The Morning Call
4/26/19
The
Market
Technical
The Averages (26462,
2926) turned in something of a mixed performance yesterday---the S&P was
down fractionally but the Dow was off ½%, largely due to the impact a big drop
in 3M (earnings report and forward guidance) had on the index. Volume was flat (and puny) and breadth
weak. The Dow voided its very short term
uptrend while the S&P finished right on the lower boundary of its very
short term uptrend (yesterday, I mistakenly said that it had failed to
reestablish trend. It had.) Other than the back and forths around those
very short term uptrends, both of the indices remain technically strong.
The VIX was up fractionally,
ending above the upper boundary of its very short term downtrend for a second
day, voiding that trend. This is the
first sign in some time that investors are being aroused from their
complacency.
The long bond declined
slightly, but remains in good technical shape, finishing above the lower boundary
of its very short term uptrend and both MA’s.
The dollar advanced a nickel, remaining
technically strong, hitting another high in its uptrend since early 2018 and now
twenty five cents away from a twenty year high.
The bad news is that it has two gap up opens lower down that need to be
filled. However, as I mentioned
yesterday, doing so would do little damage to its chart.
GLD
was up fractionally. Still its chart is
broken---its 100 DMA is now resistance and gold appears headed for the lower
boundary of its short term uptrend (seven points lower).
Bottom line: the
Averages basically marched in place---the decline in the DJIA being somewhat idiosyncratic.
That they didn’t have much follow
through from their retreat off their all-time highs is a plus and lends support
to the notion that they will eventually successfully challenge those highs.
However, conditions are there that would
precipitate near term consolidation: (1) the VIX voiding of its very short term
downtrend notwithstanding, it continues to reflect a very high level of
investor complacency, historically a sign of lower stock prices, (2) the April
1st gap up open still needs to be closed and (3) the 26656/1942 [all-time
highs] levels should pose some, if not a lot of, resistance.
There was no
informational value in the pin action in UUP, TLT and GLD yesterday.
Thursday
in the charts.
WTI
crude plunges.
Fundamental
Headlines
Yesterday’s
stats were mixed: March durable goods were much better than anticipated while
weekly jobless claims disappointed. However,
since durable goods is a primary indicator, the numbers have to be viewed
positively. Nothing overseas.
Bottom line: another day of no
real news on macroeconomic events.
Earnings reports dominated the headlines; and 3M’s disappointment notwithstanding,
they were decent. Indeed, while I haven’t
seen a summary of ‘beats’ to date this week, my impression is that this earnings
season is going better than anticipated---which means a statement that I made
in yesterday’s Morning Call needs revision.
Adding
insult to injury, this morning’s blowout GDP reading (see below) demands, not
just a revision but a major revision.
In
that statement, I said: What I don’t have to speculate about is
current equity valuations which are at current historically high levels. Even assuming a complete capitulation by the
Chinese (which is not going to happen), a
smart move up in US economic activity (which isn’t happening) and a sharp pick up in corporate profits (which
can’t happen in the absence of the prior two), stock valuations are over
extended.
Clearly,
(1) the individual readings of the stats have given a different reading on the
economy than the GDP number. At this
point, I don’t have a good explanation for that; although to be fair there were
two major one-time adjustments [inventories and trade] that had a big impact on
the GDP reading and (2) better than expected profit reports can and are
happening and one reason is better economic growth.
To be sure,
(1) in the midst
of Fed tightening, I argued that since easy money didn’t help the economy,
tight money wouldn’t hurt it. In fact,
my position has always been that a normalization of monetary policy would be a
plus for the economy in that it would correct the misallocation and mispricing
of assets. I am not suggesting that the
latest GDP report supports that notion in spades. But it does make me wonder,
(2)
through the entire post financial crisis period, I have opined that corporations
have the management skills and superior labor force to be able to grow their profitability
in spite of irresponsible fiscal and monetary policy. But that doesn’t mean that they could achieve
their average historical growth rate.
Indeed, I have also pointed out that a decent portion of that growth has
been the result of (1) creative accounting, (2) tax cuts and (3) stock buy
backs---where (1) and (2) have a finite limit.
Still improved profitability is improved profitability and it must be
accounted for. (must read)
And.
With
all that mental masturbation behind us, my thoughts are that a stronger than expected
economy and correspondingly better corporate profits will alter the assumptions
in my Valuation Model which clearly would result in higher equity
valuations. It may be a bit too soon to
do that; but I will begin working on possible revisions to my assumptions. However, given the extreme overvaluation currently
measured, any changes will be simply make those valuations less extreme.
Finally,
I needn’t remind you that my concern about the lofty levels of stock prices was
less about the numbers and more about the impact of irresponsibility aggressive
monetary expansion; and that any sell off in the Market would likely result not
from poor economic performance but from a tightening Fed. So the question is, in light of the
surprisingly strong GDP report, what does Mr. Powell do?
For
the bulls.
Fear
of missing out?
News on Stocks in Our Portfolios
Revenue of $3.55B (-5.1%
Y/Y) misses by $90M.
Revenue of $17.16B (+0.3%
Y/Y) misses by $630M.
Revenue of $7.86B (-5.1%
Y/Y) misses by $160M.
Revenue of $63.63B (-6.7%
Y/Y) misses by $3.72B.
Johnson & Johnson (NYSE:JNJ) declares $0.95/share quarterly dividend, 5.6% increase from
prior dividend of $0.90.
Economics
This Week’s Data
US
The
April Kansas City Fed manufacturing index came in at 12 versus March’s reading
of 17.
Initial
first quarter GDP reading showed growth of 3.2% versus expectations of 2.0%;
the price deflator was up 0.6% versus 1.3%.
International
March
Japanese unemployment was 2.5% versus estimates of 2.4%; industrial production
fell 0.9% versus -0.1%; retail sales were up 0.2% versus -0.2%; housing starts grew
10% versus 5.8%; construction orders were flat versus +2.5%; April CPI was
+1.4% versus +0.8% while core CPI was +1.3% versus 1.1%.
Other
Market
cap of new homes.
China
seeks to allay fears over Belt and Road debt risks.
Having
a printing press doesn’t mean that money is infinite.
What
I am reading today
400
year old Greenland shark.
And we wonder why a
college education is so expensive.
You played yourself.
Putin
and Kim meeting concludes and the ‘art of the deal’ takes another hit.
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