Quiet Week

I update each Saturday with my view of the stock market for the next few weeks.  The monthly “Long Term” update will be on a Wednesday soon after the 15th of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a primary bear market, and buy back in for most of the next bull market.  You can always scroll down a few weeks and find the latest “Long Term” update.

If you lose your bookmark to the blog, google “Rich Investing” and it should show up on the first page or so.  The more often you google it and hit the link, the higher it will show in your results.

Economy:

Initial jobless claims, a rough measure of layoffs, declined to 211,000 from a revised 216,000 in the prior week.  The final reading for Q4 GDP came in at 2.2% (down from the earlier estimate of 2.6%), and the final read for the year was 2.9%.  New-home sales ran at a seasonally adjusted annual 667,000 pace in February, 4.9% higher than January’s rate, but just 0.6% above year-ago levels.

That is a weak Q4 number by historical standards.  Q4 is typically a good quarter with holiday sales, and Q1 is typically weak due to bad weather.  After stronger quarters in Q2 and Q3 last year, Q4 was a disappointment.

Geo-Political:

It’s all about China this week.  The news looks good for resolution of the trade dispute with the US.  It is a long read, but an important one.  The issues with China are numerous and complex, and I felt it important to not shorten this article.

“March 29, 2019 – Li cites progress on equal treatment for foreign investors and IPR protection

China will further open up to foreign investors and offer them treatment equal to that of domestic companies with firm protection of their legitimate rights, Premier Li Keqiang said at the Boao Forum for Asia on Thursday.

The country will fully adopt pre-entry national treatment and negative lists for overseas investment, Li said at the opening ceremony of the forum’s annual conference in Hainan province.

By the end of June, China will release the amended negative lists for foreign investment access, he said. “The negative lists will only be shortened. … We will ensure fair competition and common development for Chinese and foreign companies with fair supervision,” Li told more than 2,000 participants.

A negative list shows areas where investment is prohibited; all other areas are presumed to be open.

The government has started formulating matching regulations and rules to support implementation of the Foreign Investment Law, adopted two weeks ago, Li said, adding that supporting regulations will take effect along with the law on Jan 1.

The draft amendment to the patent law has been submitted to China’s top legislators. It sharply increases compensation for infringement to a cost that violators will not be able to afford, he said.

Forced technology transfers are prohibited and violators will receive harsh penalties, Li said. The complaint mechanism for foreign-invested companies will be perfected to improve exchanges and coordination between the government and investors, making it an effective way to protect the legal rights of foreign companies, he said.

China will not resort to massive economic stimulus to boost growth, but will continue to open up and innovate to energize market players, Li said.

The country will further open up its financial sector and accelerate the process to fully lower the market access threshold for foreign investments in banking, securities and insurance, the premier said. Service sectors, including medical care and education, will be opened up along with transportation, infrastructure and energy, he said.

Li said China will further make it easier for foreign companies to set up a venture capital presence and will improve regulations on foreign investors’ strategic investments in listed companies and their mergers with and acquisitions of domestic enterprises.

Also, preferential policies for investments from Hong Kong, Macao and Taiwan will remain unchanged, and greater development opportunities will be offered for them, Li said.

Wang Huiyao, president of the Center for China and Globalization, said he was impressed by Li’s speech to clean up rules and regulations inconsistent with the Foreign Investment Law as well as to launch a more streamlined negative list.

“It shows China’s attitude of further opening-up, which is a higher-level and more concrete commitment of China,” he said.

Leif Johansson, chairman of global biopharmaceutical giant AstraZeneca, said Li’s speech reflects the determination to create a more open, fair and transparent investment environment.

“Such an optimized market as well as a positive and dynamic investment climate will inspire us to expand our footprint in China and promote more cooperation with domestic firms to realize mutual development,” he said.

http://www.chinadaily.com.cn/a/201903/29/WS5c9d3abca3104842260b32a7.html

That is an astonishing level of change for China and it needed to happen.  When you read the last paragraph by Mr. Johansson, you realize that it actually could work out well for China.  I wrote a piece months ago about how it was not up to the government to halt the practice of forced technology transfer from their company to a Chinese joint venture.  It is up to the CEO of the US company to make a determination of what can be shared without costing his company a competitive edge.  Apparently, many CEO’s like Mr. Johansson had done the right thing and refused to transfer their IP to China, at the cost of some business in China.  Now with greater IP protection from the Chinese, they may be able to attract more foreign investment, which can help their economy expand faster than without the foreign investment.  I would guess that the Chinese are looking at it this way.  They are not going to act against their own self-interest.  The same set of measures that are necessary to support an immature and developing economy can start to work against the country once it is adequately developed.  Once it becomes a viable competitor, it is not surprising that foreigners feel the need to change the rules.  And when China realizes the choices foreign investors have been making recently, to not invest in China because IP protection is lacking, the Chinese realize the old rules are now working against them, and it is time to change.  That is how I see it, and it could be a win – win for China and the US (and the rest of the international players).

That’s a bit long, sorry, but it is important to the stock market.  As investors we always need to try and cut through the crap and gain as clear a picture of reality as we can.  We need to separate the propaganda from the facts.  I take in many data points, I don’t believe any of them at first, then I try to synthesize them into a coherent picture based on human nature and business strategy that nobody usually talks about because it can be ugly to tell the unvarnished truth.  I don’t have contacts in Washington DC or all the data that the Wall St. folks have, but they many times won’t tell you the unvarnished truth, either afraid to harm their reputation, or they are “talking their book” and saying things that put their investment positions in the best light.  As a blogger, I can afford to tell the truth as I see it because my reputation depends solely on the assistance I provide to you in making a better quality investment decision.  The benefit to me is that it imposes a discipline on me to organize the data and formulate opinions that I will act on in the week ahead.  My readership grows slowly over time, evidence by my page loads.  You are all important to me, and I appreciate you coming by to read!  I enjoy the occasional comment that I get on the blog, so don’t be shy!  Some of my readers I see once a month at an investor group meeting, so I get their comments in person.

