Tuesday, December 4, 2018

The Morning Call--Deal or no deal?

The Morning Call


The Market

The Averages (DJIA 25826, S&P 2790) soared at the open, then drifted lower through the day.  They continue to work through some of the technical damage to their charts: (1) the Dow traded above its 200 DMA for the fourth day, reverting to support, (2) it also ended above its 100 DMA [now resistance; if it remains there through the close on Wednesday, it will revert to support], (3) the S&P traded above the upper boundary of the developing very short term downtrend for a second day, voiding that trend, (4) it also traded above its 200 DMA [now resistance, if it remains there through the close on Thursday, it will revert to support].  Two other factors that should have a positive impact on the pin action:  (1) we are in a historically strong seasonal period for stock prices and (2) both indices have made a higher low off the late October low.
The only negative comment that I have is that both indices gapped up at the open.  You may recall that this occurred in early November and the gap was closed within three trading days.   You may also recall that the technical necessity of filling that gap is not an argument that the Market will resume its downtrend; it is an argument that it can’t continue its uptrend until the gap is closed.

The VIX was down 9%, though it remains above both moving averages and in a short term uptrend.  So its chart remains positive (bad for stocks).

The long bond rose ½ %, rising above the upper level of the base that it has been building.  Nevertheless, 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.   

That said, what is important right now is that the short end of the yield curve is inverting---historically, a precursor to recession.


            Three reasons to hold long bonds when short rates rise.

The dollar was up fractionally, finishing in very short term and short term uptrends as well as above both MA’s.  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 traded up ¾ %, remaining above its 100 DMA and continuing to build a base. Its chart is getting less negative.

 Bottom line: investors continued to get jiggy with the US/Xi trade deal.  I said in the Closing Bell, I have no idea how to be optimistic about anything coming out of the China trade talks other than smoke and bulls**t.  So far, administration officials aside, that appears to be just what we got.  That said, I can’t argue with the tape.  If the Averages successfully challenge their 200 DMA, the assumption will have to be that they are headed for their all-time highs.

            Monday in the charts.



            The US stats released yesterday were mixed: the October construction spending (primary indicator) was not good, the November manufacturing PMI was in line and the November ISM manufacturing index was better than expected.

            Overseas, the numbers were positive: the November EU and UK manufacturing PMI’s came in above estimates.

            Of course, investors’ focus was on the US/China trade truce (?).  I opined a bit of skepticism in Monday’s Morning Call.  After another day of news flow, I see no reason to change that judgement.  

            As you know, I originally believed that Trump foreign policy objective was to overhaul the post WWII political/trade regime. NAFTA 2.0 fell woefully short of that goal.  And this latest move with Xi suggests that the Donald’s art of the deal strategy is to talk loudly and carry a white flag.  To be sure, if his goal now is just stopped negotiations and returned to the former trade pattern, it would be a short term plus for the economy in that it would eliminate uncertainty and return the prices of imported goods to their prior (lower) level. 

But that is not point.  The Chinese have played unfairly with respect to theft of US intellectual property and subsidizing industries that compete with, not just US, but global companies for far too long.  Trump said that he was going to put an end to it.  Giving them reprieve after reprieve isn’t putting an end to it. 

The Chinese have a saying, roughly translated, means ‘it is your fault’---meaning if you let us get away with breaking the rules, you have nobody to blame but yourself. 

            More thoughts on the China trade deal.

            And (from Doug Kass).

                Confusion over the Chinese auto tariffs.

                In fact, confusion over everything.

 Bottom line: we can hope that not only are the Donald and his minions serious about correcting current global trade imbalances but that they have the right strategy for doing so.  Grading NAFTA 2.0 and this latest move in the China trade negotiations, I would give him/them a C-.  As I noted above, this losing strategy has the short term benefit of removing the uncertainty created by Trump’s threat campaign in the first place.  Longer term, it will do little to improve the secular growth rate of the economy---which after all is one of the keys to equity valuations.       

            Latest on valuations.


    News on Stocks in Our Portfolios
            Donaldson (NYSE:DCI): Q1 Non-GAAP EPS of $0.56 misses by $0.01; GAAP EPS of $0.56 in-line.
Revenue of $701.4M (+8.8% Y/Y) in-line.


   This Week’s Data


            October construction spending declined 0.1% versus an anticipated increase of


            The November manufacturing PMI came in at 55.3, in line.

            The November ISM manufacturing index was reported at 59.3 versus forecasts of 57.2.



            Subprime auto loan issuances soar.

            The Fed is trapped.

            Is it already too tight?

What I am reading today

            Even when I lie: thoughts on the political dysfunction in the US.

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