Thursday, February 02, 2012

The Morning Call + Subscriber Alert + A look at Valuation


The Market
Technical


Yesterday, the indices (DJIA 12716, S&P 1324) inched closer to the upper boundaries of their intermediate term trading ranges (10725-12919, 1101-1372) and finished well above the lower boundary of their short term up trends (12281, 1270).

Volume was down; breadth rebounded dramatically. The VIX fell 5% and remains firmly within its down trend--that is good for stocks. Remember there is support at 15.5.

GLD advanced again and continues in its short term up trend. Our Portfolios are buyers on weakness.


Bottom line: stocks returned to their rally mode. All indications are that the current momentum will carry prices higher, almost certainly to at or near the May 2011 highs (12919, 1372). While I continue to believe that those levels will hold, I still have to consider what happens if I am wrong. If they are successfully challenged, the next meaningful resistance levels exist at the October 2007 highs (14190, 1570). Should that occur, I am looking at making a trading Buy several ETF’s.

Fundamental

Headlines


The news flow yesterday was mixed; but investor reaction was giddy. The economic news was mediocre--not awful, just not great. The most positive stats were better than expected PMI numbers out of Europe and China, January auto sales, December construction spending and, of course, the awe inspiring Facebook IPO. On the other hand, the January ISM manufacturing index, the ADP private payroll report and weekly mortgage applications were below estimates

Meanwhile, the global political class is doing what it does best, i.e. screwing up any and every thing that they put their hand on. In Europe, the eurocrats continue to leak statements on Greece that vacillated between ‘it will be done by the end of day’ and ‘the terms are unacceptable’. Morons.

A look at how the new EU funding program is working (medium):
http://www.zerohedge.com/news/vicious-cycles-persist-global-lending-standards-tighten

Back in the good ol’ US of A, Obama is busy working on new and improved ways of giving Your Money away; this time another housing bail out plan. This one involves allowing mortgage holders who (1) are upside down on their mortgage, (2) but current in their payments to refinance that mortgage at a lower interest rate. Sounds good to everyone but the guys who own those mortgages and get screwed by another program of government picking winners. The good news is that it will never pass congress.

If you want all the details, here they are (long):
http://www.zerohedge.com/news/obama-lays-out-his-latest-mortgage-plan

Paying lip service to saving the eurozone (medium):
http://www.testosteronepit.com/home/2012/1/24/paying-lip-service-to-saving-the-eurozone.html

Instead of risk-on or risk-off trades, maybe investors will risk-out (medium):
http://www.minyanville.com/businessmarkets/articles/risk-off-risk-on-risk-out/1/31/2012/id/39127

Up date on earnings season (medium, must read):
http://www.ritholtz.com/blog/2012/02/earnings-season/

Bottom line: once again the data support our forecast of sluggish growth. The only bit of cognitive dissonance was the better than expected PMI’s in China and Europe, implying the global economy may be stronger than I have assumed which in turn would suggest our forecast is underestimating economic growth.

Certainly, that could be the case; but there simply isn’t yet enough evidence of that to make the case for altering our outlook. Indeed in Europe, most other stats of late point to a recession which is a somewhat less optimistic scenario than factored into our Models. Meaning to yesterday’s datapoints, I am more worried about having over estimated EU growth in 2012/2013 than underestimated it. Again, I could be wrong; but it will take more than a couple of contrary numbers to warrant questioning our assumptions.

In the case of China, I never bought the pessimistic china ‘hard landing’ thesis in the first place. So any improvement in growth would only confirm our assumptions.

In other words, in seems that I am back in the camp of being on the pessimistic side of consensus. This is the second or third time in the last year where our forecast (which has remained unchanged) has gone from being too pessimistic relative to consensus to too optimistic and then back again. As much as I continually worry about being wrong, swings in investor sentiment don’t get calculated into our Models.

At the moment, I have no reason to change our Models and therefore our strategy.

A long term long at valuation (medium, must read):
http://advisorperspectives.com/commentaries/dshort_20112.php
http://advisorperspectives.com/dshort/updates/Q-Ratio-and-Market-Valuation.php

Subscriber Alert

Following yesterday’s run up, our Portfolios will continue to chip away at some holdings. Therefore, at the Market open this morning, small portions of the following positions will be Sold.

In the Dividend Growth Portfolio: Lowe’s (LOW-$27), Paychex (PAYX-$32)

In the High Yield Portfolio: (Eli Lilly (LLY-$40)

In the Aggressive Growth Portfolio: Lowe’s (LOW-$27), Amphenol (APH-$55)


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.