Technical Analysis:

It was a decent week in the market, up 1%.  There was no earth shattering news this week.

Technically, the market remains in neutral mode.  RSI (Relative Strength Index) at the top of the chart is neutral with a reading of 59.  Momentum measured by MACD at the bottom of the chart is moving sideways, also neutral.  The price action continues to bounce around 2815, and I don’t see a discernable pattern there.  I still don’t see a definitive breakout one way or the other.

I have been focused for a couple of months on the Factset analysts projection that Q1 earnings that start April 8 will be 2% below last year.  It is hard to predict a big market breakout to the upside on such weak data, if that is what happens.  Perhaps that is what the big correction last fall was all about.  Perhaps the big move down already occurred, but the fact that it so easily recovered indicates that poor earnings could take the market back down.  One analyst remarked that earnings estimates have been taken down so far that people with be beating estimates and that will support the market.

2019 03 29

Click THIS LINK to open the chart in a separate window.

What am I doing?  Still not much.  I think the risks are to the downside, more than opportunity to the upside.  I hold lots of cash and I look for opportunities to put it to work.  This year I am playing “small ball” (in baseball terminology, working on getting base hits and advancing runners a base at a time to score runs, as opposed to “big ball” which is swinging for the fences and trying to hit home runs).  I bought some CD’s last fall when rates were higher, that is working well.  I won’t take a large position in an index ETF unless the market is oversold.  I try to buy quality dividend payers, and I buy smaller quantities of the individual stock.  If the market corrects I will add some shares to that position by buying at a lower price.  If the stock gets strongly overbought, I will sell 1/3, 1/2 , or all of the shares and look to buy it back at a lower price later.  I sell some covered calls and a few puts.  Small ball this year so far.

If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post, or send me an email, my address is on the “About” page at the top of the blog.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text so he can look at the chart while reading the text.  To do this in Firefox you can open a “private window” from the browser menu and have two instances of Firefox up, then size each window to about half of your monitor size.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update, but if you bookmark the link to the live chart on stockcharts and look at that daily, it does update.

Rich Comeau, Rich Investing

Interest Rate Crazy

I update each Saturday with my view of the stock market for the next few weeks.  The monthly “Long Term” update will be on a Wednesday soon after the 15th of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a crash, and buy back in for most of the next bull market.  You can always scroll down a few weeks and find the latest “Long Term” update.

If you lose your bookmark to the blog, google “Rich Investing” and it should show up on the first page or so.  The more often you google it and hit the link, the higher it will show in your results.

The monthly Long Term update was posted on Wednesday and can be viewed by just scrolling down following this weekly update.

Economy:

U.S. factory orders rose a scant 0.1% in January, another sign pointing to slower economic growth in the first quarter.  Initial jobless claims, a rough measure of layoffs, fell by 9,000 to 221,000 in the seven days ended March 16, and employment remains strong (this is a trailing indicator, meaning it does not go bad until the economy has been bad for a while).  The leading economic index increased 0.2% in February, the said the Conference Board, it’s the first uptick since September.  Existing-home sales ran at a 5.51 million seasonally-adjusted annual rate in February, an increase of 11.8% for the month (mortgage rates remained subdued, incomes kept growing, and more inventory helped the housing market).

The overall picture is a sluggish economy, but still growing.  The best performance came from housing, but there is a cautionary note there also.  Mortgage rates have come down over the last 6 months, because the economy is slowing.

Geo-Political:

The news that everyone was waiting for this week came on Wednesday when the Fed meeting ended and Powell gave his news conference.  The Fed took all rate hikes off the table for 2019 and the market liked it, rising nicely on Thursday.  They announced they will end the runoff of the balance sheet in September, keeping their balance sheet at $3.5 trillion, up from 800 billion at the start of the financial crisis in 2008.  That will limit the supply of bonds hitting the market and with a constant demand, that would keep bond prices high and yields low.  The Fed also published their GDP forecast with 2019, 2020 and 2021 showing growth rates of 2.1%, 1.9, and 1.8%.  Larry Kudlow from the White House says there will be growth rates of 3% as far as the eye can see, but I do not know what actual work he has to back that up, or did he just make up a number.  For that matter, what work does the Fed have to support their number (do they have a numerical model where they plug in economic data points?), or is that just a gut feel?  Folks, it makes a difference!!!  Who do you believe?

https://www.federalreserve.gov/monetarypolicy/files/fomcprojtabl20190320.pdf

Friday saw the inversion of the yield curve of interest rates, specifically the difference between the 10 year T-bill and the 2 year, and that is the most widely watched bond indicator.  Normally the 10 year yield will be higher than the 2 year, so the difference will be a positive number.  Right now the 2 year yield is higher than the 10 year, so the difference is a negative number, or a downward dip if you graph the interest rates by maturity date.  The downward dip on the graph is what is called the “inversion”, since the graph normally “rises to the right”.  The inversion does not always produce a recession, however all recessions have been preceded by an inversion of the yield curve.  The signal is not actually very accurate, and recessions typically follow by about 18 months, if they occur at all.  But, the market freaked out Friday, for many reasons, and the inversion of the yield curve was one more.

