Friday, November 9, 2018

The Morning Call--No letup in the unwinding of QE


The Morning Call

11/9/18

A football weekend in Norman.  See you next Tuesday.

The Market
         
    Technical

The Averages (DJIA 26191, S&P 2806) rested (mixed: Dow up, S&P down, both fractionally) after a big Wednesday, leaving open the probability of a potential dramatic change in the technical picture.  The Dow ended above its 100 DMA for a third day, reverting to support and above its 200 DMA (now support).

The S&P finished below its 100 DMA for (now resistance) but above its 200 DMA for a second day (now resistance; if it remains there through the close next Tuesday, it will revert to support).

With the Dow now getting support from both MA’s and the S&P threatening to break back above its 200 DMA (that strong support level for the last two years), it appears increasingly likely that the decline that began in October is over and that the positive  seasonal and calendar effects are starting to exert themselves.  The only negative is two previously mentioned gap opens to the upside, which in tech wisdom have to be closed before a longer term uptrend to continue.  That doesn’t necessarily mean that the uptrend won’t continue; but it means that there needs to be some back and filling before any launch to the upside.

Volume fell; breadth was mixed.

The VIX was up 2 ¼ %, bouncing up off its 200 DMA, remaining above its 100 DMA and within a short term uptrend.

The long bond was down one cent finishing within very short term and short term downtrends and below both moving averages.   Still a negative technical picture, indicating higher interest rates.

The dollar was up ½ %, closing back above its August high and within short term and very short term uptrends and above both moving averages.  I continue to believe that UUP will move higher as long as the dollar funding problem persists. 

GLD was down ¼ %, but still ended above its 100 DMA.  While the pin action remains a bit confusing, it does seem to be trying to establish a trading range slightly above the former August to October trading range.

 Bottom line: the S&P has begun a challenge of its 200 DMA, which if successful would point to higher prices---the likely next stop being the September/October highs.  That seems a reasonable scenario given the seasonal and post mid-term calendar effects.  However, confusing the technical picture are two gap opens at lower levels that, technically speaking, have to be closed.  I await for the confirmation of the break of the 200 DMA.

While I disagree with this analyst’s take on the fundamentals, he provides the technical bull case based on the calendar.

TLT’s and UUP’s performances both continue to point to higher interest rates (a tighter Fed) which is definitely not a plus for the Markets. 
           
            Thursday in the charts.

    Fundamental

       Headlines

            One minor US stat reported yesterday: weekly jobless claims were in line.  Overseas, the October Chinese trade surplus was $34 billion ($31.7 billion with the US) down slightly from $34.1 billion in September.  Still it is not likely to make the Donald happy.

            The main headline of the day was the FOMC November meeting which concluded. It issued its usual formal statement that hardly varied from the prior release: rates unchanged, balance sheet unwind continues, the economic assessment was upbeat, no mention of Market volatility or concern about inflation.   

            While stocks sold off a bit, the pin action was calm as was trading in other markets.

            However, in my opinion, the most important Market take away is that the Fed’s balance sheet will continue to run off, meaning that the end of the mispricing and misallocation of assets draws close---though, clearly, the Market disagrees with me at this point. 

This a great article dealing with the Fed unwinding its balance sheet and the impact it is having (hint: dollar funding shortage).  The author makes an important point that I hadn’t thought of; and that is that a large portion of the Fed’s balance sheet is being used by banks to meet more stringent capital requirements dictated by Dodd Frank and regulators.  Hence, those funds are not loose money chasing asset prices higher but basically passive funds that are being utilized to increase the financial strength of the US banking system. 

While that is good news for the health of our financial system, it also means that the Fed’s run off of its balance sheet is having a more leveraged impact on the speculative money that created the mispricing and misallocation of assets.  In other words, even though the decline in total Fed holdings has been modest to date, it is having a larger effect on the speculative dollar holders because all those reserves on bank balance sheets are not available to satisfy the speculators dollar debt servicing obligations.
    
            Bottom line: with a big news week behind us, we now know that (1) fiscal policy will probably be less stimulative over the next two years as political gridlocks diminishes the chances of tax cuts or big spending plans.  That doesn’t mean that the fiscal drag from servicing a ginormous national debt is going away; hopefully it means that conditions won’t get any worse and (2) the Fed remains on course to unwind QE.  The longer that goes on, then, in my opinion, the more pressure it puts on speculators and low quality creditors with dollar denominated debt to reverse those trades. 

And that is likely a Market negative.  I would use any continuing price strength in stock prices to build cash reserves (sell high).
           
            The tailwinds to the Market have shifted.

            Profit margins are likely to contract.

            Why investors like gridlock.

            The risk of a ‘buy and hold’ strategy.

I would like to see more of the math that determines this author’s conclusion about stock market returns; so I am not sure I agree with it.  In any case, it is an interesting read.


    News on Stocks in Our Portfolios
 
United Parcel Service (NYSE:UPS) declares $0.91/share quarterly dividend, in line with previous.

Economics

   This Week’s Data

      US

            October PPI came in at a sizzling +0.6% versus expectations of +0.2%; ex food and energy, it was much the same +0.5% versus +0.2%.


     International

    Other

            The state of consumer debt.

            The commercial real estate momentum index declines.

            The oil boom in Africa.

            New lending directive from the Chinese government.

What I am reading today

            This author is wrong on so many counts it would take an article of equal length just to refute all his inaccurate assertions.  But in the interest of a balanced approach, I include it.

            Ten easy ways to waste your money.

                How memories influence our investment perspective.

Buffett’s underrated investment attributes.

Things that you see in every market correction.

Quote of the day.

Russia deploys new hypersonic missile.

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