Wednesday, March 18, 2020

The Morning Call--the biggest risk is in the credit markets

The Morning Call


The Market

The Averages  (21237, 2529) rallied yesterday as the Fed and the White House joined forces to throw everything but the kitchen sink at solving the coronavirus problem.  Still, it wasn’t enough to alter a lousy technical picture.   The S&P remained in its newly reset intermediate term trading range. The Dow ended below the newly reset lower boundary of its short term trading range for a second day; if it remains there through the close today, it will reset to a downtrend.    In short, it is going to take a lot more enthusiasm from investors to brighten the indices’ charts.

Market bottom indicator #1.

            Market bottom indicator #2.

TLT, GLD and UUP continued their volatility.  TLT  staged another big reversal, ending back below the upper boundary of its intermediate term uptrend.  GLD bounced hard off its 200 DMA, though it is still below its 100 DMA.  The UUP spiked, closing back above its 100 and 200 DMA---the third reversal in as many days. 

The question remains, are TLT, GLD and UUP starting to forecast a major change/incident in the economy as they did from late 2018 to their recent peak (low)?’ ---for instance, a Market rattling credit/liquidity event which would explain higher yields, lower gold prices and a strong dollar.
            Tuesday in the charts.


Yesterday’s dataflow was mixed.  Month to date retail chain store sales, the January JOLTS report and February industrial production (primary indicator) were better than anticipated while January business inventories, February retail sales (primary indicator) and the March housing index were worse.
            A less optimistic view.

            Update on big four economic indicators.

            Overseas, the stats were not as good.  While January Japanese industrial production was above forecasts, January UK unemployment and average earnings along with           March EU and German economic sentiment were disappointing.

            Everyone was manning the battle stations yesterday.

            The Fed

                        The Fed initiates liquidity to the commercial paper market.

                        It also unveils additional $500 billion injection in repo market.

                        The case for a Fed/Bank of China swap line.

                        What the Fed still needs to do (must read):

            The White House

                        White House announces $850 billion bailout of US economy (consumer).

            The coronavirus
                        ***overnight update.

                        A positive opinion on the progress of the coronavirus in the US.

                        A word of caution from Ron Paul (must read):

            Bottom line.  the price of oil continues to decline; but as I opined in last week’s Closing Bell, I think that the damage is quantifiable and, therefore, largely reflected in valuations.
            The coronavirus remains a big unknown, though the actions of the Fed and the White House are likely to hasten the peak in the infection/death rates.  Once that occurs we have the experience of China and South Korea to draw on as a guide to quantifying the economic consequences.  I am not suggesting that the results will be pretty; I am saying that more certainty will enter the picture and, at least, discounting can be begin in a half- way intelligible manner.

            That leaves the one risk that I have been harping on for the last five years still hanging out there---the unwinding of the mispricing and misallocation of assets.  Evidence so far suggests that the Market has finally come to the realization that Fed put which drove this process did more harm than good.  If it is dead, then the process of repricing risk will move forward.  To be sure, the equity markets have born the brunt of this adjustment so far.  Not that it is over, because it probably is not.

            What hasn’t happened is the unwind in the credit markets.  As you know, they were the problem in the Financial Crisis and the Fed has allowed them to remain so---and by problem, I mean inefficient companies/ companies with major liability issues (think unfunded pension liabilities)/companies whose management wanted to borrow heavily and buy back stock to enhance their bonuses/hedge funds were given access to cheap credit which they gorged on and that debt has to be repaid sooner or later.  Has the day of reckoning arrived?  If it has, can the Fed pull another rabbit out of its hat?  I am not smart enough to know.  But the point is there potentially remains some major negative developments coming from the credit markets.

Is this the moment of truth?

            Those who don’t learn from history are doomed to repeat it (must read).

            Update on valuations.

            Reasons to be buying stocks.

            A couple of very positive thoughts.

            The latest from Jeff Gundlach.

    News on Stocks in Our Portfolios
General Mills (NYSE:GIS): Q3 Non-GAAP EPS of $0.77 beats by $0.01; GAAP EPS of $0.74 in-line.
Revenue of $4.18B (-0.5% Y/Y) misses by $30M.


   This Week’s Data


            Month to date retail chain store sales grew more rapidly than in the prior week.

            The January job openings report showed an increase of 411,000 job openings versus estimates of a decline of 76,000 openings.

            January business inventories declined 0.1%, in line.

            February industrial production rose 0.6% versus consensus of +0.4%; capacity utilization was 77% versus 77.1%.

            The March housing market index came in at 72 versus expectations of 73.

                        Weekly mortgage applications fell 8.4% while purchase applications were off 0.9%.

            February housing starts dropped 1.5% versus estimates of -7.6%; building permits declined 5.5% versus -3.2%.


            The January EU trade surplus was E1.3 billion versus projections of E3.9 billion; February CPI was +0.2%, in line.

            The February Japanese trade surplus was Y1109.8 billion versus forecasts of Y917.2 billion.


What I am reading today


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