Friday, July 27, 2012

The Morning Call--Draghi's wet dream


The Market
Technical


Yesterday, the indices (DJIA 12887, S&P 1360) did their best impression of a Titan III moon shot but still remained well within their primary trends (1) short term trading ranges [12022-13302, 1266-1422] and (2) intermediate term uptrends [12057-17059], 1268-1848]. Within the short term trading ranges, additional resistance exists at 12904, 1364, which the Averages are now approaching. However, recall that they have unsuccessfully challenged these levels on three prior occasions. That, of course, doesn’t mean that the fourth time won’t be a charm, but it does clearly indicate a level at which investors are prepared to sell.

Volume was flat; breadth improved. The VIX declined, finishing above the lower boundary of its intermediate term trading range and still within a developing head and shoulders formation.

GLD rose, remaining above the lower boundary of its intermediate term trading range and still unable to break the long string of lower highs.

Bottom line: yesterday, I closed this section discussing the indices proximity to several support levels. Today, they begin the day close to resistance. I have found that in this kind of highly volatile Market that it makes no sense for me to try to get involved---except at prices that I have predetermined based on the fundamentals. I am simply not a good enough trader to react spontaneously to this kind of volatility and thus the opportunities for me to look like an idiot are boundless.

At the moment, stocks are in a no man’s land technically speaking and near FairValue, fundamentally. That keeps me an observer.

Market performance in August (short):
http://blog.stocktradersalmanac.com/post/August-Best-Month-in-Election-Year-QQQ-IWM

Fundamental

Headlines


Yesterday’s economic data was mixed: weekly jobless claims looked great but they continued to be heavily influenced by seasonal adjustments; the headline number for June durable goods orders looked very good but ex transportation orders was quite disappointing.

Of course, once again what is happening in the US meant nothing because Europe commanded the headlines from the start. Specifically ECB chief Draghi said that the eurocrats would do whatever it takes to salvage the euro. That was like sticking a bottle rocket up the Market’s a**, prices soared and remained at lofty levels for the balance of the day. Call me a cynic, but:

(1) however much rhetorical puffery coming out of Draghi’s mouth regarding the ‘tools’ and policy alternatives at his disposal, in the end absent the Germans, they all boil down to one and only thing---a printing press. He can say what he wants about creating funds and channeling them through all kinds complex organizational structures, but in the end the only one with the assets and cash flow to back up those funds are the Germans. Without them, all he has is a press and some paper---which will not solve the current EU bank and solvency problems except via inflating its way out of them.

Now, it may be that the eurocrats have decided to inflate their way out of their current dilemma. Indeed, in almost every discussion that I have read regarding possible solutions to Europe’s problems, the dramatic devaluation of debt is listed as an alternative. If that is the plan, then [a] they will do it without the Germans and [b] history tells us that the consequences of politically induced currency destruction are not pleasant.

Back to the Germans [a] not coincidentally, Angela Merkel just happened to start her summer vacation yesterday, so we await for German reaction to Mr. Draghi’s promise ***last night the Bundesbank said ‘now way, Melvin’ and [b] as I understand it, even if Merkel did sound accommodative, the bail out is still subject to the German high court and it has already said that it wouldn’t rule until September.

So for the life of me, with the exception of a massive short covering rally, I have been unable to grasp the groundswell of enthusiasm reflected in yesterday’s pin action.

Citi on Draghi (short)”
http://www.zerohedge.com/news/citi-draghi-expect-nothing-ecb-esm-active-september-earliest

Charles Biderman on Draghi (4 minute video):
http://www.zerohedge.com/news/biderman-batters-believe-me-draghi

Deposits continue to flee Greece (short):
http://www.zerohedge.com/news/greek-deposit-plunge-continues-tax-inspection-finds-every-business-zakynthos-broke-law

(2) I continue to be dumbfounded by current investor behavior. The eurocrats have lied time after time about their intent to solve the EU banking and sovereign debt problems; they have consistently either proposed solutions impossible to implement and/or had to crawfish on those that could have been possible had they the will. Yet, investors bite every single time the EU political class runs another half baked plan up the flagpole and then get bludgeoned in the cold light of dawn. It is like Lucy and her promise to Charlie Brown not to jerk the football when he attempts to kick it. She always promises, he always believes her, she always jerks the ball, he always falls on his ass. Whether yesterday was a function of uninformed buying or panic short covering or both, it was a Charlie Brown market. Maybe investors are right this time; but you will have to excuse me if I am not sympathetic with current sentiment.

Bottom line: the economy continues to stumble forward though with less momentum in the last two weeks. Nonetheless, it is advancing. Stocks at current levels reasonably reflect that scenario which includes the assumption of a non-stop clusterf**k among the global political classes.

Yesterday’s pin action notwithstanding, my conclusion is simply a quote from the Morning Call: ‘Europe and the incredible ineptitude of its ruling class in dealing with its massive banking and sovereign insolvencies remain center stage and keep our Portfolios on the sidelines until we either get clarity or lower equity prices.’ Clearly, we got neither.

Here is a negative take of Sandy Weill’s ‘split up the banks’ suggestion (medium):
http://www.nakedcapitalism.com/2012/07/the-real-significance-of-sandy-weills-break-up-big-banks-recommendation.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.