Low Volume Week, New Record High

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  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:

Orders for durable goods sank 2% in November, the biggest decline since May (what happens to durable goods orders eventually happens to sales).  New home sales increased 1.3% on a monthly basis in November to a seasonally-adjusted annual rate of 719,000.

The stock market is hitting record highs, but the economy is uneven and sluggish.

Geo-Political:

Let’s take a look at what is going on in the “repo market” and the Fed’s response, which has been to add liquidity to the banking system.

According to Bankrate’s December Federal Reserve Forecast survey, experts noted in their written responses that they’re continuing to watch the repo market mess because it has a great deal of impact on the Fed right now.

Should market rates again rise above the Fed’s target range upper limit, it will mean that the Fed’s existing strategy hasn’t proven capable of making its operating system function as it is supposed to,” says George Selgin, director of the Center for Monetary and Financial Alternatives at the Cato Institute.

Some experts have already outlined what that might look like, with the most drastic call coming from Credit Suisse. Zoltan Pozsar, Credit Suissee’s managing director for investment strategy and research, suggested that the Fed wouldn’t be able to fix the repo market turmoil simply by injecting cash into the marketplace. Instead, they’d need to reinstate another round of “QE” because reserves are still insufficient, he said.

Of course, that hasn’t been confirmed, while other Fed watchers are predicting that the Fed will take a different, less-drastic step. One such alternative is the creation of an even-more wonky financing program known as a “standing repo facility.” This facility would likely be a permanent program at the Fed, allowing participants to exchange bonds for cash at a set interest rate.

Many details still need to be hammered out — such as who would be eligible — but it’s something that “many” Fed participants see as needed, according to records of the Fed’s October meeting.

What next steps should consumers take?

All of this volatility and uncertainty underscores the importance of building an emergency savings fund, Hamrick says. Investors, meanwhile, should brace for more market choppiness as the Fed figures out this process.

“Some of the volatility that we saw in financial markets toward the end of 2018 is an indication of what can go wrong if the Fed makes a policy mistake,” Hamrick says. “The worst of that may be behind. But whether anticipating an economic slowdown or market volatility, think about your long-term plans, including retirement and emergency savings.

 “Consumers, investors, savers and borrowers should think about this (quantitative easing) as one of the two main tools in the central bank’s toolbox to help adjust the strength of the U.S. economy,” Hamrick says. “It remains to be seen how the Fed will learn how best to employ it and whether there are unintended negative consequences from having invented and deployed it.”

https://www.bankrate.com/banking/federal-reserve/federal-reserve-balance-sheet/

From 2000 – 2002 (the dot com bust) we had three consecutive down years in the stock market after the terrific gains in the 1990’s, that took the stock market down 50%.  Then in 2008 we had a 50% decline in the S&P is just over one year following the mortgage backed securities bust.

The big question remains, is there another “bust” out there, a really big problem?  If there is, and I believe that there is another crisis out there, it will start in the bond market and the crisis will be one of DEBT.  Can the US carry $23 trillion of total debt, and add to it at a rate of over $1 trillion per year when the economy is in good shape, and do that over a long period of time, without a serious detrimental effect on the economy?  I think the answer is no.  Why is there insufficient liquidity in the banking system to operate the repo market?  Could it be that the US trillion dollar annual deficit is sucking all the liquidity out of the world to fund its deficit?  Is that why the Fed is expanding its balance sheet again like it did in the 2008 financial crisis, because the rest of the world lacks the cash to finance the US deficit?  If that is the case, eventually interest rates will rise to attract more cash to the bond market.  That would have a slowing effect on the US economy.  Think about a slowing economy in a rising rate environment, that’s not good.  What are the unintended negative consequences of having invented quantitative easing and having deployed it to finance huge on-going US deficits?  Once you have gone down that road, can you get off?

Technical Analysis:

The market was up another percent this week, closing at another record high.

Technically we are in the same shape as last week.  The market is strongly overbought with the RSI at the top of the chart up at 79.  Momentum shown by MACD at the bottom of the chart is still rising, a positive.  The price action is still rising.  That is all positive, but the strongly overbought reading is a caution sign, and the price is extended far above the 50-day moving average (blue line).  A reversion to the mean (correction) can come at any time.

