Wednesday, February 27, 2019

The Morning Call--Lower prices on good news

The Morning Call


The Market

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.



            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


   This Week’s Data


            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.


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

                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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