Thursday, May 16, 2019

The Morning Call--Maybe this is all about the Fed


The Morning Call

5/16/19

The Market
         
    Technical

The Averages (25648, 2850) had another good day, starting down big and then recovering intraday.  Volume declined though breadth improved.  Both remain above their DMA’s.  The Dow closed below both the upper boundary of its very short term downtrend and the April 1st gap open.  However, the S&P ended above the April 1st gap open and right on the upper boundary of its very short term downtrend.

The VIX fell another 8 ¾ %, finishing below its 100 DMA (now support; if it remains there through the close on Friday, it will revert to resistance) and 200 DMA (now support; if it remains there through the close next Monday, it will revert to resistance).  However, it is still in a solid very short term uptrend.

The long bond rose 5/8 %, closing above both MA’s, in a very short term uptrend and made a two and a half year high.

             The dollar was up a penny.  Its chart remains quite positive but UUP has two unfilled gap up opens below current price levels.

            GLD was down slightly, ending right on its 100 DMA (that stops the clock on its upside break.  If it closes above that level today, the MA will revert to support; if below, the upside break will be negated.)
                        https://www.etf.com/sections/features-and-news/why-bitcoin-isnt-gold-20

Bottom line: the indices were up yesterday.  The Dow is still below the upper boundary of its very short term downtrend and its April 1st gap up open, while the S&P closed right on that boundary and above its April 1st gap up open.   That puts the S&P at a more important technical level than the Dow.  A break above the very short term uptrend would be a positive signal while a third failure to challenge that level would be negative.

The pin action in the dollar continues to point at a stronger economy/higher rates; and if GLD breaks below its 100 DMA, it would confirm that scenario.  What is striking to me is TLT making a new high, indicating a weaker economy.  As you know, I believe that the bond market is much better in anticipating events than any others.  So, I put an explanation point on its pin action if there is solid follow through.

Wednesday in the charts.

                    

    Fundamental

       Headlines

            Yesterday’s dataflow was negative.  While the May NY Fed manufacturing index and the May housing index were better than anticipated, April retail sales and industrial production, both primary indicators, were  below.  In addition, weekly mortgage and purchase applications declined.

            Overseas, it was the same.  Q1 German and EU GDP were up, in line.  However, April Chinese fixed asset investments, industrial production and retail sales were disappointing as was April Japanese machine tool orders.

            Trade remains in the forefront of investors’ minds.

            More data on the impact of US tariffs on Chinese goods.
           
            And.

            And.

            More opinions on the efficacy of the tariffs.

            And:

            ***overnight, Trump bans US companies from doing business with Chinese 5G company, Huawei. 

China calls this the ‘nuclear option’.

            In other trade news, Trump decided to postpone the imposition of tariffs on EU, Japanese and Canadian automakers by six months.  The good news is that he, wisely in my opinion, decided that fighting a two front trade war was foolish and unnecessary.  The bad news is that this likely means Trump thinks that the China trade war is not apt to end anytime soon.

            US allies pulling troops out of Iraq on fears of a US/Iran confrontation.

            Bottom line: so, let’s see.  Yesterday we got really poor economic data---that is not a plus for corporate profits.  Then, Trump makes a move that seems to portend that he is prepared for the trade war with China to be an extended affair.   I doubt that the auto tariffs are being figured into current profit estimates.  However, if my assumption about them is correct, then if analysts haven’t started factoring in a China trade standoff into their profit forecasts, they soon will be. 

            None of this is good news for economic/corporate profit growth or equity valuations.  Of course, I could be wrong about the economic data; but I see support from the bond market.  And I could be wrong about Trump’s motive in delaying the auto tariffs---it could be just another ploy to convince China of his seriousness.  In which case, it would support the first point of my bottom line on China trade:

(1) we can’t believe a thing that gets said by either party 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, now that tariffs are going up, economic and corporate profit expectations will likely start to be reduced with the concomitant impact on equity valuations and (5) hoping for a deal, won’t make so.

            Or the only thing that matters is that all of this will likely force the Fed’s hand to lower rates sooner rather than later; and as I continue to observe, Fed policy has been and is the dominate factor in the Market’s performance.
           
    News on Stocks in Our Portfolios
 
           

Economics

   This Week’s Data

      US

            April industrial production fell 0.5% versus estimates of it being flat.

            The May housing market index came in at 66 versus forecasts of 64.

            April housing starts were up 5.7% versus expectations of up 6.2%; building permits were flat.

            The May Philadelphia Fed manufacturing index came in at 16.6 versus consensus of 9.

            Weekly jobless claims declined 12,000 versus projections of down 8,000.

     International
            April Japanese PPI rose 0.3% versus estimates of up 0.2%.

            The March EU trade balance was +E22.5 billion versus forecasts of +E19.9 billion.

    Other

            More on rising corporate debt.

            Interest rates and fiscal policy.

            Tax revenues under Trump

                Update on big four economic indicators.

            Italy worries rise as the prime minister threatens to push budget deficit beyond EU limits.

                In the Fed we trust, Part 1.
            https://www.zerohedge.com/news/2019-05-15/fed-we-trust-part-1                  

What I am reading today

            Young, stupid and overconfident.
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