The economic statistics do not warrant this type of record setting gains in the stock market.  For all of Trump’s complaints about the Obama 2% GDP economy, that is what we have now as 2019 will go down as a 2% GDP year.  Earnings for 2019 were flat compared to last year.  With flat earnings and a substantial gain in the S&P, the market valuation has moved from neutral to moderately overvalued.  Color me cautious.

2019 12 28

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

What did I do last week?  Not much, but as I had sold most of my SPY, and my call options on stocks that I held had expired, I began to sell overvalued stocks that no longer had call options covering them, BIIB for one.  Then I sold a BIIB Jan 280 Put to buy it back if it goes down in a correction.  I have a lowball buy order to pick up CTL on a pullback, for the dividend and hopefully a pop on a market rebound.  The little SPY that I have left has a trailing stop loss percent order under it, close at 1% down.

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

Impeachment, and a New Record High

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  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.

The monthly Long Term update was posted on Wed. and is just below this post, so just keep scrolling down to see it.

Let me also wish all of my readers a happy holiday season! 

Economy:

The four-week average of new unemployment claims rose by 1,500 to 225,000, a generally low number.  The Leading Economic Index was unchanged in November, breaking a string of three straight declines.  The LEI being unchanged after 3 straight months of decline is no victory since it is so close to being the 4th straight month of declines.  Three straight months of decline often (not always) is a predictor of a slowdown in the economy six months in the future.  The third estimate of Q3 GDP was unchanged at +2.1%, an average reading.

Existing home sales decreased 1.7% in November thanks in large part to the constrained inventory of homes for sale.  Nevertheless, the pace of existing-home sales was higher than a year ago when the rate came in at 5.21 million.  The median sales price for existing homes in November was $271,300, which was 5.4% higher than a year ago.

Everything points to slow steady growth, except the poor performance of the Leading Economic Index over the last 4 months, which often foreshadows a slowdown in the economy six months in the future.

Geo-Political:

The president was impeached but the market did not react since everyone knows the Senate will not convict the president.

We still await details of the China trade deal.

Technical Analysis:

The stock market was up about 1%, closing at yet another all-time high.

Technically the market looks good, except for being overbought.  RSI at the top of the chart is at 75, clearly overbought.  In bull markets, the market can stay overbought for months, but I am skeptical of this one since earnings have been flat all year.  The market looks powerful since it has managed to rise above the top trendline of the channel we have been in for most of 2019.  That type of action is usually seen early and the middle of bull market cycles, or in late cycle blowoff tops.  Momentum shown by MACD at the bottom of the chart is positive in a rising mode.  The price action is positive, strong enough to get above the top of the rising channel.

I remain skeptical given the rising P/E multiple of the market riding on the back of flat earnings for 2019.  I captured most of the rise from the October lows, and I’m willing to forego the rest of the rise and wait for a correction to buy back in.

2019 12 21

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

What am I doing?  Not much since I sold out a month ago.  I placed some lowball buy orders waiting for a correction.  It appears the market wants to continue up in the short run, technicals and poor earnings aside for now, so I am making some small daily buys in SPY, and protecting them with a trailing stop loss % order at 1%.  The next two weeks will be low volume weeks as the professionals will be taking vacation, so I won’t believe much of what I see go on until after the first of the year when everyone gets back.  Low trading volume can exacerbate market moves.

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 – December 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 – The second estimate of Q3 GDP was +2.1%.

With the China trade war, we are seeing some slowing of economic growth in China, Asia, and Europe.  So far, it is not a serious problem in the US, although clearly our economy has slowed and the ISM manufacturing sector purchasing managers index (PMI) is showing contraction. The much larger ISM non-manufacturing PMI continues to show growth.

Although the US and China have reached a Phase 1 trade deal, it is not known exactly what is in it, nor how much of a positive impact it will have on the US economy.  Any impact will probably not be felt for 6 to 9 months.

The latest (Dec. 17) Atlanta Fed GDPNow estimate for Q4 GDP is +2.3%.

Annual GDP growth had been stable for a few years at a 2% annual rate and moved up a bit to 2.6% in 2017 and 2.9% in 2018.  2019 will not be as high as the two previous years if we continue as expected.

This GDP number supports the assertion that the bull market continues.  

Year Quarter GDP %
2019 Q3 2.1
2019 Q2 2.0
2019 Q1 3.1
2018 Year 2.9
2018 Q4 2.2
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 cut the Funds rate by ¼% on 10/30, the third cut this year to the level of 1.5 – 1.75% (I call that 1.7 in the chart below).  At the December meeting, the Fed left rates unchanged.

