The Morning Call
6/20/23
The
Market
Technical
I was clearly
wrong about the magnetic pull of that gap up open three Fridays ago holding
back the S&P and stifling an attempt to breach the upper boundary of its short-term
trading range (~4325). The index blew
through 4325 like a hot knife through butter and achieved a strong follow
through. It also makes those pundits
proclaiming a new bull market look awfully smart (at least for the time being). However, as I noted last week, I don’t think
a new bull market is confirmed until the old high (~4818) is successfully
challenged.
https://www.nytimes.com/2023/06/16/business/bull-bear-market-investors.html
That, however, is
a minor point relative to the issue of whether or not to commit cash at this
point. I also said last week that if the
4325 level is surpassed that I would likely begin adding to my equity position. Well, I lied.
With the lousy incoming data (both government stats and anecdotal evidence)
from the last two weeks, the strength of my conviction regarding the
probability of recession has been given a strong jolt. And with that, I am holding firm to my cash position---though
I did nibble on the long Treasury (TLT) on the thesis that a rough recession will
result in lower long-term rates.
https://www.capitalspectator.com/10-year-treasury-yield-surges-over-stock-markets-dividend-yield/
Positioning is
extreme.
https://www.zerohedge.com/the-market-ear/it-getting-extremely-extreme
A prescient signal
of a durable economy or a bull trap?
https://www.zerohedge.com/markets/extreme-greed-prescient-signal-durable-economy-or-giant-bull-trap
Parabolic
sentiment.
https://www.zerohedge.com/the-market-ear/parabolic-sentiment
TLT finally did something
positive by making a higher low last week.
On the other hand, it also failed a challenge of its 200 DMA. So, I am not suggesting all is well. Indeed, as you well know, my commentary on
the long bond has not been particularly upbeat for some time. Why then suddenly change my investment
opinion on the long bond? One, because I
am an unapologetic contrary opinionist; and the long bond is ten percent off a twenty-year
low, making it historically cheap. Two, as
you will gather from my comments both above and below, my belief that recession
(lower rates) is the big risk to the economy has been reinvigorated; and in
that scenario, the long bond should do well.
After voiding its
very short-term uptrend in the prior week, GLD challenged its 100 DMA (now
support) three times and failed each time.
That could mean that no challenges
of its intermediate or long-term uptrends are in the offing and that perhaps
another challenge of its all-time high could be forth coming. Plus, if we do get a recession, that tends to
be good for gold. But that is all sheer
speculation at this point. The only real
takeaway from last week’s pin action was that it improved slightly.
The dollar was
down for the week, continuing its decline; though it did seem to find support
at its 100 DMA. As I noted last week, it
seems a bit odd in the face of a supposedly strong economy and a hawkish Fed;
but not so much if a recession is in the cards.
Friday in the
charts.
https://www.zerohedge.com/markets/stocks-dump-massive-triple-witch-punks-euphoric-markets
Fundamental
Headlines
The
Economy
Last Week Review
Another
week of few economic stats. However, what
there was, was negative (primary indicators were one neutral, one
negative). And both core CPI and core
PPI were unchanged. The international data continued its downbeat trend---Europe
remains in the doldrums and China’s economic growth is well below expectations. So, it appears that large segments of the
rest of the world are or are about to slide into recession.
The
question is (1) how far behind is the US? Or (2) can we scoot by with a mild or
no recession at all? I think that the latter seems less probable. Indeed, as I
repeatedly note, there are some leading US economic indicators that are
pointing towards recession. Plus, we keep getting more anecdotal evidence that
have recessionary implications: declining corporate tax receipts, shrinking M2,
trouble in the commercial real estate market, resumption of student loan
repayments. The list goes on. This all is contributing to rekindling my
confidence in a recession forecast; although I admittedly have no clue about
its timing and depth.
More
discouraging datapoints.
https://www.zerohedge.com/markets/dont-let-month-month-data-distract-recession-signal
PIMCO’s
thoughts.
The
other issue investors must deal with is, of course, inflation. And perhaps more
importantly, how the Fed perceives this problem and even more important, just
how firm is its determination to achieve its 2% target. We got some idea of the
answer this week with the narrative out of the FOMC meeting and Powell’s
subsequent presser---which has been dubbed a ’hawkish’ pause. The take away being that the Fed expects to
continue to hike rates through the end of 2023, i.e., it is quite determined to
bring inflation back to 2%.
At
the risk of continuing to beat a dead horse, the Fed has been and remains
clueless. There is no more reason to put
much stock in its latest forecast of higher rates than there was in its ‘inflation
is transitory’ theme in 2021. Not only is
the Fed’s outlook likely wrong but even if it’s not, it has proven time and again
that it is weak kneed when it comes to monetary discipline---and as an aside,
this is precisely the reason the stock market if smoking in the face of that
FOMC meeting.
https://www.advisorperspectives.com/commentaries/2023/06/18/a-skip-not-a-stop
The
stock market isn’t buying what the Fed is selling.
Neither
is the bond market.
So,
I have no great expectations that the Fed will stick to its guns in pushing
inflation back to 2%.
However,
this analyst does.
https://disciplinefunds.com/2023/06/15/theres-still-no-pivot-coming/
Indeed,
I believe that the only way inflation gets back to 2% is on the back of a
painful recession. To be clear, I have
no idea if we will have a painful recession; but as you might guess from my
recent comments, my confidence that in the short term there will be one,
however mild, is rising.
The
NY Fed has a new measure of inflation.
https://www.advisorperspectives.com/dshort/updates/2023/06/16/underlying-inflation-gauge-down-may
Longer
term, irrespective of how low inflation goes in the short term, irrespective of
whether or not we have a recession and if so, how deep it will be, we are still
faced with an economy growing at well below its historic secular rate and a
base rate of inflation above 2%.
Global
economic surprise plummets.
https://www.zerohedge.com/markets/global-economic-surprise-plummets-eurozone-enters-recession
Regrettably, years of fiscal profligacy have left us with a debt to GDP
ratio far in excess of the boundary marked by Rogoff and Reinhart as the level
at which the servicing of too much debt negatively impacts the growth rate of
the economy. And years of irresponsible monetary expansion have led to the
misallocation of resources and the mispricing of risk.
National
debt hits $32 trillion.
https://www.zerohedge.com/economics/us-national-debt-hits-all-time-high-32-trillion
Correcting those self-inflicted wounds won’t be easy. It will take years
of fiscal and monetary restraint to do so. And that would mean less fiscal
stimulus and interest rates staying higher for longer than many now expect---which
unfortunately is not apt to happen.
The
Economy
US
May housing starts were soared 21.7% versus expectations
of -1.2%; building permits were up 5.2%
versus +0.6% (that sure doesn’t sound like recession).
International
April Japanese industrial production rose
0.7% versus estimates of -0.4%.
April EU YoY
construction output was up 0.2% versus predictions of -2.0%.
May German PPI
came in at -1.4% versus consensus of -0.7%.
Other
Fiscal Policy
We could still be facing a government shutdown
later this year.
Bottom line
The latest from BofA.
Update on valuation.
https://www.advisorperspectives.com/dshort/updates/2023/06/02/p-e10-unchanged-in-may
The bull case.
Words
of wisdom from Josh Brown.
News on Stocks in Our Portfolios
What
I am reading today
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