Friday, May 11, 2012

The Morning Call - Liar, liar, pants on fire

The Market

The DJIA (12885) closed below the lower boundary of its short term trading range (12919-13302) for the second day. Should this challenge be confirmed, 12744 looks to be a logical candidate for a re-set lower boundary. It does however remain firmly within its intermediate term up trend (11597-16597).

The S&P (1357) is now in a short term down trend with an upper boundary at 1368. However, I continue to believe that this index is in a transition to a wider trading range with a lower, lower boundary (1338). Like the Dow, it is safely within its intermediate term up trend (1218-1785).

Each index remains below its 50 day moving average (13055/1386). Volume rose again; breadth also improved. The VIX fell but is trading well above the lower boundary of its short/intermediate term trading range.

GLD (154.77) rallied fractionally but it still well below the lower boundary of its short term trading range. I think that this boundary is a lost cause; however, there is a secondary support level slightly below it that corresponds to the left shoulder of the reverse head and shoulders formation that I have mentioned several times. So I am not giving up on GLD quite yet. I know that this sounds like I am rationalizing my GLD position; and I probably am. Nonetheless, our Portfolios won’t start scaling back their positions until GLD breaches 154.10.

Bottom line: if yesterday was a dead cat bounce, then ‘dead’ is the operative word. As you can tell, I was surprised at the weakness of the rally---which I don’t think bodes well for the near term pin action. I noted yesterday that the level at which any rally fizzled would tell us something about the underlying strength of the Market. If there is no follow through to the upside today, then I think it likely that there is sufficient downside left to warrant staying on the sidelines.

Regressing to the trend (short):



Another slow day for economic data: barely better than anticipated jobless claims, a slightly larger than expected trade deficit and a stronger budget surplus than forecast. Also, once again, no one cared.

And once again, Europe was the center of attention. The stand out news was a statement from the Greek politician who is expected to become the country’s next prime minister in which he basically said that he would call Germany/the ECB bluff on the bailout. If he does it, it may be the biggest political bluff since the Kennedy/Russian standoff in the Cuban missile crisis.

In addition, there was steady speculation about what the EU sovereign debt crisis end game will look like:

And the math in Europe doesn’t work (sound familiar?); does it work here? (medium):

And China’s sovereign wealth fund bails on Europe (medium):

The other news item which occurred after hours and is likely to influence trading today was the announcement by JP Morgan that it needed to ‘reposition’ its propriety trading portfolio. Translation: more risk was taken than should have been, an $800 billion (minimum) loss was incurred and it can’t be corrected overnight. Probably worse, JP Morgan is supposed to be the best in breed; so what do you think will be coming from the rest of the ‘too big to fail’ thieves?

For anyone who wants to get into the weeds on this issue, here is an explanation. For those who don’t the bottom line is (1) the big banks are betting too much money in an ill defined market and end up harming themselves, (2) the whiz kid traders understand math but not markets and the markets are what kill you.

Bottom line: for a long time, the summary statement on our economic forecast included the provision that the banking system’s balance sheet was impaired by having taken too much risk and too many losses. I took it out after the endless hoopla by the Fed, the Treasury and the industry insisting that US bank financial condition was gold plated. Liar, liar, pants on fire. It is clear that Dodd Frank, management controls and incentives have not changed enough to alter the mindset among bankers that they can leverage up other people’s money and if they win, they get a bonus and if they lose, it is someone else’s problem (yours and mine). That is not encouraging going into a potential EU financial crisis when the premier US bank management clearly has no idea where the mines are laid.

I sure don’t want to get in front of this train. The good news is that we might find where the real support for stock prices exists sooner than we thought.

More on the bullish case (short):

The latest from Marc Faber (12 minute video):

The Fed and the S&P (short):

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

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This Week’s Data

The April Treasury budget was in surplus by $59.1 billion versus expectations of a $30 billion overage.

The April producer price index fell 0.2% versus forecasts of no change; core PPI was up 0.2% as anticipated.


***over night, Chinese and Indian industrial production came in below estimates.

Stimulus spending keeps failing (medium):

A look inside yesterday’s US trade deficit numbers (medium):

The Bloomberg Consumer Comfort Index falls (medium):



The impact of the Obamacare tax (medium):

Can the Fed hold interest rates down when the refinancing needs are so high? (medium):

International War Against Radical Islam

What is a Palestinian refugee? (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.