Friday, May 25, 2012

The Morning Call--Good vs Bad Austerity

The Market


The indices (DJIA 12529, S&P 1320) had another schizophrenic day---down early, then rallying late in the day. They remain well within their intermediate term uptrends (11686-16686, 1226-1793) and closed for the second day above their very short term downtrends. The longer the Averages remain above 12344, 1292, the more authority this level gains as the lower boundary of the short term trading ranges.

Volume was down, as was breadth. The VIX fell and while it is well above the lower boundary of its intermediate term trading range, it finished below the former upper boundary of its short term trading range---adding to the overall confusion in the Market.

GLD declined fractionally, remaining above the lower boundary of its intermediate term trading range.

Bottom line: yesterday’s pin action didn’t do a lot to reduce my confusion; although it seems that while investors are nervous about Europe (stocks trade down early in the day), they don’t want to be short over night (stocks rally late in the day)---apparently because they think (hope?) that the eurocrats will do something to prevent a disaster. Could be; but I would like more clarity before taking any action.

Bullish sentiment increases (short):



The economic data yesterday were not that positive: weekly jobless claims were flat while durable goods orders were lousy. However, there was nothing here to warrant even considering altering our forecast.

The other domestic item worth noting was the new Obama line that spending during His administration has grown slower than any other since Eisenhower. When I first heard it, I nearly broke my arm falling out of my chair laughing. Then I checked the TV dial to be sure I wasn’t watching a parody piece from Stephen Colbert or Jimmy Kimmel. No. This Guy has the balls to stand in front of the American people and assume they are too stupid not to believe Him. It is so comical that I have to let Ann Coulter do her usual caustically humorous analysis.

But never mind because all eyes remain on Europe. We started the day with some rough economic data: EU PMI’s across the board were lower and Spain announced it had more debt than last reported. That coupled with the general uncertainty over Greece pushed stock prices down in early trading.

But later in the day, equities rallied as the notion that the eurocrats would somehow come up with a ‘fix’ for their sovereign and bank debt problems gained some momentum. In their defense, as this crisis has progressed, the eurocrats have always come up with some measure to paper over the emergency (however, half assed and short term the fix may be). So I can see the rationale for subscribing to that belief. In addition, it makes sense to assume that the more time that passes, the more all the negative scenarios will get aired and hashed out in the media---and hence discounted in stock prices. Indeed, I think that risk that the eurocrats do something sensible and in response, stock stage the mother of all rallies is rising. I just have no feel for the magnitude of that risk.

Europe is likely only near the end of Act 1 (medium):

Bottom line: the problem for me is that this time around the EU crisis issues are more threatening (bank runs, social unrest, revolt against austerity [which in my opinion has to play a significant role in any workable long term solution]), the fix requires more participants compromising on more complex issues and the price of success is considerably higher than anything that has been done previously (indeed, I wonder if there are sufficient resources even if universal agreement can be reached). Of course, all of this is being considered in ‘aired and hashed out in the media’ process. So on the one hand, if the euros do the right thing, we have the potential for a stunning rally. On the other hand, given the magnitude of the downside if the worse case occurs and the proximity of a resolution to the Greek chapter to this horror story, if Europe implodes, there will be no place to hide. In the end, the level of uncertainty is so high that I think that discretion is presently the better part of valor.

Thoughts on Investing--New Rules of Money courtesy of Forbes

#16 Always Keep Some Powder Dry--Hold Cash

If the market meltdown of 2007-09 taught investors anything, it is that leverage has a very ugly side in declining markets. If you like to sleep at night, forget about margin buying and keep a healthy portion of your holdings in cash. From 10% to 40% is not uncommon.


This Week’s Data


Good and bad austerity (medium and today’s must read):

The bull case on the economy (medium):

More on the US energy revolution (medium):

More indication of the decline in inflationary pressures (short):



International War Against Radical Islam

What Iran’s rulers want (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.