The British are twisting under pressure of the looming Brexit deadline.  Theresa May could not strike a deal with the EU that their Parliament would support, so the EU has granted a brief extension of time.  It seems doubtful that an additional couple of months will produce a deal that could not be found in the last year.  If the short term extension fails, thinking is it could set up a one year extension, and that could be used to call for a second referendum and overturning Brexit.  In the meantime, the British economy is suffering as the EU is taking some jobs back from Britain, and business is being slowed by uncertainty.  This has been an ill-advised venture for England, all bad so far and no upside.  The proponents of Brexit made it sound easy, but the negative implications were glossed over to get people to vote for it.  The British people were not given sufficient information (they were lied to) to make one of the most important decisions of the last 50 years.

Technical Analysis:

The stock market had a volatile week, ending down 1% for the week.  There was euphoria on Thursday based on the dovish comments from the FOMC meeting.  Then Friday the market seemed to “get it” that those dovish comments were because the global economies are slowing and this is backing into the US economy which is also slowing.  Delivery of the Mueller report to the Attorney General on Friday also spooked the market as nobody yet knows what the evidence will show.  The market hates uncertainty.  I also stay focused on the Factset analyst projection that Q1 earnings will come in with a small decline of 2% vs. last year’s Q1, and that cannot be good for the market.  Those earnings will start coming in April 8.

Technically I would call the picture neutral.  RSI at the top of the chart declined to 53 which is a neutral reading.  MACD at the bottom of the chart is going sideways, neither up nor down, so it’s neutral.  The price action is the most interesting.  Last week we finally broke up through the upper green line, which was resistance from the fall double top.  It passed the “three day rule” staying above 2815, then crashed down below it.  The three day rule is a useful guideline, but I am not as literal as some market technicians.  I really want to see, where does the market start living, above the breakout of resistance, or back below.  We don’t know that for a while.  But I still consider the breakout above resistance as a failure “at resistance” if we go down farther and live below that level.  So, I am still very interested in 2815.

2019 03 22

Click THIS LINK to open the chart in a separate window.

What did I do last week?  I did what I said I would do.  After 2 days above 2815, I bought a little SPY, and the next day a bought a little more (LITTLE being the operative word).  Thursday I was up, Friday it was down, but the move down looked like it had more conviction than the move up, and in consideration of all the negatives in the news and economy, I sold the SPY with a little loss.  They say the first loss is the best one, because it is smaller than the losses that follow, if we go into a downdraft.  I had a few individual stocks that I had profits in since January and I sold those.  We are very close to April and if earnings come in as poor as the analysts project, and corporate guidance on the conference calls is weak, the downdraft can continue.  It is amazing to me how the TV narrative switched from “everything will be OK because the Fed has gone on hold” to “damn, the Fed is on hold because the economy is slowing down, domestically and globally”.  I am very light in stocks.

I don’t have a plan for next week, I’ll have to watch and see.  My guess is we see weakness, but it’s just a guess.

I’m glad I picked up some CD’s last fall while CD rates were higher.  If they had gone up some more, I would have bought more at the higher rates, but I got 2.7% – 3.2% on 2 year to 4 year CD’s, which is not bad.  Those same duration CD’s today are about a quarter of a percent lower, so locking those rates up was a good deal.

If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post, or send me an email, my address is on the “About” page at the top of the blog.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text so he can look at the chart while reading the text.  To do this in Firefox you can open a “private window” from the browser menu and have two instances of Firefox up, then size each window to about half of your monitor size.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update, but if you bookmark the link to the live chart on stockcharts and look at that daily, it does update.

Rich Comeau, Rich Investing

Long Term – March 2019

Once a month, on the Wednesday following the 15th of the month, I will put up a long term view of the market.  This is provided for investors who don’t want to trade secondary swings in the market, but would like to exit the stock market relatively soon after a bear market begins, or enter the market after a new bull market begins (change in the primary trend).  In the blog, they will always have a title called “Long Term (month) (year)”, so you can use your browser “Find” function and easily find them.

Economics:

GDP – Fourth quarter GDP first estimate of +2.6% was released on 2/28, and it was both the first and second estimate of GDP due to the government shutdown.

Fourth quarter is usually a strong one, and this number is a little light for a fourth quarter.  This could be due to shaken consumer confidence due to the stock market correction, and business stalling investment due to uncertainty over the tariff wars.

If the third estimate of GDP due later this month still shows 2.6% was the increase, then the 3.1% increase for the year will be the best number in years.  Is that good?  You have to evaluate HOW the increase was brought about.  If it is from normal organic growth, there is probably no downside to the number and it is good.  However, if it is due to stimulus applied by the government, in this case the tax cuts, and those tax cuts cause the annual deficit to increase substantially, it will eventually have a negative side effect.  We’ve gotten by with this for 3 decades; the deficit started rising rapidly under Reagan in the ‘80’s.  The hit should eventually come in the value of the dollar and if that goes down, inflation would pick up.  I think the reason the national debt has not come home to roost is the other developed economies are in worse shape than the US, so the dollar remains high.  There is no guarantee that continues forever.

Annual GDP growth had been stable for a few years at a 2% annual rate and moved up a bit in 2017 to 2.6%.  This GDP number supports the assertion that the bull market continues.  

