Wednesday, August 14, 2019

The Morning Call---Sold to you

The Morning Call


The Market

The Averages (26279, 2926) made yet another reversal yesterday, closing up on the day.  Volume was up (finally) and breadth improved (but not by much).  The Dow closed right now 100 DMA (now support;  still pointing to a reversion to resistance).  The S&P ended back above its 100 DMA, continuing to see saw above and below this boundary for the last seven trading days; its pin action has been too erratic around the 100 DMA to make call support/resistance call.  Both indices remained above their 200 DMA’s---which right now is their major support levels.

The VIX declined 17 %, but still finished above both MA’s (now support) and is building a short term uptrend.  So, it lends a negative bias to equities.

The long bond backed off 3/8%, but remained above both MA’s and in uptrends across all timeframes.  However, it still has last Monday’s gap up open which needs to be closed.

Treasury2s10s yield curve inverts.

The dollar was up ½%, ending in short and long term uptrends and above both MA’s.  It still has a gap down open which needs to be filled but it closed back above the upper boundary of its former long term trading range.  Good news if you want a higher dollar.
Gold was down 5/8% but finished within very short term and short term uptrends and above both MA’s.  However, it still has last Friday’s gap up open which needs to be closed.

            Bottom line: long term, the Averages are in uptrends across all timeframes; so, the assumption is that they will continue to advance.  But they seem to be stuck around their 100 DMA’s.  If they move decisively above those barriers, then momentum will clearly remain to the upside.  If they can’t, then the current consolidation will continue.  But  the lower boundaries of their short term uptrends are much lower.  So, the indices could experience a big correction and still not break their upward momentum.

           That said, while stocks got jiggy yesterday, the pin action in the long bond, the dollar and gold are all pointing at the need for a safety trade.
                Tuesday in the charts.



Yesterday’s data releases were negative: the July small business optimism index came in below estimates, month to date retail chain store growth slowed; July CPI was in line but the core number was hotter than anticipated.

            Overseas, the numbers weren’t any better: July Japanese PPI and machine tool orders, July German  PPI and the August EU economic sentiment were disappointing; the July German CPI and Q2 UK productivity were in line; and May UK jobs growth were above expectations.
            Of course, the big headline of the day was Trump’s decision to remove some products from the tariff increase list scheduled to take effect September 1st (health, safety and national security considerations) and delay the imposition of the tariffs for other products to December 15th (cell phones, laptops, video game consoles, computer monitors, and certain  toy, footwear and clothing items---in other words, products most likely to be purchased at Christmas). 

            What did Trump get in return?  An agreement to resume trade talks in a couple of weeks---as they say on the trading floor ‘sold to you’.  At the risk of being repetitious, let me review my thesis:  China is not going to agree to any trade deal until at least November 2020, if then. 

That leaves any progress to a resolution on Trump’s shoulders: (1) he can fold (in the hopes of influencing the 2020 elections) in which case Chinese pernicious industrial and IP policies go unchanged and the economic turmoil generated by the trade war in the first place will be for naught, or (2) he can play hardball and continue to punish the Chinese until they relent or all US supply chains move elsewhere.

Yesterday’s announcement has all the markings of alternative (1) above.  Now there is the possibility Trump could be playing the Market---giving it reason to ramp up near term but not really changing his overall long term strategy. i.e. the kicking the can down the road strategy.   But what is he going to do in September/October 2020 when there is no deal? 

My conclusion is the same as before---whichever, alternative that Trump chooses, negative headlines are in our future.  If he folds, the economy will improve short term but the long term economic growth prospects are negative.  If he hangs tough, the economy will continue to experience a short term drag on growth but the longer term outlook improves. 

That, of course, assumes that the Chinese won’t fold (which I believe that they won’t).  If they do, then both short and long term growth forecasts will be much brighter.

            Bottom line: at the moment, it appears that the Donald has called a timeout in the US/Chinese trade war, (1) giving some consumer related US companies a rest until after Christmas, (2) more time for them to move production out of China, (3) hoping that the Chinese will view this as an olive branch and respond accordingly and (4) giving the stock market a boost [which we all know is his barometer of presidential success]. 

I think that giving US industry a respite, however brief, was a smart thing to do even if I don’t believe that the Chinese will make any meaningful concessions.  However, while stocks got all jiggy with it, the bond, currency and gold traders are pointing at problems that will overwhelm any short term effects of a delayed imposition of tariffs---like recession.  The caveat, as I noted above, is that the Chinese are serious about making a deal.


    News on Stocks in Our Portfolios


   This Week’s Data


            The July small business optimism index was reported at 104.7 versus estimates of 104.9.

                Weekly mortgage applications were up 21.7% while purchase applications grew 2.0%.

            July export prices advanced 0.2% versus consensus of 0.0%; import prices were up 0.2% versus 0.0%.


            June Japanese machinery orders rose 13.7% versus estimates of -1.3%.

            YoY June Chinese fixed asset investments were up 5.7% versus forecasts of up 5.8%; industrial production was up 4.8% versus up 5.8%; retail sales were +7.6% versus +8.6%.

            Q2 German flash GDP was -0.1%, in line.

            July UK CPI was 0.0% versus expectations of -0.1%; core CPI was +0.1% versus -0.1%; PPI was +0.9% versus +0.5%; core PPI was +0.3% versus +0.1%.

            Q2 EU GDP grew 0.2%, in line while employment was up +0.2% versus +0.3%; June industrial production was -1.6% versus -1.4%


            Mortgage delinquencies rose in Q2.

            Household debt continues to increase.

            The Phillips Curve trade off.

            Is the Fed really robbing savers?
            Your tax dollars at work.

            54% say Brexit in any form.

What I am reading today

How the Hong Kong protest could impact global and US/China trade.


            Warfare in ancient Maya.

            The tough choices in Medicare for all plans.

            The air battle over Britain (WWII).

            Thoughts on current political discourse.


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