Tuesday, February 4, 2020

The Morning Call--It is all about liquidity

The Morning Call


The Market

The Averages (28399, 3248) bounced yesterday.  They managed to recover above a minor support level (28399, 3215); if they can hold those levels, the worse may be over.  That is supported (1) in the very short term by they are oversold condition, (2) yet the money flows continue to be upbeat and (3) a VIX that seems somewhat elevated.  Even longer term, the indices remain technically strong (above both MA’s and in uptrends against all major timeframes). 

However, should they experience further downside, little technical damage would be done until the Averages reach their 100 DMA [27661/3098] and the lower boundaries of their short term uptrends [24696/3058].

            TLT, GLD and UUP continue to trade like the economy is weakening not strengthening.  Clearly, the Averages to date are resisting that scenario.

            Six commodity charts to watch.
            Oil market sends tanker rates plunging.

            Monday in the charts.



Yesterday’s stats were somewhat upbeat. The January manufacturing PMI and the January ISM manufacturing index came in above expectations though December construction spending (primary indicator) was disappointing.

            C&I loans continue to fall.

            Overseas, everything came up roses.  The January Japanese, Chinese Caixin, EU and UK manufacturing PMI’s were better than anticipated.

            Bottom line: while the current economic numbers look OK, the more important factors are (1) are what they are going to look like when the impact of the coronavirus becomes manifest?  At the minimum, it would seem reasonable to assume that there will be a period of weak stats, and (2) how long will that effect last?  My assumption is that any decline/slowdown in economic activity will be short lived.  In other words, it will almost surely influence 2020 growth estimates but the impact will dissipate through the year.

            In short, I don’t believe the economic fallout of the coronavirus will have that big an effect on Fair Value in our Valuation Model.  However, given that current valuations are extremely stretched versus our Fair Value, poor data would just mean valuations are less stretched.

            But as usual, central banks will have (are having) a lot to say about equity prices:

                 Bank of China pumps up the liquidity to offset coronavirus impact.

                 ***overnight, Bank of China doubles down on monetary injection.

                 Probability of US rates cuts increasing.
Recession odds.

            For the optimists on valuation.

    News on Stocks in Our Portfolios
Cummins (NYSE:CMI): Q4 Non-GAAP EPS of $2.56 beats by $0.10; GAAP EPS of $1.97 misses by $0.46.
Revenue of $5.58B (-8.5% Y/Y) beats by $190M.        

Emerson Electric (NYSE:EMR): Q1 Non-GAAP EPS of $0.67 in-line; GAAP EPS of $0.53 misses by $0.13.
Revenue of $4.15B in-line (flat Y/Y).


   This Week’s Data


            December construction spending fell 0.2% versus estimates of +0.5%.

            The January manufacturing PMI was 51.9 versus forecasts of 51.7.

            The January ISM manufacturing index was 50.9 versus consensus of 48.5.


            December EU PPI came in flat, in line.


            When does the federal debt matter?

            Update on Brexit.

            Framing lumber prices up YoY.

What else I am reading today

            The world is becoming more fragile.

            The toughest questions you can ask yourself.
            Quote of the day.

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