Friday, March 09, 2012

The Morning Call - It ain't over till its over

The Market

The indices (DJIA 12903, S&P 1365) had another good day. The Dow managed to get back to the lower boundary of its intermediate term up trend (12903-14621); however, under our time and distance discipline, it has to close above that boundary to negate the break. So it finished its third day of the break process. It was also unsuccessful at surmounting the former resistance, turned support, now resistance 12919 level.

The S&P remains within its intermediate term trading range (1101-1372).

Volume fell; breadth was flat. The VIX declined again and finished within its short term down trend but above the lower boundary of its intermediate term trading range.

GLD also had a good day; but it closed below that initial support level for the fourth day. A finish below this boundary will re-set the trend to a short term down trend.

Bottom line: the Averages remain out of sync with two day left under our time and distance discipline to confirm the break of its intermediate term up trend and re-set to an intermediate term trading range. If this occurs, then the indices are back in harmony but are at or near the upper boundary of their trading ranges. If the Dow negates the break, then the indices will remain in diverging trends. No matter what happens, there is little technical reason to get off the sidelines.

Up date on the ‘three peaks and a domed house’ pattern (short):



Yesterday’s weekly jobless claims number was a disappointment; but it didn’t matter because investors continued to tip toe thru the tulips on the Greek bankruptcy/bail out. I say that sarcastically because I remain perplexed by the psychology on this issue.

The rumor flow throughout the day was that bond holders would tender sufficient bonds to allow the bond swap and, hence, Greece getting its second bail out. The fact that Greece/EU may have avoided a disorderly bankruptcy is a positive. But as I have noted repeatedly that positive is in our Economic Model.

On the other hand, a successful bond swap does not mean that all is well in euroland. For one and perhaps most importantly, Greece is still insolvent and there is enormous work yet to be done to correct its deplorable fiscal state. Whether or not the Greeks have the political will to take the tough, painful steps necessary to put its house in order is anybody guess based on history. So while this latest transaction may have bought some time, investors have no clue what the political, social and economic consequences will be of either success or failure.

This says nothing about how the equally distressing fiscal condition of the rest of the PIIGS gets resolved. I am not saying that Europe can’t ultimately work its way out of its current over spent, over leveraged, over regulated condition. Indeed, our forecast is for it to ‘muddle through’. But ‘muddle through’ means an extended period of no to slow growth (Japan 2.0) and that is nothing about which to be getting jiggy.

No matter what occurs short term, long term things are going to get worse in Greece (medium):

And (medium):

It also says nothing about what occurs in the short term about which there is just as much uncertainty: (1) we know that the ‘collective action clauses’ have been triggered; but will that trigger a credit event? If not, what happens to the CDS market?, (2) the new bonds being exchanged are trading 18-20 when issued; that suggests 90%+ of another default, (3) net of the ‘deals’ under taken to get this swap done, Greece has only wiped out about 50 billion euros in debt; the new bail out is for 130 billion. How does this improve Greece’s solvency? (4) Greece just reported a -7.5% fourth quarter GDP. It is critical to understand that in the absence of the ability to devalue their currency, THE ONLY WAY Greece returns to solvency is to grow its way out. (5) Greek elections are in April. The point here is that there will be little respite between now and the next pressure point.

What happens next? (medium):

And perhaps this (medium):

Bottom line: it appears that Greece/EU has dodged a bullet; and we have to be thankful for that. However, (1) current price levels that scenario is already discounted, at least according to our Valuation Model and (2) this was a baby step in getting Europe out of the fiscal mess it has created for itself; so the danger of some negative exogenous event occurring there will be with us for a long time.

Our own economy is progressing as per our forecast; but that is not going to match historical recovery rates; and as a result in my opinion, stocks are not likely to match historical valuation rates during recoveries. That doesn’t suggest lower prices; but neither does it argue for higher ones.

In perhaps the worst irony the American citizenry could face, the better the economy does, the better the dems chances in November; and the better they do in November, the less likely the maladies that infect current fiscal, monetary, regulatory and individual freedom policies will be remedied. That also is not a prescription for much higher valuations.

In the end, businessmen, entrepreneurs and workers are doing their best in tough circumstances; and I think that has led to economic growth in spite of the headwinds they face. That is also a positive but not enough to push prices higher.

Up date on valuation models (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.