectual property until we put a stop to it.  Correcting these ills will be painful.  More than it would have been if our ruling class had acted properly.  Less than it will be if nothing is done.

            I would use any further advance in stock prices to build a cash position---if I hadn’t already done so.

            When cash outperforms everything else.

    News on Stocks in Our Portfolios
 
            United Technologies (UTX) to split into three companies.

Tiffany (NYSE:TIF): Q3 GAAP EPS of $0.77 beats by $0.01.
Revenue of $1.01B (+3.5% Y/Y) misses by $40M.

Economics

   This Week’s Data

      US

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

            November consumer confidence was reported at 135.7 versus expectations of 136.5.

            The September Case Shiller home price index rose 0.3%, in line.

                        Weekly mortgage applications were up 5.5% while purchase applications advanced 9.0%.

            The second estimate of Q3 GDP was +3.5%, in line with the first estimate; corporate profits were up 5.9% versus the prior reading of +6.4%.

            The October trade deficit was $77.2 billion versus consensus of $76.9 billion; exports decline 0.6%.

     International

    Other

            Silent inflation.

            Current expected 2018 earnings growth

            GOP announces new cut tax package.  No hint of how much it will cost.

            Mortgage delinquency rate declined in October.
           
            Oil prices continue to leak lower.

What I am reading today

            How to avoid stupid mistakes when the Market declines.

                        How to retire at 65.

                Growing meat without animals.

                National Geographic’s best photos of 2018.


Visit Investing for Survival’s website (http://investingforsurvival.com/home) to learn more about our Investment Strategy, Prices Disciplines and Subscriber Service.




Tuesday, November 27, 2018

The Morning Call--A big week for the Fed and trade


The Morning Call

11/27/18

The Market
         
    Technical

Not amazingly, the Averages (DJIA 24640, S&P 2673) rallied off an oversold condition that had developed in last week’s plunge.  But their charts are still broken on a short term basis.  Both are below their respective 100 and 200 DMA’s and both are now in a short term trading. That’s the bad news. 

The good news is that (1) both indices remain solidly in intermediate and long term uptrends, (2) we are in a historically strong seasonal period for stock prices and (3) I still believe further upside is likely in the short term in order to close last Tuesday’s gap down opening (~24840/2679).   However, the odds of them challenging their all-time highs or the upper boundaries of their long term uptrend anytime soon is declining.

I was somewhat surprised by the low volume on such a strong up day; but breadth did improve.

The VIX fell 12%, which put it back in (inverse) step with the Market pin action, though its chart remains positive (bad for stocks): above both MA’s and within a short term uptrend.

The long bond was down ¼ %, but seems to be building a base very short term.  However, it still finished below both moving averages and in a short term downtrend; meaning that until some of these resistance levels are successfully challenged, the assumption is that bond prices are going lower.

The dollar was up, remaining technically strong.  I continue to believe that UUP will move higher as long as the dollar funding problem persists. 

GLD was down, but still ended above its 100 DMA, suggesting that it is attempting to build a base.  However, like TLT, the longer term chart is negative.

 Bottom line: the Averages charts continue to deteriorate, yesterday’s pin action notwithstanding.  I still believe that seasonal and calendar factors could provide some lift near term; but it will take some serious work for the indices to repair the technical damage done over the last month.  In short, I don’t think a rally back to former highs is likely near term.

            UUP is benefitting from its role as a safety trade as well as the prospects for higher rates.  TLT investors seem torn between fears of rising rates and fear in general (safety trade).  GLD remains docile in the face of volatile Markets and headlines.  The problem is that this docility is occurring at low prices.

            Monday in the charts.


    Fundamental

       Headlines

            Yesterday’s economic stats were slightly negative.  The October Chicago Fed national activity index was better than expected though the September reading was revised down; the November Dallas Fed manufacturing index was very disappointing.

            In addition to a busy week for the dataflow, there are other developments in areas the will impact the US economy.

            First, Fed policy---the major issue being the length to which the Fed will pursue its current quantitative tightening policy, specifically, will it continue to unwind QE in the face of fears about recession.  The focus will be on how hawkish/dovish the language is in (1) multiple Fed member speeches this week, not the least of which are vice chair Clarida today and chair Powell tomorrow and (2) the minutes from the last FOMC meeting which will be released on Thursday---this all in anticipation of the December FOMC meeting. 

            You know my thoughts on this issue.  The Fed needs to undo the damage done by QE to the pricing of risk/assets in order for the economy to efficiently allocate capital.  If that causes Market heartburn, that is the price to be paid.  As you also know, I don’t think this process is going to cause a recession except perhaps in those areas that benefitted the most from QE (i.e. banks and inefficient companies/industries that would never have received credit in a normal environment).  The US economy has thrived in periods with rates considerably higher than they are today or will be under Fed’s current plan.

            That said, Powell has never been put in the spot of having to choose between making the Markets happy and doing the right thing.  Will he be Volcker-esque or Yellen-esque?  We will soon know.

            The second major concern is how Trump handles the upcoming talks with Xi.  He has been his usual belligerent self, indicating yesterday that additional tariffs will be imposed if there is no deal and, importantly, that he would not delay those tariffs to allow more negotiations.  Again, I have made myself clear on this issue---sooner or later, the US has to put an end to the Chinese theft of our intellectual property.  If the Donald sticks to his guns and the Chinese blink, there is the potential for great news coming out to these negotiations.  Though I am not holding my breath. 
                       
In other news,             EU approves Brexit deal.
            https://www.bbc.com/news/uk-46334649
           
            But the French aren’t happy.

            Bottom line: this is going to be an active week for news flow.  But I am not making bets on the potential outcomes.  Whatever occurs, the facts remain that (1) the Fed has wrecked the price discovery function of the Markets---that either gets corrected or the economy continues to allocate capital inefficiently---and (2) the Chinese will continue to steal our intellectual property until we put a stop to it.  Correcting these ills will be painful.  More than it would have been if our ruling class had acted properly.  Less than it will be if nothing is done.

            I would use any further advance in stock prices to build a cash position---if I hadn’t already done so.

            Morgan Stanley turns negative.

    News on Stocks in Our Portfolios
 
Bank of Nova Scotia (NYSE:BNS): Q3 Non-GAAP EPS of C$1.77 misses by C$0.02; GAAP EPS of C$1.71.
Revenue of C$7.45B (+9.4% Y/Y) misses by C$190M.

Economics

   This Week’s Data

      US

            The November Dallas Fed manufacturing index came in at 17.6 versus estimates of 28.6.

     International

    Other

            Global financial crimes.

            And speaking of Goldman Sachs, the Fed is not happy with its compliance controls

What I am reading today

            If you want to be happy.

                        Stocks versus the economy.

            Investment wisdom from Jesse Livermore.

            More turmoil in the crypto markets.
           
            The life changing art of asking versus telling.

            The economics of Le’Veon Bell’s gamble.
           

Visit Investing for Survival’s website (http://investingforsurvival.com/home) to learn more about our Investment Strategy, Prices Disciplines and Subscriber Service.