Thursday, November 03, 2011

The Morning Call Time to Nibble


The Market

Technical


The indices (DJIA 11836, S&P 1237) recovered yesterday finishing (1) well within their respective intermediate term trading ranges [10725-12919, 1101-1372], (2) within their short term up trend [11445-12371, 1211-1320] and (3) above the 11719, 1230 resistance turned support level.

Volume declined, breadth improved. The VIX fell but remains elevated in the upper zone of its current trading range (negative for stocks).

GLD was up, keeping it within its intermediate term up trend.

Bottom line: stocks bounced pretty much where the text books said that they should (11719, 1230)--although you wouldn’t think it given the continuing turmoil in the fundamentals.

This rebound is the good news; the bad news is the VIX remains at lofty levels which suggests continuing above average risk to the downside. Nevertheless, I think that the technical picture is reasonably sound at this point and offers the opportunity to do some Buying.


Louise Yamada urges caution (short)
http://yhoo.it/vJx7dS


Fundamental

Headlines


There was only two minor datapoints yesterday and both were modestly encouraging: weekly mortgage and purchase applications were up, as was the ADP private employment survey. Not much here really.

Two other items which have been negatively impacting investor psychology of late, MF Global and Greece, did nothing to improve the mood:

The headlines continued to come fast and furious on MF Global as ever more government agencies began investigating the disaster. In addition, we got an initial handle on the potential losses in its customer accounts ($600 million) although the firm’s lawyers promised that it was there (yeah, right).

This article says the above loss could be $1.5 billion (medium):
http://www.zerohedge.com/news/mf-global-client-theft-estimate-doubled-15-billion

However, as I said yesterday, this bankruptcy remains small potatoes in the scheme of things. What worries me is the damage to investor confidence, if as it seems, that no one has learned the lessons of Bear Stearns and Lehman Bros--not our regulatory agencies, not the accounting firms and ratings agencies and perhaps not Wall Street itself, if Corzine is representative of the current mindset.
http://www.zerohedge.com/news/guest-post-mf-global-shines-light-monetarisms-incapacity-enhance-real-economy

The good news is that everyone involved in MF Global is going to lose money for having bet on an overleveraged investment in products that assumed moral hazard--which is what should have been happening in 2008/2009.
http://cafehayek.com/2011/11/breaking-news-creditors-lose-money-in-mf-global-collapse.html

As far as its direct affect on Your Money, (1) it is too small to impact macro economic activity and (2) I am not going to alter the discount factor in on Valuation Model right now; but in the worse case, the resulting lack of confidence could cause me to do so.

Then there is what has to be the biggest clusterf**k in the history of the world--(the ‘referendum’) will the Greeks vote to accept a gift from the rest of Europe and have to endure some very difficult austerity or will they reject the gift out of hand and nuke their economy? I haven’t a clue how this works out since I haven’t studied the decision making process of a moron. Optimists contend that reason will prevail and a solution will be found; and that might prove to be the case. But the Greeks had a solution (sort of) but rejected it in favor of a game a Russian roulette.

So now the EU leadership has cut Greece off from any bail out funds until the referendum is passed (?) (now slated of 12/4); and if it is rejected, then they will default on all their debts.

I say, f**k’em. Greece is wart on a goat’s ass. Two weeks after its demise, no one will notice (except the Greeks). The EU should withdraw their offer of assistance, let Greece fail; let all the other PIIGS watch Greece go up in flames and then make them the same offer and see if there is a stop watch fast enough to measure how quickly those PIIGS accept.

What is the right course for Papandreou (medium):
http://pragcap.com/the-greek-referendum-and-the-role-of-democracy

Unfortunately, Italy may overtake Greece on the way to self destruction (medium):
http://www.zerohedge.com/news/game-over-berlusconi-italian-anti-crisis-bill-fails

Over night rumors are flying that Papandreou will/won’t withdraw referendum, he will/won’t resign, he will/won’t survive a confidence vote.

Lastly, the FOMC meeting adjourned and in its post session press release, it said that (1) there were signs of life in the economy, (2) but not enough to get jiggy, (3) in fact, it lowered its economic growth rate forecast and (4) left its current monetary policy unchanged, (5) but said it was available for further action if conditions continued to deteriorated. In other words, QEIII is coming to a station near you.

Bottom line: I have no idea why investors bid the Market up in the early going other than the fact that it was either over sold and/or the worst in Europe has been discounted. The ‘and/or’ is the operative word because as I have repeated noted, the Universe knows Greece is bankrupt and that there will be fallout when it happens. Some if not most of that has to be in stock prices. The problem with investor psychology, it seems to me, is not the consequences of a Greek bankruptcy, it is the incredibly torturous path it is traveling to get there. It is like getting a shot when I was a kid--the anticipation of pain was worse than the pain itself.

This isn’t to say that if the EU leadership does not handle this problem correctly that the ‘disaster’ scenario (multiple country and financial institution bankruptcies) can’t happen. It clearly has a greater probability today than it did last Friday; but it may be that this probability is still low.

I do understand how the Fed release (and its suggestion of more Fed ‘help’) later in day prompted additional buying--money, money, money. Indeed, I am confident that a Greek default would bring forth a new wave dollars; and that should help stocks, at least, initially. It will also help GLD.

In the end, while confusion reigns in the short term, everyone has had plenty of time to get ready for the long term. With 1230 having held yesterday, I believe more nibbling is in order.

More on current equity valuations (medium):
http://www.minyanville.com/businessmarkets/articles/10-year-Treasury-Yields-annual-income/11/2/2011/id/37714

And this from Doug Short (short):
http://advisorperspectives.com/commentaries/dshort_110211.php

Subscriber Alert

The stock price of Nucor (NUE-$38) has traded above the upper boundary of its Buy Value Range. Accordingly, NUE is being Removed from the Dividend Growth Buy List. It will continue to be Held by the Dividend Growth Portfolio.

The stock prices of Target (TGT-$51) and Sigma Aldrich (SIAL-$64) have traded into their respective Buy Value Ranges. Therefore, they are being Added to the Dividend Growth Buy List. The Dividend Growth Portfolio owns a full position in both stocks, so no new shares will be Bought.

SIAL is also being Added to the Aggressive Growth Buy List. Like the Dividend Growth Portfolio, the Aggressive Growth Portfolio owns a full position in SIAL, so no further purchases will be made.

The problem with wanting to Add to stocks is that our Portfolios already own full positions in all those stocks on our Buy Lists; and I do believe that there is sufficient risk out there to not want to chase prices in other stocks.

My very unsatisfactory solution to this dilemma is to Buy a US market ETF as a trade in the Aggressive Growth Portfolio: Vanguard Dividend Appreciation Fund (VIG-$53).

In the High Yield Portfolio, additional shares of Federated Investors (FII-$19) are being Added.