Friday, December 13, 2019

The Morning Call--It ain't over till the fat lady sings

The Morning Call


The Market
The Averages (28137, 3168) advanced on a host of positive headlines.  As a result, nothing changed with respect to the multiple gap opens or my concern that this is not healthy and could be an indication that the Market is entering or has already entered a blow off top.  On the other hand, the S&P reset a new very short term uptrend.  Volume was up; breadth improved.  The VIX fell another 7 %, continuing its  move back toward a range indicative of complacency. 

The future will not look like the past.

The long bond got hammered (down 1 5/8%) on heavy volume as short term momentum remains down  (1) as it is still well below its 100 DMA which reverted to resistance last Friday,  (2) it continues trade in a trend of lower highs and (3) is now approaching the lower boundary of its very short term uptrend.

The dollar was up 1/8%, (1) ending below its 100 DMA for a second day [now support, if it remains there through the close today, it will revert to resistance] and (2) remains near the lower boundary of its short term trading range.

Gold fell 3/8 %.  Intraday, it traded all the way up to its 100 DMA and the upper boundary of its very short term uptrend before retreating, closing both last Tuesday’s gap up open and Friday’s gap down open.  It remains in the trend of lower highs.

The headlines (China trade deal, more NotQE, a budget deal) pushed everything in the direction of an improving economy scenario.

             Thursday in the charts.



Yesterday’s stats were not that good. While November PPI was unchanged, core PPI declined; weekly jobless claims were really bad.
            Another forecast for 2020.

Overseas, October Japanese machinery orders fell more than forecasts while October EU industrial production and November German CPI were in line.

            Of course, the numbers were small potatoes when it comes to headlines.

(1)   the US/China have apparently reached ‘agreement in principle’ for Phase One trade deal.  We don’t know the terms of the deal yet; but any agreement that reduces tariffs will be a near term positive.  The key to achieving a long term plus would be the addressing unfair Chinese industrial policy and IP theft.

                  ***of course, the overnight countervailing press release---or lack thereof.

                  ***just in, China will hold press conference at 8:30CST.

(2)   the Fed announced that it would head off repo funding problem with a massive injection of liquidity.  The good news is all the new money that will be sloshing around the financial system which has always been good for the Market.  The bad news is that [a] no one has yet been able to determine the exact reasons for the funding problem, [b] while the Fed is clearly responding to this issue, it is doing so without knowing why it is having to respond, [c] meaning that there is the risk that true reason for the problem becomes manifest and it may be bigger than the Fed can manage.

                 Here is a recap of Lagarde’s press conference.

(3)   Congress reached an ‘agreement in principle’ on $1.37 trillion budget deal [the bad news], avoiding possible government shutdown [the good news, sort of].  I don’t need to go through another rant about fiscal irresponsibility.  But this is it in spades and it negatively affects the ability of the economy to grow,

(4)   the conservatives scored a big victory in the British parliamentary elections, seemingly assuring a Brexit, hard or otherwise.  The initial reaction has been quite positive in the UK markets; but I don’t think anyone has a handle on exactly what the economic consequences are for a Brexit for the short term; though I have always been of the opinion that a country reclaiming its sovereignty is a positive.

Bottom line: as I have suggested above there is good news (mostly short term) and bad news (potentially in the long term) in all the above development. 

(1)   a trade deal will certainly be an economic plus short term but if Trump has folded for political reasons and no effort has been made to correct unfair Chinese policies, the long term implications are negative,

(2)   the initial flood of reserves will almost surely have a positive affect on equity prices as it has for the last ten years.  But if there is a severe problem like the potential bankruptcy of a major bank with huge counterparty risks [think Deutschebank] that has been the source of the dollar funding problem and it bursts into the open, it could be a big potential negative for multiple securities markets,

(3)   while investors may think avoiding a government shutdown is good news, servicing an exploding national debt will continue to be a restraint on economic growth,

      The preponderance of these developments appears upbeat near term, especially given the  positive seasonal bias.   So, sit back and enjoy it.  But if you don’t have cash reserves, in my opinion, you should use the current opportunity to build them.

    News on Stocks in Our Portfolios
Oracle (NYSE:ORCL): Q2 Non-GAAP EPS of $0.90 beats by $0.01; GAAP EPS of $0.69 beats by $0.01.
Revenue of $9.61B (+0.5% Y/Y) misses by $40M.

Oracle (NYSE:ORCL) declares $0.24/share quarterly dividend, in line with previous.


   This Week’s Data


            November retail sales were up 0.2% versus consensus of up 0.5%; ex autos, they were up 0.1% versus 0.4%.


            October Japanese industrial production fell 4.5% versus estimates of -4.2% while capacity utilization declined 4.5% versus +0.3%; the Q4 large manufacturers index came in at 0 versus +2, the small manufactures index was -9 versus -8, all industry capex rose 6.8% versus 6.6%.

            November German wholesale prices dropped 0.1% versus expectations of +0.2%.

            The growing gap between mean and median household income.

            The mounting China debt default problem.
            Two million homes with negative equity in Q3 2019.

            The Fed’s wishful thinking.

What I am reading today


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