The Fed has managed to “un-invert” the yield curve by cutting short term interest rates.  Longer term rates rose a bit after the August global recession scare.  The Fed has indicated they will pause the interest rate cuts and observe what happens to the economy, so a few months of stability of rates is expected.

Fed policy supports the assertion that the long term bull market continues.

Date Fed Funds Rate 5 Year Treasury 10 Year Treasury 30 Year Treasury
Dec. 18, 2019 1.7 1.7 1.9 2.3
Nov. 20, 2019 1.7 1.6 1.7 2.2
Oct. 16, 2019 1.9 1.6 1.8 2.2
Sept 18, 2019 1.9 1.7 1.8 2.2
Aug 21, 2019 2.2 1.5 1.6 2.0
July 17, 2019 2.4 1.9 2.1 2.6
June 19, 2019 2.4 1.8 2.0 2.5
May 15, 2019 2.4 2.2 2.4 2.8
Apr 17, 2019 2.4 2.4 2.6 3.0
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 23.8, up from 23.1 last month.  I used 4 quarters of earnings with the most recent being Q3 2019.

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

The stock market rose to record highs, while Q3 earnings are down marginally from the prior year, stretching valuation.

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

S&P earnings – Factset projects that earnings for Q4 will be 1.3% below the year ago quarter, and that CY 2019 will have been flat on earnings.  They project that Q1 will show earnings growth of 5% and Q2 will be +7%.  Will that come to pass?  I don’t know.

This indicator is neutral to the bull market.  2019 was a flat year for earnings, while market prices are up considerably, not a good combination.

Age of primary move, bull or bear market – The bull market is 10.7 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).  The US has ratcheted up pressure on Iran, sending a carrier group to the region (May 2019).  Iran has begun attempts to disrupt oil shipments in the Persian Gulf and has begun to enrich uranium beyond the limits of the Nuclear Agreement that the US dropped out of, which is a destabilization to the region.

Robert Mueller has issued his report and no serious indictments came out after Roger Stone.  The report was made public on 4/18/2019.  This will be kept alive through the 2020 election in my opinion.  If the House decides to impeach, it will put a drag on the stock market.  A new threat to Trump’s presidency is the flap over Trump’s request that Ukraine investigate Hunter Biden’s board membership on a Ukrainian gas company, while withholding $400 million of military aid.  President Trump was impeached by the House on December 18, 2019.

Trade wars are in effect with China and the EU.  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 to China.  Growth is slowing in both Europe and China.  This is already a small negative for the economy and if these are not fixed soon this can degrade and threaten the global economy.  A Phase 1 trade deal was announced December 12th, but few details have been seen.

Anthony Scaramucci in the Republican Party has openly called on the party to discuss replacing Trump on the ticket for 2020 (August 2019).  Trump’s poll numbers are very low, and if the republicans believe that Trump has no chance to win the presidency in 2020, they will move to replace him.  This is very preliminary and it may not go anywhere, but it bears watching.

Boris Johnson, the new British prime minister, threatens to force England out of the EU on a “hard Brexit” if necessary.  This will be temporarily disruptive to the markets until they figure out exactly what the implications of a hard Brexit really are, if it does occur (Sept. 2019).

Global geo-politics have degraded from supporting of the bull market to neutral.

Technical:

The market has been slowly rising to near daily record highs based on optimism for a Phase 1 trade deal with China, and the deal reportedly defers the new tariffs that were set to take effect on Dec. 15.

Technically, the long term market condition has improved slightly this month.  RSI at the top of the chart is 69 and rising, which is positive and not overbought yet on the long term basis.  Momentum shown by MACD at the bottom of the chart is rising mildly, a positive.  The price action is positive in a four month upswing.  The long term chart looks very good.

Currently there is nothing to overturn the thesis that the long term bull market remains in effect.  The price remains in the channel this bull market has been in for the last 10 years.

2019 12 18 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, market valuation, in Fed policy, or in the global geo-political realm to overturn that conclusion. 

Two of the long term indicators, earnings and geo-political, have been downgraded from “supportive” of the long term bull market to “neutral”.  The long term bull market continues, but it is no longer the vibrant and almost risk free market of a few years ago. 

 

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.  The US added $980 billion to the national debt in fiscal 2019 (ended 9/30/2019), a tragedy in good financial times.

