Friday, January 20, 2012

The Morning Call--Upside is limited


The Market
Technical


The indices (DJIA 12623, S&P 1314) had another quietly up day closing within their intermediate term trading ranges (10725-12919, 1101-1372) and above the lower boundary of their short term up trends (12056, 1244).

Volume was flat; breadth down. The VIX fell 5%, finishing (1) within the current down trend and (2) below the developing base that I mentioned previously--a positive for stocks.

GLD was off fractionally, but remains within its short term up trend.

A long term perspective on gold (medium):
http://www.zerohedge.com/news/longer-term-perspective-gold-and-more-nomura


Bottom line: price momentum is clearly to the upside and seems to be picking up. I have no good technical argument why that wouldn’t continue. Indeed, more and more technical factors are turning positive.

I would be thrilled by all this if the S&P were 200 points lower. Unfortunately, the S&P is fractionally below Fair Value, the DJIA is well above it, the upper boundaries of the Averages current trading ranges are within striking distance and I keep adding to my list of our stocks that are nearing either their Sell Half Range or significant multi year resistance barriers.

I am clearly looking very wrong right now for not making a trading Buy when prices took out the neckline of that reverse head and shoulders. In the end, I am sticking with what at the moment is a clear contrarian view that the upside is limited and that the boundaries of the current trading ranges will hold; so I remain content to not chase prices up.

A different look at sentiment (short):
http://www.marketwatch.com/story/worrisome-complacency-2012-01-18?link=home_carousel

Is the Market simply tired of being pessimistic? (short):
http://www.macrobusiness.com.au/2012/01/pessimism-fatigue/

Another thought on what is driving this Market (medium):
http://www.zerohedge.com/news/print-or-panic-trimtabs-markets-meltup

A chart of long term interest rates:
http://www.ritholtz.com/blog/2012/01/222-years-of-long-term-interest-rates/

Fundamental
Headlines


Yesterday’s economic news was mixed: the weekly jobless claims number was outstanding, December housing starts were very disappointing and December CPI was a wash. On the other hand, earnings season continues to perk along and appears to be meeting expectations, i.e. up but at a decreasing rate of growth. Finally, the almost daily EU sovereign debt auctions are occurring at rising prices (lower rates) indicating increasing optimism that the sovereign debt crisis is easing.

Most of the above fits our forecast; though I would question investor enthusiasm for the debt of countries that mathematically have no chance of paying that debt back except via inflation. However, assuming the US recovery continues and that corporate profits continue to grow and the EU ‘muddles through’, I can’t get equity values much higher than they are at present. If investors want to pay year end 2012 or 2013 values today, that is their privilege.

But I am not because (1) given the severe division within not only our political class but our electorate, I am not sure the problems of an over spending, over taxing, over regulating nanny state are ever going to be solved; and until they are the US economy may grow but it will never achieve its historical secular rate because it will constantly be plagued with an overbearing, inefficient government that commands too large a share of this country’s resources and (2) just because investors are getting jiggy over the debt of near bankrupt countries doesn’t make those countries less bankrupt. The sovereign debt levels of much of southern Europe are so enormous relative to those countries’ ability to repay and then fund growth on top of that, you have to question what the buyers of their bonds are thinking about.

Bottom line: this is not an argument for a Market crash. I am simply pointing out that the good news of a sustained albeit below average US economic recovery and a scenario in which the eurocrats do just enough to resolve decades of fiscal irresponsibility so that the continent does not fall off a cliff but not enough to enforce financial prudence is already reflected in a Market that has risen 22% since October 2011, doubled since March 2009 and is only 20% off the all time highs achieved in the speculative blow tops of the 2000 and 2007 Markets.

The latest thoughts of Mohamed El Erian (medium):
http://www.project-syndicate.org/commentary/elerian13/English

Why the IMF is looking to raise $500 billion to back stop the EU (medium):
http://www.nakedcapitalism.com/2012/01/so-why-has-the-imf-asked-for-500-billion-that-it-probably-wont-get.html

KKR not positive on Europe (medium):
http://www.zerohedge.com/news/kkr-avoids-european-sovereigns-austerity-concerns

A contrarian view on the massive liquidity injections now taking place in Europe (medium):
http://www.zerohedge.com/news/citis-contrary-fx-view-ecb-easing-would-be-eur-positive



Steve Cook received his education in investments from Harvard, where he earned an MBA, New York University, where he did post graduate work in economics and financial analysis and the CFA Institute, where he earned the Chartered Financial Analysts designation in 1973. His 40 years of investment experience includes institutional portfolio management at Scudder, Stevens and Clark and Bear Stearns. Steve's goal at Strategic Stock Investments is to help other investors build wealth and benefit from the investing lessons he learned the hard way.