The Morning Call
11/7/22
The
Market
Technical
Powell put the quietus
on the Santa Claus rally---at least for the moment. As you can see, the S&P
touched its 100 DMA, then quickly reversed, voiding the uptrend off its 10/13
low. On Thursday, it made a large gap down open but then closed it on Friday, eliminating
any magnetic pull from that gap open. Now the question is, can stocks regain their
seasonal momentum or have they shot their wad? The S&P’s first task is to
find support which as I noted on Thursday includes the lower boundary of its
short term downtrend (~3650) and its June low (~3633).
https://www.zerohedge.com/the-market-ear/c5ewhuwxkd
I said last week
that I do not see any resolution to the economic problems facing both the US
and global economies; so, I remain cautious about the Market.
Patience remains a.
virtue.
The long bond was
off for the week---not surprising given the Powell stunner. If he means what he
says, I can’t think of a reason for bonds to trade higher, at least until/if higher
rates tank the economy. Further, there continues to be signs of extreme stress
in the credit markets; so, I don’t think the worst is over for the long bond
(see below).
Is
bond volatility trying to tell us something?
https://www.zerohedge.com/the-market-ear/csqlwotxyz
Gold tested
(unsuccessfully) the lower boundary (long term uptrend) on Thursday, then exploded
higher on a monstrous gap up opening on Friday to close above the downtrend off
its March high (the upper boundary of that developing pennant formation). A
finish above that boundary on Tuesday will signal a further move to the upside.
The dollar’s chart
was a mirror image of gold’s: it made a gap up opening on Thursday, pushing through
the downtrend off its 9/27 high, then dramatically reversing on Friday, making
a huge gap down open (which needs to be filled). The volatility aside, it
remains well above the lower boundary of its very short term uptrend though it
is drifting lower continuing to develop a downtrend. My thoughts of UUP have
not changed: 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.
No top yet.
https://allstarcharts.com/a-logical-place-to-pause/
Fundamental
Headlines
The
Economy
Review last week
The
US data last week was overwhelmingly positive with the primary indicators also
on the plus side (two positive, one neutral). But as remains the case for the
Fed, good news is bad news, especially after Powell’s uber hawkish narrative at
his presser last week.
https://www.capitalspectator.com/us-economy-shows-more-strength-than-recently-forecast/
Overseas
the stats were also quite upbeat.
Despite
all this ‘good’ news, I continue to believe that the EU is in a recession and
that the US is not far behind. And, if you believe Powell, then assuming that he views strong economic numbers as inflation
inducing, then an economic downturn seems inevitable.
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 frankly we won’t know until inflation drops to the 3-4% level and we see
how deeply entrenched it is,
(2)
which
leads us to the all-important question, 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. However,
that said, Powell’s rhetoric since Jackson Hole has remained consistently
hawkish. So, at some point, I have to seriously question my assumption. Of
course, neither the Market nor the economy has suffered any major dislocations
as a result of the current monetary tightening. And I believe that it is only
when that occurs will we really know how truly serious Powell is about bringing
inflation back to the 2% level.
https://www.zerohedge.com/markets/stockman-why-fed-gonna-break-some-serious-financial-furniture
(I recognize that many would argue that a 20%
drop in the S&P this year qualifies as a ‘major dislocation’. To which I would
counter that the economy and the Market’s risk pricing mechanism has suffered
so much abuse from irresponsibly expansive
monetary policy and fiscal policies that much work remains to be done to return
both to health. And that ‘work’ involves pain[i.e., still lower stock prices]. Whether
Powell has the courage of a Volcker to stand firm through that pain, in my mind
is an open question.)
Paul Singer warns of more
pain to come.
https://www.ft.com/content/f3bb0f96-1816-4481-8318-4f7583326a4a
And speaking of pain, the
(il)liquidity in the financial system continues to deteriorate.
The Treasury market is the Fed’s next crisis.
US
International
September
German industrial production rose 0.6% versus estimates of +0.2%.
The October German
construction PMI was 43.8 versus consensus of 43.0; the October EU construction
PMI was 44.9 versus 44.6.
Other
Recession
Record increases in small business rent delinquencies.
https://www.zerohedge.com/personal-finance/record-7-surge-small-business-rent-delinquency-october
Bottom line
Update on
valuations.
https://www.advisorperspectives.com/dshort/updates/2022/11/03/p-e10-october-2022-update
October dividends
by the numbers.
News on Stocks in Our Portfolios
EOG Resources (NYSE:EOG) declares $0.825/share quarterly dividend, 10% increase from prior dividend of $0.750.
What
I am reading today
The
difference between amateurs and professionals.
https://www.sahilbloom.com/newsletter/the-difference-between-amateurs-professionals
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