Friday, May 22, 2020

The Morning Call---'Less bad' doesn't mean stocks are fairly valued

The Morning Call


The Market

The Averages  (24474, 2948) continue to struggle to make upward progress, closing lower on the day and  leaving the Market in a somewhat confused technical state: (1) neither closed Monday’s huge gap up opens, (2) both finished above the top end of the 4/17-4/21 trading range, (3) the Dow is still building a double top formation, (4) the S&P remained within its very short term uptrend; the Dow did not and (5) the S&P bounced down off  its 100 DMA.    

My assumption continues to be that equity prices’ bias is to the upside but that effort will be labored.  The resistance presented by both indices 100 and 200 DMA, the magnetic pull of those gap up opens and the pin action in the VIX, supports that notion.

For the optimists.

TLT and UUP were up, GLD down.  But all their charts remain strong, reflecting risk aversion among their investors.

                Thursday in the charts.



            The economy

The US numbers were again weighted to the ‘less bad’ than had been expected scenario.  April existing home sales, the April leading economic indicators, the May flash manufacturing, services and composite PMI’s fit that pattern.  On the other hand, weekly jobless claims and the May Philadelphia Fed manufacturing index were disappointing.

Overseas, the pattern was similar.  May EU flash consumer confidence as well as the May Japanese, German, EU and UK flash manufacturing, services and composite PMI’s were better than anticipated.  The only disheartening stat was the April Japanese trade balance which was much more negative than forecast.

            The coronavirus

            ***overnight update.

            How Florida has succeeded.

            Another dump on Sweden.  The problem with this analysis is that is just looks at deaths from the coronavirus.  Nothing about the economic havoc wreaked on the average citizen nor the deaths that occurred because a test, treatment, etc. wasn’t done.

            A wave of small business closures is on the way.

            Part 2.

            The Fed

            Did the Fed overreact?

            And is it still doing so?

            Fed balance sheet hits $7 trillion.


            ***overnight, China cracks down on Hong Kong and abandons growth targets.

            Hong Kong again sticking its finger the Beijing’s eye.; Beijing’s response.

            The senate’s response to Beijing’s response.

            US just made a new sale of military hardware to Taiwan---which will clearly piss of the Chinese.

            Bottom line: as encouraging as the trend of ‘less bad’ economic data is, I still believe that the economy faces some major headwinds (the magnitude and extent of an economic recovery, the drag that the wildly expansive fiscal policy will exert on capital investment and consumption, the righting of the mispricing and misallocation of assets; plus the potential negative fallout from a US/China standoff) that render current equity valuations excessive.

    News on Stocks in Our Portfolios


   This Week’s Data


            April existing home sales declined 17.8% versus estimates of -18.9%.

            The April leading economic indicators fell 4.4% versus forecasts of -5.5%.

            The May flash manufacturing PMI came in at 39.8 versus expectations of 38.0;
the services PMI was 36.9 versus 30.0; the composite PMI was 36.4 versus 32.5.


            April Japanese CPI was -0.2% versus consensus of -0.5%; ex food and energy, it was +0.2% versus +0.4%.

            April UK retail sales fell 18.1% versus projection of -16.0%; ex fuel, they declined 18.2% versus -15.0%.


            Hotel occupancy rates declined 54% YoY.

            Loan defaults hit six year high.

            Oil down after Chinese abandon growth targets,

What I am reading today


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