The total national debt exceeds $23 Trillion (late 2019), 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.  The thing saving us today is how poorly all the other nations are managing their economies.

Rich Comeau, Rich Investing

China Trade Deal

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  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.

The monthly Long Term update will be posted Wed. the 18th.

Economy:

The consumer price index rose 0.3% last month, while the increase in the cost of living over the past 12 months was 2.1%.   The 4 week average of new unemployment claims rose by 6,250 to 224,000, a significant increase.  Retail sales edged up 0.2% last month, rather poor moving into the holiday season.

The Fed left rates unchanged at 1.7% for the Fed Funds rate.

It was just a lackluster week on the economy.

Geo-Political:

China and the US reached agreement on a Phase 1 deal on trade.  The market reaction was muted.  The market managed to set a new all-time high, but the market did not surge higher.  I view it mostly as a win for China.  Trump did not want to do a phased deal, which will take a LONG time, so that is a win for China.  China wanted to avoid the new Dec. 15 tariffs, and they did for the now.  US business leaders were telling the White House the new tariffs would have impacted too many US businesses negatively.  China will buy more US agricultural products, and apparently they agreed that US banks will be able to do business in China without having a Chinese partner, which is good for US banks.  The deal has not been signed, and more details will be released in the weeks ahead.

Dec. 13, 2019 – China and the U.S. announced Friday they have reached a phase one trade deal including some tariff relief, increased agricultural purchases and structural change to intellectual property and technology issues.

Some details of the partial accord, which the world’s two largest economies will now move toward signing as they aim to rein in a boiling trade war, appeared murky. As Chinese officials briefed reporters on the details of the agreement Friday morning, President Donald Trump also announced terms of what he called an “amazing deal.”

Major U.S. stock indexes initially jumped following news of the deal but later gave up those gains.

The U.S. plans to scrap tariffs on Chinese goods in phases, a priority for Beijing, Vice Commerce Minister Wang Shouwen said. However, Wang did not detail when exactly the U.S. would roll back duties.

Trump later said his administration would cancel its next round of tariffs on Chinese goods set to take effect Sunday. In tweets, he added that the White House would leave 25% tariffs on $250 billion in imports in place while cutting existing duties on another $120 billion in products to 7.5%.

China will also consider canceling retaliatory tariffs set for Sunday, according to Vice Finance Minister Liao Min.

Beijing will increase agricultural purchases significantly, Vice Minister of Agriculture and Rural Affairs Han Jun said, though he did not specify by how much. Trump has insisted that China buy more American crops as part of a deal and cheered the commitment in his tweets.

Both sides said they would move to make changes related to intellectual property, technology transfers and financial services. The White House has repeatedly said it wants to address those issues as Trump pushes to crack down on what he calls Chinese trade abuses.

https://www.cnbc.com/2019/12/13/china-says-it-has-agreed-to-us-trade-deal-text-indicates-next-step-is-signing.html

In England, Boris Johnson won a convincing victory as Prime Minister, and he stated that England will leave the EU by the end of January.  His opponent, Jeremy Corbin, was viewed as too liberal and his policies too risky.  Would Bernie Sanders and Elizabeth Warren face a similar fate in a US nationwide election?

Technical Analysis:

The market ended the week up 1%, setting a new all-time high along the way.  The market did not surge on news of the trade deal, so it was probably priced in during the rally since early October.

Technically, there is not much change from last week, or the last few weeks.  The market is near overbought on the RSI, momentum shown by MACD is flat, price action is positive.  The concern is that the price action is already at the top of the channel we’ve been in and with the market being overbought, it is ripe for a correction.  We are entering the second half of December, which is noted for the “Santa Clause Rally” effect, where stocks rise into the end of the year (but not always, last year was a disaster).

2019 12 14

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

What am I doing?  Not much, I’m waiting for a correction before putting money back to work.  I own some stocks and sold covered calls against most of them.  Some will be called away and I will keep some.  For those that are called away, I will try to buy them back at lower prices in the next correction.  For those I keep, I will probably sell a new covered call at a higher strike price.

The only problem selling covered calls is that you do cap your profit at the strike price of the call.  Make sure you would be happy selling the stock at that price.  Usually I accept a smaller option premium and set the strike price of the option higher.

