Thursday, October 27, 2011

The Morning Call Houston, we have a deal (sort of)

The Market


The indices (DJIA 11869, S&P 1242) recovered yesterday, closing back above the 11719, 1230 former resistance level as well as within their intermediate term trading range.

Volume was up slightly; breadth improved considerably. The VIX fell 7% and finished the day right on the lower boundary of the upper zone of its current trading range; once again, as long as it remains in the area, it is negative for stocks.

A check of our internal indicator shows that in a Universe of 165 stocks, 72 are trading above their comparable 11719, 1230 level, 56 are not and 37 are too close to call. This is a little weaker than Monday’s reading (77, 39, 49).

GLD continued to move up and remains within its intermediate term up trend.

Bottom line: the technical picture remains a little foggy. While yesterday’s recovery by the Averages suggests that Tuesday’s pin action was just a momentary retreat from an over bought condition, the sluggishness of our internal indicator continues to make me uneasy; so I await stronger confirmation until I commit more cash.



The economic news yesterday was once again up beat: weekly mortgage and purchase applications were strong; September durable goods were not as bad as anticipated; and September new home sales were much better than forecast.

In addition, optimism returned to earnings season--the highlight being Boeing’s better than expected results.

The news out of Europe improved:

(1) the German parliament approved the leveraging of the EFSF [bail out] fund,

(2) China indicated its willingness to buy some of the EFSF bonds [while any money from anyone is welcome news, the Chinese are only buying the EFSF securities which are AAA rated and not the debt of individual countries. So they are not intending to take any risk; but who could blame them?],

(3) following their meeting, the EU leaders announced that they were working toward [a] imposing a 50%+ haircut on Greek bonds, [b] forcing banks to raise minimum capital levels from 5% to 9% and further stipulating that the banks must first try to raise that capital in the private market, then if unsuccessful to obtain funding from their country’s central bank and if unsuccessful, then and only then could they approach the EFSF, [c] agreeing on the magnitude of leverage in the EFSF.

P.S. Over night, it appears that the EU leadership have crafted a deal (details):

Why the Greek haircut may not be so great:

Why the EFSF portion of the plan won’t work either:

Clearly, this is not a long term fix; think Japan 2.0 and gold (medium):

On the bank capital requirements (medium):

Bottom line: the data continue to point away from recession, corporate earnings are once again beating estimates, the outlook for emerging economies is improving and seem to be pointing a better ex-Europe global economy and China and India have begun easing monetary policy. All this fits our forecast and based on that forecast, stocks are modestly undervalued.

The fly in the ointment is Europe. Both sovereign and financial institution balance sheets continue to deteriorate; and unless the political class can get ahead of this process and somehow alter the fiscal policies that are causing this mounting crisis, the EU is totally f**ked.

The good news is that the eurocrats have recognized that the situation is sufficiently urgent that it is likely that measures will be adopted that at the very least will paper over the underlying deficiencies of their economic model for the short term. The bad news is that longer term though Europe will likely be a drag on the global (US) economic system (Japan 2.0); and, all other things being equal, this will necessitate a lowering of our estimate of the long term secular growth rate of the US economy.

However, there is a way out of this for the US that doesn’t entail bailing out Europe and its banking system; and that is, to kick out a sufficient number of the parasites now inhabiting Washington, so that a new class can correct the prevailing economic/social agenda that has led to an overtaxed, over regulated economy burdened by a profligate, economically ignorant political and bureaucratic class. However, until that happens, the economic growth rate of the US will be sub par and inflationary pressures will grow.

That in turn means that the Fair Value for stocks will make slow, uneven progress and that we need to stick closely to our Price Disciplines, i.e. Buying only those stocks in their Buy Value Range, Selling stocks that enter their Sell Half Range and maintaining tight Stop Losses in periods of high volatility.

The pessimist’s view of the euro crisis (medium):

Subscriber Alert

The stock price of Phillip Morris (PM-$70) has traded above the upper boundary of its Buy Value Range. Accordingly, it is being Removed from the Dividend Growth and High Yield Buy Lists. Both Portfolios will continue to Hold this stock.

The stock price of CH Robinson (CHRW-$68) has traded below the upper boundary of its Buy Value Range. Therefore, it is being Added to the Aggressive Growth Buy List. The Aggressive Growth Portfolio already owns a full position in this stock, so no additional shares will be Bought.