The Morning Call
7/23/19
The
Market
Technical
The Averages (27171,
2985) were up yesterday but continue in a consolidation phase after pushing
through their all-time highs. Both are
above their MA’s and in uptrends across all time frames. So, the trend is quite strong; though on a
very short term basis, a recent gap up open still needs to be closed. Volume was down, remaining anemic; breadth
was again mixed. My assumption is that the indices will
challenge the upper boundary of their long term uptrends (29947, 3191), though
the aforementioned conditions remain a potential early warning of a reversal.
The VIX fell 6 3/8
%, dropping back below the upper boundary of its very short term downtrend,
voiding Friday’s break. That puts it
closer to its historic lows---which should provide pretty stiff resistance.
That said, it finished below both MA’s and in a very short term downtrend. So, impetus is lower.
The long bond was
up 1/8%, ending above both MA’s and a minor support level, in a very short term
uptrend (that earlier gap down open has been filled) and six cents below a
twenty year high. With the Fed trying to
out-dove itself and economic growth slipping, the pin action makes sense.
The dollar rose
1/8%, closing above both MA’s, in a short term uptrend and roughly fifteen cents
from a twenty year high---not what I would expect with Trump crying for a lower
dollar and the Fed seemingly accommodating him with a more aggressive expansion
of monetary policy.
GLD was down two
cents; but the trend remains strong. It is
above both MA’s, in short and very short
term uptrends, three dollars above a five year high but fifty dollars below its
all-time high. Still, it has that one
gap up open that needs to be filled.
Bottom line: the
Averages continue to quietly work off an overbought condition but on weak
volume, deterorating breadth and the need to fill gap up opens from three weeks
ago. Given the strength of their pin
action, my assumption remains that the Averages are on their way to challenging
the upper boundaries of their long term uptrends.
The long bond and gold are pointing to lower
rates/weaker economy; the dollar just the opposite in spite of Trump’s rhetoric
and the Fed’s increasingly dovish narrative. One way to resolve this inconsistency
is to view them all as safety trades.
Monday in the
charts.
Fundamental
Headlines
One datapoint was
released yesterday: the Chicago Fed national activity index was negative but
not as much as forecast. Nothing
overseas.
Speculation on the
outcome of the FOMC meeting next week is taking a lot of airtime and print
space---the debate being whether there will be a 25 or 50 basis point rate cut
and what either would say about the Fed’s opinion on the economy. As you know, I think this debate akin to arguing
about the number of angels that can dance on the head of pin. In my opinion, the Fed was way too late
raising rates which makes it way too late to lower them. In short, whatever the magnitude of the cut,
it will have little impact on the economy.
But, as long as the Fed/Market co-dependency exists, the Markets will
continue to levitate.
The
Fed’s asymmetric bubble blowing policy.
The Fed, the Phillips
Curve and asset price inflation.
The
debt ceiling and QE/QT.
Issue
number two, which appears to have been put to rest, is an agreement on the debt
ceiling. Of course, it provides for
additional spending (and, hence, a bigger deficit)---which, as I repeatedly
point out, is exactly the opposite of what sound fiscal policy would entail,
i.e. running surpluses or at least balancing the budget when the economy is at
or near full capacity.
Three,
tensions in the Middle East continue to escalate as the UK works to build a
coalition to provide safe conduct for tankers going through the Straits of
Hormuz
https://www.zerohedge.com/news/2019-07-22/uk-announces-joint-european-task-force-patrol-persian-gulf
And Trump imposes sanctions
on a Chinese firm for importing Iranian crude.
Finally, progress seems
to be occurring on the US/China trade front.
It was reported that talks will soon resume. In addition, the Pres met with tech leaders to
hammer out a reasonable approach to the Huawei dilemma.
Bottom line: whatever
one might think of the longer term implications of the terms of the (fiscally
irresponsible) debt ceiling agreement, it removes a potential near term negative
(a government shutdown).
The resumption of
face to face US/China trade talks is a positive; though the question is, will Trump
remain steadfast in his insistence that China cease pirating US technology or
will he fold?
Whatever the
magnitude of the Fed rate cut, it will likely be a plus for the Market---at
least until investors come to realize that higher prices don’t mean a higher
discounted value of future cash flows.
The potential for an
escalation of violence in the Middle East remains a wild card.
The latter
notwithstanding, the above seems a prescription for higher stock prices.
News on Stocks in Our Portfolios
Kimberly-Clark (NYSE:KMB): Q2 Non-GAAP EPS of
$1.67 beats by $0.05; GAAP EPS of $1.40 misses
by $0.02.
Revenue of $4.59B (-0.2%
Y/Y) misses by $10M
Sherwin Williams (NYSE:SHW): Q2 Non-GAAP EPS of
$6.57 beats by $0.21; GAAP EPS of $5.03 misses
by $0.30.
Revenue of $4.88B (+2.3%
Y/Y) misses by $60M.
Revenue of $10B (+31.6%
Y/Y) beats by $140M.
Economics
This Week’s Data
US
International
July
UK industrial orders index was -34 versus estimates of -15; the business
optimism index was -32 versus -14.
Other
Elizabeth
Warren’s plan for the financial industry.
It has some merits.
What
I am reading today
Who is afraid of cryptocurrencies?
The cannabis opportunity.
Insurers running Medicare Advantage
plans overbill taxpayers.
How we make changes.
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