Year Quarter GDP %
2018 Year 3.1
2018 Q4 2.6
2018 Q3 3.4
2018 Q2 4.2
2018 Q1 2.0
2017 Year 2.6
2017 Q4 2.9
2017 Q3 3.2
2017 Q2 3.1
2017 Q1 1.2
2016 Year 2.0
2016 Q4 2.1
2016 Q3 3.5
2016 Q2 1.4
2016 Q1 .8

 

Fed interest rates –  The Fed left the Fed Funds Rate at 2.0 – 2.5% in March as expected.  Commentary from the Fed has been dovish and the markets have liked that, helping fuel the stock market rally so far this year.  The Fed indicated that currently they do not plan a rate hike in 2019, per the “dot plot”.

The Fed has moderated their stance substantially since the last rate hike in December, indicating they will pause the rate hikes and watch the data for a while.  For now, rates still support the long term bull market. 

Date Fed Funds Rate 5 Year Treasury 10 Year Treasury 30 Year Treasury
Mar 20, 2019 2.4 2.4 2.6 3.0
Feb 20, 2019 2.4 2.5 2.7 3.0
Jan 16, 2019 2.4 2.6 2.7 3.1
Dec 19, 2018 2.4 2.6 2.8 3.0
Nov 21, 2018 2.1 2.9 3.1 3.3
Oct 17, 2018 2.1 3.0 3.2 3.3
Sep 19, 2018 1.9 3.0 3.1 3.3
Aug 15, 2018 1.9 2.7 2.9 3.0
Jul 18, 2018 1.9 2.8 2.9 3.0
2018 Q2 1.7 2.8 2.9 3.1
2018 Q1 1.5 2.6 2.8 3.1
2017 Q4 1.2 2.1 2.4 2.8
2017 Q3 1.1 1.8 2.3 2.9
2017 Q2 .9 1.8 2.2 2.8
2017 Q1 .7 2.0 2.5 3.1

 

Valuation:

PE on S&P 500 – The current 12 month trailing GAAP PE on the S&P 500 is 21.3, up from 20.0 last month.  I used 4 quarters of earnings with the most recent being Q4 2018 (98% of companies have reported).

This metric is mildly elevated relative to my trimmed 30 year average of 19.

This indicator is supportive of the bull market since the valuation is not extreme.

S&P earnings – The March estimate from Factset for Q1 earnings is now -3.6%, and estimates for Q2 and Q3 are also poor, but positive, less than 3% growth.

The stock market struggled through an earnings recession a couple of years ago and it did not end the bull market.  It does induce volatility, and if it is not handled properly from a policy perspective, it could end the aging bull market.  This is a cautionary note, keep watching and be vigilant.

This indicator is supportive of the bull market, but if estimated earnings for 2019 are continually marked down, volatility will continue.

Age of primary move, bull or bear market – The bull market is 10 years old, which is a long bull market by historical standards.  In and of itself, this is meaningless.  It does provide some perspective that one should keep in mind.

Geo-Political:

Tension between Saudi Arabia (Sunni center) and Iran (Shiite center) has reached a level that bears watching, centered in the Yemen conflict (noted Dec. 2017).

In the US, we are approaching the point in the investigation into Russian meddling in the 2016 US presidential election where we will find out whether charges will be filed against the president’s closest advisors.  At that point a constitutional crisis could emerge.  A constitutional crisis is not a given, but if it occurs, I would expect the stock market to retreat for a while. (noted January 2018)

Trade wars are in effect with China and the EU.  I think some of the objectives Trump pursues are valid, but I am not confidant the method being used is the best.  This is causing serious pain to some segments of the economy, notably anyone that uses steel to make their products, and for farmers trying to sell their products.  Growth is slowing in both Europe and China.  This is already a small negative for the economy, but currently the reports out of China on trade talks with the US are mildly positive.

Global geo-politics is supportive of the bull market, currently.  The trade issues are less supportive of the bull market than a year ago.

Technical:

March has been a decent month so far, with a one week pullback pulling the return down.

Technically, the market is in a fairly neutral position.  RSI at the top of the chart is in neutral territory at 60.  The momentum on a long term basis is going sideways, neither up nor down, shown by MACD at the bottom of the chart, but the histograms shrunk again in March, a minor improvement.  The price action is encouraging since it has climbed back into the uptrend channel it has been in for years.  That looks good on the graph, but the chart is the history.  Where is the market heading if earnings go flat for 3 quarters, as the folks at Factset are predicting?

2019 03 20 Long Term

The market’s technical indicators support the thesis that the long term bull market remains in force.

Conclusion:

The stock market remains in a long term bull market technically, and there is nothing in the general economy, in Fed policy, or in the global geo-political realm to overturn that conclusion. 

The earnings projections from Factset for 2019 Q1, Q2 and Q3 are negative to low single digit increases vs. the prior year’s respective quarters.  That will limit upside progress in the stock market this year, and if these earnings “guesses” are still too high, and you must realize they are just guesses at this point and they are much lower than the last set of guesses, well, worse results are possible.  The last set of guesses (oh, I mean “estimates”, like that is any better, but who would invest if we called them guesses) was wrong, so why should we believe this set of guesses is any better?

 

Long Term Issues to Keep in Mind:

Federal Deficit:  (Negative – Noted Jan. 2018)  It will go up despite the republicans saying that if the tax cut bill is “dynamically scored” using “possible” increases in economic activity, it will hold down the deficit by increasing tax receipts.  This has not been shown to work in the past.  With the Fed no longer buying the US government debt that is currently running at $650 billion per year, and will likely expand to $750 billion per year, who is going to buy that debt, and what interest rate will they demand before committing their capital to that investment?  If that causes interest rates to rise unexpectedly fast and high, that would pose a significant risk to the US economy.

