Tuesday, February 14, 2012

The Morning Call--A default is a better deal than what they got


The Market
Technical


The indices (DJIA 12874, S&P 1351) retraced much of their loses from last Friday, pushing back to close proximity to the upper boundaries of their intermediate term trading ranges (10725-12919, 1101-1372) and closing well above the lower boundaries of their short term up trends (12485, 1291).

Volume was down, though breadth improved. The VIX tumbled 8%, leaving in its short term down trend. If there is follow through then the question will be how it handles last May’s lows (15.5).

GLD bounced fractionally off that initial minor support level--which is better than a sharp stick in the eye. It remains below the lower boundary of its short term up trend for the second day. Our time and distance discipline is now operative; so if GLD doesn’t recover the short term up trends lower boundary in the next two to three days, the trend will re-set to a trading range.


Bottom line: if there is any kind of follow through to yesterday’s trading, the DJIA will be seriously testing the upper boundary of its trading range; the S&P has a little more distance to cover. As you know, I think that the S&P more representative of the broader market of stocks; so it must successfully challenge 1372 for a break out to be confirmed.
http://www.minyanville.com/businessmarkets/articles/stock-market-stock-market-correction-market/2/13/2012/id/39363

As you also know, I am skeptical about such a prospect for a variety of fundamental and technical reasons. However, I have to be ready to be proven wrong; and so I will be. Assuming a break the next logical stop is 14190, 1561 which is sufficient up side to warrant a trading Buy of a Market ETF (s).

Fundamental

Headlines


No economic data yesterday. But then even if there had been, it would have been so obscured by the smoke being blown up our collective skirts, it probably wouldn’t have mattered.

Indeed, I was reminded (with some fondness) of Sunday nights long passed when Disney owned a hour of our time and the programs were always centered on either Frontier land (Davy Crockett was so great), Tomorrow land, Fantasy land or Adventure land; because I thought I had regressed to a twelve year old and I was watching some magical Fantasy land tale where the heroes always do the right thing and true, justice and the American way prevails.

How markets could be up on such a day means one of two things: either there is massive self delusion or all or most of it is discounted.

First, investors incredibly got jiggy over an austerity measure passed by the Greek parliament (while the rabble stormed the barricades) on the assumption that Greece was now saved. The problem is the math; austerity only digs the Greek deficit hole deeper. I haven’t seen a serious analysis of the Greek problem that concludes otherwise. Either the entire European political class is smoking dope or they know that Greece can’t survive without a repudiation of 70-90% of its debt, that it has to leave the euro, go back to the drachma and default on most of its debt--so what is now transpiring is just theater.

Of course, it may be me that is smoking something funny. Europe (read Germany) may decide that they can’t live without Greece, the Greek electorate may decide it is prepared to allow the imposition of mandates on wages, hours, pensions etc from the outside. I can’t imagine what could go wrong with that scenario; oh, well maybe:

But is the deal for real (medium):
http://www.zerohedge.com/news/germany-speaks-not-so-fast-greek-deal

And:
http://www.zerohedge.com/news/greek-side-deal-finland-bailout-collateral-about-kill-greek-rescue-again

A default is better than the deal they got (medium):
http://www.nakedcapitalism.com/2012/02/marshall-auerback-greece-%E2%80%93%C2%A0a-default-is-better-than-the-deal-on-offer.html

Second, Moody’s downgraded the credit rating of Italy, Malta, Portugal, Slovakia , Slovenia and Spain and put the UK, Austria and France on credit watch.

Although no one is worried:
http://www.bespokeinvest.com/thinkbig/2012/2/13/euro-sovereign-spreads-making-lower-lows.html

Third, Obama delivered His 2013 budget proposal, the essence of which was a $1 trillion deficit, no spending cuts, no entitlement reform but increases in taxes. Of course, He and the rest of universe knows that this puppy is DOA; but He can sell it as His vision for the future. Some future.

Here is a stunning graphic summary of His proposed budget (short):
http://www.zerohedge.com/news/4-charts-summarizing-obamas-2013-budget

A little historical perspective (graphs):
http://advisorperspectives.com/dshort/updates/Debt-Taxes-and-Politics.php

On top of that, the GOP apparently felt that it needed to make its own contribution to your future indebtedness by dropping their demands that the proposed cuts in the payroll tax be off set by spending reductions.

Bottom line: as discouraging as the above is (1) a Greek default is in our forecast; and I think that the EU ‘muddle through’ scenario has a better chance of occurring if Greece does default versus getting endlessly bailed out and having the other PIIGS demanding a similar deal, (2) as is an inept political class.

Nothing in yesterday’s news does anything to alter the assumptions in our Models and hence our notion of Fair Value. My focus is still on our Sell Discipline. As I noted above, if a break above 12919, 1372 is confirmed, I might have to bite the bullet and acknowledge that somewhere my analysis is wrong. But until that happens, I am sticking with our current strategy.

An interesting perspective on global fiscal problems: it is not the politicians, it is the public (medium):
http://www.project-syndicate.org/commentary/rajan26/English



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.