Tuesday, February 28, 2012

The Morning Call -- Greece and oil are still a problem


The Market
Technical


The indices (DJIA 12981, S&P 1367) had a mixed day (Dow down, S&P up).
The DJIA closed within its intermediate term up trend (12833-14302), while the S&P remains within its intermediate term trading range (1101-1372). This keeps the Averages out of sync and, therefore, under our discipline, directionless. Historically, that is not a time to be overly active in the Market. Although I don’t let it interfere with our Sell Discipline.

Volume rose; breadth declined. The VIX was up but closed within its short term down trend.

GLD fell fractionally but remained above the lower boundary of its short term up trend.
http://www.zerohedge.com/news/chatham-house-gold-standard-impractical-gold-hedge-against-declining-values-key-fiat-currencies


Bottom line: as long as the S&P is unable to successfully challenge the 1372 level, it can’t considered as anything other than trading near the upper boundary of its intermediate term trading range. The notion that it may not go higher is supported by our Valuation Model as well as our internal indicator. Hence, my focus remains on our Sell Discipline.

Dow flashes ‘down Friday/down Monday’ warning (short):
http://blog.stocktradersalmanac.com/post/DJIA-Flashes-Down-FridayDown-Monday-Warning-2

Update on the ‘best indicator ever’ (short):
http://advisorperspectives.com/dshort/guest/John-Carlucci-Best-Indicator-Ever-Update.php

S&P performance after its has been up 15% in a three month period (short):
http://www.bespokeinvest.com/thinkbig/2012/2/27/sp-500-15-gains-in-three-months.html

Fundamental

Headlines


There were two secondary economic indicators reported yesterday: January pending home sales were better than forecast as was the February Dallas Fed manufacturing index. Mildly positive but nothing to write home about.

The news out of Europe continues to point to a state of confusion: the G20 said no additional funding for the IMF (to help the EU), the German parliament approved the Greek bailout and S&P again downgraded the credit rating Greece (its gotta be a Z- by now). The Market yawned which means that investors have either thoroughly discounted a Greek default or they are smoking dope. We will know when it happens.

Martin Feldstein on Greece and the EU fiscal policy (medium):
http://www.project-syndicate.org/commentary/feldstein45/English

The S&P announcement (medium):
http://www.zerohedge.com/news/its-official-sp-cuts-greece-selective-default-cc

And the consequences; the Ponzi scheme continues (medium):
http://www.zerohedge.com/news/ecb-finds-defaulted-bonds-be-ineligible-collateral-bundesbank-stuck-holding-defaulted-greek-bag

Bottom line: the economy continues to struggle along. While slower than many would want, it is still progress. I think that this below average growth is well reflected in our Valuation Model. The political economy is on hold till November. That is good news (they won’t do anything else to screw the electorate); the bad news is that they aren’t going to do anything to help us. That too is in our Model.

Forget the media headlines, Greece is going to default; and that is also in our Model. What isn’t, is a disorderly default brought on by investors’ disgruntlement with the persistent obliviousness of the eurocrats to basic math of the EU sovereign debt crisis. Of course, as I noted above, this could all be in the price of eggs. However, I worry a lot about the damage that could be done if this hasn’t been discounted and investors realize that they have already been pushed off the cliff.

Rising oil prices whether from speculation and/or genuine concern about war in the Middle East aren’t helping matters either. The economic history of the impact of an extended period of high energy prices is not comforting.

On the likelihood of lower oil prices (medium):
http://www.nakedcapitalism.com/2012/02/chris-cook-the-oil-end-game.html

And the counterpoint (medium):
http://www.zerohedge.com/news/mountain-worry-shifts-olympus-zagros

In the end, an improving US economy keeps our Portfolios 60-65% invested in stocks. But Greece and energy mitigates my enthusiasm.

First quarter’s earnings estimates keep coming down (short):
http://www.crossingwallstreet.com/archives/2012/02/declining-q1-earnings-estimates.html

The latest from David Rosenberg (medium):
http://www.zerohedge.com/news/david-rosenberg-its-gas-gas-gas



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.