Thursday, February 21, 2019

The Morning Call--FOMC minutes make it official

The Morning Call


The Market

The Averages (DJIA 25954, S&P 2784) continued their rally.  The Dow ended above both MA’s (now support) and in a very short term uptrend.  The S&P remained in a very short term uptrend, above its 100 DMA (now support), above its 200 DMA (now resistance) for a third day (if it remains there through the close today, it will revert to support).   Both remain below their previous lower highs (~25977, 2800).

Volume was flat as was breadth---remaining in overbought territory.

The VIX fell 5 ¾ % percent, ending below the lower boundary of its short term uptrend, resetting it to a trading range.  It remains below both MA’s (now resistance) and now is reflective of the surge in equity prices.

The long bond declined ¼%, but finished above both MA’s, in very short term uptrend and within short and intermediate-term trading ranges. 

The dollar was up two cents, closing above both MA’s and within a short-term uptrend. 

GLD was off ¼%, but still ended above both MA’s (the 100 DMA is crossing above its 200 DMA---a positive technical signal) and within very short-term and short-term uptrends.  

 Bottom line: the Averages are within a short hair of challenging their prior lower highs.  If successful, it would set the stage for a move to their all-time highs.  Though given their very overbought condition, some retreat makes sense in the short term.  However, I don’t think that any consolidation lowers the odds of a test of those prior lower highs.
          The dollar, bonds and gold seem to be attracting ‘safety trade’ investors with gold and the long bond being very strong (gold typically rallies on lower interest rates).



            Yesterday was another slow day for data: mortgage and purchase applications were up and month to date retail chain store sales were up from the prior week. Overseas, EU consumer and business confidence continues to wane though not quite as much as predicted.

            The big headline of the day was the release of the minutes from the last FOMC meeting.  They largely reflect the changed narrative by Fed members over the last month, their primary points were:

(1)   it cited softer consumer and business sentiment and slowing global economic growth as factors leading to a declining growth rate in the US economy,

(2)   it is concerned about tightening credit conditions---which, of course, is its doing,

(3)   it plans to review its interest rate and QT policies at its March meeting, pointing to an easier monetary policy. 
In my opinion, the most important takeaway was the confirmation that QT is or will be ending soon.  That leaves the mispricing and misallocation of assets as the primary risk from a too accommodative Fed.

The problem with Fed forecasts.

***overnight, the ECB met, expressing concern about EU economic growth and stating the odds of a new round of QE has increased.

In other news, China agreed not to use exchange rates as policy tool in trade disputes (remember, these guys lie a lot).
***overnight, US/China trade representatives are working on six ‘memoranda of understanding’ covering the major areas of US concerns.

Prominent among them. China proposes to buy its way out of changes in industrial policy and IP theft.                  

Bottom line: the latest minutes confirm the shift in Fed policy towards easing.  So, the global central banks are unanimous in their returning to monetary ease, meaning that short term, stocks are likely to continue to advance whatever the news flow.  The only potential problems are (1) if inflation returns forcing tighter monetary policy, (2) if a recession starts, central banks have with few policy tools to reverse declining economic activity or (3) if valuations get so stretched that even the algos realize that there are no greater fools left.

In the meantime, if any stock that trades into its Sell Half Range, I will act accordingly.

            The latest snapshot of expected 2019 S&P earnings.

    News on Stocks in Our Portfolios
Hormel Foods (NYSE:HRL): Q1 GAAP EPS of $0.44 misses by $0.01.
Revenue of $2.36B (+1.3% Y/Y) misses by $30M.


   This Week’s Data


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

December durable goods orders rose 1.2% versus expectations of up 1.0%; ex transportation, they were up 0.1% versus estimates of up 0.2%.

Weekly jobless claims fell 23,000 versus forecasts of down 14,000.

The February Philadelphia Fed manufacturing came in at -4.1 versus consensus of +14.


February flash EU consumer confidence came in at -7.4 versus consensus of -8.0.
The February Japanese flash manufacturing PMI was reported at 48.5 (anything below 50 indicates contraction) versus projections of 50.3.

The February EU flash composite PMI was 51.4 versus predictions of 51.1; the manufacturing PMI was 49.2 versus 50.4; the services PMI was 52.3 versus 51.3.

The February German flash composite PMI was 52.7 versus expectations of 52.0; the manufacturing PMI was 47.6 versus 49.7; the services PMI was 55.1 versus 53.0


            The $3 trillion time bomb.


It’s even worse in the EU.

            January architectural billings up strong.

What I am reading today

The difference between the ‘public option’ and ‘Medicare for all’.

Uncomplicating investing.

            Will the US actively pursue regime change in Iran.

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