The Morning Call
12/13/17
The
Market
Technical
The indices
(DJIA 24504, S&P 2664) had another good day. Volume was up; and breadth improved. The bottom line remains that both of the
Averages continue to trade above their 100 and 200 day moving averages and are
in uptrends across all time frames---with the assumption being that stock
prices are going higher.
The VIX (9.9) rose
6 ¼ %, closing below its 100 and 200 day moving averages (both resistance) but
back above the lower boundary of its long term trading range. Again, being up 6 ¼ % on a strong market day is
a bit unusual.
The long
Treasury was down fractionally for a second day, ending above its 100 and 200
day moving averages and the lower boundaries of a very short term uptrend, its
short term trading range and long term uptrend. So bond investors still don’t appear to be
concerned about a Fed rate hike today.
The dollar was up,
finishing below its 200 day moving average (now resistance) but above its 100
day moving average (now support) and above the upper boundary of its short term
downtrend (if it remains there through the close on Thursday, it will reset to
a trading range).
Gold
rose slightly, but remained below its 100 and 200 day moving averages and within
a short term trading range. GLD
investors are apparently more concerned about a rate rise than the bond guys;
but part of its poor performance could be impacted by cryptocurrencies.
Bottom line: long
term, the indices remain strong viz a viz their moving averages and uptrends
across all timeframes. Short term, they are above the resistance level marked
by their August highs, meaning that there is no resistance between current
price levels and the upper boundaries of the Averages long term uptrends. The
technical assumption has to be that stocks are going higher. If you own enough cash to sleep at night, lay
back and enjoy it.
Trading in UUP,
GLD and TLT are back out of sync with themselves (sluggish economy, weak
interest rates) and with the VIX and stocks.
I remain confused and uncomfortable with the overall technical picture.
Fundamental
Headlines
Yesterday’s
economic data were mixed: the November small business optimism index and month
to date retail chain store sales were pluses; the November budget deficit was
disappointing (questions: [a] how can
the US government be running a larger than expected deficit at a time when
everyone is wee weeing in their pants about improved GDP growth? and [b] how can
net tax cuts be helpful to this situation?)
November PPI was also above expectations but that can interpreted
differently depending on your perspective.
The bulls undoubtedly are happy because inflation is nearing the Fed’s
2% inflation objective which they believe to be valid.
Me, I don’t
understand why anyone wants a 2% inflation rate. It robs you and me of our purchasing power
year after year. Further, it is another
sign of that the Fed has again waited too long to begin the transition toward
monetary normalization. The issue here
is the extent to which rising inflation will push the Fed to a more aggressive
tightening stance than is now expected by the markets. I don’t know the answer; but the risk is it
just moves the goal posts on inflation like it did on growth. However, in my opinion, if inflation
continues to accelerate, so do the Fed’s problems. Having said all of that, CPI gets reported today
and it may portray a much more benign pricing environment.
In
addition, we get Yellen’s famous final scene today which will most likely be a
hike in rates coupled with the promise to tighten as slowly as possible.
David
Stockman on the latest economic numbers (medium):
***overnight,
October EU industrial output was above expectations; November UK unemployment
rose while CPI and PPI were in line.
The
headline item of the day was Sen. Cornyn’s optimistic assessment that the tax
bill will be out of conference soon.
But
the Europeans don’t like it; and that could lead to trade issues (medium):
And many still aren’t
buying the ‘dynamic scoring’ results (medium):
Given
the above, it appears that even if the final version of the tax reform is as
described above, it will not have changed enough to alter the conclusion that
the bill will not be simpler, fairer or sufficiently stimulative to warrant the
assumption of another $1.5 trillion in national debt.
Bottom line: the
bulls have very reason to be optimistic: (1) the economic data is improving
[though the issue is whether this is the beginning or the end of an expansion],
(2) the Fed is slow playing the normalization of monetary, even though the aforementioned
economic numbers are meeting its objectives [though they were altered several
times to allow the Fed to maintain monetary ease longer than its original
guidelines], (3) the electorate is apt to get a big beautiful tax cut [to coin
a phrase] this year [though the only
things that are big are {i} tax cuts for corporations and wealthy individuals
and {ii} the increase in the deficit] and (4) there is now the likelihood of a
infrastructure spending bill [though we have so few specific, it is hard to
draw any conclusions about its potential impact on the economy].
To be sure,
there are plenty of historical arguments on both sides as to whether the tax
bill as it is currently structured will indeed be stimulative. As you know, in my opinion, it will not. That said, if it stimulates economic hopes of
businesses and consumers, that in itself could prompt a change in behavior that
could raise the level of investing and spending. Whether that happens or not, I have no
clue. But I believe that current equity
valuations reflect a goldilocks result---which may occur. But I wouldn’t have all my assets riding on
that bet.
The
latest from Jim Grant (medium):
Investing for Survival
What
a complacent investor looks like.
News on Stocks in Our Portfolios
Economics
This Week’s Data
Month
to date retail chain store sales growth rose from the prior week.
The
November budget deficit was $138.5 billion versus consensus of $134.0 billion.
Other
Today’s
bitcoin entries:
On
a related matter---the EU’s war on cash (medium):
Politics
Domestic
International War Against Radical
Islam
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