Tuesday, July 9, 2019

The Morning Call---A big pot of Fed stew


The Morning Call

7/9/19

The Market
         
    Technical

            The Averages (26806, 2975) drifted lower yesterday, but remain above both MA’s and in uptrends across all time frames.  While volume was up, it is anemic; breadth was weak.  Still momentum is to the upside; so, my assumption is that they will challenge the upper boundary of their long term uptrends (29947, 3191). Nevertheless, there are some negative: (1) short term, last Friday’s gap up opens need to be closed and (2) long term, all the other non-stock indices are pointing to a need for safety which is contrary to the current pin action in stocks. 

            The VIX was up 5 1/8%, but remained below both MA’s and in a very short term downtrend.   So, impetus is lower.  However, as I noted yesterday, it is near its historic low, suggesting limited additional downside.

The long bond rose 1/8 % but couldn’t breach the upper boundary of its short term trading range (seventeen cents away).  Importantly, a successful challenge will reset its long term trend to up.  Nonetheless, it is above both MA’s and in a very short term uptrend.  In addition, it had a gap down open on Friday which needs to be filled---which if it happens, would start another challenge of the upper boundary of the short term trading range.    It continues to act as a safety trade.

            The dollar advanced 1/8%, ending above both MA’s and in a short term uptrend.  However, it made a gap up open on Friday which needs to be closed.  I still believe that its pin action reflects its role as a safety trade.

            GLD fell 5/8% though it remains in a strong uptrend.  Still, it has made one gap up and one gap down opens and those need to be dealt with.  That said, it continues to act as a safety trade.

Bottom line:  despite being overbought and the need to fill gap up opens from the prior week, the Averages appear on their way to challenging the upper boundaries of their long term uptrends.

It is remains disconcerting that volume is low (versus high volume in bonds, the dollar and gold which are pointing to recession/or the need for a safety trade), breadth is weakening, other equity indices have failed to confirm the breakout of the Dow/S&P and the VIX  has been acting unconventionally for the last couple of weeks.

            Monday in the charts.

    Fundamental

       Headlines

            Only one stat reported yesterday: May consumer credit continued to grow---not what you want when total credit is near all-time highs.

            Overseas, May Japanese machine tool orders and June bank lending and economic sentiment were below forecasts as was May German industrial production.

            Update on big four economic indicators.

            It was a quiet day otherwise.  So, I include articles on my favorite subjects:

            Goldman admits that the Fed has lost control.

            Trump’s latest nominee to the Fed and the realization of a liquidity trap.

            Lagarde and the ECB’s monetary policy.

            Another study on how a high debt to GDP ratio can inhibit long term secular economic growth.

            Bottom line:  the economic data continues to deteriorate---which is starting to sound like a broken record.  While I don’t expect any kind of 2009 like decline,  any slowdown will likely have a negative impact on corporate profits.  And that would make current valuations even more extreme.
              
            Of course, that means nothing given the Market/Fed co-dependency.  And we will get a snoot full of Fed news this week with Powell’s speech today, his testimony before congress on Wednesday and Thursday and the release of the minutes of latest FOMC meeting.  As long as the narrative remains dovish, stocks are likely to maintain an upward trajectory.

            Buy all things.

    News on Stocks in Our Portfolios
 
PepsiCo (NASDAQ:PEP): Q2 Non-GAAP EPS of $1.54 beats by $0.03; GAAP EPS of $1.44 in-line.
Revenue of $16.45B (+2.2% Y/Y) in-line.


Economics

   This Week’s Data

      US

            May consumer credit expanded $17.0 billion versus expectations of $16.7 billion.

                The June small business optimism index was reported at 103.3 versus consensus of 105.0.

     International

    Other

            June heavy truck sales at all-time high.

            Another look on the bright side from my favorite optimist.

            Economic orthodoxy is failing.

            How economic data works.

            The problem with Keynesianism.

What I am reading today

            What blows a hole in your budget.

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