Friday, July 13, 2012

The Morning Call-Rumors of a healthy US financial system were premature


The Market

Technical


The indices (DJIA 12573, S&P 1334) drifted lower yesterday but remain well within their primary trends: (1) the short term trading ranges [12022-13302, 1266-1422] and (2) the intermediate term uptrends [11959-16959, 1258-1838]. Within the short term trading ranges, additional support exists at 12344, 1292, resistance at 12903, 1384.

Wednesday, I noted that there were several near in support levels: (1) the 50 day moving average: the Dow busted this level on Wednesday moving still lower yesterday, the S&P closed yesterday right on this moving average [1334], (2) the very short term uptrend off the June low: again, the DJIA violated this trend line Wednesday, while the S&P did so yesterday (1336). Our time and distance discipline is operative here though to a lesser extent than applies to a primary trend. That said, the above pin action may portend more downside,

Volume rose; breadth weakened. The VIX closed down but remains well above the lower boundary of its intermediate term trading range and continues to develop a head and shoulders pattern.

GLD fell but finished well above the lower boundary of its intermediate term trading range.


Bottom line: the indices push below their 50 day moving averages and the uptrend off the June lows suggests lower prices. Such an occurrence is what our Portfolios have been waiting on. I have targeted the S&P 1250-1300 zone, which is in the lower quadrants of the primary trends, as a good place to do so nibbling.

Short interest drops (short):
http://www.zerohedge.com/news/nyse-short-interest-plunges-most-january-equity-outflows-hit-one-month-high

Fundamental

Headlines


The economic news yesterday was positive, at least on the surface: weekly jobless fell considerably more than anticipated though much of the decline was impacted by seasonal factors; the June budget deficit was below expectations but was considerably higher than that of June 2011. While these numbers are a bit confusing, there is little about which to be concerned.

Most of the day’s gloom was centered on continuing disappointment in the language (i.e. nothing suggesting that QEIII is near) in minutes of the most recent FOMC meeting released Wednesday. As I noted at that time, I think that no QEIII is good news and, in my opinion, those who don’t are simply the crowd that has been mindlessly following the Fed with little thought of the underlying fundamentals.

Europe was quiet, though things are degenerating in Spain, i.e. Greece part deux (medium and today’s must read):
http://www.nakedcapitalism.com/2012/07/is-spain-going-the-way-of-greece.html

Up close and personal in Portugal (medium):
http://www.zerohedge.com/news/guest-post-five-things-i%E2%80%99ve-learned-ground-portugal

**Overnight, Moody’s downgrades Italy’s debt from A3 to Baa2.

Finally, in my theme that our financial system is as f**ked up as ever:

(1) estimates for the fines, costs etc of the Libor scandal have started to roll in (medium):
http://www.zerohedge.com/news/here-come-libor-liability-estimates

(2) JP Morgan now admits it was guilty of mispricing the credit default swaps on its books (medium):
http://www.zerohedge.com/news/jpm-admits-cio-group-mismarked-hundreds-billions-cds-effort-artificially-boost-profits

Bottom line: our economy is doing all that could be expected in the face of some rough headwinds---indifference from our political class, mounting proof that our financial system is as corrupt as ever, a drought in the Midwest that has already negatively impacted the corn crop and may also do so to the soybean crop and a collection of cowards in Europe incapable of facing a serious problem of their own making.

That said, much of this is accounted for in our forecast and right now stocks (as defined by the S&P) are slightly undervalued (as defined by our Model). So opportunities are being created for our Portfolios with each day’s decline. However, I would like to see prices at least 5% below Fair Value before beginning to nibble.




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.