The Morning Call
5/7/19
The
Market
Technical
The Averages (26438,
2932) opened down big but recovered almost all of their losses by the end of
trading. Volume was up slightly, and
breadth was weak. Having traded back above
the upper boundary of its short term trading range (all-time high) for a second
time on Friday, the S&P ended back below it yesterday, marking a second failed
attempt to challenge that boundary. The
Dow did not trade above its comparable level on Friday. That said, the rally of the indices off major
losses indicates good internal strength; so, I wouldn’t be surprised by another
challenge of their all-time highs near term.
That said, there is still that April 1st gap up open that
needs to be filled.
The VIX was up,
putting it in (reverse) sync with the Averages which had not been the case last
week. Given yesterday’s pin action, investors
had the opportunity to blow the VIX out of the water, but didn’t---continuing
to suggest investor complacency.
The long bond rose
¼ %, following through from Friday’s bounce off the fourth challenge of the
lower boundary of its very short term uptrend.
That likely means a lack of investor concern regarding higher interest
rates.
The dollar was up two cents. Its chart remains quite positive; though
there is still a gap up open below that needs to be filled.
GLD
managed an increase in price, but its chart remains broken. Its 100 DMA and the upper boundary of its
very short term downtrend represent overhead resistance.
Bottom line: I was
impressed with the indices’ resiliency---which suggests limited downside and/or
another challenge of their all-time highs fairly quickly. On the other hand, a further decline to close
that April 1st gap up open would not mean a reversal in trend.
A higher dollar
suggests higher interest rates; higher long bond and gold prices not so much.
Monday
in the charts.
Fundamental
Headlines
No
US data releases yesterday. However,
there were a number of overseas stats recorded: the April Chinese Caixin
composite and services PMI’s, the April EU composite and services PMI’s and March
EU retail sales were all better than anticipated.
Update
on big four economic indicators.
There are still
signs of a struggling economy.
We got more
background on Trump’s latest tariff threats:
(1)
apparently, Chinese premier Xi did not like the terms
of the trade agreement that have been negotiated to date and nixed them,
(2)
China’s vice premier on trade is still expected to accompany
the Chinese trade delegation that is scheduled to arrive on Thursday, meaning that
the talks aren’t dead. To me it looks
like Xi is simply following the pattern of ‘the art of the deal’. I have negotiated enough deals in my life to
know that a favorite tactic for one party is to get within an inch of a deal
which is an indication that the opposing party thinks that the deal is fair/good
and is eager to close, then back off to see what additionally can be extracted,
(3)
Trump’s response was the right one, in my opinion---don’t
show any eagerness to close. In this case,
set a deadline of midnight Thursday for progress or $325 million in new tariffs
go into effect.
Bottom line: as
you know, one of my concerns regarding the trade deal with China was that Trump
would give away the farm (i.e. no progress on correcting unfair Chinese
industrial and IP theft policies) in order to get a deal ahead of the 2020
elections.
If his latest
tariff threats are indicative, hopefully it is a sign that this won’t happen. I believe a deal addressing Chinese unfair
trade practices is a plus for the long term secular growth rate of the US and would
be a positive short term assuming it leads to lower tariffs.
On the other hand, if the current
negotiations fall apart, more tariffs equal lower trade volume which in turn
equals slower economic and corporate profit growth near term---which means if
stock prices remain at current levels, valuations will get more even stretched.
All of which may
mean nothing if the central banks continue to provide the liquidity for more
asset purchases.
And
speaking of my favorite subject, there were a number of Fed related articles
yesterday:
The Fed needs to
leave the Market alone.
The
rich get richer when monetary policy is easy.
No
more recessions?
Fed
has a tough sell on inflation guideline.
The
Fed releases its semiannual Financial Stability Report in which it warns of
elevated valuations.
Charlie Munger on the Fed.
Views from the
Milken conference.
https://www.zerohedge.com/news/2019-05-06/invest-little-extra-caution-views-gloomy-milken-conference
News on Stocks in Our Portfolios
Economics
This Week’s Data
US
International
EU
reduces 2019 economic growth forecast.
March
German factory orders rose 0.6% versus expectations of up 1.5%; the April
construction PMI came in at 53 versus estimates of 55.
Other
Income
stagnation is a myth.
When
European bank problems become our problems.
What
I am reading today
$2 trillion in
infrastructure spending is not going to happen.
A
legacy of the Hubble telescope.
Investing lessons from
the Jeopardy champ.
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