The Morning Call
10/31/22
The
Market
Technical
As I noted last
week, there are number of technical factors pointing to a powerful yearend rally.
Clearly, we are getting it in spades. Resistance is visible at; (1) the 100 DMA
[~3918---we are a short hair away; so, it will likely be tested this week], (2)
the 200 DMA [~4134], and (3) the upper boundary of its short term downtrend
[~4204].
That said, I don’t
see any resolution to the economic problems facing both the US and global
economies; so, I remain cautious about the Market. Nimble investors may want to
trade this rally. But I continue to
believe that that there is a strong probability that we haven’t seen ‘the’
bottom, so I am not going to chase it.
Patience remains a.
virtue.
What is driving
this melt up.
And
it is likely to continue.
https://www.zerohedge.com/the-market-ear/moreupsidepain
And.
$20 billion in
daily stock demand through year end
The long bond caught
equity investors hopes for a Fed ‘pivot,’ bouncing off the lower boundary of its
long term trading range. However, it remains a fairly ugly chart. I wouldn’t
expect much follow through until we get through Wednesday’s Fed meeting. Even
then, there are still signs of extreme credit stress. So, barring some positive
dynamics coming out of the Fed meeting, I don’t think the worst is over for the
long bond.
Gold remained
within that developing pennant formation as the trading range narrows
dramatically. That leaves GLD directionless until one of those boundaries are
taken out---which is not that far away. Notice the 10/10 gap down open that
needs to be closed (hinting at a break to the upside?)
The dollar drifted
lower continuing to develop a downtrend. That said, I noted last week
that the upper boundary of its intermediate term uptrend will likely act as a
restraint on the rate of its upward momentum---so the loss on momentum is not surprising.
In addition, UUP is well above the lower boundary of its very short term
uptrend; meaning that it could drop almost five percent and not disrupt even
its shortest term upside momentum. The assumption has to be that the trend
remains up.
Fundamental
Headlines
The Economy
Review last week
The
US data last week was very negative, though the positive primary indicators outnumbered
the negative three to two; but positives (personal spending, personal income, housing
starts) were all negative as far as the Fed is concerned.
Overseas
the stats were equally disappointing.
As
you know, I believe that the EU is in a recession. And given the US data flow, I
think that it is only a matter of time until the US will join it. How deep the recession
will be heavily influenced by Fed monetary policy---which as you know, is
currently restrictive. The issue is how much more restrictive it will become.
Which
brings us back to the two questions that I posed weeks ago:
(1) how deeply embedded is inflation in our
economy? So far, there is no clear sign of an answer.
And while the data is pointing to a weakening economy that doesn’t tell us how
deeply embedded inflation is and more importantly,
(2)
how
firm will the Fed remain in its policy decisions to bring the inflation rate
back to acceptable levels? [if it is deeply embedded]
.
If
we use history as a guide, then answering the question is easy because the Fed
has never, ever, ever successfully managed a transition to normal monetary
policy. So, we are faced with two scenarios (three actually if you want to
believe that the Fed will successfully negotiate the return to stable monetary).
One is that it stays too tight for too long resulting in a severe recession.
And two, it will chicken out before inflation is squelched---which is its
historic modus operandi---leaving us in the same boat in which we started, i.e.,
inflation above the Fed’s mandate, the necessary creative destruction needed to
cleanse the system of the misallocation of assets and the mispricing of risk
incomplete and, hence, the need to ultimately have to repeat the whole process.
You know my opinion: I don’t think that the
Fed has the fortitude to hold firm in the face of a faltering economy and
plunging asset prices. That means ever slowing secular economic growth, ever
increasing income disparity, ever increasing leverage in the financial system
and ever increasing volatility in the securities markets.
Jeffrey Snider believes that another QE is
not far away. https://www.realclearmarkets.com/articles/2022/10/28/the_real_antagonists_are_those_doing_the_same_things_over_and_over_861730.html
Counterpoint.
And the Dreamweaver.
https://www.capitalspectator.com/us-soft-landing-possible-says-former-fed-vice-chair-alan-blinder/
US
International
Q3 EU flash GDP grew + 0.2%, in
line; the October CPI was +1.5% versus +1.3%
September Japanese YoY housing starts were up
1.0% versus estimates of +2.2%;
October consumer confidence was 29.9 versus 30.0.
September German retail
sales were up 0.9% versus predictions of down 0.3%.
Other
Americans savings rate plunges.
Weak payrolls set stage for Fed ‘pivot.’
Japan unveils fiscal stimulus and more QE.
The Fed
Fed rate hikes approaching breaking point.
Bottom line
The latest from BofA (must read).
https://www.zerohedge.com/markets/hartnett-very-likely-fed-will-raise-its-inflation-target-3-2024
News on Stocks in Our Portfolios
Illinois Tool Works (NYSE:ITW) declares $1.31/share quarterly dividend, in line with previous
What
I am reading today
The
first short seller.
https://investoramnesia.com/2022/10/23/legends-of-market-history-isaac-le-maire/
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