Wednesday, October 25, 2017

The Morning Call--How significant are those earnings beats?

The Morning Call

10/25/17

The Market
         
    Technical

The indices (DJIA 23441) exploded to the upside yesterday largely on the back of two stocks: CAT and MMM.  The S&P (2569) was also up but on a much smaller order of magnitude.  Volume was down, but still high; breadth improved.  Both remain above their 100 and 200 day moving averages and are in uptrends across all time frames. 

The VIX (11.2) was up 1%---a bit of an anomaly on a very strong Market day.  It remained below the upper boundary of its short term downtrend and its 200 day moving average (but it is close).  However, it is above the lower boundary of its long term trading range, above its 100 day moving average for the second day (if it remains there through the close today, it will revert to support) and continues to develop a very short term uptrend.  It still looks like the July low was the bottom.

The long Treasury was down, finishing below its 100 day moving average for the third day, reverting to resistance.  In addition, it traded right on its 200 day moving average (support) and remains above the lower boundaries of its short term trading range and its long term uptrend. 

The dollar rose, ending within in its short term downtrend and below 200 day moving average.   However, it closed above its 100 day moving average (if it remains there through the close on Thursday, it will revert to support). 


GLD declined, finishing above its 200 day moving average (support) and the lower boundary of a short term uptrend.  However, it ended right on its 100 day moving average.

 Bottom line: long term, the indices remain strong viz a viz their moving averages and uptrends across all timeframes. Short term, they are above the resistance level marked by their August highs, meaning that there is no resistance between current price levels and the upper boundaries of the Averages long term uptrends. 

One day of consolidation (Monday) hardly deserves to be called consolidation.  However, along with the big bounce in the Dow, it is evidence of just how strong the underlying momentum in the Market is.

Trading in UUP, GLD and TLT remains inconsistent, although yesterday’s the pin action pointed to higher rates.

I remain uncomfortable with the overall technical picture.
           
            For the bulls (short):

    Fundamental

       Headlines

            Yesterday’s economic data was mixed:  month to date retail chain store sales growth and the October Richmond Fed manufacturing index were below expectations while the October Markit flash manufacturing, services and composite PMI’s beat estimates.

            Overseas, the October Markit flash manufacturing, services and composite PMI’s were above projections.

            ***overnight, third quarter UK GDP growth was above forecasts as was October German business confidence.

            The headline of the day was the earnings beat of several industrial companies, the most significant of which were Caterpillar and 3M.  These two stocks accounted for a majority of the Dow’s gain and explain why the S&P and NASDAQ trailed. I speculated in yesterday’s Morning Call that these profit beats may indicate that the US economy is much better than our forecast reflects.  But on second thought, I had already raised our economic outlook based on an improved regulatory environment.  So maybe these better corporate results are simply starting to reflect that.  Certainly, a couple of upbeat earnings reports are not cause to raise our outlook again.

I should also note that most of these companies have a major international exposure; and I have been saying for some time that the lift off in the EU economy could at some point start effecting the US economy.  Again perhaps this factor along with a weaker dollar help explain the pickup in these industrial companies’ profits. 

To be clear, I am hypothesizing an explanation for these earnings surprises one day after they occurred.  There may be other factors that present themselves that I haven’t thought of.  So I could be dead wrong on all of this.  The good news is that (1) our Portfolios own the stocks of every one of those reporting company.  So if I am wrong, at least I am making money anyway and (2) with more information, the causes will become more obvious. 

            Tax reform was also a lead story with Trump meeting with senate leaders and McConnell stating in a post-meeting interview that congress will have a laser focus on tax reform by year end.  On the other hand:

            Plus the Donald’s constant twitter battles with various GOP leaders aren’t helping (medium):

            Bottom line: the big question is how much significance do we give to yesterday’s earnings surprise? Whether we are seeing the results of either international or domestic economic improvement or both, it is clear that strength exists somewhere.  Even though I forecast some improve in the US economy based on a more business friendly regulatory environment and suggested that the EU escaping the ‘muddle through’ scenario should be a positive for the US, there has been a  lack of any results to date, save for that very upbeat week in economic data several weeks ago.

Even if we assume that the aforementioned occurrences (one week of strong data and yesterday’s earnings report) are connected and reflect the economic improvement in our forecast, those positives are already in our Models. 

Perhaps the bigger question is, how will the central banks factor this data (again assuming they are connected and portray an improving economy) into their models, in particular as it relates to the speed and magnitude of monetary policy changes?  If their answer is to push forward with the unwind of QE, then the testing of my thesis draws ever closer: a return to monetary normalization will have little impact on the economy but will trigger the unwind of asset mispricing and misallocation.

            More on valuations (short):

            My thought for the day:   plan for the worst even if and as you hope for the best because  we discount future risk too much, so we need to be particularly skeptical about our various estimates of results and outcomes and ought to consider more carefully the consequences if  things don't turn out as well as we planned.  In addition, we should value the benefits of guarantees (when available) more than the benefits of potential. Accordingly, we should typically be concerned more about the costs of failure than about opportunity costs.
       Investing for Survival
           
            Tips for retirement.
           
    News on Stocks in Our Portfolios

Canadian National Railway (NYSE:CNI): Q3 EPS of C$1.31 misses by C$0.01.
Revenue of C$3.22B (+7.0% Y/Y) misses by C$60M.

AT&T (NYSE:T): Q3 EPS of $0.74 misses by $0.01.
Revenue of $39.67B (-3.0% Y/Y) misses by $450M.

General Dynamics (NYSE:GD): Q3 EPS of $2.52 beats by $0.08.
Revenue of $7.58B (-1.0% Y/Y) misses by $360M.

Boeing (NYSE:BA): Q3 EPS of $2.72 beats by $0.06.
Revenue of $24.3B (+1.7% Y/Y) beats by $380M.

Coca-Cola (NYSE:KO): Q3 EPS of $0.50 beats by $0.01.
Revenue of $9.08B (-14.6% Y/Y) beats by $240M.

Economics

   This Week’s Data

            Month to date retail chain store sales grew slower than in the prior week.

            The October Richmond Fed manufacturing index came in at 12 versus expectations of 20.

            The October Markit flash manufacturing PMI was reported at 54.5 versus estimates of 53.3; the services PMI was 55.9 versus forecasts of 55.2; the composite PMI was 55.7 versus consensus of 54.8.

            Weekly mortgage applications fell 4.6% while purchase applications were down 6.0%.

            September durable goods orders rose 2.2% versus consensus of +1.0%; ex transportation, the number was up 0.7% versus projections of up 0.5%.

   Other

            Chemical activity rises in October (short):

            Thoughts on the budget (medium):

            And the potential benefits of tax cuts (medium):

            To whom does the US government owe money (short):

Politics

  Domestic

The new populism (medium):

PC run amok (medium):

Overtreatment in the US healthcare system (medium):

  International War Against Radical Islam


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