The Morning Call
7/25/22
I am taking off for a month,
travelling. I will have my computer with me. So, if action is needed, I will be
in touch.
The
Market
Technical
The good news is
that the S&P (1) blew through the upper boundary of its very short term
downtrend like s**t through a goose, (2) has now made two higher lows and two
higher highs---suggesting the start of a new trend and (3) resolved that
developing pennant formation to the upside. The bad news is that it remains (1)
below both DMA’s, (2) in a short term downtrend, and last Friday (3) it made a
gap up open that will likely be closed and has (4) now filled those two big
gaps down opens.
As I tried to
document last week, there is a developing red hot debate about whether the
above good news means ‘the’ bottom has been made or the above bad news means
that stocks are just in one of those vicious bear market rallies. I am leaning
to the latter because I have never lived through a bear market that didn’t end
in capitulation (I have been doing this since 1968). That said, there is always
a first time; so, I am trying to remain open. As you know, as yet I have taken
no action.
The long bond continues
to tell us that inflation has, is and is about to peak and that recession is
now its major concern. That reinforces my outlook though it doesn’t answer the
questions posed below: how deeply embedded is inflation and how much resolve
does the Fed really have to bring it back to the 2% level. Whatever the answers,
it still appears to be a good time to add to your fixed income portfolio (I am
now 90%+ invested in the bond portion of my portfolio.
Gold has reached a
significant support level. Let’s see if it can hold. If bonds are right, then
GLD may be at or near a buying price. But it is too soon to make a commitment.
The
long term story remains the same---up, up and away. Though clearly the dollar
has hit a soft patch. That said, given its meteoric rise, it would be foolish to
think that some consolidation wouldn’t be in order. So, my conclusion is
unchanged: no matter how badly everyone wants the dollar to go down, as long as
the globe looks at the US as the safest place to invest (Japan at 0% real
rates; China in continuous covid lockdown and a real estate market on the edge
of a cliff; Europe which is so f**ked up, it would take a small book to cover
their self-inflicted problems) the uptrend is not apt to change.
Friday in the
charts.
More
technical evidence that this move has more to go.
https://www.knowledgeleaderscapital.com/2022/07/20/room-to-run/
More.
https://allstarcharts.com/panic-buying-ensues/
Plus,
this week will see big stock buyback programs.
On
the other hand, we still haven’t seen capitulation.
And BofA bear
turned bull crawfishes a bit.
Fundamental
Headlines
The
Economy
Review of last Week
The US economic
data continued its dismal path; the numbers were negative as were the primary indicators
(one neutral, two minus). Overseas, the stats were again mixed.
My forecast remains:
(1) that we are at or
near peak inflation. Unfortunately, we don’t know how deeply embedded that
inflation is [i.e. if only declines from a 9% annual rate to say a 6% annual,
that would still be a negative for the economy and an cause for the Fed to
remain tight]; and if all the recent exogenous events [covid, Ukraine, China]
made this a temporary phenomenon or has the prolonged period and the magnitude
of monetary ease created a structural problem making a return to a lower stable
inflation rate and a return to the Market determining the price of risk
impossible absent the application of some pretty harsh medicine from the Fed?,
Jeffrey Snider thinks that the ECB called the
top (must read).
(2) and that we are
already in or soon will be in a recession. And that raises the more important issue:
how long Fed policy needs to and will remain tight. How long it needs to stay
tight is dependent on the answer to the above question. How long it will stay
tight depends on its courage.
Unfortunately, the turd in punch bowl is that the
Fed does not have well documented history of courage. To be sure, Powell has been
firm in his public commitment to squash inflation. And if that proves to be the
case, then if inflation is deeply embedded in the economy, the resulting
recession is apt to be a painful experience---certainly more so than the
majority of the public narrative now implies.
Recession is the price to pay to cure
inflation.
Nearing the point of no return.
https://www.capitalspectator.com/new-signs-of-rising-but-not-yet-decisive-us-recession-risk/
All of that said,
there is a heavy element of uncertainty in that analysis because we do not know
how deeply embedded inflation is and we can’t say for sure that Powell won’t
stand as tough as he says that he will.
Which leaves the
outlook for the economy and, more importantly for investors’ purposes, corporate
profits murky at best. The good news is that we are the midst of second quarter
earnings results have improved from the prior week. That said, the really heavy
part of the season begins this week and that could alter the tone again.
Patience is virtue.
US
The June Chicago
Fed national activity index came in at -.19 versus expectations of -.05.
International
The July German
business climate index was reported at 88.6 versus estimates of 90.2.
The July UK industrial
trends orders index came in at 8 versus projections of 15; the Q3 business optimism
index was -21 versus -45.
Other
China
Goldman on the Chinese mortgage funding
problem.
https://www.zerohedge.com/the-market-ear/chinaproperty
Bottom line
Bear market lessons.
https://www.zerohedge.com/markets/bear-market-lessons-ex-sac-portfolio-manager
News on Stocks in Our Portfolios
What
I am reading today
Shift your perspective.
https://ritholtz.com/2022/07/shift-your-perspective/
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