With the ECB ending their QE bond buying by the end of 2018, and probably beginning to raise rates in 2019, this may divert some buyers of US treasury bonds to Euro bonds, and that would put upward pressure on US interest rates (noted June 2018).

The total national debt exceeds $20 Trillion, and as interest rates rise, the component of the annual budget allocated to “interest on the debt” will increase, putting pressure on existing programs, or increasing the deficit.  If the deficit is allowed to rise too much in good economic times, the value of the dollar will fall and that is inflationary which is usually bad.

Rich Comeau, Rich Investing

One Day Above 2815

I update each Saturday with my view of the stock market for the next few weeks.  The monthly “Long Term” update will be on a Wednesday soon after the 15th of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a crash, and buy back in for most of the next bull market.  You can always scroll down a few weeks and find the latest “Long Term” update.

If you lose your bookmark to the blog, google “Rich Investing” and it should show up on the first page or so.  The more often you google it and hit the link, the higher it will show in your results.

The monthly Long Term update will be posted Wednesday 3/20.  Time is flying, it does not seem like a months since I wrote the last monthly update!

Economy:

Retail sales rose 0.2% in January, led by home centers and Internet stores, a sluggish showing on the heels of December’s weak print.  The consumer price index climbed 0.2% in February following three straight months of no change, while the year over year inflation rate was 1.5%, slightly below the Fed target of 2%.  Durable goods orders rose 0.4% in January, and these orders will translate into sales later.  Initial jobless claims rose by 6,000 to 229,000 in the seven days ended March 9, which is a generally low number but it is moving up slightly from its recent low at 200,000.  New home sales dropped almost 7% in January to a 607K annual rate, indicating the housing market got off to a slow start in early 2019 amid a partial government shutdown and patches of unusually harsh weather.

The picture is of a slowing economy.  Is it due to higher Fed rates?  Some of it is since mortgage rates have climbed and housing has slowed.  Some is due to the tariff wars which are cutting profits at steel and aluminum manufacturers and hurting farmers that sold to China.  Some is due to uncertainty on the part of US business over when the tariff wars will end and what the outcome might be.  Business will not allocate to major projects until the prospects going forward are clear.  The government shutdown and the steep stock correction have shaken investor confidence, although that shows signs of improvement since the govt. restarted and the stock market recovered in Jan./Feb.

Geo-Political:

Today we’ll take a look at Japan from Thursday’s news:

The Bank of Japan kept monetary policy steady on Friday but tempered its optimism that robust exports and factory output will underpin growth, a nod to heightened overseas risks that threaten to derail a fragile economic recovery.

Factories across the globe slammed on the brakes last month as demand was hit by the U.S.-China trade war, slowing global growth and political uncertainty in Europe ahead of Britain’s departure from the European Union.

In a nod to the increased risks, the BOJ cut its assessment on overseas economies to say they are showing signs of slowdown. It also revised down its view on exports and output.

“Exports have shown some weaknesses recently,” the central bank said in a statement on its policy decision, offering a bleaker view than in January when it said they were increasing as a trend.

At a two-day rate review ending on Friday, the BOJ maintained a pledge to guide short-term interest rates at minus 0.1 percent and 10-year government bond yields around zero percent. The widely expected decision was made by a 7-2 vote.

The central bank also stuck to its view Japan’s economy is expanding moderately, but added a phrase that “exports and output have been affected by slowing overseas growth.” In January, it said only that the economy was expanding moderately.

The sharp deterioration in exports and industrial production should be a serious source of concern for the BOJ. I think the BOJ is doing some thought experiments about what they can do,” said Masayuki Kichikawa, chief macro strategist at Sumitomo Mitsui Asset Management.

For now you can still make the argument that current economic weakness is temporary, but this is becoming an increasingly closer call. The next three months are critical.”

Japan’s exports posted their biggest decline in more than two years in January as China-bound shipments tumbled. Factory output also posted the biggest decline in a year in that month, a sign slowing global demand was taking a toll on Japan Inc.

Many in the BOJ expect Japan’s economy to emerge from the current soft patch in the second half of this year, when Beijing’s stimulus plans could lift Chinese demand and underpin global growth, sources have told Reuters.”

https://www.cnbc.com/2019/03/15/bank-of-japan-keeps-monetary-policy-tweaks-view-on-global-economy.html

I highlighted most of the article, but it is such an excellent brief analysis of what is going on around the world.  Exports are extremely important to Japan as their domestic economy is rather small, so they are very sensitive to the international sphere.

The US tariffs on China are slowing China, and that is backing into a slowing in Japan.  Europe is weak, and the US is slowing also.  Regarding tariffs, be careful what you wish for.

We also see Japan has kept a negative interest rate on the short end and the BOJ is targeting their 10 year bond to zero percent.  That is one reason that US treasury longer term rates are so low, and have actually fallen the last few months since the global economies have slowed.  In Japan, if your investment choice is between a Japanese 10 year bond yielding 0% or a US 10 year bond yielding 2.5%, it is clear that you would buy the US bond.  The same is true for European investors.  So, there is global demand for US treasuries, and that is the reason the US has been able to run huge deficits without interest rates here rising at all.  Interest rates here fell for about 8 years following the financial crisis, for the reason we are discussing concerning our Fed and global interest rates.

Now pay attention.  Is it working?  Are low global interest rates producing growing economies?

The “global synchronized growth” scenario of two years ago has turned into the “global economic slowdown”.

Europe and Japan have experimented with negative and zero interest rates for 5 years, with negligible success AT BEST!  That is the linchpin in the argument that negative/zero interest rates do not work.

