Friday, March 16, 2012

The Morning Call - Still perplexed but planning the next move


The Market
Technical


The indices (DJIA 13252, S&P 1402) extended their rally yesterday. The Dow continues in its intermediate term up trend (13049-14769). The S&P finished its third day above the upper boundary of its intermediate term trading range (1101-1372).

Volume fell; breadth improved. The VIX rose above the lower boundary of its intermediate term trading range. Under our time and distance discipline that negates Tuesday’s break down; it is also not a positive sign for stocks.

GLD (161.06) bounced but remains below the upper boundary of its short term down trend (163.64).

Bottom line: I am waiting as the confirmation process works itself out for the S&P. It should be done by the close Monday; and if the break is confirmed the S&P will re-set to an up trend.

My strategy at that point will before our Portfolios to purchase the Vanguard Dividend Appreciation Fund (VIG) with a portion of their cash. This will allow our Portfolios to participate in any additional upside but reduces the specific risk associated with adding to a small number of holding and the costs of trading when, as and if the Market tops and a cut in equity exposure is needed.

The Shanghai Composite continues to struggle (short):
http://www.bespokeinvest.com/thinkbig/2012/3/15/chinas-stock-market-continues-to-lag.html

Fundamental

Headlines


The economic data dominated the news yesterday and it was all good: weekly jobless claims fell again; both the February headline and core PPI were tame; and both the New York and Philadelphia Fed manufacturing reports came in above expectations. These stats clearly support the current optimistic view of the economy held by much of the Market. To be sure, I welcome days like this. But one day doesn’t a trend make; and, as I have been at pains to document, the trend in data has been much more mixed. I am not making an economically bearish argument. I am simply saying that there are major headwinds restraining our economy’s return to a normal secular growth rate and yesterday’s very positive economic numbers are not properly reflective of those headwinds.

And as an aside, neither are they reflective of the continuing disorganized, ostrich-like approach to resolving the EU sovereign debt problems, the impact of an extended period of high energy prices, a hard landing in China nor the possibility that interest rates could accelerate to the upside.

Bottom line: the S&P is a short hair away from 2012 year end Fair Value and I still can’t justify this level of valuation based on the facts on the ground: (1) our economy is improving but it is not smokin’, (2) our political class is doing nothing but obstructing what little progress the economy is making on its own, e.g. when I listen to Obama mock advocates of maximizing the energy production resulting from new technologies and His bureaucrats soliciting comments on the regulation of labor standards for farm families, I get sick to my stomach, (3) I am mystified by the cluelessness of eurocrats on the math of the fiscal disaster they have aided and abetted and (4) I am concerned that the Iran/Israel faceoff could end tragically.

On the other hand, as I have said, the Market is telling me that I am missing something. I believe that the strategy described above in the Technical section that will allow our Portfolios to respond to the likelihood that I could be wrong (assuming the S&P break up is confirmed) but at the same time make it easy to reverse is the right course.

The myth of cash on the sidelines (medium):
http://www.ritholtz.com/blog/2012/03/the-myth-of-cash-on-the-sidelines-%E2%80%93-an-update-2/

A summation of all that is wrong in Greece (medium plus a video):
http://www.zerohedge.com/news/summing-all-wrong-greece

Getting in the weeds of the Greek default (short):
http://www.zerohedge.com/news/about-those-foreign-law-greek-bonds

And the latest from Spain (short):
http://www.zerohedge.com/news/spanish-housing-re-plunging

And in four days there will be 30% of the entire US Navy carrier fleet in the Persian Gulf and the Arabian Sea:
http://www.zerohedge.com/news/enterprise-just-4-days-away-arrival-swift-cut-iran

Gridlock in DC (medium):
http://www.zerohedge.com/news/guest-post-gridlock-dc



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.