Thursday, February 28, 2019

The Morning Call--Battleground


The Morning Call

2/28/19

The Market
         
    Technical

The Averages (DJIA 25985, S&P 2792) continued to languish yesterday---the S&P struggling with the critical 2800 level.  2800 has shown itself to be an important resistance level, so I think the odds are decent that a top has been made.  That said, so far there has been no ‘sell the news’ reaction to the positive news out of the trade talks and the Fed.  That all suggests to me that a battle is occurring between the bulls and bears, the outcome of which is to be determined.  So, follow through remains important.

Volume was flat; breadth weakened.

The VIX was down 3% on a down Market day, once again acting contrary to its normal inverse relationship with prices.  That is supportive of its move below both MA’s and remaining within a very short term downtrend.  

The long bond (120.43) declined 1 % on decent volume.  While it ended above both MA’s, it is nearing a support level (~119), leaving open the question, has it made a triple top?   The implication of that would be either a strengthening economy or rising inflation.

The dollar rose two cents, continuing to trade in a very narrow range---indicative of little directional conviction.  Still it finished above both MA’s and within a short-term uptrend. 

GLD was down ¾ % but remains a strong chart.  

Bottom line: the Averages did very little, with the S&P remaining below the 2800 resistance level.  While neither could advance on good news (trade and Fed), there also hasn’t been any ‘sell the news’ reaction.  That leaves me uncertain and awaiting follow through. 

          Gold’s chart remains strong though if TLT is selling off; GLD’s future performance will likely be determined by the reason (economic strength or inflation).  UUP is remains stuck in a very narrow trading range.

                Wednesday in the charts.

    Fundamental

       Headlines

            Yesterday’s economic stats were mixed: weekly mortgage/purchase applications and January pending home sales were pluses while the December trade deficit and December factory orders were disappointing.

            It was a big day in DC with multiple hearings on multiple issues:
(1)   Powell gave his second day [to the house] of Humphrey Hawkins testimony in which he stayed very close to the current Fed narrative,

(2)   Trade czar Lighthizer appeared before the house.  His comments suggest that all the US has right now by way of an agreement is the Chinese offer to up their purchase of soybeans/oil with little give on the issues of industrial policy and IP theft.

                 Meanwhile, the trade deficit continues to grow.
           
(3)   Trump’s lawyer was also in the house, trashing Trump.  I make no comments on the truth of his allegations.  I leave it to FOX and CNN to do that.  Whether true or not, the accusations will likely intensify the political turmoil within our ruling class.  While emotions will undoubtedly run high, that might be good news in that it could keep their attention off doing more fiscal mischief.

Bottom line: the good news is that the Fed continues to deliver a Market friendly narrative.  The bad news is that there is no US/North Korea deal and the chances of a comprehensive US/China deal are low.  That said, I believe that an easy Fed is the more important element in the Markets’ performance; and until something occurs that illuminates the negative economic consequences of QE, it will likely remain so.

    News on Stocks in Our Portfolios
 
EOG Resources (NYSE:EOG): Q4 Non-GAAP EPS of $1.24 misses by $0.10; GAAP EPS of $1.54 beats by $0.17.
Revenue of $4.6B (+37.7% Y/Y) beats by $130M.

Boeing signs deal for 42 777 aircraft.

Economics

   This Week’s Data

      US


            January pending home sales rose 4.6% versus forecasts of up 1.0%.

                Preliminary Q4 GDP was up 2.6% versus expectations of up 2.2%; the price index was up 1.8% versus consensus of +1.7%.

           Weekly jobless claims rose 8,000, in line.

     International


            The February Chinese manufacturing PMI came in at 49.2 versus consensus of 49.4.        

                On the other hand.


    Other

            The social impact of the misallocation of assets.

            The impact of the Fed balance sheet on bank reserves.

            Ballooning global debt.

            January median household income.
           
            The latest on Brexit.

Oil spikes as OPEC sticks with its production cuts.

What I am reading today

Trump’s financials are out.


            Crypto innovation needs guidance (rules).

                        Numbers are not reality.


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Wednesday, February 27, 2019

The Morning Call--Lower prices on good news


The Morning Call

2/27/19

The Market
         
    Technical

The Averages (DJIA 26057, S&P 2793) paused yesterday---not surprising since (1) they are very overbought and (2) the S&P has been struggling with the critical 2800 level---intraday, it again traded above 2800 but again fell back. However, the Dow ended above its prior lower high (25977). It is still too soon to make a big deal out of this; but this pin action has the characteristics of a top.  So, follow through is important.

