The Morning Call
Last week, the S&P challenged both the upper boundary of its very short term downtrend and its 100 day moving average on heavy volume and failed. That leaves it in the narrowing gap between its 200 day moving average and the upper boundary of its very short term downtrend. A break of either level would suggest a move in the direction of the break.
Talk about a sharp reversal, TLT got hammered Thursday and Friday. The very short term uptrend was negated, leaving downward pressure from its 100 and 200 day moving averages and its short term downtrend. A big test appears to be near as TLT approaches the lower boundary of its long term uptrend. A successful challenge will break a thirty year plus bull market in bonds and would have major implications for Fed policy (it will be very difficult to lower short rates when long rates are rising) and stock valuations (higher yields make bonds more competitive with stocks).
The dollar broke above the upper boundary of its intermediate term downtrend (if it remains there through the close on Wednesday, it will reset to a trading range), finished right on its 100 day moving average and is close to pushing out of the current three and a half month trading range. That the dollar would rally hard as bond yields are spiking is very consistent with historical trading patterns (bonds become a more attractive investment for foreigner; so they have to buy dollars in order to buy bonds).
Gold was hit hard Thursday and Friday on decent volume. Again that is not surprising in the face of rising interest rates. The good news (for gold investors) is that it is holding above its 100 and 200 day moving averages and the lower boundary of its short term uptrend. Whether it can stay in an uptrend depends of why yields are up: if it is due to strong economic growth, gold should decline; if it is due to inflation fears, it should rise or, at least, hold its own.
The VIX challenged its 100 day moving average and was unsuccessful. So for the moment, volatility is not going away; and that suggests some downward bias to the Market.
Oil breaking to the upside (short):
More on oil prices (medium):
The Markets are speaking and no one is listening (medium):
Bottom line: the big question at this moment is, was the Thursday/Friday pin action across all asset classes a sign of a major shift in the economic/Market narrative (i.e. weaker growth and higher inflation) or was it just a short term worry that will soon pass.
Last week’s dataflow was mixed including the results of three primary indicators. Score: in the last 132 weeks, forty-four were positive, sixty-two negative and twenty-six neutral.
Say boys and girls, can you say ‘stagflation’? (medium):
The Fed released its latest Beige Book; the bottom line of which was (1) consensus that the economy is continuing to expand at a moderate pace and (2) heightened worries about the potential impact of tariffs on inflation.
Overseas, the numbers weren’t as upbeat with most of the poor data coming from the EU and China.
Problems in Germany (medium):
Was 2017 the economic growth peak for the EU? (medium):
Draghi admits EU economic growth may have peaked (short):
Chinese bond yields declining (medium):
US/China trade war truce? (medium):
IMF sounds the alarm on global debt (medium):
Morgan Stanley and B of A believe that the end of the credit cycle is near (medium):
Bottom line: the long term secular economic growth rate is being pulled in both directions. Deregulation and a potential improvement in trade are positive forces while the endless, massive deficits will act as a drag. On a shorter term basis, the economic growth rate is slowing as tax cuts are not having the positive impact that originally thought and the global economy appears to be losing steam.
In the meantime, the Fed is tightening monetary policy---not a plus in the face of economic weakness. Even worse, the Fed may not have the option to switch back of easing as inflationary forces seem to be increasing.
A weakening economy and a tightening Fed is not a combo historically beneficial to stock prices.
News on Stocks in Our Portfolios
Genuine Parts (NYSE:GPC): Q1 EPS of $1.27 misses by $0.05.
Revenue of $4.59B (+17.4% Y/Y) beats by $100M.
W.W. Grainger (NYSE:GWW): Q1 EPS of $4.18 beats by $0.76.
Revenue of $2.76B (+8.7% Y/Y) beats by $50M
Procter & Gamble (NYSE:PG): Q1 EPS of $1.00 beats by $0.01.
Revenue of $16.28B (+4.3% Y/Y) beats by $60M.
Schlumberger (NYSE:SLB): Q1 EPS of $0.38 beats by $0.01.
Revenue of $7.83B (+13.6% Y/Y) beats by $20M.
Kimberly-Clark (NYSE:KMB): Q1 EPS of $1.71 in-line.
Revenue of $4.7B (+4.9% Y/Y) beats by $90M.
This Week’s Data
The March Chicago national activity index was reported at .10 versus expectations of .29.
The April Markit EU manufacturing PMI came in below estimates, however the services and composite PMI were above.
What I am reading today
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Disclosure: I am/we are long gpc, gww, kmb, pg, SLB.