Wednesday, February 15, 2012

The Morning Call-Greece is better off defaulting


The Market
Technical


The indices (DJIA 12878, S&P 1350) had a roller coaster day but ended basically flat (DJIA up a bit, S&P down fractionally). They closed near the upper boundary of their intermediate term trading ranges (10725-12919, 1101-1372) and above the lower boundary of their short term up trends (12443, 1274).

Volume inched up but remains anemic; breadth fell though the flow of funds indicator was up. The VIX rose but is still well within its short term down trend.

GLD was off but finished above a short term support level. However, this is the third day below the lower boundary of its short term up trend; under our time and distance discipline, it will re-set to a trading range Thursday unless tomorrow is a big down day.


Bottom line: the Averages continue to dick around just below the upper boundaries of their intermediate term trading ranges. They haven’t been able to mount a serious assault of these resistance points. On the other hand, they are not recoiling and, other than the complete absence of volume, show little sign of weakness. I believe that 12919, 1372 will prove too formidable to overcome in the near term and maintain my focus on our Sell Discipline.

Fundamental

Headlines


Once again, I am on the wrong side of public sentiment. Yesterday began with January retail sales numbers coming in about half of expectations. To be sure that is not a positive. On the other hand, ex autos, sales were ahead of estimates. One of the reasons, that the statisticians break out auto sales is because they are much more erratic and unpredictable than the general population of retail sales. So an unexpected decline in auto sales any month in particular when the rest of retail sales are above estimates shouldn’t be cause for alarm, at least in my opinion. Hence I wasn’t all that upset by this report.

In addition, while December business inventories came in a little light of forecast, business sales soared. So we got two sets of contradictory data both of which are relatively easy to explain and neither of which is unexpected in a slow sluggish recovery. Didn’t matter, investors banged stock prices hard.

My initial thought was that ‘OK, the news may be mixed but it can be interpreted negatively if investors are looking for a reason to sell. So may be this is the beginning of some sort of correction’. Nope.

While I am still not sure why investors were aggressively selling in early trading, it was a moot point because of the second bit of cognitive dissonance--the leader of the Greek conservative opposition who (1) is expected to win the next election and (2) is the same guy that yesterday said that he would renegotiate the Greek bail out, is allegedly signing a commitment letter to live by the aforementioned bailout agreement. That got stocks rockin’ and they recovered most of what was lost in the morning.

The problem is, as of this writing (9:00 pm), he hasn’t signed it yet; and if history is any guide, it is probably no better than a 50/50 shot that he will. And even if he does, again if history is a guide, there is a 100% probability that he won’t honor it.

To be sure, the Greek bailout may happen; but (1) I won’t believe it until I see it and (2) as outlined in a link in yesterday’s Morning Call and well as one below, it isn’t in the Greeks interest to accept or live by this deal. They are better off going into default and withdrawing from the euro. Indeed, the rest of the EU is better off if that course is taken. Why these eurocrats are spending time and effort trying to fix the unfixable will be in the end be a monument to their ineptness.

This is the latest news out of Greece as of 9:00 pm::
http://www.zerohedge.com/news/market-spike-driven-latest-bout-idiocy-out-greece

Another op-ed on why exiting the euro is Greece’s best choice (medium):
http://www.telegraph.co.uk/finance/comment/jeremy-warner/9080159/Greece-faces-death-by-a-thousand-cuts-unless-it-leaves-the-euro.html

Bottom line: the economy continues to perform as expected; and I continue to believe that Greece will default and the rest of Europe will ‘muddle through’. Indeed, (1) I don’t see how Greece cannot default and (2) I believe that everyone in the EU including Greece will be better off if it does. That puts me 180 degrees from what appears to be the current Market sentiment, i.e. Greece getting bailed out is a positive. As long as that condition exists, our Portfolios will likely be better sellers as the euphoria for a bail out rises and could be buyers if Greece defaults and investors start puking stocks.

Doug Kass on Jeremy Siegel’s recent call for DJIA 15,000 (medium):
http://www.thestreet.com/story/11417253/1/kass-the-wisdom-of-jeremy-siegel.html

Thoughts from David Rosenberg (medium):
http://www.zerohedge.com/news/david-rosenberg-lets-get-real-risks-are-looming-big-time

Subscriber Alert

Another of our 10 Baggers has had a great run. Polymedix (PYMX-$1.40) has run from $.55 a share to $1.40 since December (and the Aggressive Growth Portfolio’s addition to this holding). This company remains one of our favorites; but the recent price spike suggests that we take a little money off the table. Accordingly, this holding is being reduce by one third at the Market open.



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.