Volume dropped; breadth was mixed.

The VIX was up 2%.  However, it remains below both MA’s and in a very short term downtrend.  

The long bond rose ½ %.  While it ended above both MA’s, the question remains, has it made a triple top.

            The Triple B problem.

The dollar declined ten cents, but still finished above both MA’s and within a short-term uptrend.  However, it just made a lower high after failing to trade above the upper boundary of the November to present trading range and is approaching its 100 DMA.

GLD was up; its chart remains strong.

Bottom line: the S&P failed to push through the 2800 resistance for a second time in as many days.  This after a steady stream of US/Chinese trade happy talk and on a day in which Powell basically said everything the Markets could hope for.  Sloppy pin action amidst positive headlines and a stronger than usual VIX continues to suggest that the current rally may be coming to an end.  As I said above, follow through will determine that.  That said, even if they have reached an interim high, that doesn’t mean a major sell off is in the cards. 

          Gold’s chart remains strong; UUP is stuck in a range and the long bond may be starting to suggest that rates could be moving up.

            Money supply and stock prices.

            Tuesday in the charts.

    Fundamental

       Headlines

            Yesterday’s economic releases were pretty positive: February consumer confidence and the February Richmond Fed manufacturing index were well above forecasts; the December Case Shiller home price index was below estimates---though that could be interpreted bullish or bearish depending on you perspective; and month to date retail chain store sales grew slower than in the prior week.

            Everyone’s focus was on Powell’s first day of his Humphrey Hawkins testimony before congress.  He basically repeated the narrative outlined in the January FOMC meeting statement: the economy is healthy but there are headwinds so ‘patience’ (the new operative monetary policy mantra) is warranted, i.e. fewer if any rate increases and revamping QT this year.  As you know, I am not thrilled with ending QT (it continues to enable the mispricing and misallocation of assets which I believe inhibit economic growth). 

            However, in the Q and A session. Powell rejected Modern Monetary Theory (countries that borrow in their own currency have the ability to borrow unlimited amounts of money).  Thank you, Mr. Powell.

            Unfortunately, nonsense continues to spew forth from the Fed.

            Bottom line: the Fed continues to deliver a Market friendly narrative.  While I think stopping QT is a mistake, I am in the minority.  So, all other things being equal, I expect the Market will maintain a positive bias especially if a US/China trade agreement is forthcoming.  That is, until investors absorb the economic consequences of the gross mispricing and misallocation of assets---a circumstance about which I have no clue.

    News on Stocks in Our Portfolios
 
            FDA expands use of Medtronics’ Resolute-DES
           

Economics

   This Week’s Data

      US

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

            Weekly mortgage applications rose 5.3% while purchase applications were up 6.0%.

            The December trade deficit was $79.5 billion versus consensus of $73.7 billion---the rise being driven by a big decline in exports.

            The December Case Shiller home price index was up 0.2% versus expectations of up 0.4%.

            February consumer confidence came in at 131.4 versus estimates of 128.0.

            The February Richmond Fed manufacturing index was 16 versus forecasts of 3.

                                    
     International

February EU economic sentiment was reported at 106.1 versus projections of 105.9.

    Other
               
                Economic growth set to slow again.

                Should we fear budget deficits?

                More on the debt cap dilemma.

                Inflation risks and inflation expectations.  The argument here is that the Fed will respond with force to an increase in inflation.  Unspoken is whether it will do it irrespective on the Markets’ reaction.

                The impact of high state income taxes.

                     The problems with a wealth tax.

What I am reading today

            Cherish your exceptions.

            Neuroscientists have a new form of neural communication.

                State level trends in residential real estate valuations.

                The easiest retirement choice.

                        Life probably exists beyond earth.  How do we find it?

                        The India/Pakistan food fight is getting out of control.


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Tuesday, February 26, 2019

The Morning Call--Was yesterday a top?


