Thursday, October 20, 2011

Morning Call Small wonder investors are confused + Subscriber Alert

The Market


The indices (DJIA 11504, S&P 1209) sold off yesterday, closing for a second time below the 11548, 1219 ‘higher low’ resistance level but remaining well within their intermediate term trading ranges (10725-12919, 1101-1372). The bulls and bears are clearly duking it out at the 11548, 1219 level.

Volume decline (holding to the very recent and very positive trend of low volume on down days and higher volume on up days); breadth was off, though the flow of funds indicator continues to demonstrate strength. The VIX spike again (9%) leaving it within the upper zone of its current trading range--a negative for stocks.

GLD sold off and finished the day close to the lower boundary of its intermediate term up trend.

Bottom line: battle lines appear to have been drawn in the vicinity of the 11548, 1219 level. If the bulls win, the Market will likely take out the 11719, 1230 August 2011 level; and as I have noted there is very little resistance between 11719, 1230 and 12919, 1372. If the bears win, equities will remain in a trading range.



The economic data yesterday was basically mixed though it was a bit confusing: weekly mortgage applications were down substantially but that was largely a function of a shortened work week due to the Columbus Day holiday; September CPI was a bit ‘hot’ but the core number came in below expectations; September housing starts were very strong though most of this gain came in multifamily construction, not single family homes; building permits were disappointing.

Investors were unimpressed with the data as they were with some poor over night news: Apple missed its earnings expectations; Moody’s down graded Spanish debt; the Greeks were rioting; and the German bond auction was a dud.

I thought it a positive that the combination of the above news did little to move prices. Stocks traded flat until early afternoon; then two things happened: (1) the Fed released its latest Beige Book [an every six weeks anecdotal look at the economy]; and the language was not reflective of the more recent upbeat consensus [hope?] that the economy might avoid a recession. That upset investors and stock prices started down. (2) Sarkozy was quoted as saying that France and Germany were at an impasse over EFSF [bail out fund]; that led to an acceleration to the downside.

The EU infection spreads (short):

Over night the Greek parliament approved the required austerity measures in its first vote (it takes two) and both Spain and France had poorly received bond auctions.

Bottom line: the news out of Europe is confusing and often contradictory because, despite their best efforts, the eurocrats seem confused and often contradict each other. How one makes an investment decision when the ‘known unknown’ (how the sovereign debt problem and its impact the EU financial system’s balance sheet gets resolved) is not only opaque but hampered by persistent disinformation brought on by dramatically differing political perspectives, is beyond me.

I have no doubt that these guys are trying and that they are making some kind of progress. I am just unsure that they can come to a consensus on a solution before the Markets impose their own--and this is the crux of all but the most risk adverse investors’ dilemma right now. How do you place a bet in such an uncertain environment when the outcome is so binary and the consequences so extreme?

In the end, I believe that the electorate will throw out the group of clowns that now govern us, that US business will continue to do what it does best (manage successful, profitable business), that the stocks of growing companies that pay a dividend and raise that dividend on a consistent basis are a better bet long term than any piece of government paper in existence right now, so I have to have a big part of my portfolio invested in those companies. However, given the prevailing schizophrenia, cash is good because it allows me to buy the stocks of those growing companies at attractive prices if uncertainty takes them lower. Finally, I think that the western world’s race to currency debasement argues for owning gold and the stocks of companies headquartered in countries where fiscal and monetary responsibility is still considered a virtue.

As of last night, the current ‘beat’ rate among reporting S&P companies is 73%.

Subscriber Alert

The stock prices of several of holdings have traded above the upper boundary of their Buy Value Range. Accordingly, the following stocks are being Removed from their respective Buy List; however, no shares will be Sold.

In the Dividend Growth Buy List: Sigma Aldrich (SIAL), CR Bard (BCR).

In the High Yield Buy List: Kinder Morgan Energy Ptrs (KMP).

In the Aggressive Growth Buy List: CH Robinson Worldwide, (CHRW), Sigma Aldrich (SIAL).