Wednesday, March 4, 2020

The Morning Call--Well, that didn't turn out quite like we thought


The Morning Call

3/4/20

The Market
         
    Technical

The Averages  (25917, 3003) failed miserably at any follow through to Monday’s moon shot.  Indeed, they are starting to remind me of Six Flag’s Texas Tornado.   The principal technical headline was that the S&P fell back below its 200 DMA (now support; if it remains there through the close on Friday, it will revert to resistance). 

On the one hand, stocks continue very oversold.  So, a bounce is to be expected.  On the other hand, both of the indices seem likely to challenge their next resistance level. (1) the Dow, the lower boundary of its short term uptrend [25009], (2) the S&P, the lower boundary of its short term trading range [2855].

The long bond soared again on increased volume, making a new all-time high.  Ditto with GLD.  It is again nearing the upper boundaries of its short and very short term uptrends---which you will recall offered stiff resistance the last time this occurred. The dollar continues to get hammered.  I remain confused by the dramatically mixed performance of TLT, GLD and UUP.

                        Tuesday in the charts.

    Fundamental

       Headlines

            Yesterday was slow for economic releases.  In the US, month to date retail chain store sales declined less rapidly than in the prior week.  Overseas, January EU unemployment  was line while EU January CPI and PPI were less than anticipated as was
February Japanese consumer confidence.

            Of course, the coronavirus continued to capture the headlines.  This is a report from the WHO report on the coronavirus.
           
            ***overnight,

            But the biggest headline was the Fed (1) cutting rates by 50 basis points (2) following an unscheduled meeting---both of which were designed to emphasize how serious the Fed is in doing its part in getting the economy/Market through the coronavirus crisis.

            That said, this cut will do nothing for the economy short term.  No business hire someone and no person is going to go to a restaurant today because interest rates are lower.

            ***overnight, it also did nothing to solve the liquidity problem in the repo market.

            What level of interest rates will incentivize you to risk the health of your family?

            Bottom line: more importantly, since we know the Fed’s unspoken first concern is  equity prices, yesterday’s pin action would have to be rated as one of the all-time raspberries in Market history.   Down 800 Dow points on an unscheduled 50 basis point rate cut?  Who would have dreamed of such a response two weeks ago?  I have long contended that the Fed’s QEInfinity policies have been negative for the economy and that this bull market would end when investors finally recognized that fact.  Yesterday could be that moment.  It is too soon to make that call; but this will be a major test of my thesis.

            The risks here are that (1) the infection/death rates of the coronavirus haven’t peaked and until they do, quantifying the magnitude of the economic impact of the virus is impossible and (2) the Fed ‘put’ is history.

            Fed capitulates to the Market.

            Fed impotence exposed.

            The unstable balance between finance and the economy.

            Update on valuations.

    News on Stocks in Our Portfolios
 
           

Economics

   This Week’s Data

      US

            Weekly mortgage applications rose 15.1% while purchase applications declined 2.7%.

            The February ADP private payroll report showed a 26,000 fall in jobs versus expectations of a 39,000 drop.

     International

            January German retail sales were up 0.9% versus forecasts of +1.0%; January EU retail sales were up 0.6%, in line

            The February Japanese services PMI came in at 46.8 versus estimates of 46.7. the composite PMI was 47.0, in line; the February Chinese Caixin services PMI was 26.5 versus the January reading of 47.7, the composite PMI was 27.5 versus 47.2; the February German services PMI was 52.5 versus 53.3, the composite PMI was 50.7 versus 51.1; the February UK services PMI was 53.2 versus 53.3, the composite PMI was 53.0 versus 53.3; the February EU services PMI was 52.6 versus 52.8, the composite PMI was 51.6, in line.

    Other

            Median household income declined slightly in January.

            Proxies for Chinese economic activity.

What I am reading today

            Planning for when your spouse dies.

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