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The Morning Call--Is The End Of QE Getting Closer?

|Includes: Illinois Tool Works Inc. (ITW)

The Morning Call

7/24/18

The Market

Technical

The Averages (DJIA 25044, S&P 2806) turned in a mixed performance (Dow down, S&P up). Volume declined; breadth mixed. The Dow continued to trade above its 100 day moving average (now support), above its 200 day moving average (now support) and within a short term trading range. The S&P ended above both moving averages, in uptrends across all timeframes. There is a bit of cognitive dissonance: the S&P has made fourth successively higher highs while the Dow failed which also has been unable to challenge its former high. At the moment, I don’t think that this is all that important. So I continue to assume the indices will now challenge their all-time high.

Where Are Edges To Be Found In The Current Stock Market?

VIX fell 1 ¾ %, remaining below both moving averages and in a narrow trading range near the lower boundary of its short term trading range. It doesn’t seem to want to challenge that lower boundary which would mean that stocks are in for some congestive trading.

The long Treasury got hammered again on big volume. In two sessions, it has gone from testing the upper boundary of its short term downtrend and trading above both moving averages to nearing the upper boundary of its long term uptrend and ending below its 100 day moving average (now support; if it remains there through the close on Wednesday, it will revert of resistance) and its 200 day moving average (now support; if it remains there through the close on Thursday, it will revert to resistance). Clearly a significant change in momentum.

What's Behind Today's Dramatic Curve Steepening

Also:

Treasury Yields Spike To 1-Month Highs as Yuan Tests Cycle Lows

The dollar was up on volume. It remains above both moving averages and in a short term uptrend but remains below its June high.

Gold was down another ½%, finishing below both moving averages and in a short term downtrend. Its pin action suggests that it will challenge the lower boundary of its intermediate term trading range (roughly 10 points lower).

Why Gold Is Such A Dog

Bottom line: the indices appear to be doing some consolidation after a good run. However, their technical position remains strong. The assumption remains that stock prices are going higher.

The price performances of TLT and UUP have decoupled over the last two trading days with TLT falling on the perception that global long term rates are going higher but the dollar remaining strong as the US is still viewed as the best economy on the planet.

GLD remains the ugly duck

Yesterday in the charts:

Japanese Jawboning Sparks Global Bond Rout; Stocks, Dollar Unimpressed

Fundamental

Headlines

Yesterday’s economic data was not that impressive: June existing home sales were a disappointment; the June Chicago Fed national activity index came in well above forecasts but the May number was revised down by more than the index beat June expectations.

Investors were given a lot to think about aside from US economic growth:

  1. the Chinese insisted that they weren’t engaged in a currency war.

China Says It Has "No Intention" To Devalue Yuan To Boost Exports

And if you believe that I have a bridge for sale.

They also appear to be considering another measure---a boycott (medium):

"Worst Case Scenario" Looms As Chinese Overwhelmingly Ready To Boycott US Goods In Trade War

  1. I mentioned in the last Closing Bell that the Bank of Japan was trying to come up with some new ‘metric’ that would allow it tighten without having to admit to it. That didn’t work (medium):

BOJ Offers To Buy Unlimited JGBs After Yields Surge, USDJPY Tumbles

More (medium):

https://www.bloomberg.com/news/articles/2018-07-23/japan-s-bond-yields-jump-on-reports-boj-to-discuss-policy-change

  1. continued nervousness that Trump’s criticism of the Fed could lead to something more serious (medium):

Trump rips Fed rate hikes, but investors expect Powell to stay the course

  1. and last but not least, US and Iran swapped threats (medium):

Trump Blasts Iran's Rouhani: "Never, Ever Threaten The US Or Suffer Consequences Few Have Ever Suffered Before"

Bottom line: what mystified me about yesterday’s pin action is that the long bond is getting murdered because fixed income investors are becoming increasingly worried about the unwinding of global QE and its natural consequence (higher interest rates) but equity investors didn’t really seem to care. But quantitative tightening means not just higher interest rates (a key component of stock valuation is the discount factor, i.e. the interest rate, at which future earnings are brought forward. The higher the interest rate, the lower the valuation), it also means shrinking money available for equity investment/speculation (as the Fed/BOJ/ECB sell off their bond portfolios, the funds to buy those bonds has to come from someplace; one of which is equities). That doesn’t mean stock prices will roll over tomorrow; it does mean that over time there will be less investment funds to buy all securities, that interest rates will rise and that equity investors will sell equities to buy higher yielding bonds.

Stock buybacks hit record levels and guess who is selling? (medium):

As Firms Buy-Back Shares In Record Amounts, Look Who Was Selling

Dan Loeb’s outlook (short):

QOTD: 16 times

News on Stocks in Our Portfolios

Illinois Tool Works (NYSE:ITW): Q2 EPS of $1.97 in-line.

Revenue of $3.83B (+6.4% Y/Y) misses by $10M.

Economics

This Week’s Data

US

The June Chicago Fed national activity index was reported at .43 versus estimates of .23; but May was revised down by an even greater difference from -.15 to -.45.

June existing home sales fell 0.6% versus expectations of being flat.

NAR: Existing-Home Sales Decline in June, Inventory UP Year-over-year

International

Other

More on Trump on Fed policy (short):

Taylor Rule Implied Rate, Trump-Annotated

More on the public employee pension crisis (medium):

Public Sector Pensions: The Parasite Devours Its Host

The latest on Brexit (medium):

Mish Blasts Brexit: May's Way Is Worst Way...And Not The Only Way

What I am reading today

This is a great interview with Silicon Valley titan Peter Thiel (a bit long but worth the read):

Die Weltwoche | Weltwoche Online - www.weltwoche.ch: Interview of the Week: Peter Thiel:"Hypnotic Mass Phenomena" | Die Weltwoche, Ausgabe 29/2018

The humility curve (also a bit long, also worth reading):

The Humility Curve - Tim Hanson - Medium

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Disclosure: I am/we are long ITW.