The Morning Call

2/26/19

The Market
         
    Technical

The Averages (DJIA 26091, S&P 2796) advanced for another day, though they closed well off their intraday highs.  However, the S&P ended below the lower boundary of its very short term uptrend; if it remains there through the close today, that trend will be voided.  The Dow voided its very short term uptrend on Friday.  The Dow ended above its prior lower high (25977); the S&P did not (2800). Indeed, it challenged 2800 intraday and failed for the fourth time---an extremely rare occurrence.  It is too soon to make a big deal out of this; but this pin action has the characteristics of a top.  So, follow through is important.

Volume was flat and breadth was mixed.

The VIX was up 10%.  It is unusual for the VIX to be up on an up Market day; it is even more unusual for it to be up this much.  However, still it remains below both MA’s and in a very short term downtrend.  

The long bond fell ¼ %, leaving open the possibility that it has made a triple top.

The dollar was down two cents, ending above both MA’s and within a short-term uptrend.  It remains stuck in that November to present trading range.

GLD declined slightly, but its chart remains strong.

 Bottom line: while the Averages managed another up day, yesterday’s pin action along with the strong performance of the VIX suggests that the current rally may be coming to an end.  As I said above, follow through will determine that.  However, even if they have reached an interim high, that doesn’t mean a major sell off is in the cards. 
              
          Gold’s chart remains strong; UUP is stuck in a range and the long bond may be starting to suggest that rates could be moving up.

                Monday in the charts.

    Fundamental

       Headlines
            Yesterday’s economic data weighed to the negative: the January Chicago Fed national activity index and December wholesale inventories/sales were extremely disappointing, but the February Dallas Fed manufacturing index was much better than expected.

            Most of the Markets’ attention was focused on the news Sunday night that Trump would delay the March 1st deadline for the imposition of additional tariffs on Chinese goods.  That, in turn, lifted investors’ optimism that a trade deal will be struck. 

Counterpoints:

            Trump is misreading Chinese strengths/weaknesses.

            Will Trump blink?

            Also taking up a lot of space on CNBC was the annual interview with Warren Buffett after the release of his annual letter to shareholders.  One of the segments that stood out to me was the reversal of his opinion on the US deficit/debt.

            Bottom line: the dataflow is not getting any better.  My concern is rising that my own forecast of sluggish growth may be too optimistic.

               On the other hand, it is becoming increasingly likely that some sort of trade deal will be struck with the Chinese.  The question is, will it address Chinese industrial policy and IP theft in a meaningful way or will there be a lot of ‘further studies’ needed but in the meantime China buys more soybeans?  To be sure, the latter would be a plus for US growth near term; however, Trump has put the economy through some unnecessary pain if that is all he gets. 
           
            Should stock buybacks be banned?

            Howard Marks on getting the odds on your side.

            On Friday, the debt ceiling returns.

Most economists see recession by 2021 (does that mean that we won’t have one?).

    News on Stocks in Our Portfolios
 
Bank of Nova Scotia (NYSE:BNS): Q1 Non-GAAP EPS of C$1.75 misses by C$0.07; GAAP EPS of C$1.71.
Revenue of C$7.61B (+7.3% Y/Y) misses by C$170M.


Bank of Nova Scotia (NYSE:BNS) declares CAD 0.87/share quarterly dividend, 2.4% increase from prior dividend of CAD 0.85.

Home Depot (NYSE:HD): Q4 Non-GAAP EPS of $2.25 beats by $0.09; GAAP EPS of $2.09 misses by $0.06.
Revenue of $26.49B (+10.9% Y/Y) misses by $90M.

Home Depot (NYSE:HD) declares $1.36/share quarterly dividend, 32% increase from prior dividend of $1.03.           

Economics

   This Week’s Data

      US

            December wholesale inventories rose 1.1% versus expectations of up 0.3%; however, sales declined 1.0%.
                       
            The February Dallas Fed manufacturing index came in at 13.1 versus estimates of 4.8.

            December housing starts fell 11.2% versus forecasts of being slightly up; however, building permits were up fractionally versus consensus of a decline of 2.9%.

     International

    Other
           
            More nonsense from the Fed.

            Update on student loans.

            $8 billion hedge fund using 10x leverage.

                May opens door for Brexit delay.

India and Pakistan rattle their nuclear swords.

What I am reading today

            Why smart people don’t necessarily make smart investments.

                And Markets have a way of making one look stupid.

                The nothingness value of cryptocurrencies.

                Edge over odds.

            Taming the wild.


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