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The Morning Call--What Good Are Estimates If Trump And The Fed Allow The Market To Dictate Policy?

The Morning Call

5/17/19

The Market

Technical

The Averages (25842, 2876) maintained their upward momentum though volume declined again and breadth was mixed. Both remain above their DMA’s. The Dow closed above the upper boundary of its very short term downtrend (if it ends there today, that trend will be negated) but below the April 1st gap up open. The S&P finished above the April 1st gap open and the upper boundary of its very short term downtrend (if it closes there today, that trend will be negated).

The VIX fell another 6 ½ %, finishing below its 100 DMA for a second day (now support; if it remains there through the close today, it will revert to resistance) and 200 DMA for a second day (now support; if it remains there through the close next Monday, it will revert to resistance). However, it is still in a solid very short term uptrend.

The long bond declined ¼ %, but still finished above both MA’s and in a very short term uptrend.

https://www.bloomberg.com/news/articles/2019-05-16/goldman-fund-says-bond-market-has-gone-too-far-yields-will-rise

The dollar was up ¼ %. Its chart remains quite positive but UUP has two unfilled gap up opens below current price levels.

https://www.zerohedge.com/news/2019-05-16/something-just-broke-chinese-yuan

GLD dropped ¾ %, ending below its 100 DMA, reverting to resistance.

Bottom line: the indices continued to follow through to the upside after their bounce off the break below the April 1st gap up opens---which is exactly what the bulls would want, i.e. fill the gap then return to the upside. Low volume and mixed breadth detract a bit from a positive view. Nonetheless, if they close above the upper boundaries of their very short term downtrends today, the assumption has to be that another challenge of their all-time highs is coming soon.

The pin action in the dollar continues to point at a stronger economy/higher rates; and GLD confirms that scenario. What is striking to me is TLT making a new high, indicating a weaker economy. As you know, I believe that the bond market is much better in anticipating events than any others. However, it failed to follow through to the upside yesterday---which may not be that big a deal. But it needs to happen or it will turn into a double top.

https://www.zerohedge.com/news/2019-05-16/angry-trader-rages-dont-judge-market-its-latest-gyration

And:

https://www.zerohedge.com/news/2019-05-16/nomura-explains-why-stocks-are-last-3-days-why-thats-about-change

Thursday in the charts.

https://www.zerohedge.com/news/2019-05-16/global-markets-surge-erase-trade-war-escalation-losses

Fundamental

Headlines

Yesterday’s data was somewhat positive: the May Philly Fed manufacturing index was well ahead of estimates and weekly jobless claims more than anticipated; however, April housing starts (primary indicator) were below consensus.

Overseas, the March EU trade balance was bigger than expected and the April Japanese PPI was hotter than projected.

The main news item of the day was the late Wednesday blacklisting of Chinese tech giant, Huawei, preventing it from doing business with US companies. This strikes at the heart of the trade war---unfair Chinese industrial and IP theft policies. As you might expect, I have no problem with it; but it does represent an escalation in the trade battle, which the Chinese were none too happy about.

***overnight, their reaction.

https://www.zerohedge.com/news/2019-05-17/trade-optimism-fizzles-china-says-no-plans-more-talks

In my opinion, the only issue here is the strength of Trump’s conviction to stay the course. As I have said repeatedly, if he continues to judge his performance as president by the level of the Market, then that ‘strength of conviction’ factor is in play.

On the other hand, if he is willing to go to the mat with the Chinese, then economic difficulties are going to get worse before they get better. Unless, of course, the Chinese fold, which I believe is unlikely.

Is a trade war with China just the opening shot? This author may be a bit out over his skis.

https://www.ft.com/content/9317cc0e-7664-11e9-be7d-6d846537acab?segmentId=b385c2ad-87ed-d8ff-aaec-0f8435cd42d9

The economy heads south.

https://global-macro-monitor.com/2019/05/15/the-economy-heads-south/

The Atlanta Fed’s latest now forecast.

https://www.frbatlanta.org/cqer/research/gdpnow.aspx

Global air freight volume declines.

https://www.zerohedge.com/news/2019-05-13/recessionary-forces-global-air-freight-volume-plunges-sign-economic-stress

Bottom line: while economic data over the last month has been neutral to positive, the above links suggest that this is not going to last. The question is, how much of the slower growth is attributable to lousy fiscal and monetary policies and how much to the current trade skirmish? To date, several estimates of the potential impact of the latter have been quite sanguine. On the other hand, the anecdotal evidence is a bit more concerning.

Whatever the effect, a trade deal would almost surely offset any short term cyclical growth problems that have occurred as a result of the tariff war. Judging by the current pin action, investors seem to believe that an agreement will be reached in the near term. Given the Donald’s preoccupation with the Dow, they have good reason for thinking that.

But a trade deal is only good for long term secular economic growth if the Chinese reform their industrial and IP theft policies. Otherwise, the whole tariff exercise will have been for naught.

So, if Trump stays the course, then the issue becomes how much additional pressure is put on economic growth and corporate profits by as yet unknown steps that the Chinese or Trump could take? I certainly don’t know the answer.

This says nothing about the impact of irresponsible fiscal and monetary policies on the economic growth rate which, to be sure, is negative. Even if we get a quick resolution to the US/China trade war, these drags on economic growth remain. This is not to say that I won’t raise my economic growth estimates if the numbers continue to come in positive. It just won’t be by much.

All that said, the above is just mental gymnastics because the most apparent factor in equity pricing is the Market’s belief that both Trump and the Fed will allow it to dictate their policies.

The US naval buildup in the Persian Gulf continues.

https://www.zerohedge.com/news/2019-05-17/two-more-us-warships-travel-persian-gulf-tensions-iran-escalate

But the meaning is uncertain.

https://www.zerohedge.com/news/2019-05-17/trump-de-escalating-satellite-intel-based-tehran-misreading-us-intentions

News on Stocks in Our Portfolios

Economics

This Week’s Data

US

International

March EU construction output rose 6.3% versus estimates of +1.8%.

April EU CPI was 0.7%, in line.

Other

The irrelevance of the Fed.

https://www.realclearmarkets.com/articles/2019/05/16/if_the_fed_can_instigate_why_is_middletown_still_so_poor_103741.html

What Pompeo and Putin did and did not talk about.

https://www.zerohedge.com/news/2019-05-16/what-putin-and-pompeo-did-not-talk-about

What I am reading today

How has Danielle Steel managed to write 179 books?

https://www.glamour.com/story/danielle-steel-books-interview

At last, FCC proposes restrictions on robocalls.

http://www.aei.org/publication/fighting-robocalls-chairman-pais-move-is-step-in-right-direction/

Value plus a catalyst.

https://demonetizedblog.com/2019/05/15/value-catalyst/

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