Wednesday, October 26, 2011

The Morning Call Eurocrats Continue to Pound Their Pud

The Market


The indices (DJIA 11706, S&P 1229) suffered some serious whackage yesterday. However, they remain well within their intermediate term trading range.

On the other hand, they closed right on the former 11719, 1230 resistance level. Under the rules of our time and distance discipline, since the 11719, 1230 break was confirmed, this shouldn’t be a matter of concern. However, given the compressed time frame in which a potential reversal may be taking place as well as the very weak confirmation of our internal indicator, it is a tough call here as to whether yesterday was just a decline from an over bought condition or the Friday/Monday spike was another head fake.

Volume was flat; breadth suffered some serious damage. The VIX jumped back into the upper zone of its current trading range. That remains a cloud over the Market.

Yesterday’s redeeming feature was our GLD position which experienced a very substantial increase in price.

Bottom line: the question is, does 11548/11719, 1219/1230 range remain a battle ground for the bulls and bears or was yesterday just a retreat from an over bought condition? This Market has been so volatile and so schizophrenic, I am not going to venture a guess. But I don’t need to because we will know soon enough.

50 day moving average spread (short):



Yesterday’s economic news was neutral to negative: weekly retail sales were mixed; the Case Shiller home price index was unchanged; the Conference Board’s October consumer confidence index was abysmal.

On top of that, earnings reports of some key economic players were disappointing, to wit, 3M, US Steel and Cummins Engine. To that, add Amazon which reported lousy profits after hours.

The cherry on top was the cancellation of the EU finance ministers’ meeting today which was interpreted as a negative for some sort of agreement on a solution to the EU debt crisis. There is still a summit meeting but expectations have been lowered considerably for any positive outcome. To make matters worse, the Italian government appears headed for a collapse.

Italian government near collapse (medium):

Here are more details of the Italian dilemma (medium):

And Brazil decides that throwing good money after bad is not a swell idea (medium):

Bottom line: the economic data doesn’t really bother me. The only matter of concern was the consumer confidence index; but the Conference Board’s numbers have been negative for the last two months when most other measures of economic activity have been trending better. I question whether there isn’t something wrong with one of their inputs--I just can’t see most other stats being wrong and it being right.

Similarly, unless yesterday marked a 180 degree change in the entire earnings season, one bad day of reports shouldn’t alter the outcome of the overall quarterly results.

On the other hand, the eurocrats continue to pound their pud--which of course, is the biggest risk to our forecast and the assumptions in our Valuation Model. That said, they are yakking about their debt crisis everyday which signifies some elementary recognition that they have a problem and something needs to be done. As I noted previously, that ‘something’ will likely be just enough to keep the EU from running falling off a cliff but not enough to truly deal with the underlying causes.

In the end, that solution will have a negative impact on US economic growth long term; but shorter term, it will at least take investor focus off of a dysfunctional EU and redirect it to what hopefully is an improving ex-Europe global economy.

Unless the eurocrats do something really stupid (which I can’t totally rule out), I think that the August/October lows are as bad as it is going to get; if they do anything that is equal to or better than half assed, then I think stocks can get back to Fair Value. In the meantime, QEIII or its equivalent is a rising possibility in multiple countries--one word, gold.