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The Morning Call---Not Nearly As Clear As I Thought

|Includes: Mastercard Incorporated (MA), MCD, PX

The Morning Call

7/27/18

The Market

Technical

The Averages (DJIA 25527, S&P 2837) turned in a widely divergent performance yesterday (Dow up 112.97, S&P down 8.63). Volume was up as was breadth---which is approaching overbought territory. 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 and in uptrends across all timeframes. The previous cognitive dissonance I noted has dissipated: (1) the Dow’s 100 day moving average has flattened out and (2) it closed above its June high. The assumption remains that the indices on their way to all-time highs.

VIX declined fractionally, not surprising given the day’s schizophrenic pin action. It remains below both moving averages and in a narrow trading range near the lower boundary of its short term trading range. But it doesn’t seem to want to challenge that lower boundary.

The long Treasury was down. It closed below its 200 day moving average for a fourth day, reverting to resistance, and back below its 100 day moving average (now support; if it remains there through the close on Monday, it will revert to resistance). It remains caught between the declining upper boundary of its short term downtrend and the rising lower boundary of its long term uptrend; though, at present, it is closer to the latter and it is losing technical strength. A break of this developing pennant pattern has directional import.

The dollar was up ½ % on good volume, ending above both moving averages and in a short term uptrend but remains below its June high.

Gold was down ¾ %, likely reflecting the stronger dollar and higher interest rates. It finished below both moving averages (its 100 day moving average has now crossed below its 200 day moving average---not a technical plus) 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).

Gold Bears Press Bets In Record Numbers

Bottom line: my conclusion yesterday was that investors didn’t have enough time to react properly to the late in the day news of the US/EU trade truce and that we would have a better read on sentiment by the end of trading today. Well, not so much. On the one hand, the Averages had decidedly different sessions. On the other hand, the Dow’s positive performance put it back in sync with the S&P. And the latter has a much longer term implication. So my assumption of a challenge of the all-time highs remains.

TLT, UUP and GLD investors appeared to agree that the US/EU cease fire was good for the US economy.

Yesterday in the charts.

The FANGover

Fundamental

Headlines

Yesterday’s economic data was not good: June durable goods orders, the June trade deficit and the Kansas City Fed manufacturing index were below estimates, while weekly jobless claims were up less than anticipated. That means that no matter how positive today’s second quarter GDP report is, this week’s stats will be negative overall.

Speaking of which, a good deal of yesterday’s news flow was focused on pundits speculating on the magnitude of that GDP growth report. While the entire planet knows that the number will be an improvement over the first quarter reading, the talking heads were very upbeat. However, there were some less enthusiastic.

Sharp Acceleration In Growth Expected For US Q2 GDP Report

The second quarter GDP mirage (medium and a must read):

The Mirage That Will Be Q2 GDP

Naturally, there was also debate on the potential economic implications of the US/EU cease fire. As you know, I have been a supporter of Trump’s efforts to reframe the global trade regime; so I was encouraged. Others not so much.

This from a cynic and clearly no Trump supporter (short):

The real Art of the Deal

A more balanced view (medium):

Financial Times: Chinese Officials "Awed" by Trump's "Skill as a Strategist and Tactician" | naked capitalism

A view from the outside---China not happy with US/EU accord (short):

Yuan Tumbles As China Rages At Washington's "Extortion, Demonization"

In other news, the ECB met, left rates unchanged and confirmed that it will end QE December 2018---undoubtedly made easier by the US/EU truce. (short):

ECB Repeats June Statement: Pledges QE End By Year End, Rates On Hold Until Next "Summer"

Bottom line: I want to make clear that I believe that Trump is on the right track with respect to trade policy and, if successful, the changes will be a plus for the long term secular growth rate of the country.

On the other hand, on a cyclical basis, I believe that the present giddiness over the anticipated upbeat Q2 GDP report is misplaced and doubt that the reported growth rate is sustainable. The primary reason is that our ruling class keeps heaping debt on the electorate---which I believe is a major impediment to growth. I have beat this horse to death so I won’t get repetitious; but provide this link to the NY Times, of all places, which happens to agree with me. (medium):

How the Trump Tax Cut Is Helping to Push the Federal Deficit to $1 Trillion

Finally, to date, investors have ignored the potential consequences of a global unwinding of QE. The US has already started. The ECB just reiterated that it will begin in December. The Bank of Japan is doing the green apple two step trying to start its own tightening while convincing investors that it is not. My thesis remains that when tightening begins in earnest, the Markets will pay a price.

News on Stocks in Our Portfolios

Mastercard (NYSE:MA): Q2 EPS of $1.66 beats by $0.13.

Revenue of $3.67B (+20.3% Y/Y) beats by $20M.

McDonald's (NYSE:MCD): Q2 EPS of $1.99 beats by $0.07.

Revenue of $5.35B (-11.6% Y/Y) beats by $30M.

Praxair (NYSE:PX) declares $0.825/share quarterly dividend, in line with previous.

Economics

This Week’s Data

US

June durable goods orders rose 1.0% versus projections of up 3.2%; ex transportation, they increased 0.4% versus expectations of up 0.5%.

The June US trade deficit was $68.3 billion versus estimates of $67.2 billion.

Weekly jobless claims were up 9,000 versus forecasts of up 12,000.

Weekly Unemployment Claims: Up 9K from Last Week - dshort - Advisor Perspectives

The July Kansas City Fed manufacturing index was reported at 23 versus the June reading of 28.

Kansas City Fed Survey: Optimism Still High in July - dshort - Advisor Perspectives

International

Other

Saudi’s halt oil shipments through Red Sea (medium):

Saudis Halt Oil Shipments Through Red Sea: A Potential Watershed In The Yemen War

What I am reading today

How to avoid screwing up your retirement (medium):

At some point you'll retire. Here's how to avoid screwing it up

Buying a home counts as savings (medium):

The Best Way to Save for Retirement Might Be Paying Off a Mortgage

Why are there so many suckers? (medium):

Why are there so many suckers? A neuropsychologist explains

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Disclosure: I am/we are long ma, mcd, PX.