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

Going Nowhere

I update each Saturday with my view of the stock market for the next few weeks (if occupied with family or travel, rarely I am a day or two late, just check back).  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:

The ISM manufacturing index sank to 48.1% in November from 48.3% in October, the fourth straight sub-50 reading. Readings below 50% indicate business conditions are getting worse.  The ISM non-manufacturing index fell to 53.9% in November from 54.7%, slowing but still showing growth (the service economy is now much larger than the manufacturing economy).  Factory orders rose 0.3% in October, an OK number.  The economy produced a robust 266,000 new jobs in November and the unemployment rate returned to a 50-year low of 3.5% (about 50,000 GM workers returned to work, inflating the report, but in spite of that it is a strong report).

The manufacturing economy is weak, the service economy looks strong, and employment is good.  On balance it looks like a stable slow growth economy, a good thing.  There are a couple of cracks to watch out for if they worsen down the road.

Geo-Political:

There was a NATO Summit in London last week, and while all leaders appear committed to the alliance, there is more strife there than in the past.  As I see it, that is not good for the US.

One major bone of contention is the US withdrawal from the Iran Nuclear Deal, without consultation with our NATO allies, and without Iran violating any of the terms of the deal.  The US just dishonored its commitment, it re-imposed US sanctions on Iran, and threatened to impose secondary sanctions on any nation trading with Iran (except for humanitarian goods).  The US is able to enforce secondary sanctions because so much international commerce is conducted in US dollars, and those trades ultimately are settled in the US via a private banking system called CHIPS, or by a Federal Reserve clearing system.

The US has much of the world under control of its banking system.  It knows much of what is transpiring because it can see the flow of payments.  Europe is powerless to resist.  As long as everyone feels the US does not abuse its position of power, there is no need to do anything else.  Europe seems to think the US is abusing the power it has, and it is looking for a way to regain its financial independence, from what they perceive as an abusive overseer.  The effort started a year ago when the US withdrew from the Iran Nuclear deal.

Europe is attempting to set up its own payment clearing system, outside of the US dollar denominated system.

Nov. 29, 2019 – Six European nations say they will join a fledgling financial system to bypass U.S. sanctions against Iran, challenging U.S. President Donald Trump days before he meets leaders of some of those nations in London.

In a joint statement Friday, Belgium, Denmark, Finland, the Netherlands, Norway and Sweden said they are in the process of become shareholders of the Instrument in Support of Trade Exchanges (INSTEX). Britain, France and Germany launched INSTEX in January to enable companies to trade with Iran without using U.S. dollars or going through U.S. banks, thereby shielding such companies from U.S. sanctions.

Trump has been toughening U.S. sanctions against Iran since November 2018 as part of a campaign of “maximum pressure” on Tehran to reach a new deal to stop its perceived malign behaviors. Earlier last year, he pulled the U.S. out of a 2015 deal in which world powers eased sanctions on Iran in return for curbs on the Iranian nuclear program. Trump said that deal was not tough enough on Tehran.

The Trump administration has warned other nations not to engage in various transactions with Iran or face secondary U.S. sanctions. But the 28-member European Union has pledged to do what is necessary to uphold its nuclear deal commitments, seeing the deal as a major contributor to global nonproliferation and Mideast stability.

In their joint statement, the six European nations said: “In light of the continuous European support for the agreement and the ongoing efforts to implement the economic part of it and to facilitate legitimate trade between Europe and Iran, we are now in the process of becoming shareholders of INSTEX, subject to completion of national procedures.”

https://www.voanews.com/middle-east/voa-news-iran/more-european-nations-join-effort-bypass-us-sanctions-iran

Trump has unilaterally driven a wedge between the US and the EU, with overlap with our NATO allies.  Europe questions how good of an ally the US is, when it takes unilateral action that involves them, without any consultation with them.  The result is this action expressing their desire to be independent of unilateral US dictates.

The rest of the world is OK with the US controlling the financial payments system, as long as we live up to international commitments we have made, act consultatively with our allies, and act reasonably.  So, now we have the seeds of a rebellion.  Europe will not allow the US to control all of the payments since they do not want to be controlled by an unreliable partner who breaks its commitments without consultation with our partners.

Will this alternate payment system succeed?  I don’t know, the EU is still a fairly fractious lot.  If it succeeds as wildly as the Euro (sarcasm alert!), it will fail.  But, the member nations may find enough common interest to pull this off, and asserting their financial independence from an unreliable US partner just may do it.

