Wednesday, May 8, 2019

The Morning Call--How much of this is posturing?


The Morning Call

5/8/18

The Market
         
    Technical

The internal strength that the Averages exhibited on Monday quickly dissipated yesterday as they (25965, 2884) experienced a sharp decline on slightly higher volume and very poor breadth.  The Dow closed its April 1st gap open intraday while the S&P still has a way to go (2837).  But as I have observed, closing those gap up opens does little technical damage and in no way precludes another challenge of their all-time highs. 

The VIX soared 25 ½ %, clearly torching the complacency that it had existed the prior two weeks and was again evident in Monday’s intraday reversal.

The long bond rose 3/4 %, continuing its bounce off the fourth challenge of the lower boundary of its very short term uptrend. 

             The dollar was up another two cents.  Its chart remains quite positive; though there is still a gap up open below that needs to be filled.
           
            GLD increased 3/8%, but its chart remains broken.  Its 100 DMA and the upper boundary of its very short term downtrend represent overhead resistance.

Bottom line: even though Monday’s intraday reversal didn’t presage another challenge on the indices all-time high and Tuesday’s pin action was a bit painful, the spike in the VIX as well as the Dow closing the April 1st gap open are probably longer term pluses in that they are starting to correct what was an overbought, over extended Market.  We knew that the powerful advance from December 26th had to end at some point as did the degree of complacency exhibited in the VIX.  The only question was when.  So far, no technical damage has been done to either chart; and until it is, the question is how much backing and filling will be required before the Averages mount another challenge to their all-time highs.
           
Yesterday’s performance by the dollar, long bond and gold were likely more a function of their role as a safety trade than anything else.

            Things are out of whack.

            Tuesday in the charts.

    Fundamental

       Headlines

Yesterday’s stats were weighted to the positive: month to date retail chain store sales and the March JOLTS (job openings) report were better than expected while the rise in consumer credit (credit cards) was below forecasts.

            Overseas, the numbers weren’t so good: March German factory orders and the April construction PMI were below estimates; plus the EU reduced 2019 economic growth forecast.
           
            US/China trade talk concerns dominated yesterday’s news narrative, the latest input being the comments by head US trade negotiator Lighthizer which were not positive.  That said, I continue to think that (1) we can’t believe a thing that gets said by either party, especially Trump, for public consumption, (2) no deal is better for long term US secular economic growth than a crumby deal, but (3) short term, a crumby deal will  be better for the economy than no deal, (4) in any case, if tariffs go up on Friday, economic and corporate profit expectations will likely start to be reduced with the concomitant impact on equity valuations.

            Thoughts on the Trump/Xi stare down.

            Go small and go home.
      
            ***overnight,

            Not talked about so much was the escalating saber rattling between the US and Iran.  A ‘shots fired’ scenario could turn out to be a nightmare; and having a couple of neocons (Pompeo/Bolton) seemingly in charge of managing events doesn’t help.

            Bottom line: I have two questions: (1) will Trump raise tariffs on Friday?---which will almost surely be a negative for the Market short term and (2) if he does, what will Mr. Powell do?

            In the meantime, we are one tweet away from reversing Monday and Tuesday’s damage.

            When everything is coming up roses.

            Update on corporate buybacks.

    News on Stocks in Our Portfolios
 
Emerson Electric (NYSE:EMR): Q2 GAAP EPS of $0.84 in-line.
Revenue of $4.57B (+7.5% Y/Y) misses by $70M.

Emerson Electric (NYSE:EMR) declares $0.49/share quarterly dividend, in line with previous.

Economics

   This Week’s Data

      US

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

            The March JOLTS (job openings) report showed available jobs at 7.4 million versus estimates of 7.2 million.

Consumer credit was up $10.2 billion in March versus consensus of +$16.0 billion.

                        Weekly mortgage applications rose 2.7% while purchase applications were up 4.2%.

     International

            The April Chinese trade balance was +$13.8 billion versus expectations of +$35 billion---a sharp drop in exports was the primary cause.

            March German industrial production advanced 0.5% versus projections of -0.5%.

    Other

            Fed warns of risky corporate debt levels.

            Italy has risky government debt levels.

                        Recovery in Europe (Germany)?

                Will the yuan become a reserve currency?
                       
What I am reading today

            Death by loneliness.

            On the other hand.

            More ‘make work’ from the government bureaucrats.

            Some interesting facts about student loans.

            Quote of the day.

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