Tuesday, November 08, 2011

The Morning Call Don't forget the 'super committee'


The Market
Technical


The indices (DJIA 12068, S&P 1261) closed within both their intermediate term trading ranges (10725-12919, 1101-1372) and their short term up trends (11419-12440, 1216-1329).

Volume was light; breadth improved modestly. The VIX fell but remains in the upper zone of its trading range (negative for stocks).

GLD had a smokin’ day, so it is still in its intermediate term up trend.
http://www.zerohedge.com/news/china-takes-advantage-september-gold-price-drop-imports-record-amount-gold

Bottom line: technically speaking, the bias remains to the up side, with very little visible resistance between present levels and 12919, 1372 save the 200 day moving average (circa 1275).

Great long term chart showing four secular bear markets (including the one we are in):
http://www.ritholtz.com/blog/2011/11/4-major-secular-bear-markets-1900-2011/


Fundamental

No economic news yesterday. But investors still had Europe to focus on; and we got a little good news there: (1) as I noted in yesterday’s Morning Call, it appears that the Greeks are putting the while disruptive bail out ‘referendum’ issue behind them. News is that Papandreou will resign and the new government will approve the EU bail out, (2) the EU finance ministers are attempting to ‘fast track’ the increase and implementation of the EFSF bail out fund, and (3) an ECB official was quoted as saying that Europe will have its sovereign debt problems solved within two years [what is he smoking?]. Ignoring the latter, these are still positive developments.

Unfortunately, Europe still has multiple problems; and the latest and by far the biggest, is Italy. Universal consensus is that before any austerity plan can be implemented, PM Berlusconi has to go simply because he has to date been so ineffective in delivering the necessary austerity measures needed to warrant support from the EU/ECB. This is Act II of the European Farce; and if it goes like Act I (Greece), then we are likely in for some more volatility.

The problem with Berlusconi (short):
http://www.cnbc.com/id/45191575

And the problem for Italy (medium):
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8873041/Europes-rescue-fiasco-leaves-Italy-defenceless.html

P.S. overnight the Japanese bought 300 million euros of EFSF bonds and the world awaits the budget vote in Italy.

In the meantime, our ‘super committee’ on budget reform has been hard at work finding nothing on which to compromise. Remember, they are supposed to come up with measures to reduce the deficit by $1.2 trillion by the 23rd of November; and if they don’t, there is a ‘trigger’ that automatically makes the cuts, one half from entitlement, one half from defense.

Well, mates, check your calendar because the 23rd is drawing nigh and all reports are that this group hasn’t done diddily. Just to make this more suspenseful, the congressional budget office would like the results a week ahead of their presentation to the electorate, so that it can ‘score’ it--which is DC speak for rating its bulls**t factor. That would put the deadline a week from today.

The only question now is, will this group of geniuses figure a way to ‘un-trigger’ the trigger in order to remain firmly on the path to fiscal irresponsibility?

Bottom line: investor reactions to EU events suggest that much of the potential worst case has been discounted. Whether or not the worst case is in stock prices, I think remains an issue. However, I can buy the scenario that the eurocrats are far enough along in the current rendition of ‘kicking the can down the road’ that they are going to be able to hold the EU together for another six to twelve months (the good news). Then, we will be back to ‘all bets are off’ (the bad news).

Our own political class appears to be preparing to the snatch the reins of fiscal mismanagement from their European counterparts. So far, investors have either been totally ignoring the aforementioned 11/23 deadline or are placing considerable faith that our elected representatives will do the right thing. This seeming complacency makes me especially nervous given the Markets’ reaction the last time these yahoos tried their hand at budget compromise (the August lows).

Net, net, the current flow of events suggests that prices can go higher. However, (1) stocks are in a trading range and will be until they are not; so there is no need to chase prices from these levels and (2) our Portfolios have Bought shares in all the stocks on our Buy Lists; therefore, there is nothing to Buy even if I wanted to chase prices up.

The latest from John Hussman (medium):
http://hussmanfunds.com/wmc/wmc111107.htm

Three reasons to be positive on stocks (short):
http://www.thereformedbroker.com/2011/11/07/dougie-three-reasons-the-bullish-stars-are-aligned/

Kyle Bass turning bullish on housing (short)?:
http://www.zerohedge.com/news/did-kyle-bass-turn-bullish-housing-and-does-it-mean-substantial-upside-mortgage-insurers