There are many factors that influence the performance of an economy, and interest rates are just one.  Free market capitalism vs. communist state planned economy, population and demographics, technology, infrastructure, tax policy, rule of law, are some of the big ones, beside interest rates.  Yet somehow, we look to central bankers to regulate the economy with one lever, interest rates.

Interest rate changes tended to work better in a slower moving time like the 19th and 20th century.  Since the late 20th century, the widespread use of robots and computers, the internet, email, supertankers and containerized shipping, and cheaper labor around the globe, have all conspired to shrink the US middle class, and in Europe as well (the developed economies).  In the developing nations, they are struggling to create a middle class and they are using cheap labor to attract industry and jobs.

In the 21st century, with such immense change in the economy, it is entirely reasonable to me that interest rate policy is not as effective as it used to be.  It is also possible that as the world population increases and robots automate many jobs, that employment is such a problem that if you don’t have a good job, you can’t afford a new car no matter how low interest rates are.

So, what is the answer to stoke growth?  It is possible that “it is what it is” and there is no answer.  Our politicians all run promising to make our lives better and they generally all fail.  The problem with that is that we ever believed them in the first place.  Or they make it appear to make something better for a few years, but the national debt skyrockets because after all, our problems are BIG.

That’s a ramble, but I make no apology for it.  I believe the major underpinnings of the economy have shifted over the last 30 years, to the extent that what used to be “rules of thumb” about the economy, no longer hold true.  If that is true, you may need to re-think your views on investing, and on the politicians you choose to listen to (I don’t hear any of them that I fundamentally believe).

Technical Analysis:

The S&P had a good week, up 3%.

Technically, the chart is interesting and has some encouraging signs, and a whiff of caution.  RSI at the top of the chart is rising but approaching overbought with a reading of 67.  MACD at the bottom of the chart is beginning to turn up which is a short term good sign.  The price action has the most interest, closing at 2822, finally closing above the double top level shown by the upper green line.  But, it has not broken above the resistance DECISIVELY, neither in magnitude nor duration.  I try to go by a 3 day rule, so a change in direction is not solid until then.

2019 03 15

Click THIS LINK to open the chart in a separate window.

What am I doing?  Not a lot.  I’m mostly looking for “fallen angels”, companies that have been taken down but have good prospects to improve better.  I favor a dividend payer also.  I’ve sold some covered calls on stocks I hold to pick up a little return.

I’m underperforming the market year to date.  I’m OK with that.  I’m retired and I don’t want to be speculating with much of my portfolio.  I would rather invest like a quarterback in football, see what the defense will make it easy to attack, and make a few easy yards here and there.  I also look ahead to the lowered expectations for Q1 earnings that will start announcing around April 10.  I see that as a risk.  Some traders on CNBC say they think the analysts have taken estimates down too low and it won’t be that bad.  I will have to see some good earnings before I would be a buyer on that thesis.

If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post, or send me an email, my address is on the “About” page at the top of the blog.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text so he can look at the chart while reading the text.  To do this in Firefox you can open a “private window” from the browser menu and have two instances of Firefox up, then size each window to about half of your monitor size.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update, but if you bookmark the link to the live chart on stockcharts and look at that daily, it does update.

Rich Comeau, Rich Investing

Pullback Has Started

I update each Saturday with my view of the stock market for the next few weeks.  The monthly “Long Term” update will be on a Wednesday soon after the 15th of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a crash, and buy back in for most of the next bull market.  You can always scroll down a few weeks and find the latest “Long Term” update.

If you lose your bookmark to the blog, google “Rich Investing” and it should show up on the first page or so.  The more often you google it and hit the link, the higher it will show in your results.

Economy:

New home sales were 3.7% higher in December than in November and the median sales price was $318,600, 7% lower than a year ago.  New home sales inched up 1.5% for the year 2018 over 2017, a weak showing.  The ISM non-manufacturing survey rose to 59.7% last month from 56.7% in January, which is an improvement to near the prior trend and reverses recent weakness, good news.  Jobless claims fell by 3,000 to 223,000 in the seven days ended March 2, right at the recent trend.  The employment report showed the economy added just 20,000 new jobs last month, the smallest gain since September 2017.  The overall picture is of slowing growth, but still growth.

The most striking statistic that caused all the buzz in financial markets was Friday’s employment report and the massive tumble in hiring, adding only 20K new jobs in January.  The President said it is a fluke, along with many market watchers; the prior trend had been about 200K monthly.  Given the steep decline in the stock market, hawkish tone from the Fed in December, and the trade wars, I can see employers taking a wait and see approach to hiring until conditions become more clear.  That would be rational behavior for corporations and small business.  The Fed turned dovish in Jan., the stock market regained much of the ground it lost in Oct. – Dec., and mildly encouraging statements are coming from the China trade talks.  I am willing to call the number a one-time event and wait on more data to evaluate what is going on.

Looking beyond our shores, Draghi is clearly concerned about the possibility of the EU slipping into recession and is trying to stimulate with a TLTRO (google it to find out more) program.  China’s economy has slowed due to the trade war and their central bank lowered bank reserve requirements to incent the banks to lend to business in an effort to stimulate.  It is hard to picture robust growth in the US if our two major trading partner’s economic growth is in decline.  This should be filed in the “be careful what you wish for” folder.

Geo-Political:

Much of the world events are static currently, so I will offer my thoughts on the trade war with China.

I think China pursued policies contrary to WTO rules and the US let them get away with it for a couple of decades.  I think we did that to help them get up to speed and integrate into the world economy, like we did with Germany and Japan following WW II, because it is a hard decision to militarily attack your top trading partners, especially if most of your citizens enjoy the status quo in their country.  This promotes peace.