What has this got to do with the stock market?  This week, absolutely nothing.  But in the long run, if we alienate Europe bad enough and they succeed in setting up an alternate payment system for themselves, the US will have given up a measure of control of international commerce, potentially for no gain.  That will ultimately weaken the US.  Allowing a healthy distrust of the US by our trading partners can inject bias into our dealings and cause former partners to choose to do business with other sources, just to weaken the US and limit the amount of control we have over their affairs.  We already see it altering the course of foreign affairs.

I defy you to write a better script for Russia to extend its influence in the world, by weakening the US in ways that are not even apparent to our US citizens.

Trust is an extremely important commodity in business and foreign affairs.  It is only earned, never given.  A small rupture of that trust can take a long time of observation in order to overcome and repair.

PS:  China and Russia are working on an alternative system also.

Oct. 29, 2019 – An alternative to the Society for Worldwide Interbank Financial Telecommunication (SWIFT) global payment system, which is being drawn up by China, Russia and India, has a fair chance to end the dominance of the US dollar in the global financial sector, Chinese analysts said Tuesday.

Russian news outlet RT reported Monday that China, Russia and India are working on an alternative to SWIFT that would connect an eye-catching 3 billion people in the three BRICS emerging economies.

Huang Qifan, a former mayor of Southwest China’s Chongqing Municipality with a reputation of being a financial expert, on Monday openly blasted SWIFT, saying that it – along with the Clearing House Interbank Payments System (CHIPS) – is being degraded into a financial tool of US long-arm jurisdiction and global hegemony.

SWIFT is an interbank, nonprofit cooperative organization that provides transaction clearance services for its member banks. SWIFT takes strictly neutral positions. However, the US has great influence on the organization, to the point that it is capable of controlling SWIFT, industry observers said.

CHIPS is an important component of SWIFT, as well as the key method for converting payments into the US dollar, processing transactions, and making electronic payment transfers and clearances. CHIPS deals with cash flows, while SWIFT is for information communication.

Huang is seen as the architect of the miracle of Southwest China’s Chongqing, the nation’s fourth provincial-level municipality, which had a record run of double-digit economic growth. He said at the Shanghai Bund Summit that SWIFT is out of date, inefficient and extremely expensive.

According to RT, Russia, India, and China aim to connect their financial messaging systems to bypass SWIFT.

http://www.globaltimes.cn/content/1168382.shtml

Technical Analysis:

The market corrected a little early in the week on bad news about the China trade negotiations, then recovered later in the week on positive news about them.  We don’t know what is really going on, so I don’t know why the govt. officials try to say anything.  It all looks premature and therefore like senseless noise at present.

Technically the market remains in good shape.  RSI at the top of the chart is in high-neutral at 63 and rising, and momentum shown by MACD at the bottom of the chart is moving sideways in neutral mode.  The price action is good, but we are still living near the top of the channel we have been in for the last half of the year, so we remain vulnerable to a correction.

Let’s talk about earnings.  That is what the stock market should trade on, earnings, or profits.  Q3 came in flat, and Q4 is projected by Factset to be flat.  In fact, calendar year 2019 has been flat all year.  Looking ahead to 2020, Q1 is projected at +5%, Q2 at +7% and all of calendar 2020 at +10%, meaning the second half of 2020 would have to come in strong indeed, like +15% for two quarters.  Will that happen?  Factset changes their estimates as the time gets closer, based on feedback from the companies themselves, so it certainly could change.  What is the thesis by which Factset projects such strong earnings growth next year?  It is not stated, but with the labor market in a strong position, the theory could be that consumers are flush with cash and willing to spend and carry the economy.  We’ll see.

2019 12 07

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

What am I doing?  Not much.  I sold into strength and hold a lot of cash.  The next big move in the stock market will probably be driven by an announcement on the China trade deal.  I expect an initial pop higher, then some pullback as folks realize it is not much of a deal (I have been known to be wrong though).  It appears right now the market just wants to go up until there is a reason to correct.  In a situation like that, I will usually pick a sector or two and start buying small amounts on a daily basis (like the financials, XLF), and keep a close “trailing stop loss %” order under the position.  That gives me a little participation, without much risk.  We’re in the time of the year where we get a “Santa Claus Rally” into year end, sometimes, since at this time of year the analysts estimates for next year are usually at their highest because they have not been marked down.

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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