Friday, September 16, 2011

Before the Bell and Subscriber Alert (9-16)

The Market


The Averages (DJIA 11433, S&P 1209) moved up again yesterday, remaining well within their respective intermediate term trading ranges (10725-12919, 1101-1372) and above the lower boundary of their short term up trends (11250, 1152).

Volume fell; breadth continued to improve. While the VIX fell again, it still closed in the upper zone of its current trading range.

GLD got whacked, again breaking the lower boundary of its short term up trend but closing right on a clearly defined initial support level. If this holds, our Portfolios will do nothing; if GLD breaks this level, they will likely lighten up.

Bottom line: yesterday’s pin action was positive and our Portfolios will put some money to work. That said, it took the DJIA long enough to reconfirm the up trend that stocks are a little ahead of themselves, technically speaking. Therefore, our purchases will be relatively small.



Yesterday was a huge day for economic data: a hotter than anticipated CPI, lousy employment numbers, disappointing New York and Philadelphia Fed business indices accompanied by one positive stat--August industrial production which was stronger than expected.

These figures had investors bummed out initially; but then as has been the case for the last week or so, news out of Europe took over the headlines. In this case, the ECB announced that with the help of other major central banks (read: the Fed) it would provide a (dollar funding) liquidity facility for the EU financial system (in other words, it provides dollars to meet dollar denominated funding agreements for banks that are having problems borrowing dollars). That eased investor concerns over the short term health of the major banks. To be clear, while it will assist banks meet dollar denominated liquidity requirements, it did nothing correct the longer term problem of their solvency.

Nevertheless, on a short term basis, liquidity is an easier problem to address than solvency. In this case, the ECB/Fed/global monetary authorities are basically saying that they are not going to allow the short term funding needs of the EU banks push them into bankruptcy/restructuring. At the very least this means that we have global leaders all sitting at the same table and acting in unison. At the most, this is another tiny step in the ‘wet dream’ scenario that I put forth in yesterday’s Morning Call: provide sufficient liquidity long enough (until late this fall) for the EU to enact measures (EFSF and a potential Eurobond) that when coupled with capital raises by the banks will allow an orderly solution (i.e. a managed bankruptcy/restructuring for the worse cases and the improvement in bank balance sheets for the less egregious profligates) to the solvency problem ASSUMING (1) the individual countries get their fiscal house in order and (2) all EU member countries can actually enact the proposed rescue plan (EFSF, Eurobond).

To be sure that is a tall order, may in fact never happen and the EU eventually runs off a cliff. But yesterday, it was a gleam in investors’ eyes and that helped push stock prices higher. Understand that I am not saying that this ‘happy’ scenario will occur; I am not even saying that there are at least even odds that it will occur. But the actions of the EU leadership over the last few days suggests that there is at least more than a zero probability that it will happen and that is better than a sharp stick in the eye.

Bottom line (straight from yesterday’s Morning Call): ‘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 current strategy of a bottom fisher (medium):

For the bears amongst you (medium):

Subscriber Alert

I want to take advantage of the recent Market strength to reduce the size of several of our foreign ETF’s that (1) got whacked in the recent decline and (2) have not recovered presumably as a result of the rising dollar. If the EU crisis continues to drive investors into the US dollar as a safe haven, then ETF’s with exposure to EU economic malaise with likely remain under pressure. Therefore, at the Market open this morning, our Portfolios are reducing the Wisdom Tree Emerging Markets ETF (DEM) and the ishares EAFI Growth Index Fund (EFG) to one half positions.

In addition, small additions will be made to the following holdings in the designated Portfolios.

In the Dividend Growth Portfolio: Federated Investors (FII), Charles Schwab (SCHW), Nucor (NUE), Emerson Electric (EMR) and Paychex (PAYX).

In the High Yield Portfolio: 3M (MMM), Federated Investors (FII), Mine Safety Appliances (MSA), Emerson Electric (EMR)

In the Aggressive Growth Portfolio: Blackrock (BLK), Staples (SPLS), Reliance Steel (RS).

Note: the net affect of these trades will actually raise our Portfolios’ cash position.