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.
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.
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for Survival’s website (http://investingforsurvival.com/home)
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