Thursday, September 15, 2011

Before the Bell 9/15/11


The Market

Technical

The indices (DJIA 11246, DJIA 1188) had another good day, closing within their intermediate term trading ranges (10725-12919, 1101-1372). The S&P finished well above the lower boundary of its short term up trend (1151), while the DJIA closed right on the lower boundary of its short term up trend (11246). The latter solves a couple of problems, at least in the short term: (1) under our time and distance discipline, the DJIA’s recent break of its short term up trend is now negated and hence (2) the Averages are no longer out of sync.

That said, prices had been much higher in the early afternoon and were sinking fast into the close which, in turn, raises the possibility that if the Market had been open another 30 minutes, the DJIA would not have finished the day within its short term up trend. So for the sake of caution, I am waiting one more day before calling an ‘all clear’.

Volume was flat on the day; breadth continued to improve. The VIX fell but remains at an elevated level within its current trading range.


GLD slipped and again closed below the lower boundary of its short term up trend. That re-starts our time and distance discipline clock on a break of trend. Our Portfolios are taking no action on this position.

Bottom line: while the pin action was positive yesterday bringing the DJIA back in sync with the S&P and negating the damage of its recent break below the lower boundary of its short term up trend, the final hour of trading gives me pause. So I am waiting one more day before our Portfolios resume nibbling.

Fundamental

Lots of economic data released yesterday: weekly retail sales were disappointing though they still look good year over year; mortgage and purchase applications were quite strong, business inventories and sales were positive and August producer prices were not as ‘hot’ as expected. Solidly mixed numbers like this do provide some comfort that the economy is not rolling over.

That said, all eyes remain focused Europe and there was lots going on. Initially, stocks sold off on a rumor that the Austrian parliament had voted down any participation by that country in a Greek bail out. Later, it was established that the vote had been to simple delay the vote. That took pressure off prices; then we got two developments that investors interpreted positively:

(1) in an interview at an investment symposium, Geithner stated that there was not way that the EU debt crisis would devolve into another ‘Lehman Bros’.

Here is the Geithner interview:
http://video.cnbc.com/gallery/?video=3000045521

(2) following a conference call, Merkel, Sarkozy and Papandreou announced that Greece remains an integral part of the EU and that Greece commits to implementing the necessary austerity measure to return to solvency. Implicit in this statement is that the EU would provide the necessary near term financing that Greece needs to remain liquid as it attempts to correct its solvency problems--the operative words, as emphasized, being ‘attempts to correct’.

That all sounds great but Greece is simply too far in debt to make full repayment of that debt economically or politically feasible. So don’t get too optimistic. It is still likely to go toes up; it just won’t happen for a while. But there may be the good news scenario. Indeed, it appears that the potential endgame has been scheduled for the late fall: following a vote [hopefully] of all the EU participants approving expansion of the European stability fund [EFSF] that will [perhaps along with what may be a newly created Eurobond instrument] possess TARP-like qualities allowing it to deal with the liquidity issues of Greece [and perhaps other associated PIIGS] and the likely losses in the sovereign debt on member bank balance sheets.

Without getting jiggy with it, this does have the potential to be the solution that fits the assumptions in our Model: Greece goes bankrupt but on a current budget account basis it is covering its expenses; its debts are ‘restructured’ but the sovereign debt losses get covered by an EU agency infusion of liquidity in to the banking system.

Right now, this is just the ‘wet dream’ scenario; but at least the eurocrats appear to have a plan. How likely is it? No clue; but if necessity is indeed the mother of invention, then it may have a chance.

Bottom line: while the Greece relief rally continues, it would be irresponsibly na├»ve to assume that it won’t default on/restructure its debt or that as a result there won’t be some balance sheet destruction in the EU banking system. However, as I have repeatedly noted, I believe that much of this is in the price of stocks. What is not in the price of stocks is (1) that there may be a consensus slowly developing on how to deal with and reform the fiscally promiscuous elements in the EU and the financial fallout from said promiscuity, or (2) the inability of the Three Blind Mice to do anything but kick the can down the road until the EU runs off a cliff. The latter remains the biggest risk to our current forecast; the former, even if we are lucky enough for it to occur, will still present us with some scary headlines that will keep volatility high. So I remain cautious, but I believe that enough risk is in current prices that I am willing to commit funds to stocks that are in their Buy Value Ranges.

The price of Chinese aid (medium):
http://www.spiegel.de/international/world/0,1518,786287,00.html

How shadow banking transactions fit into the high risk scenario (medium):
http://www.zerohedge.com/news/shadow-banking-contagion-approaches-european-banks-sign-private-repo-agreements-us-counterparts