Friday, April 26, 2019

The Morning Call--A blow out GDP report. What does Mr. Powell do?

The Morning Call


The Market

The Averages (26462, 2926) turned in something of a mixed performance yesterday---the S&P was down fractionally but the Dow was off ½%, largely due to the impact a big drop in 3M (earnings report and forward guidance) had on the index.  Volume was flat (and puny) and breadth weak.  The Dow voided its very short term uptrend while the S&P finished right on the lower boundary of its very short term uptrend (yesterday, I mistakenly said that it had failed to reestablish trend.  It had.)  Other than the back and forths around those very short term uptrends, both of the indices remain technically strong. 

The VIX was up fractionally, ending above the upper boundary of its very short term downtrend for a second day, voiding that trend.  This is the first sign in some time that investors are being aroused from their complacency.

The long bond declined slightly, but remains in good technical shape, finishing above the lower boundary of its very short term uptrend and both MA’s.

             The dollar advanced a nickel, remaining technically strong, hitting another high in its uptrend since early 2018 and now twenty five cents away from a twenty year high.  The bad news is that it has two gap up opens lower down that need to be filled.  However, as I mentioned yesterday, doing so would do little damage to its chart.  
            GLD was up fractionally.  Still its chart is broken---its 100 DMA is now resistance and gold appears headed for the lower boundary of its short term uptrend (seven points lower).
Bottom line: the Averages basically marched in place---the decline in the DJIA being somewhat idiosyncratic.   That they didn’t have much follow through from their retreat off their all-time highs is a plus and lends support to the notion that they will eventually successfully challenge those highs.

  However, conditions are there that would precipitate near term consolidation: (1) the VIX voiding of its very short term downtrend notwithstanding, it continues to reflect a very high level of investor complacency, historically a sign of lower stock prices, (2) the April 1st gap up open still needs to be closed and (3) the 26656/1942 [all-time highs] levels should pose some, if not a lot of, resistance.
There was no informational value in the pin action in UUP, TLT and GLD yesterday.

            Thursday in the charts.

            WTI crude plunges.


            Yesterday’s stats were mixed: March durable goods were much better than anticipated while weekly jobless claims disappointed.  However, since durable goods is a primary indicator, the numbers have to be viewed positively.  Nothing overseas.

       Bottom line: another day of no real news on macroeconomic events.  Earnings reports dominated the headlines; and 3M’s disappointment notwithstanding, they were decent.  Indeed, while I haven’t seen a summary of ‘beats’ to date this week, my impression is that this earnings season is going better than anticipated---which means a statement that I made in yesterday’s Morning Call needs revision.

            Adding insult to injury, this morning’s blowout GDP reading (see below) demands, not just a revision but a major revision.

            In that statement, I said:  What I don’t have to speculate about is current equity valuations which are at current historically high levels.  Even assuming a complete capitulation by the Chinese (which is not going to happen), a smart move up in US economic activity (which isn’t happening) and a sharp pick up in corporate profits (which can’t happen in the absence of the prior two), stock valuations are over extended. 

            Clearly, (1) the individual readings of the stats have given a different reading on the economy than the GDP number.  At this point, I don’t have a good explanation for that; although to be fair there were two major one-time adjustments [inventories and trade] that had a big impact on the GDP reading and (2) better than expected profit reports can and are happening and one reason is better economic growth. 

To be sure,

(1) in the midst of Fed tightening, I argued that since easy money didn’t help the economy, tight money wouldn’t hurt it.  In fact, my position has always been that a normalization of monetary policy would be a plus for the economy in that it would correct the misallocation and mispricing of assets.  I am not suggesting that the latest GDP report supports that notion in spades.  But it does make me wonder,

(2) through the entire post financial crisis period, I have opined that corporations have the management skills and superior labor force to be able to grow their profitability in spite of irresponsible fiscal and monetary policy.  But that doesn’t mean that they could achieve their average historical growth rate.  Indeed, I have also pointed out that a decent portion of that growth has been the result of (1) creative accounting, (2) tax cuts and (3) stock buy backs---where (1) and (2) have a finite limit.  Still improved profitability is improved profitability and it must be accounted for. (must read)


            With all that mental masturbation behind us, my thoughts are that a stronger than expected economy and correspondingly better corporate profits will alter the assumptions in my Valuation Model which clearly would result in higher equity valuations.  It may be a bit too soon to do that; but I will begin working on possible revisions to my assumptions.  However, given the extreme overvaluation currently measured, any changes will be simply make those valuations less extreme. 

            Finally, I needn’t remind you that my concern about the lofty levels of stock prices was less about the numbers and more about the impact of irresponsibility aggressive monetary expansion; and that any sell off in the Market would likely result not from poor economic performance but from a tightening Fed.  So the question is, in light of the surprisingly strong GDP report, what does Mr. Powell do?

            For the bulls.

            Fear of missing out?

    News on Stocks in Our Portfolios
Illinois Tool Works (NYSE:ITW): Q1 GAAP EPS of $1.81 misses by $0.01.
Revenue of $3.55B (-5.1% Y/Y) misses by $90M.

United Parcel Service (NYSE:UPS): Q1 Non-GAAP EPS of $1.39 misses by $0.04; GAAP EPS of $1.28.
Revenue of $17.16B (+0.3% Y/Y) misses by $630M.

3M (NYSE:MMM): Q1 Non-GAAP EPS of $2.23 misses by $0.27; GAAP EPS of $1.51.
Revenue of $7.86B (-5.1% Y/Y) misses by $160M.

Exxon Mobil (NYSE:XOM): Q1 GAAP EPS of $0.55 misses by $0.13.
Revenue of $63.63B (-6.7% Y/Y) misses by $3.72B.

Johnson & Johnson (NYSE:JNJ) declares $0.95/share quarterly dividend, 5.6% increase from prior dividend of $0.90.

T. Rowe Price (NASDAQ:TROW) declares $0.76/share quarterly dividend, in line with previous.

Coca-Cola (NYSE:KO) declares $0.40/share quarterly dividend, in line with previous.


   This Week’s Data


            The April Kansas City Fed manufacturing index came in at 12 versus March’s reading of 17.

            Initial first quarter GDP reading showed growth of 3.2% versus expectations of 2.0%; the price deflator was up 0.6% versus 1.3%.


            March Japanese unemployment was 2.5% versus estimates of 2.4%; industrial production fell 0.9% versus -0.1%; retail sales were up 0.2% versus -0.2%; housing starts grew 10% versus 5.8%; construction orders were flat versus +2.5%; April CPI was +1.4% versus +0.8% while core CPI was +1.3% versus 1.1%.


            Market cap of new homes.

            China seeks to allay fears over Belt and Road debt risks.

            Having a printing press doesn’t mean that money is infinite.

What I am reading today

            400 year old Greenland shark.

            And we wonder why a college education is so expensive.

                You played yourself.

            Putin and Kim meeting concludes and the ‘art of the deal’ takes another hit.

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