Wednesday, June 06, 2012

The Morning Call--Will another round of easing do any good?


The Market

Technical


The indices (12127, 1285) managed to close up yesterday though only fractionally so. They closed well within their intermediate term uptrends (11746-16746, 1233-1800) and continue to struggle to find a lower boundary to their short term trading ranges.

Importantly, the S&P finished the day right on its 200 day moving average (1285); however, the Dow remains well short of its own moving average (12254). While an S&P move above 1285 would leave the Averages out of sync, it would give us a potential lower boundary of a short term trading range against which to measure the Market. On the other hand, a bounce off 1285 would likely set stocks up to trade lower. So this level clearly has some near term importance, technically speaking.


Volume declined again; breadth improved. The VIX traded down but remains above the lower boundaries of both the short term uptrend and the intermediate term trading range.

GLD was down slightly for the second day but continues to trade above the upper boundary of a short term downtrend and the lower boundary of it intermediate term trading range.

Bottom line: even though we finally got an up day for both Averages, it wasn’t that inspiring. Nevertheless, the S&P closed right on its 200 day moving average. How this index trades against its moving average could be provide some insight into Market direction.

Fundamental

Headlines


The economic data finally turned positive yesterday: weekly retail sales were up and the May ISM nonmanufacturing index came in above forecasts. Following a week of consistently disappointing numbers, these reports were clearly welcome. Nevertheless, I will continue to feel uneasy about our outlook until the trend in the datapoints returns to a more ‘mixed’ picture.

These better numbers provided something of a pause in a barrage of bad news which I think accounted for the lift in equity prices. However, the focus of investor attention did not change meaningfully from Monday; that is, the concern over a global recession and the hope that monetary authorities will inject yet another round of liquidity into the financial system.

Below expands on the main themes of the day: (1) should the US help finance Europe out of its current mess, (2) the Fed may ease more, (3) another round of money printing may not have the same positive effects as earlier occasions because (4) without austerity, it is money down a rat hole, and (5) Germany says ‘no way, Jose’ to Spain’s appeal to inject money directly into its banks,

Uh, oh, Steve Liesman wants to give more of Your Money away (medium):
http://www.zerohedge.com/news/steve-liesmans-modest-proposal-america-must-bail-out-europe

The Fed is ‘considering’ more easing (medium):
http://www.zerohedge.com/news/here-come-hilsenrath-leak-fed-considers-more-action

More money printing does not alleviate the problem of too much debt (medium):
http://www.zerohedge.com/news/guest-post-monetary-easing-fixes-nothing

Why austerity isn’t (won’t?) working in Europe (medium):
http://www.steynonline.com/5006/give-and-take

Germany to Spain: nein, nein, nein (short):
http://www.zerohedge.com/news/germany-ruling-cdu-rejects-direct-spanish-bank-aid

***over night (1) the EU reported total first quarter GDP flat with the prior quarter. Statistically speaking, that means it has avoided the ‘r’ word, at least for the time being and (2) Moody’s cuts the credit ratings of all Austrian banks and six German banks.

Bottom line: I am encouraged by a more positive spin to yesterday’s economic data. However, as I have repeatedly said, Europe is calling the tune to which equities are now dancing. That is not likely to change anytime soon primarily because the eurocrats are making the resolution to their financial dilemma into a Chinese water torture. As long as the agonizing process is ongoing, I think that the bias of the Market is down. However, as share prices decline, values rise; so with any sign of stability, our Portfolios will be nibbling.

More thoughts on what Greece and the EU would look like if Greece withdraws (medium):
http://www.realclearmarkets.com/articles/2012/06/05/will_greeces_exit_kill_the_euro__99702.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.