Wednesday, May 16, 2012

The Morning Call-Stocks are the hands of the EU


Note: I am on jury duty today; so I have no idea what tomorrow’s Morning Call will look like.

The Market

Technical


The indices (12632, S&P 1330) are in the midst of a challenge of the 12744, 1338 support level---the Dow for the second day, the S&P for the first. Absent a huge price drop (the distance element), the time element of our Discipline will confirm the penetration of the 12744, 1338 level on Friday.

To repeat the parameters of any new short term trading range:

On the downside (1) their 200 day moving averages [12190, 1277], (2) the neckline of the reverse head and shoulders pattern [12287, 1266] and (3) the old resistance/support level [11741, 1230].

As for resistance, we are now looking at (1) the 12919, 1372 former support level, (2) the 50 day moving averages [13039, 1384] and (3) upper boundaries of their short term trading ranges [13302, 1422].

Intermediate term, the Averages are well within their up trend (11624-16624, 1219-1786).

Volume rose; breadth was mixed, though the flow of funds indicator is getting downright ugly. The VIX was up and closed right on the upper boundary of its short term trading range. A confirmed break above this level would be negative for stocks.

GLD fell again, but remains above the lower boundary of its intermediate term trading range (148.20).

Bottom line: even though I am not bearish on stock prices at current levels, if 12744, 1338 can’t hold, then among the other visible support levels the closest is 4.5% percent away. So we could be in for some more pain near term. In this atmosphere, I continue to focus on our Stop Loss and trading discipline. However, a number of stocks that our Portfolios made trading sales in earlier this year are approaching attractive re-entry levels. That raises the potential that our Portfolios could be both buying and selling if prices continue to decline.

Fundamental

Headlines


Pre-opening the data flow was pretty darn good yesterday: (1) on the economic front, April CPI was flat, retail sales were up and the NY Fed manufacturing index was a blow out, and (2) over night the EU chiefs suggested that Greece deserved some leniency in solving its fiscal problems; and while the PMI’s across most of Europe were negative, Germany was in the plus column and talking heads were getting jiggy with that info. Later in the morning, we got more good news as March business inventories were up with sales growing at twice that rate; and the home builders’ confidence index improved. That kept prices above the flat line for the first half of the day.

Then the Greek political parties announced that they couldn’t form a coalition government, the finance ministry estimated that 700 million euros had been withdrawn from the Greek banking system in recent days (raising fears of similar actions in Portugal, Spain and Italy) and not surprisingly, sovereign debt across the EU traded down. Confirming that US economic data is meaningless however positive, stocks got the willies and finished off for the day.
http://www.zerohedge.com/news/has-greek-bank-run-started

More on what happens if Greece leaves the euro (medium):
http://www.ritholtz.com/blog/2012/05/what-happens-if-greece-leaves/

JP Morgan’s recent trading losses seem to be fading for the moment---partly because the $2 billion loss is manageable, partly because Jamie Dimon still commands respect (and the benefit of the doubt). That said, the risk in this situation is not that Morgan’s losses could disrupt our financial system but that it could represent the tip of an iceberg that incorporates not just US banks but European banks as well. If it turns out that Morgan is an isolated incident, then it will continue to receive less and less attention. But the risk is that the problem is more systemic and there are other shoes to drop.

Part two of the Biderman/Bianco discussion (9 minute video):
http://www.zerohedge.com/news/biderman-and-bianco-black-swan-bonanza

Satyajit Das looks at JP Morgan (medium/long):
http://www.nakedcapitalism.com/2012/05/satyajit-das-topiary-lessons-jp-morgans-us-2-billion-loss.html

The real problem with JP Morgan (medium and today’s must read):
http://www.zerohedge.com/news/guest-post-president-obama-view-and-false-notion-too-big-fail

Bottom line:

The economy is progressing much as I expected---slow and uneven; but it is moving forward. Under that assumption, stocks (as measured by the S&P) are slightly undervalued. Given that equities tend to vacillate around Fair Value, sometimes in quite volatile swings, it is not surprising that prices could move lower. In the process, it is likely that within our universe of stocks values will be created---that’s the good news.

The bad news is the current political inertia in Europe in dealing with the fiscal problems of its southern states. The risk is that the eurocrats delay any action too long and events overwhelm whatever curative measures they attempt to implement at the last minute---and Europe sinks into a major recession and/or its financial system becomes partially or completely dysfunctional. That won’t be good for the US economy or for US stocks. I can’t believe the eurocrats will be that stupid and so I have not yet factored an EU debacle into our forecast. But that moment is not that far away.

The latest from Mohamed El Erian (medium):
http://advisorperspectives.com/commentaries/pimco_51312.php



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.