Friday, December 09, 2011

The Morning Call I am underwhelmed + Subscriber Alert


The Market
Technical


Volatility returned yesterday with the indices (DJIA 11997, 1234) down big, challenging

(1) the down trend off the October highs [intersect 12006, 1233]. I noted yesterday that the S&P had confirmed a break above this trend line while the DJIA had one more day to go. Yesterday’s pin action left both index below that trend line. I am not ready to re-establish the October to present down trend; but if stocks don’t bounce today or Monday, then I will.

(2) the 11741, 1230 resistance, turned support, turned resistance, now support level--if these can’t be held, the next stop in 11257, 1158. Perhaps more important, the Averages have been forming a reverse head and shoulders and the 11741, 1230 represent the right shoulder. A bounce would move the pattern further toward completion, which if it happens would be a positive for stocks.

Unfortunately, once again, the S&P clearly couldn’t surmount its 200 day moving average. Every time it can’t get through this resistance, the more significant it becomes.


Volume was flat; breadth plunged. The VIX exploded to the upside trading once again within the upper zone of its current trading range--not something we wanted.

GLD fell, remaining within its intermediate term up trend. Regrettably, it is also still within the boundaries of the pennant formation mentioned in yesterday’s Morning Call.

Bottom line: it appears stocks may have lost that positive bias and finished the day in the midst of a number of conflicting technical patterns--increasing the level of uncertainty, making any directional call highly suspect but suggesting that any break up or down would likely have significant follow through. Since our Dividend Growth and High Yield Portfolios became as fully invested as I want to get at lower price levels, a move up would be a time for joy. A move down and our Sell Discipline becomes more important. In either case, I believe the boundaries of the current intermediate term trading ranges will hold.

Dr. Copper flashes a warning (short):
http://www.ritholtz.com/blog/2011/12/dr-copper-flashes-a-warning/

Nourishment for the bears:

Short term technical concerns:
http://advisorperspectives.com/dshort/guest/Chris-Kimble-111208-market-risk-update.php

A very dismal forecast from a long term indicator (medium):
http://advisorperspectives.com/dshort/guest/John-Carlucci-111208-The-Great-Repression.php

But sentiment rebounds:
http://www.bespokeinvest.com/thinkbig/2011/12/8/bullish-sentiment-rebounds.html

Fundamental

Headlines


Not much economic data yesterday: weekly jobless claims fell considerably more than anticipated while wholesale inventories and sales were both up strong. Despite these being positive numbers for a change, there was little reaction in stocks.

Because Europe is still the center of the investing universe. Two developments yesterday:

(1) the ECB lowered rates by 25 basis points as expected. However, [a] many wanted a 50 basis point drop, so clearly they were disappointed, [b] it declined to increase its lending facility to either countries {on the condition of increased austerity] or banks {on the condition of deleveraging}. The latter was particularly discouraging because even if the EU adopts more fiscally responsible policies, the individual countries and banks need additional time {and funding} while they implement those policies.

Some observers are opining that the ECB couldn’t come out with a blanket statement vowing to backstop the system in front of the EU ministers meeting (today) for fear that it would lessen the pressure on them to take the really tough steps that are needed. That may or may not prove to be the case; but investors were certainly not happy campers.

(2) the EU ministers [Germany and France apparently agreed on this Monday and spent the rest of the week selling it to other members] leaked a draft of a new ‘fiscal compact’ that included: [a] the formation of a new EC commission that will oversee EU member budgets and a Court that will act as an enforcer on those who violate the rules, [b] the ESM {another bail out fund} will stand side by side with the EFSF instead of replacing it, thus creating two instead of one bail out fund {some German official quickly denied this proposal}, [c] the EU would follow IMF protocol on private sector involvement in debt restructurings which means voluntary instead of forced debt exchanges, [d] Euro area central banks will likely provide the IMF with bilateral loans which then get recycled into loans back to Europe.

The $64,000 question is, will the rest of Europe buy it? The $128,000 question is, after reviewing the plan will the ECB with stipulations become more willing to assist the transition to a new EU by providing the funding needed by both the countries and the banks? And the $250,000 question is, if both occur will global investors be satisfied? With that kind of money, I only wish that I had the answers, though in the first instance, i.e. the new plan, I am not terribly impressed; and judging by yesterday’s pin action apparently a lot of others weren’t as well.

Bottom line: it would seem that the EU sovereign debt crisis is coming to a critical juncture and soon. Any version of a ‘shock and awe’ or ‘muddle through’ scenario would likely be positively received by the Market. Even if the above proposals are accepted by the bulk of the EU members but a few of the PIIGS bail (accompanied by much needed restructuring of their debts) might not be all that bad for us, depending on the exposure (after any defaults on counterparty risks) of the US financial system to EU sovereign and bank debt. That said, there is much that we don’t know and much about what we think we know that could be wrong. The only anchor in situations like this is our Sell Discipline which may once again prove its value.

A not very hopeful comment on the choices facing EU leadership from Satyajit Das (medium):
http://www.minyanville.com/businessmarkets/articles/euro-debt-Germany-European-banks-eurozone/12/8/2011/id/38269

Central banks start planning for possible euro break up (medium):
http://www.nakedcapitalism.com/2011/12/central-banks-plan-for-possible-euro-breakup-as-merkel-focuses-on-wrong-issues.html

S&P revenue and margins (short):
http://blog.yardeni.com/2011/12/s-500-revenues-and-margins.html

The latest from David Rosenberg (today’s must read-medium):
http://www.zerohedge.com/news/rosenberg-8-areas-behavioral-change-2012

Subscriber Alert

The stock price of CR Bard (BCR-$84) has fallen below the upper boundary of its Buy Value Range. Accordingly, it is being Added to the Dividend Growth Buy List. The dividend Growth Portfolio owns a full position inn BCR.

The stock prices of Cato (CATO-$25) and Mine Supply Appliances (MSA-$33) have fallen below the upper boundary of their respective Buy Value Ranges. Therefore, they are being Added to the High Yield Buy List. Both holdings are roughly 75% of normal; however, no shares will be purchased at this time.

I am unimpressed with the new EU plan and raises concerns near term about Market direction. I am using this morning strength to Sell the trading position in VIG in the Aggressive Growth Portfolio.