Wednesday, February 22, 2012

The Morning Call + Subscriber Alert + Deal or no deal


The Market
Technical


Given the announcement of the Greek bailout, the indices (DJIA 12965, S&P 1362) were a bit more sedate yesterday than I expected. Nonetheless, the DJIA remained above the upper boundary of its intermediate term trading range (10725-12919) for the second day; our time and distance discipline will confirm the current challenge later in the week, assuming it stays above 12919. The S&P remains within its intermediate term trading range (1101-1372).

This leaves the Averages directionally out of sync. Our discipline calls for them to be in harmony before any change of direction is confirmed.

Volume fell; breadth was off though the flow of funds indicator continues to be quite positive. The VIX was up but remains in a downtrend.

GLD surged; however, while it closed above its current support level it still could not regain its former short term up trend.

Benjamin Graham’s curse on gold (medium):
http://www.ritholtz.com/blog/2012/02/ben-graham%E2%80%99s-curse-on-gold/

Bottom line: the indices are in no man’s land in which the DJIA has broken but not confirmed the upper boundary of its intermediate term trading range but 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).

Don’t listen to the media. 13,000 is not a magical Buy signal (medium):
http://advisorperspectives.com/dshort/guest/Lance-Roberts-120221-Media-Headlines.php

Oil breaks out of six month trading range (chart):
http://www.bespokeinvest.com/thinkbig/2012/2/21/oil-breakout.html

The diverging transports (charts):
http://www.bespokeinvest.com/thinkbig/2012/2/21/dow-transports-diverge-from-industrials.html

Fundamental

Headlines


There was no economic news yesterday; and even if there had been, it would likely have taken a back seat to the announced ‘bail out’ of Greece. I tried to make clear in yesterday’s Morning Call that this deal is a long way from being done. Given the Market’s tepid pin action, it would seem that most investors acknowledge that. Below I provide some more links from analysts that are really in the weeds on this issue.

Satyajit Das on the Greek bailout (medium):
http://www.nakedcapitalism.com/2012/02/satyajit-das-its-all-greek-to-me.html

And this (medium):
http://www.minyanville.com/businessmarkets/articles/greece-greece-news-greece-economy-greek/2/21/2012/id/39501

And this (4 minute video):
http://www.zerohedge.com/news/tale-financial-fascism-shakespeare

It ain’t over till it is over (medium):
http://www.zerohedge.com/news/iifs-dallara-warns-holdout-greek-bondholders-could-kill-successful-greek-deal

Bottom line: stocks are on the high side of Fair Value and getting more so. The eurocrats can announce all the deals they want, but they can’t change the math; and the math says Greece is broke. My oft expressed concern is that they keep sticking their fingers in a leaky dike long enough to build up such pressure that when it finally breaks, an orderly default is not possible. To be sure, a less onerous scenario could unfold; but that is an unknown so I don’t want to be fully invested while it is unfolding.

On the other hand, our own economy continues to struggle upward in spite of the machinations of a sub par political class foisting higher spending, higher taxes, more regulations and sweetheart deals with the unions and Wall Street on the taxpayer/electorate. The good news is that there is enough strength in our capitalist system to overcome these burdens, but just barely. The bad news is that I am not sure anything is going to change. In any case, I am not bearish on stocks, but our Valuation Model prices them as Fairly Valued. Hence, I am still focused on our Sell Discipline.

Update on last quarter’s earnings and revenues ‘beat’ rate (short):
http://www.ritholtz.com/blog/2012/02/earnings-season-update-%E2%80%93-still-not-good/

Subscriber Alert

Our Portfolios will continue to take advantage of the recent strength in stock prices to take money out of stocks that are over extended or companies that no longer meet the quality standards to be included in our Universe. At the open this morning:

The High Yield Portfolio will eliminate that remaining shares of Eli Lilly and Mine Safety Appliances--two companies that no longer qualify for inclusion in the High Yield Universe.

A recent review of Federated Investors (FII) determined that its finances have deteriorated and it no longer fits our investment criteria. Accordingly, today, our High Yield and Dividend Growth Portfolios will began moving out of this holding, selling one third of this position.


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.