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The Morning Call--A July Cut And Much, Much More

The Morning Call

7/11/19

The Market

Technical

The Averages (26860, 2993) resumed their upward trajectory yesterday. Both remain above both MA’s and in uptrends across all time frames. However, volume was down and still very anemic; breadth was mixed, at best. My assumption is that they will challenge the upper boundary of their long term uptrends (29947, 3191). Nevertheless, there are some negative: (1) short term, last Friday’s gap up opens need to be closed and (2) long term, all the other non-stock indices are pointing to a need for safety which is contrary to the current pin action in stocks.

The VIX fell 7 ½%, finishing below both MA’s and in a very short term downtrend. So, impetus is lower.

The long bond declined ½%. Nonetheless, it is above both MA’s and in a very short term uptrend. In addition, it had a gap down open on Friday which needs to be filled---which if it happens, would start another challenge of the upper boundary of the short term trading range. It continues to act as a safety trade.

The bond market is starting to worry that the US will reach its debt ceiling sooner than previously thought.

Treasury Curve 'Kink' Signals Debt-Ceiling Anxiety Is Accelerating

Are investors underestimating the extent of potential Fed rate cuts?

Are Investors Grossly Underestimating The Fed?

The dollar was off ½%, but still ended above both MA’s and in a short term uptrend. It is now in the process of closing last Friday’s gap up open. I still believe that its pin action reflects its role as a safety trade.

GLD advanced 1 ½ %, continuing its strong uptrend (above both MA’s, in a short term uptrend and now a very short term uptrend). Still, it has made one gap up and one gap down opens and those need to be dealt with. That said, it continues to act as a safety trade.

Bottom line: despite being overbought and the need to fill gap up opens from the prior week, the Averages appear on their way to challenging the upper boundaries of their long term uptrends.

Nobody Rings A Bell

It is remains disconcerting that volume is low and breadth is weak. While our other indicators sent a mixed message yesterday, none have broken strong uptrends---which indicate a need for safety. That said, the dollar was off on the news of an increasingly dovish Fed (see below)---lower interest rates usually result in a weaker dollar. The long bond trading down on an increased probability of lower short term interest rates is a bit confusing. Gold acted exactly as it normally does when the dollar declines and the prospect of lower rates increase. This maybe just one trading day’s noise but could indicate a change in perspective among the various indicators’ traders/investors.

Wednesday in the charts.

"It's Absurd" - S&P Tops 3,000 As Powell Promises Rate-Cuts Are Coming

Fundamental

Headlines

Yesterday’s stats were slightly negative: weekly mortgage applications declined while purchase applications rose; May wholesale inventories rose but sales increased much less.

Overseas, they were mostly negative: June Chinese vehicle sales fell; CPI declined but was in line while PPI was less than anticipated. June Japanese PPI was below expectations. May UK trade deficit and construction spending were better than estimates; GDP was in line; and industrial production was below consensus.

Well, the Fed/Powell didn’t disappoint. Powell’s house testimony couldn’t have been more dovish. Despite his contention that the economy was in good shape, he all but guaranteed a July rate cut. Indeed, the only question is not whether there will be a July rate cut but how many more cuts will follow. Defining excerpt:

Fed Chair Powell: "Semiannual Monetary Policy Report to the Congress"

And the minutes of the last FOMC meeting released yesterday support that notion.

FOMC Minutes Show "Many Fed Officials" See Rate-Cuts Warranted

Since I haven’t berated these guys lately, it is probably time for me to remind everyone that Fed has never, ever, ever gotten the timing of a transition from easy to normal monetary policy right. And this time is no different. Indeed, it had barely begun to move toward the unwinding of QE and the normalization of interest rates that it reversed itself---for the worse possible reason, a stock market hissy fit.

Yet, there is nothing in the Fed mandate that says that it needs to keep equity investors happy. Its mandate is low inflation and low unemployment both of which it achieved years ago; but if you remember, it kept moving the goal posts in order to justify continuing its QE policy (making the stock jockeys happy)---which means it should have brought a halt to QE long ago. But nooooooo. It was worried about all those rich investors not getting richer. So, what the Fed has also accomplished is the gross mispricing and misallocation of assets---which is getting worse by the day (see stock market close and the below link on negative yielding junk bonds).

To illustrate the absurdity of current central bank monetary policy, there are now fourteen euro-denominated junk bonds selling at negative yields.

Redefining "High" Yield: There Are Now 14 Junk Bonds With Negative Yields

More entertaining reading on Fed incompetency:

The Fed and the national debt.

Judd Gregg: Libra, the Federal Reserve and debt

The Fed has enough problems without creating more.

The Fed Shouldn't Be Competing With the Banks It Regulates | RealClearMarkets

The Fed has backed itself into a corner.

Inside the Fed's 'hall of mirrors' problem

Bottom line: except for QE1, Fed policy since 2009 has done little to improve the US economy. Lower unemployment and inflation were the result of hard work, business acumen and increased productivity. Indeed, I have argued that Fed policy worked against any economic recovery by keeping inefficient business alive (via cheap interest rates) and funneling money into the financial system versus the economy (via QE). And since expansive monetary policy did little to help the US economic recovery, I contend that its absence will do little to hurt it. On the other hand, QE led to massive speculation in all forms of assets leading to their significant overvaluation. Unfortunately (in my opinion), as along as the connection between Fed largess and Market temperament exists, the overvaluation will only get more distorted.

That is not likely to go on forever; though I have no clue as to what will trigger the Fed/Market disconnect. I repeat Herb Stein’s warning, that something that can’t go on forever, won’t.

News on Stocks in Our Portfolios

Economics

This Week’s Data

US

May wholesale inventories rose 0.4% but sales increased by only 0.1%.

The June inflation rate was +1.6%, in line; the core inflation rate was +0.3% versus expectations of +0.2%.

Weekly jobless claims fell 13,000 versus estimates of a 1,000 rise.

International

June Chinese vehicle sales fell 9.6% following a decline of 16.4% in May.

The June German inflation rate was +0.3%, in line.

Other

The CBO’s report on the $15/hour minimum wage.

Minimum wage bill could eliminate 1.3 million jobs, CBO says

Trump trying to talk down the dollar is a mistake and sows the seeds for a Fed tightening which is the opposite of what he wants. Remember the dollar was quite strong during the Reagan years and the economy prospered.

https://www.bloomberg.com/news/articles/2019-07-10/trump-concern-over-dollar-s-strength-spills-into-fed-selection?srnd=premium

Some de-regulation is not necessarily good.

https://www.bloomberg.com/news/articles/2019-07-10/wall-street-unbound-old-shackles-quietly-disappear-under-trump

What I am reading today

The downside to repealing Obamacare (note: this is a NY Times article).

So You Want to Overturn Obamacare. Here Are Some Things That Would Be Headaches.

Quote of the day.

Quotation of the Day...

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