Wednesday, September 07, 2011

Before the Bell 9/7/11 Subscriber Alert


After another roller coaster day, the Averages (DJIA 11139, S&P 1165) remain well within their intermediate term trading range. The S&P clearly didn’t hold the 1172 level. However, both it and the DJIA fell, traded slightly through the rising lower boundary of their short term up trends (11065, 1138) and rallied--a big show of strength for the lower boundaries of the current short term up trend.

Volume rose a bit; breadth weakened but not by much. The VIX rose 9% but closed well below the upper boundary of its intermediate term trading range which is modestly positive for stocks.

GLD price was off fractionally which was not so good given the Swiss action to tie their currency to the euro (this action eliminates the Swiss franc as a safe haven from inflation/instability which is also a function of gold) and the continuing political turmoil in Europe. On the other hand, GLD price is up 10% in the last seven trading sessions; so at some point, it has to rest.

Bottom line: yesterday was another one of those text book flushes, challenging a support level and then rallying with strength. That doesn’t mean stocks don’t remain in a trading range or that there won’t be plenty more volatility in both directions. It does mean that our Portfolios will nibble some more at the Market open this morning.

Here is another technical opinion (medium):



The good news yesterday was the ISM nonmanufacturing (service) index which came in much stronger than expected--again reflecting that the business sector of the economy continues to carry the load. However, investors apparently didn’t care as Friday’s news events (the poor jobs number and the FHFA suit against the major banks) were still being digested and European woes dominated the media air time.

(1) the jobs report was clearly negative. I don’t think it sufficient to warrant altering our forecast. That said, there has been enough accumulated lousy data that I have to acknowledge that the risks of a double dip are growing.

Here is an early look at Obama’s jobs speech (medium):

The FHFA lawsuit is being decried by a lot of Market observers; but these guys [bankers] have skirted taking responsibility for some pretty grievous actions that contributed mightily to the 2009 recession and the current economic malaise. Plus to date, TARP and a Fed policy, that basically allowed them to borrow at 0% cost, reinvest the money in US Treasuries, make the spread and pay themselves healthy bonuses, bailed them out of those egregious policies. To me, they have not been held to account and it is about time they were.

(2) as noted above, the Swiss linked their currency [franc] to the euro, effectively joining the money printing/currency devaluation crowd. While I can understand their action in the face of huge inflows into the Swiss franc [driving up its value and raising the price of all Swiss produced goods internationally], I was sad to see one of the few last holdouts among the strong currency countries fold. As I also noted above, that should be a shot in the arm for gold in that it removes a source of competition as a ‘safe haven’ investment. While we got little sign of that yesterday, it will likely have a positive impact on GLD going forward,

(3) the Italian senate met to consider austerity measures while the unions took to the street in a kind of Greece redux. After first demonstrating that apparently the Italian’s definition of austerity is very similar to the Greek’s and watching Italian bonds crater, the government added some additional measures to persuade the Markets [and Germans] that they were indeed serious. Now [a] it has to pass both chambers of the Italian parliament and [b] meet acceptance from the Markets and the Germans. Stay tuned.

(4) meanwhile Germany moved ever closer to cutting off any support for additional bailout money in the absence of the German definition of austerity. Today the German courts ruled that the 2010 Greek [#1] bailout was constitutional but stipulated that any succeeding measures must be approved by the German parliament’s budget committee prior to German participation; thus keeping the uncertainty over the future [including the current one] of EU bailouts alive. Adding to the lack of confidence were statements from two German officials suggesting that either the PIIGS had to enact the necessary austerity measures or there would be no bail out. In other words, the safety net that global investors [and PIIGS politicians/electorate] had hoped would be forth coming, isn’t. Of course, this is only two German officials but judging by the pin action, it did nothing to assuage investor fears of multiple sovereign defaults/restructurings.

And this (short):

And (short):

Bottom line: stocks are undervalued as calculated by our Valuation Model. True, the economy is facing headwinds; but even if I have to revise our forecast, our growth assumptions are so modest that the bulk of any slow down is already factored into our Model. The bigger risk to valuations rests with the EU liquidity/solvency difficulties and the seeming inability/unwillingness of their political class to properly address them. Certainly, the worse case is not reflected in stocks priced at 11-12% below Fair Value. The question is the probability of the worse case. I don’t know the answer but neither does anyone else--and that likely means that in an uncertain period like now, there is more bad news discounted than widely believed. So I am willing to keep making small bets (averaging in) when the Market gets hit.

The latest from Mohamed El Erian (medium):

The EU sovereign debt crisis--Part II (medium):

The latest from John Mauldin (long):

US equity returns and a slow/no growth economy (short):

The dollar and stocks (short):

Subscriber Alert

At the Market open, the following additions to holdings will be made:

In the Dividend Growth Portfolio: South Jersey Industries (SJI) and Medtronics (MDT)

In the High Yield Portfolio: Boeing (BA)

In the Aggressive Growth Portfolio: Walgreen (WAG) and Lowe’s (LOW)