Friday, January 11, 2019

The Morning Call--Powell reverses his reversal

The Morning Call


The Market

The Averages (DJIA 24001, S&P 2596) experienced another roller coaster day but ending higher on the day.  However, both indices finished below both moving averages (the 100 DMA’s are close to crossing below its 200 DMA’s---an historically negative technical signal).   The Dow finished in a very short-term downtrend and a short-term trading range. The S&P is in a short-term downtrend. So longer term, there remains a lot of work to be done to re-establish an uptrend.  For instance, the S&P would have to successfully challenge the upper boundary of its short-term downtrend (~2626) before it makes any sense to start thinking that the worst is over.

Volume was up slightly; breadth positive. 

The VIX fell another 2½ %, but still ended above both moving averages and in a short-term uptrend.  However, it closed right on the lower boundary of its very short-term uptrend; a break would be the first sign that the upward momentum in stocks is gaining strength.  For the moment, this chart remains a negative for stocks.

The long bond was down ½% but closed above its 100 DMA (now support), above its 200 DMA (now support) and in short and intermediate-term trading ranges and in a very short-term uptrend.  However, it is approaching its prior higher low---a break of which would be the first sign that rates may have seen the lows near term.  If that occurs, it would suggest that investors are becoming convinced that either the economy is stronger than is currently apparent or that the Fed won’t be as ‘flexible’ or ‘patient’ as the headlines portray.  As you know, I think that the latter is more likely.  However, no break has happened yet; so, no real technical damage has been done.

The dollar rose ½%.  While it remained below the lower end of its mid-November to present consolidation range, it finished back above its 100 DMA voiding Wednesday’s break.  In addition, it is above its 200 DMA and in a short-term uptrend.

GLD fell ½%, but still ended above both MA’s, within a very short-term uptrend and within a short-term trading range.  It remains a healthy chart.

 Bottom line: yesterday’s pin action was the mirror image of Wednesday (which gave a muted response to positive news on both the US/China trade talks and Fed policy), gaining on a day in which Powell said that the Fed would continue to unwind its balance sheet.  Color me confused.  So, I retreat to ignoring the news flow and just watch the technicals.  Now, on the upside that is the upper boundary of the S&P short term downtrend (~2626) and on the downside, the December 26th low (2349) or, at least, the last higher low (2446).

 TLT, UUP and GLD all acted like the Fed is going to tighten into a strong economy--- with which I take issue.

Thursday in the charts.


            Another slow day for economic data: weekly jobless claims fell more than expected.
            The big headline of the day was another Powell speaking engagement at which he (1) reiterated the new ‘patient’, ‘flexible’ attributes of the revised Fed policy, (2) opined that he saw no weakness in the economy, (3) but he also said that the Fed’s balance sheet needs to continue to shrink. If that sounds somewhat out of touch and contradictory to you, join the crowd. 

Forget what real Fed policy, probably the major takeaway for me is that Powell is still learning how to communicate and, so far, is making a mess of it.  That said, the Market appeared to interpret Powell’s comments as dovish, apparently focusing on ‘flexible’ versus ‘the balance sheet will continue to shrink’.  You know my thoughts---whether the Fed raises rates or not is almost irrelevant; shrinking the balance sheet is critical.  If the Fed is proceeding with this process, liquidity problems will continue and that spells trouble with a capital ‘T’ right here in River City.  Here is a summary of his comments.

            To make the confusion all the worse, Powell’s statement was followed by these stunning remarks from Chicago Fed head Evans.

                        Speaking of liquidity problems.

                        Are we now at Quantitative Failure?

                Bottom line:  under the Bernanke/Yellen regimes I constantly railed about their statements and policies being totally out of touch with reality.  Instead of a robust economy, they gave us an anemic one and extraordinary distortions in the pricing of risk and assets (e.g. negative interest rates).   Markets got used to free money and the deference shown to them by the Fed.

            Now comes Powell and he says that he sees no signs of weakness in the economy.  He apparently missed the Apple, Macy’s and American Airlines lower forward guidance as well as the layoffs being announced by GM, Ford, Blackrock and others; and that lack of perception is being echoed by other FOMC members.  In addition, Powell seems unable or unwilling to provide consistency in his monetary policy statements.  Cutting him some slack: he is new in the job, it is a very difficult one and mistakes are inevitable.  But switching from ‘the Fed balance sheet unwind is on autopilot’ to ‘the Fed is flexible and listening the Markets’ to ‘the balance sheet is going to continue the shrink’ in less than sixty days is a bit much.

            I continue to believe that QE II, III and Operation Twist did little to help the economy and that slowing their unwind will do little to hurt it.  The negative impact of shrinking the balance sheet falls primary on the Markets---to which the Fed has absolutely no responsibility, except to insure that they are properly pricing the cost of capital which they almost certainly are not.

            In all this confusion, I only hope that the Fed ‘call’ is the real policy.  If so, then at best, there is a lid on valuations.  If not, then Powell will blow his own bubble at a time of monstrous government and corporate debt. I don’t believe that will end well.

            Government shutdown impacts some home buyers.

            How it is likely to end.

            The total return roller coaster.

    News on Stocks in Our Portfolios


   This Week’s Data


December CPI fell 0.1%, in line; ex food and energy, it was +0.2%, also in line.



            Average hourly pay and benefits in the US.

            Mortgage serious delinquency rate dropped in November.

            A slowdown in the Chinese economy is the biggest threat to global growth.

Update on Brexit.

French yellow vests urge people to withdraw money from banks to spark a bank run.

What I am reading today

            When Markets are tough, stop looking.

                The demographic path of human self extinction.

            Investment thoughts from Morgan Housel.

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