Friday, February 17, 2012

The Morning Call - The ECB deal is no deal fro the Greeks

The Market

So much for the potential loss of upside momentum. The indices (DJIA 12904, S&P 1358) were off the races again yesterday, closing very near (and in the case of DJIA very, very near) to the upper boundaries of their intermediate term trading ranges (10725-12919, 1101-1372) and well above the lower boundaries of their short term up trends (12555, 1298).

Volume was up but remains anemic; breadth improved. The VIX fell 9% and finished within its short term down trend.

GLD sold off early in the day and for a time traded below that initial support level; however, it rebounded and finished flat on the day. That leaves it above support but below the lower boundary of its recent short term up trend. With that close, our time and distance discipline confirms the break of the short term up trend and re-sets GLD to a trading range. Clearly, this is not a positive development; though initial support has held several times. So I am encouraged that GLD isn’t rolling over. That said, this is our Portfolios’ biggest position and any additional weakness will prompt some scaling back in the size of this holding.

Bottom line: it is a bit gut wrenching to hold tight to my position that 12919, 1372 will prove impenetrable when prices are spiking toward that level. However, nothing has occurred that prompts me change my opinion. Not to be repetitious, but (1) that doesn’t mean that I am a bear; it simply means that at current levels, our work considers stocks slightly rich to Fair Value. Therefore, there is no reason to assume higher prices other than momentum might carry stocks there, and (2) if our time and distance discipline does ultimately confirm a break above 12919/1372, I will have to adapt and invest accordingly.

The low number of new highs; does it mean anything (medium):

Here is a comprehensive sentiment indicator (short):

Stocks performance around the President’s Day holiday (short):



We did get some positive economic news yesterday which at least gets me back to having some understanding of what other investors are thinking. Weekly jobless claims fell again; housing starts were strong (though in fairness weather helped and most of the starts were in multifamily units being built for rent. The latter if anything is a negative for housing); the PPI was much weaker than anticipated (though core PPI was hotter than expected); and the Philly Fed index came in ahead of estimates.

So the data continue to point to an economic rebound and away from a recession. And that is a positive. However, an equally important issue is how strong will the recovery be? As you know I think it will be sluggish. But clearly, there is some probability that I may be underestimating 2012 growth. That said, (1) it was only a month or so ago that consensus was a recession, (2) so I have trouble accepting that the recent data has been so strong that it would lead investors to make the swing from recession to an expansion rate higher than our 1-2% real growth estimate.

The other news was...........drum roll..........another supposedly positive development in the Greek bailout/bankruptcy saga. In this case, the ECB announced that it was swapping its 50b euros of Greek bonds for new ones. That helps Greece in that it doesn’t have to float new bonds to retire the old ones. But (1) it doesn’t put any money in the Greek’s pockets and (2) since the exchange will be a par [so there will be no notional loss to the ECB] and the new bonds will not contain the provision that locks minority bondholders to the vote of a majority of holders in any eventual bond exchange that would include a ‘haircut’, it means that the ECB will avoid [a] taking a loss on those bonds and [b] being subject to a CDS credit event. In short, the ECB will not have to abide by any restructuring. Does that sound to you like a good deal for the Greeks? Or that it makes a bail out more likely? Or....does it sound like the ECB is covering its own ass?

A less sanguine take on the ECB swap deal (medium):

Now the Germans can’t even agree amongst themselves about how the handle Greece. What do you think that does to the odds of a bailout?

Here is a ground level look at what is supposedly happening to the average Joe in Greece. The only thing that makes me hesitate to fully embrace this account is the last statement:

‘At almost 52, when your stamina and endurance have started to wither
away, life feels like a chore. However, children have a way of making
you ‘plug’ back into life, even if it’s only to focus on just one more

Isn’t this part of the problem? These people want a free ride after 50. To think that one is withering away at 52 is an absurdity in modern life. I was in Greece a couple of years ago; and I can tell you there are plenty of 52 year old men and women walking around that were thinking about a lot more than making through ‘just one more day’.

Here is an historical example of why default may be the best course for Greece (medium):

Credit Suisse fears that the odds of a disorderly default are increasing (medium):

Bottom line: the economic numbers continue to suggest that there will be no recession. That fits our Model. If the data were to turn universally positive for a sufficient period of time, it could be an indication that I am underestimating the rate of recovery. However, nothing in the recent flow of data is indicative of such a scenario.

The Greek bailout proceedings still have the appearance of a circular firing squad, except for yesterday’s ECB bond swap deal which looks like the bank is simply protecting itself in a the case of a default. If investors are making the same interpretation and believe that an orderly Greek default is the most likely outcome and the most positive outcome, then we are all on the same page. But, that is in our Model; so I don’t see stocks going higher on this outcome.

However, reading the MSM, I get the impression that investors believe that the best case scenario is that the eurocrats paper over Greece’s fiscally untenable position and somehow Zeus or the Greek fairy godmother will make everything come out rosy in the end. If that is the case, we are probably in for a rough ride because I for one don’t believe in fairy godmothers.

Of course, I don’t know any more about the true motivation or thinking of investors than the MSM. I do, however, believe that we will are going to know the outcome of the Greek/EU circle jerk in short order. Until then, caution is a virtue.

The potential for a profit margin squeeze (medium):

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.