Thursday, June 28, 2012

The Morning Call-No news is not good news

The Market


The upward bias in stock prices continued yesterday with the indices (DJIA 12627, S&P 1331) closing higher. They remain well within their short term trading ranges (12022-13302, 1266-1422) and their intermediate term uptrends (11862-16862, 1249-1829).

Within the short term trading ranges, additional resistance exists at 12744, 1338. Clearly the close yesterday puts the Averages within shouting distance of those boundaries. If they are penetrated further resistance is marked at developing downtrends (12819, 13800) and the upper boundaries of their short term trading ranges (13302, 1422).

Volume shrunk, breadth improved. The VIX was down, finishing below the lower boundary of its short term uptrend (for the second time). Our time and distance discipline is operative once again. A confirmed break would be positive for stocks.

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

Bottom line: the Averages are closer to the lower boundaries of their primary trends than the upper boundaries. However, there remains sufficient distance to those downside boundaries that there is little technical incentive to try to ‘average in’. So our Portfolios remain on the sidelines.

Stocks historical performance in July (short):

Global markets appear to be developing head and shoulder formations (short):



Yesterday’s economic news was mixed: weekly mortgage applications were negative, durable goods orders were mixed and pending home sales were positive. That said, the latter seemed to gather the most attention from the media and, hence, likely had the biggest impact on stock prices.

Overhanging trading was the specter of a big Thursday:

(1) Obamacare decision: why investors would bid stocks on this Supreme Court decision is something of a mystery to me. I do appreciate that a repudiation of Obamacare gives a psychological boost to the hope that the Wisconsin voters signaled, i.e. a political turn to the right in the US; and in that sense, it would make me feel all warm and fuzzy.

However, on a real life basis, almost any decision will leave open the question as to what happens next with respect to the extent of employer healthcare obligations. So the fact that businesses haven’t been willing to hire because they didn’t know what their future health insurance liabilities would be for employees hasn’t changed. Hence, there will be no impact on the level of economic activity or corporate profits and, therefore, in my opinion, on stock prices.

(2) the first day of the EU summit. That the Market could rise in front of the EU summit implies that investors are either positive about, unconcerned about or have already priced in the likely outcome. And that could be the case.

However, several countries in Europe are on the brink. Any half way effective solution to salvaging their financial systems and governments involves steps that require enormous sacrifices by both those countries as well as Germany; and there is no sign that either party is prepared to make those sacrifices. So I am ruling out a positive result.

As to being unconcerned, the Pollyannaish assumption that all is well seems extraordinarily risky at the very least and down right stupid at worse. And remember, this will be the nineteenth EU summit. Maybe nineteen is a charm; but the odds are that this summit will produce no more tangible results than the other eighteen. The only difference is that this time, Europe is closer to the edge of the cliff. Finally, the stock jockeys might have been tip toeing through the tulips yesterday, but the bond guys weren’t as EU spreads widened---and based on historical performance, my money is on the bond guys.

Yes, investors could be pricing in a likely negative outcome (as Barry Ridholtz argues in the link below); but I maintain that even though they know something bad is happening, they can’t efficiently price it in because there is no history of similar results to compare it to.

Will today’s EU summit be a write off (medium):

Germany should leave the euro (medium):

And (medium):

Is Slovenia next? (short)

A different take on Europe from one of my favorites (5 minute video):

Bottom line: as you can tell, I felt something of a disconnect from yesterday’s pin action. Of course, that has happened before and I have been dead wrong. Nevertheless, I don’t see anything positive coming out of today’s summit. And yesterday’s lack on news was in my opinion not good news.

Even if we get good news, the best it could be is that Greece leaves the euro and the remaining PIIGS get ring fenced so that EU ‘muddles through’. That scenario is in our forecast and our Valuation Model which at the moment prices Fair Value at S&P 1364. So if I am wrong and a miracle happens today/tomorrow, our Portfolios have 2% (1364-1331/1364) upside risk on 30% of their assets. That is a risk with which I can live.

JP Morgan’s loss on that derivative trade maybe $9 billion (short):

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.