Wednesday, October 23, 2019

The Morning Call---Deal or No Deal

The Morning Call


The Market

The Averages (26788, 2995) sold off yesterday on higher volume (not good when the volume goes up on down days) and poor breadth.  The VIX was up 3 ¼ %, but its pin action still holds little informational value.  The indices ended solidly above both MA’s and in uptrends across all timeframes.  Two somewhat worrisome details are (1) they have now made another lower high [4th to 7th depending on who is counting] and (2) short term, the October 11th gap up opens need to be closed.  My assumption remains that momentum is to the upside and that the all-time highs (27398, 3027) will be challenged; however, the more follow through to the downside, the weaker my conviction gets. 

            Gold was up ¼ %, which it needed to do to simply remain on the lower boundary of the trend of rising higher lows.  It also closed above the low set 9/10.

TLT rose ½ %, narrowly avoiding a challenge of its 100 DMA.  It finished in uptrends across all time frames. 

Who owns those negative yielding bonds? And why?

The dollar was up ¼%, bouncing off its 100 DMA and above the lower boundary of its short term uptrend. 

The dollar shortage continues.

China is having its own liquidity problems.

GLD, TLT and UUP were all in safety trade mode.  Let’s see if it lasts.

            Monday in the charts.



Yesterday’s US data was mixed: the October Richmond Fed manufacturing index was well above estimates, month to date retail chain store sales were less bad than in the prior week and September existing home sales (primary indicator) was very disappointing.

            Update on US business cycle risk report.

            Overseas, the August Japanese all industry index and September German PPI were better than forecasts while the September Japanese trade balance, the October UK industrial orders and business optimism were lower.

            The only major macroeconomic news yesterday was the soap opera that is Brexit---Parliament approved it but voted to delay it.  As an aside, I haven’t seen any meaningful analysis of the cost/benefits of Brexit deal (although I was wholeheartedly in favor of Great Britain reclaiming its sovereignty from the noxious EU bureaucracy).  So, I am not sure about any positive economic impact to the global (US) economy from a Brexit.   In my mind, its resolution will simply carry the psychological benefit of removing an uncertainty.  However, I have seen multiple doomsday estimates of a no deal Brexit. 

Here is the latest.

            Bottom line: the main news lay in the earnings reports that are now coming fast and furious.  So far, it looks like reported results are ahead of expectations---though remember that analysts mark down their forecasts ahead of earnings season in order to allow companies to ‘beat’ estimates.  Add better earnings to the free money that the Fed is handing out and the case for higher stock prices is there. 

            That said, short term, the most bothersome factor for me right now is the technical picture; that is, the Averages inability to make a new high.  Longer term, valuations in major sectors of the Market are extraordinarily expensive; and some mean reversion seems inevitable.  I want to take some profits in those overvalued sectors and use it to buy stocks that have been beaten up on any Market dip.

            A great explanation of how QE leads to the  misallocation of assets, the loss of productivity and wage growth. (must read).
    News on Stocks in Our Portfolios

Canadian National Railway (NYSE:CNI): Q3 Non-GAAP EPS of C$1.66 beats by C$0.04; GAAP EPS of C$1.66 beats by C$0.05.
Revenue of C$3.83B (+4.1% Y/Y) misses by C$40M.
Canadian National Railway (NYSE:CNI) declares CAD 0.5375/share quarterly dividend, in line with previous.

Boeing (NYSE:BA): Q3 Non-GAAP EPS of $1.45 misses by $0.67; GAAP EPS of $2.05 misses by $0.51.
Revenue of $19.98B (-20.6% Y/Y) in-line.

General Dynamics (NYSE:GD): Q3 Non-GAAP EPS of $3.14 beats by $0.08; GAAP EPS of $3.14 beats by $0.09.
Revenue of $9.76B (+7.4% Y/Y) beats by $10M.

Caterpillar (NYSE:CAT): Q3 Non-GAAP EPS of $2.66 misses by $0.24; GAAP EPS of $2.66 misses by $0.20.
Revenue of $12.76B (-5.6% Y/Y) misses by $730M.


   This Week’s Data


            Month to date retail chain store sales declined less rapidly than in the prior week.

            September existing home sales fell 2.2% versus forecasts of -0.7%.

            The October Richmond Fed manufacturing index came in at 8 versus consensus of -14.

                Weekly mortgage applications fell 11.9% while purchase applications dropped 3.6%.



            China increases infrastructure spending to stave off recession.

What I am reading today

            The rise and fall of the Roman Republic (part 1).

            Can exercise help prevent dementia?

            No inflation.  Tell my landlord.

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