Thursday, April 26, 2012

The Morning Call-Apple sold more iPads; all is right with the world


The Market

Technical


The Averages (DJIA 13090, S&P 1390) rallied hard yesterday. Both index closed (1) above their 12919, 1372 level. Pending confirmation by our time and distance discipline, this will become the lower boundary of the new short term trading range [13302, 1422 are the upper boundaries], (2) above their 50 day moving averages [13010, 1380] and (3) within their intermediate term uptrends (11508-16508, 1207-1774].

Volume was flat; breadth improved. The VIX fell, violating the lower boundary of its very short term uptrend (a positive for stocks) but remaining well above the lower boundary of its short/intermediate term trading ranges.

Money flow into the S&P is still positive (short):
http://tickersense.typepad.com/ticker_sense/2012/04/sp-500-money-flows-still-positive.html

GLD was up fractionally, although to get there, it had to bounce hard off the lower boundary of its short term trading range following the FOMC meeting and subsequent statement release and Bernanke news conference.

Bottom line: on the surface, stocks seem to be resolving the issue of the lower boundary of their new short term trading range; and if they hold both the 12919, 1372 level and their 50 day moving averages, then I think that they will have succeeded. Our time and distance discipline is now operative, though with a shorten ‘time’ element. If 12919, 1372 are confirmed and with some authority, our Portfolios may nibble at the names on their Buy Lists on any subsequent weakness.

Yesterday’s GLD bounce off of the lower boundary of its short term trading range was the fifth such since January--a pretty good sign that this level is gaining strength. Further, it continues the development of the right shoulder of a reverse head and shoulders formation--which if completed will also be a positive technical signal for GLD. Any indication that buyers are getting serious will prompt additions to holding.

Fundamental

Headlines


Overnight Tuesday, we got bad news out of Europe (poor German bond auction and a poor first quarter UK GDP). This was complemented by some lousy US economic data-lower weekly mortgage applications and horrendous March durable goods orders.
http://scottgrannis.blogspot.com/2012/04/capex-no-longer-bullish.html

But not to worry; Apple sold more iPods and iPads and that means all the world is right. Stocks opened strong and never looked back. To be sure, the Apple news was aided by better than expected profits from several other companies; and as you know, the somewhat better than anticipated first quarter profit reports thus far has me noodling over our forecast--my concern being that our Models are too pessimistic.

Of course, we just went through this a month ago when the aggregate economic data had a solid run of upbeat numbers and then faltered. So I am not going to revise our Models just yet; but this is clearly a development about which I am watching and worrying (worrying in the sense of our forecast not that conditions may be improving more rapidly than I thought).

Here is one reason I am being a bit circumspect--as usual, Jim Bianco brings some perspective to the current quarter’s earnings ‘beat’ rate (medium):
http://www.ritholtz.com/blog/2012/04/the-earnings-beat-rate-in-perspective/

The other subject occupying the chattering class yesterday was the completion of the most recent FOMC meeting and the subsequent press release and Bernanke press conference. In sum, the Fed left interest rates unchanged and slightly upgraded (sounded more positive) the language in FOMC statement describing the economy. Importantly, it did not take QEIII off the table. I didn’t view this statement or Bernanke’s interview as all that newsworthy and certainly wouldn’t be buying or selling stocks off them; but they did have the talking heads all atwitter.

Here is the full FOMC statement side by side with its prior release:
http://www.ritholtz.com/blog/2012/04/the-fed-statement-side-by-side-comparison/

Here is Bernanke, in his own words:
http://pragcap.com/more-from-the-fed

And here is a bit of analysis from a leading bond manager on the Fed’s current dilemma (9 minute video):
http://www.zerohedge.com/news/gundlach-explains-biflation-cheap-seats

**Overnight various EU confidence surveys came in abysmally down; and talk began to circulate about permitting direct lending to the banks by the ECB and instituting ‘growth’ measures. If enacted this would all play to our ‘muddle through’ scenario, at least in the short term. Fortunately longer term instead of moving governments and banks to more fiscally responsible behavior, these steps would just feed the debt beast, kick the can down the road--again--and likely lead to an ultimate resolution even worse than if things just fell apart now.
http://www.zerohedge.com/news/germany-folding-europes-insolvent-banks-get-direct-funding-esm

Bottom line: the macroeconomic numbers and the first quarter earnings reports as well as the forward guidance appear to be inconsistent. While they almost surely won’t be when finally viewed in retrospect, at the moment, they are and I haven’t heard a good explanation as to why. If stocks weren’t already overvalued (at least as measured by our Model), I would have less trouble dealing with the seemingly contradiction between poor macroeconomic measures and corporate profits; that is, if equities were undervalued, I would feel safer nibbling. But, if frogs had wings..................

So I am again on the sidelines not quite believing the prevailing investor rationale; but with a bit more confidence that our Valuation Model has it right following the last very short lived attempt to permanently take out the 12919, 1372 level. Nothing that happened yesterday demands me to buy stocks.

Earth to Europe!!! Government spending does not promote growth (medium):
http://online.wsj.com/article/SB10001424052702303459004577363641872355030.html?mod=WSJ_Opinion_LEADTop

Germany running out of allies supporting austerity (medium):
http://www.spiegel.de/international/europe/0,1518,829440,00.html




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.