Thursday, June 25, 2020

The Morning Call--A second wave won't likely trigger mean reversion

The Morning Call


The Market

The Averages  (25445, 3050) sold off dramatically yesterday.  They (1) remain out of sync on their 200 DMA’s, (2) have now established very short term downtrends and (3) still have those ‘island tops’ weighing on them.

Though short term the technical picture is getting ever shakier, for the moment, I am sticking with my assumption that the Market’s bias is to the upside---at least until/unless the Averages revert their DMA’s to resistance.

Gold was off fractionally but remained above its prior (before Tuesday’s) seven year high.  The long bond was up over 1% but didn’t overcome the struggle to break out of its month long soft spell.  The dollar was also up, but its chart remains ugly.

            Wednesday in the charts.



            The economy

            Yesterday was a slow day data wise.  In the US, weekly mortgage and purchase applications fell while the April house price index was rose more than anticipated.

Update on inflation forecasts.

            Overseas, the April Japanese leading economic indicators as well as the June German business climate index were better than expected.

            IMF June update on global growth.
             The coronavirus

             ***overnight, update.

             The latest state level coronavirus tracker.

            The Fed

            This is a great article on the evils of QEInfinity.
            On the other hand, you can’t not do what people know is possible (today’s must read).
Bottom line.  a sharp rebound in coronavirus infections was the lead story yesterday.  The Market’s reaction to this news seemed to support my observation in yesterday’s Morning Call regarding investor skittishness.  That said, I do not think what appears to be the second wave of the coronavirus will be as disruptive to the economy or the Market as the first time around. 

For one, the worst of the damage has already been done and is in stock prices.  Number two, everyone knew a second wave was coming.  Maybe not this quickly; but it was well advertised.  Third,  a major portion of the newly infected are a younger cohort which evidence to date shows are less susceptible to the severe expressions of the disease.  Finally, it is unlikely that there will be the lockdown that occur initially---barring a significant rise in hospitalizations and deaths.  So taken by itself, I do not see a major impact of a second wave on either the economy or the Market.  In short, I don’t think this a trigger for mean reversion.

That said, longer term, we still don’t know the order of magnitude or the extent of the destruction wrought by the initial lockdown.  We have no idea about the changes that could occur in American’s work, social and spending patterns.  We don’t know how many of the millions of small businesses that were forced to close will stay closed and what that means in terms of employment and consumer income.  The answer to these questions is what could drive mean reversion.   And we won’t know them for a while. 

In the meantime, I am sticking with the thesis that the major force moving equity prices is…….drumroll please……….QEInfinity/Forever. 

That doesn’t mean buy, buy, buy.  Only if a stock reaches its Buy Value Range will that happen.

More on valuations.

    News on Stocks in Our Portfolios
Accenture (NYSE:ACN): Q3 GAAP EPS of $1.90 beats by $0.06.
Revenue of $11B (-0.9% Y/Y) beats by $110M.

Accenture (NYSE:ACN) declares $0.80/share quarterly dividend, in line with previous.

FactSet Research Systems (NYSE:FDS): Q3 Non-GAAP EPS of $2.86 beats by $0.42; GAAP EPS of $2.63 beats by $0.41.
Revenue of $374.08M (+2.6% Y/Y) misses by $2.27M.


   This Week’s Data


            Final Q1 GDP growth was -5.0%, in line; corporate profits were -12.4% versus -14.2%; the price index was u[ 1.6% versus up 1.4%; the core price index was up 1.7% versus up 1.6%.

            Weekly mortgage applications fell 8.7% while purchase applications were down 3.0%

            Weekly jobless claims rose 1,480,000 versus forecasts of 1,300,000.

            The April house price index increased 0.2% versus consensus of -0.4%.

            May durable goods orders were up 15.8% versus expectations of +10.9%; ex transportation, they up 4.0% versus up 2.5%.

            May wholesale inventories dropped 1.2% versus predictions of -0.6%.



            The April Japanese leading economic indicators came in at 77.7 versus estimates of 76.2.

            The June German business climate index was reported at 86.2 versus forecasts of 85.0.

            The June Japanese all industry activity index declined 6.4% versus projections of -7.4%.

            July German consumer confidence came in at -9.6 versus consensus of -12.0.


            EU banks are expected to incur huge loan losses in 2H2020.

Oil markets are right to be nervous.

Vehicle miles driven down 40% YoY.

            Architectural billings downward trajectory moderates.

What I am reading today

            Was the Kennedy assassination a regime change operation?  Part 1.

            Factfulness rules of thumb.
            Why are credit card interest rates so high?

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