At some point, when an economy has become robust enough that it no longer requires any accommodation, it should be withdrawn and the policies changed.

That might be accomplished through soft means like rational discussion, or by harsh measures by application of tariffs, essentially an economic attack.  I’ve said before, I support our objective, but I am not sure we have selected the best method to achieve it.  I am not alone in this view, remember the President’s chief economic advisor Gary Cohn resigned rather than participate in the administration’s trade war.  I am not going out too far on a limb to say Gary Cohn understands a lot more about international economic operations than the President.

What is wrong with applying tariffs?  The major problem is the host of unintended consequences, if you have not adequately analyzed the situation.

Some of those possible unintended consequences:

  1. If you materially harm your top trading partner’s economy, they will not be able to buy as much of your products, which will slow your economy.
  2. When you apply a tariff as pressure to achieve a policy change, you have no idea how hard your opponent will resist the policy change. This could extend the negotiation far beyond your expectation and you do not know how much of your objective is achievable.
  3. Opposing heads of state can deny cooperation on issues where you would like it, in retaliation. It can mess up formerly good foreign relations.
  4. You cannot assess the long term impact of public opinion in the attacked nations. If people think you are behaving as a bully, they can quietly avoid buying your nations products in personal retaliation (boycott, whether declared or not).
  5. Your opponent will apply retaliatory tariffs on your goods, and Chinese business and consumers will seek new suppliers that do not have the tariff tacked on to their products. After the Chinese change their supply chain, there is the danger that even after the tariff war ends, those customers do not come back to their US supplier.

These are the top ones that come to my mind, but it is just scratching the surface.  I believe that Trump considered item 1, but I am not sure he considered the others.  Gary Cohn tried to convince Trump not to go down the tariff path, but he lost the debate, and I think he thought the consequences could be so negative that he could not in any way participate in a tariff war.  We’ll see who comes out right.

We will get an agreement, eventually.  Trump is under pressure to get an agreement from businesses suffering the loss of trade with China.  Trump will say it was the greatest deal ever, and therefore he won.  That is a gross oversimplification.  You don’t win if you get a deal, it is more complicated than that.  The true test of this exercise will be, what it cost us, real-time and ongoing, vs. what is the long term benefit of the deal.  That won’t be known for at least a couple of years, maybe as long as five years.

But, that is not of any concern to Trump.  Nobody, except a few academics, will track the deal, they probably won’t get the analysis published, if it gets published Trump may no longer be president, and the results will get so intertwined with so many other economic factors that assessing the impact of the deal in five years will be difficult at best and it will be defensible to true believers using some of the newer economic factors that bear on trade.  If the trade deal turns out to be a long term negative, Trump will only be held to task by economic historians, and I don’t think he cares much about that.

I doubt if you will read that opinion anywhere else.  Is it right?  I don’t know for sure, but my vote is with  Gary Cohn on the tariffs.

Technical Analysis:

The market went right up to the Oct. and Nov. double top at 2815, and reversed downward and lost 2% on the week.  Again, it was almost as if the big traders had their computers set on 2815 and started with the sell programs (they did).  Q4 earnings are over, the Fed went dovish in Jan., we have mildly positive news on the China trade negotiations, and I think it all got priced in during the Jan./Feb. rally.  Now the news goes mostly dead for the next month, and projections for Q1 earnings are poor.  That might be a good time to sell.

We’re up 12% year to date.  With the EU and China weak, and many statistics in the US economy slowing, how much do you think this market can gain this year?  Realistically, if you took the hit Oct. – Dec. and were down 20%, you may not be whole yet, and it may return more than 10% for the year simply because it started in such a deep hole.

Technically, the chart looks poor.  After reaching fully overbought two weeks ago with RSI at the top of the chart at 70, the market lost 2% this past week and RSI declined to neutral territory at 50.  Momentum shown by MACD at the bottom of the chart rolled over into a decline that shows no sign of slowing.  Price action is negative, falling all week.  We’re in a pullback and it remains to be seen how far down we go.  There is minor support at 2675, and stronger support at the double bottom from Oct./Nov. at 2625 (the lower horizontal green line, I just didn’t extend it to the right yet).  If we fail to hold support at these two levels, well, we could test the recent low from late Dec. at 2350.  I have no faith in the high support level, and it does not feel to me that we should go all the way back down to 2350, so my guess, and it is just a guess, is the pullback stops around 2625, the green line.

2019 03 08

Click THIS LINK to open the chart in a separate window.

What do we do with this market?  I’m cautious these days.  I think I will be more patient and just buy in at larger dips this year and sell into overbought rallies.  In recent years, I was a little friskier on the buy side but I will tighten that up.

If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post, or send me an email, my address is on the “About” page at the top of the blog.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text so he can look at the chart while reading the text.  To do this in Firefox you can open a “private window” from the browser menu and have two instances of Firefox up, then size each window to about half of your monitor size.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update, but if you bookmark the link to the live chart on stockcharts and look at that daily, it does update.

Rich Comeau, Rich Investing

Up Against Resistance

I update each Saturday with my view of the stock market for the next few weeks.  The monthly “Long Term” update will be on a Wednesday soon after the 15th of each month, and this supports investors who want to buy and hold, but want to sell to avoid the bulk of a crash, and buy back in for most of the next bull market.  You can always scroll down a few weeks and find the latest “Long Term” update.

If you lose your bookmark to the blog, google “Rich Investing” and it should show up on the first page or so.  The more often you google it and hit the link, the higher it will show in your results.

