The Morning Call
7/12/18
The
Market
Technical
The Averages
(DJIA 24700, S&P 2774) were down yesterday, though volume remained
flat. Breadth weakened. The Dow continued to trade above its 100 day
moving average (reverting to support), above its 200 day moving average
(reverting to support) and within a short term trading range. The S&P ended above both moving averages,
in uptrends across all timeframes but retreated from the minor resistance from
its June high.
VIX rose 7 ¾ %, but still closed below its 100
day moving average (now resistance), below its 200 day moving average
(reverting to support) and within a short term trading range. So it bounced even before mounting a
challenge of the May/June double bottom; suggesting that stocks may have to
labor for any further short term advances.
The long
Treasury advanced ½ %, remaining well above its 100 and 200 day moving averages
and in a long term uptrend.
The
dollar was also up ½ %, staying above both moving averages and in a short term
uptrend.
Gold
returned to its old ways, falling 1% and continued to trade below both moving
averages and in a short term downtrend.
Bottom
line: despite being a lousy day, the DJIA remained above both its recently
successfully challenged moving average (a positive), bringing those momentum
indicators in harmony with those of the S&P (also a plus). TLT, UUP and GLD continue to perform like
investors are betting on a relatively positive US economy versus the rest of
the world’s economy. The only problem,
in my opinion, is that doing less poorly than the rest of the world is not a
reason for stocks to advance when they are already near historic high
valuations.
Fundamental
Headlines
Yesterday’s
economic releases were mostly upbeat: weekly mortgage/purchase applications and
May wholesale inventories/sales were better than anticipated. June PPI was a tad hotter than expected which
isn’t good news if you are worried about Fed staying hawkish.
Speaking of
which and wish I wasn’t, the Fed is once again intent on ignoring the data and
constructing its own reality in order to forward policies that it thinks best
for the economy. The latest example is
the construction of a hypothetical yield curve (to replace the real yield curve)
to justify a continuing tightening of monetary policy. To be sure, I love it since I believe that
the gross misallocation and mispricing of assets created by QEInfinity has to
be corrected as a precondition for the capital markets return to
efficiency. For that to occur, the Fed
has to be equally oblivious to economic reality in unwinding QE as it was when
was implementing it. But that involves
Market pain---which means this is not a widely held view. (medium and a must read):
***overnight,
the minutes from the latest ECB meeting show that plans for unwinding QE are on
track---as long as nothing untoward occurs (medium):
But
the Fed was not the lead headline of the day.
Trade returned to center stage as Trump upped the tariff ante with
China. Prior to this announcement, the
magnitude of the threatened tariffs were relatively small. Now we are talking serious money. But it will take some time before the tariffs
are implemented; so there is still time for negotiations. That said, no one seems to talking about the
Chinese theft of US intellectual property which, for me, is their primary transgression. This has been going on for far too long and,
as a point of fairness, the US needs to stop it. So I have no issue with Trump playing hard
ball. What would be a major
disappointment to me (and would, in my opinion, have a much less important
impact of future US secular growth) is if somehow an agreement is reached
solely on tariff levels and not include a solution to this problem.
Trump and China
trade (medium):
***overnight,
China toned down trade rhetoric; traders get jiggy.
Trade
was also a part of present negotiations taking place with our NATO allies. There is more issues involved than trade;
most importantly, NATO nations not contributing their fair share of its defense
expenses. To be sure, they are
related. The good news is that, as of
last night, the rhetoric at the current conference is a lot less confrontation
than with China.
***overnight,
Trump says NATO allies agreed to up defense spending (medium):
But
Macron/Merkel say no (medium):
What
Trump should say is that the US is spending less (medium0:
Stockman
slams Trump trade strategy (medium):
This
is a great discussion on tariffs and how they do and don’t affect an
economy. It is a bit long; and even though
the prose are not pedantic, I had to re-read some portions several times to
understand.
Bottom
line: investors appear to continue to
believe that (1) the Fed will tighten only so long it isn’t disruptive to the
Market, and (2) any trade repercussions will be minimal. The difference in the two is that the trade
more directly impacts the economy while under the Fed policy regime established
by Greenspan, the Fed more directly impacts security prices. And security prices are more directly related
to my investment goals than the economy.
In short, watching the Fed monetary policy has been, is and will be the
big kahuna when it comes investment strategy; and its Alice in Wonderland
strategy, in my opinion, will not end well.
At current valuations, be sure you own some cash.
Corporate
stock buybacks are a losing proposition for companies (medium and a must read):
News on Stocks in Our Portfolios
Economics
This Week’s Data
US
May
wholesale inventories rose 0.6% versus expectations of up 0.5%; sales were up a
whopping 2.5%.
June
CPI rose 0.1% versus estimates of up 0.2%; ex food and energy, it was up 0.2%,
in line.
Weekly
jobless claims fell 18,000 versus forecasts of down 6,000.
International
Other
Facts
on unemployment (medium and a must read):
The
Market and the Fed (short):
Iran
sanctions are different this time (medium):
What
I am reading today
More on the future of social
security (medium):
Visit Investing
for Survival’s website (http://investingforsurvival.com/home)
to learn more about our Investment Strategy, Prices Disciplines and Subscriber
Service.
