The Morning Call
7/11/19
The
Market
Technical
The Averages
(26860, 2993) resumed their upward trajectory yesterday. Both remain above both MA’s and in uptrends
across all time frames. However, volume
was down and still very anemic; breadth
was mixed, at best. 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 fell 7 ½%,
finishing below both MA’s and in a very short term downtrend. So, impetus is lower.
The long bond
declined ½%. 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 bond market is
starting to worry that the US will reach its debt ceiling sooner than
previously thought.
Are investors
underestimating the extent of potential Fed rate cuts?
The dollar was off
½%, but still ended above both MA’s and in a short term uptrend. It is now in the process of closing last
Friday’s gap up open. I still believe
that its pin action reflects its role as a safety trade.
GLD advanced 1 ½
%, continuing its strong uptrend (above both MA’s, in a short term uptrend and
now a very short term 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 and breadth
is weak. While our other indicators sent
a mixed message yesterday, none have broken strong uptrends---which indicate a
need for safety. That said, the dollar
was off on the news of an increasingly dovish Fed (see below)---lower interest
rates usually result in a weaker dollar.
The long bond trading down on an increased probability of lower short
term interest rates is a bit confusing. Gold acted exactly as it normally does when
the dollar declines and the prospect of lower rates increase. This maybe just one trading day’s noise but
could indicate a change in perspective among the various indicators’
traders/investors.
Wednesday in the
charts.
Fundamental
Headlines
Yesterday’s
stats were slightly negative: weekly mortgage applications declined while
purchase applications rose; May wholesale inventories rose but sales increased
much less.
Overseas, they
were mostly negative: June Chinese vehicle sales fell; CPI declined but was in
line while PPI was less than anticipated.
June Japanese PPI was
below expectations. May UK trade deficit and construction spending
were better than estimates; GDP was in line; and industrial production was below
consensus.
Well, the
Fed/Powell didn’t disappoint. Powell’s
house testimony couldn’t have been more dovish.
Despite his contention that the economy was in good shape, he all but
guaranteed a July rate cut. Indeed, the
only question is not whether there will be a July rate cut but how many more
cuts will follow. Defining excerpt:
And the minutes of the last FOMC meeting released
yesterday support that notion.
Since I haven’t berated these guys lately, it is probably time
for me to remind everyone that Fed has never, ever, ever gotten the timing of a
transition from easy to normal monetary policy right. And this time is no different. Indeed, it had barely begun to move toward
the unwinding of QE and the normalization of interest rates that it reversed
itself---for the worse possible reason, a stock market hissy fit.
Yet, there is nothing in the Fed
mandate that says that it needs to keep equity investors happy. Its mandate is low inflation and low
unemployment both of which it achieved years ago; but if you remember, it kept
moving the goal posts in order to justify continuing its QE policy (making the
stock jockeys happy)---which means it should have brought a halt to QE long ago.
But nooooooo. It was worried about all
those rich investors not getting richer.
So, what the Fed has also accomplished is the gross mispricing and
misallocation of assets---which is getting worse by the day (see stock market
close and the below link on negative yielding junk bonds).
To illustrate the absurdity of current central
bank monetary policy, there are now fourteen euro-denominated junk bonds
selling at negative yields.
More entertaining reading on Fed incompetency:
The Fed and the national debt.
The Fed has enough
problems without creating more.
The Fed has backed
itself into a corner.
Bottom line:
except for QE1, Fed policy since 2009 has done little to improve the US
economy. Lower unemployment and
inflation were the result of hard work, business acumen and increased
productivity. Indeed, I have argued that
Fed policy worked against any economic recovery by keeping inefficient business
alive (via cheap interest rates) and funneling money into the financial system
versus the economy (via QE). And since
expansive monetary policy did little to help the US economic recovery, I
contend that its absence will do little to hurt it. On the other hand, QE led to massive
speculation in all forms of assets leading to their significant
overvaluation. Unfortunately (in my
opinion), as along as the connection between Fed largess and Market
temperament exists, the overvaluation will only get more distorted.
That
is not likely to go on forever; though I have no clue as to what will trigger
the Fed/Market disconnect. I repeat Herb
Stein’s warning, that something that can’t go on forever, won’t.
News on Stocks in Our Portfolios
Economics
This Week’s Data
US
May
wholesale inventories rose 0.4% but sales increased by only 0.1%.
The
June inflation rate was +1.6%, in line; the core inflation rate was +0.3%
versus expectations of +0.2%.
Weekly
jobless claims fell 13,000 versus estimates of a 1,000 rise.
International
June
Chinese vehicle sales fell 9.6% following a decline of 16.4% in May.
The
June German inflation rate was +0.3%, in line.
Other
The
CBO’s report on the $15/hour minimum wage.
Trump
trying to talk down the dollar is a mistake and sows the seeds for a Fed
tightening which is the opposite of what he wants. Remember the dollar was quite strong during
the Reagan years and the economy prospered.
Some
de-regulation is not necessarily good.
What
I am reading today
The
downside to repealing Obamacare (note: this is a NY Times article).
Quote
of the day.
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