Economy:

U.S. factory orders rose a slight 0.1% in December.  Gross domestic product, the official scorecard for the economy, grew at a 2.6% annual pace in the fourth quarter.  Consumer spending sank 0.5% in December, the government said Friday.  The ISM manufacturing index fell to 54.2% last month from 56.6% in January, the lowest reading of the last two years.  The final reading of the University of Michigan consumer sentiment index faded in February with a 93.8 reading but the reading was above January’s 91.2 when the bulk of the government shutdown occurred.

All of the economic data is declining compared to a year ago, but while it is slowing, it still shows growth.  The last Atlanta Fed estimate of Q4 GDP was 1.5%, but the actual number (which I believe is called the first and second estimate) came in at 2.6%.  One more estimate should come out in March.

Geo-Political:

The trade talks with China remain a primary focus of the US stock market, so let’s take a look at China’s economy:

“New loans in China surged to a record high in January — and analysts say it could be a sign that government stimulus is “finally kicking in,” which may be good news for the economy.

The world’s second-largest economy expanded 6.6 percent in 2018, the slowest growth in 28 years.

The slowdown was in part due to official efforts to reduce alarmingly high debt levels which started three years ago. Clamping down on credit, in particular non-traditional forms of lending known as “shadow banking,” suppressed economic activity and pushed growth lower.

But the onset of the tariff war with the United States and the pace of the slowdown forced a rethink. Last year, authorities began taking steps to encourage banks to lend more, cut taxes and support small- and medium-sized companies.

Record loans

Bank loans and total social financing — the country’s broadest measure of credit — rose to a record high in January, according to China’s central bank on Feb. 15.

New yuan loans hit 3.23 trillion yuan ($481.76 billion), while total social financing — which measures loans and bonds among other things — reached 4.64 trillion yuan. Those numbers took analysts by surprise.

The credit growth “indicates that the PBoC’s easing efforts are finally kicking in, as liquidity is passed on from financial institutions to the real economy,” Bank of America Merrill Lynch said in a note the day the data came out.

https://www.cnbc.com/2019/02/22/china-banks-record-lending-shows-stimulus-is-kicking-in-analysts-say.html

What does that mean to us?  If the Chinese can successfully stimulate their economy internally to offset the negative effects of the US tariffs, it puts them into a stronger negotiating position with the US.  That could elongate the negotiations, and potentially put pressure on the US to accept a smaller package of concessions, as US businesses that are negatively being impacted call the White House and complain about the pain they feel.  Trump will be running for re-election by the end of 2019, and bankrupting farmers in the mid-west would not make for a good campaign story.  The administration is under increasing pressure from business to conclude a deal.  The stock market will be happy with a deal, any deal.  After the failure of talks with N. Korea, Trump needs a win at something.  China will try to use this to their advantage.  The US could put more pressure on China by raising the tariffs from 10% to 25% as had been scheduled for March 1st, but this would elongate the process, the pain, and cause retaliation from China.  With US business already calling the White House to end this, I consider this option doubtful.  Article is at the link below if you are interested:

https://www.washingtonexaminer.com/opinion/trump-wants-more-tariff-powers-so-does-congress

Technical Analysis:

The market managed a small gain last week, up about 1%.

Technically, when I look at the chart, I see a tired overbought market.  RSI (Relative Strength Index) at the top of the chart is fully overbought at 70.  Market momentum is flagging as MACD at the bottom of the chart is starting to roll over and is heading down, if ever so slightly.  The histograms have shrunk all the way back to zero.  The price action has stalled here and faces resistance at the double top from Oct. and Nov. at 2815.  To believe the correction is over, we have to break decisively above 2815, both magnitude and duration.  An agreement with China could do it, but I don’t expect that soon.  If a month goes by with no deal, we will get to the poor forecast for Q1 earnings by the analysts at Factset and that will not go well with the market (unless Factset has it wrong and earnings surprise to the upside).

Interestingly, bond yields on the long end have ticked up, with the 30 year Treasury moving up from 3.0 to 3.1%.  What does that mean?  It could mean that the market is no longer focused on the worst possible consequences of Fed tightening or the China trade war.  If that turns out to be true, the economy may stop its slowdown and re-accelerate.  Eventually that could prompt the Fed to end the pause and raise rates again, but probably not until after July.

2019 03 02

Click THIS LINK to open the chart in a separate window.

What did I do this week?  Practically nothing.  I don’t want to buy into an overbought market that is not clearly out of its correction mode.  I’m very light in stocks at this point.  I held a few stocks through the late Dec. lows and I am almost back to break even on those.  If we move decisively above 2815 I would slowly begin to put risk on, and protect it with close trailing stops.  I’d rather see a pullback and use that as an entry point.

If you enjoy these updates, please tell your friends and family who are interested in the stock market about this blog.

Your comments and questions are always appreciated, so feel free to comment using the “Leave a Comment” feature just under the title of the post, or send me an email, my address is on the “About” page at the top of the blog.

You can use the hyperlink below the chart of the S&P that will open a larger picture of the chart in a separate window.  The reader who suggested this wants to look at the chart side-by-side with the blog text so he can look at the chart while reading the text.  To do this in Firefox you can open a “private window” from the browser menu and have two instances of Firefox up, then size each window to about half of your monitor size.  If you bookmark the link to the chart you can look at it each day of the week to see how the market is progressing to certain milestones.  The picture in this post is a static .jpg so it does not update, but if you bookmark the link to the live chart on stockcharts and look at that daily, it does update.

Rich Comeau, Rich Investing