Thursday, February 23, 2012

The Morning Call-All the tax reform talk is just that, talk

The Market


The indices (DJIA 12938, S&P 1357) faded a bit yesterday. However, the DJIA remained above the upper boundary of its intermediate term trading range (now for the third day), while the S&P is still below its comparable level.

That leaves (1) the DJIA one to two days from confirming its break above 12919 and (2) the Averages potentially out of sync. At the moment, the assumption continues to be that the indices are in a trading range.

Volume declined; breadth deteriorated. The VIX was unchanged for the day and closed well within its current down trend.

GLD’s move up accelerated and busted through the upper boundary of its very short term trading range. Though it only recently re-set from a short term up trend to the current trading range, it now appears that this original break wasn’t really confirmed. Nevertheless, our time and distance discipline will kick in again for a re-set back to an up trend; the time element will just last for only two to three days.

Bottom line remains the same: ‘the indices are in no man’s land in which the DJIA has broken but not confirmed the break of the upper boundary of its intermediate term trading range while the S&P has yet to challenge its similar resistance level. Under our time and distance discipline that means that any change in Market direction is still highly suspect. I am sticking with my call that 12919, 1372 will ultimately prove too formidable a barrier, at least at this point in time. If I am wrong, the up side, technically speaking looks to be to the October 2007 highs (14190, 1561).’

Great chart of the S&P versus an index of economic expectations:

Top ten S&P yearly starts (short):

A look at volume year to date (short):

S&P performance in year’s with similar trading patterns as 2012 (short):



Yesterday’s economic news was mixed: the good news--weekly retail sales rose; the bad news--weekly mortgage and purchase applications were down, existing home sales flat (after a December revision); undecided is the cause behind the drop in housing inventories (see links below). Nothing here to make me consider altering our forecast.

The Greek bailout continued to consume pages of print media and hours of electronic media. So far there are not a lot of folks other than the eurocrats who think this agreement is anything other than a farce (see below for more negative feedback); meaning, that a Greek default is still very much on the table but the risk of a disorderly resolution is growing.

The Greek debt accord solves nothing (medium):

And don’t forget about the credit default swaps (medium):

New provisions of the bail out comes to light (short):

The bad news scenario (medium):

The other item(s) in the news was the release of a new tax plan from both Obama and Romney (quite the coincidence). Both were generally along the theme of ‘lowering the rates and broadening the base’. There are questions with respect to the details in each. Neither will matter until 2013 at the earliest.

To Obama’s credit, He has at least produced a political document that supports the notion of lower taxes. That is a start. Whether He or whoever the GOP candidate will be able to push through a true rationalization and simplification of the tax code that will allow for spending cuts and encourage growth is a question that will have to be analyzed for our 2014 forecast. Right now any discussion about US fiscal reform is about as meaningful as those regarding the resolution of the EU fiscal problems except that Europe is just closer to the abyss. So while all the chatter about tax reform and spending cuts may make some feel all warm and fuzzy, betting money on such an outcome at this point in time, in my opinion, would be a fool’s game.

Bottom line: the economy continues to make slow and uneven progress; but it is progress nonetheless. Our political class hasn’t missed a beat in making election year promises, most of which almost surely won’t be kept. The eurocrats still don’t have a f**king clue regarding the economic realities of Greece, Portugal, Italy and Spain’s solvency or lack thereof. Meanwhile, the monetary printing press are working overtime trying to paper over the short comings of all of the above. Most of this is in our Models--which makes me neutral on stocks in general but a Seller of those that are richly valued.

The risk to this happy scenario is that investors in EU sovereign debt and the EU financial institutions get fed up with the eurocrats wistful thinking and lack of meaningful action toward resolving even their simplest problem (Greece) and institute their own solution which may not be a pretty one. Cash and gold remain important.

Final earnings season stats (short):

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.