Wednesday, August 29, 2012

The Morning Call--Draghi's hopey, changey plan

The Market


Yesterday, the indices (DJIA 13102, S&P 1409) inched lower, remaining within (1) their short term trading ranges (12022-13302, 1266-1422) and their intermediate term uptrends (12258-17258, 1290-1870).

Volume fell; breadth was mixed though the flow of funds and on balance volume indicators are looking dicey. The VIX declined but continues above the (recently re-set) lower boundary of its intermediate term trading range and below the upper boundary of its short term downtrend.

GLD rose slightly but enough to put it back above the upper boundary of its short term downtrend as well as the lower boundary of its intermediate term trading range.

Bottom line: the Averages seem to have lost momentum; and this with an easier Fed policy and the successful presentation of Draghi’s plan for bailing out Europe priced into the Market---both of which make most investors feel warm and fuzzy. That doesn’t leave much room for bad news. Given that we are transitioning from a dull, quiet August to an action packed September in which we will get a snoot full of news from both the Fed and the EU, I worry about a hiccup in one or both of these factors. Hence my conviction that 13302/1422 will hold and my focus on our stocks Sell Half prices.

Dow theory (short):



The flow of economic news picked up yesterday with the overall trend being mixed (surprise, surprise). Weekly retail sales and the most recent Case Shiller home price index were modestly positive, while consumer confidence and the Richmond Fed’s manufacturing index were disappointing. Probably the most impactful number was consumer confidence which was much below expectations and that got stocks off to a shaky start. That notwithstanding, the stats still confirmed the scenario of a sluggishly growing economy.

The rest of the day, investors spent with their thoughts on (1) the republican convention [they yawned], (2) hurricane Isaac [they were relieved that it is not as bad as it could be], (3) Jackson Hole [they hoped that if the Ber-nank, doesn’t give us QEIII on Friday, he’ll surely do it at the September FOMC meeting] and (4) Draghi’s next act [they said three Hail Mary’s, lifted their eyes to heaven and prayed but steadfastly refused to reduce their portfolio risk]. Well, good luck with all that:

Speaking of which [Draghi’s next act that is], he just wrote this hopey, changey op ed full of bulls**t signifying nothing (medium):

QEIII and consumer confidence (medium):

A not very encouraging update on Greece (13 minute video):

More pain from Spain (medium):

Bottom line: stocks (as defined by the S&P) remain overvalued (as defined by our Model) while the narrative around Fed policy and salvaging Greece, Spain and Italy continues to focus on the good news scenario. That narrative could prove correct; but if it does, it is already in current prices. That would be OK if (1) the odds of it occurring were well above 50/50 and (2) the downside risks if it didn’t happen were not that great. Unfortunately, in my opinion, neither of the above conditions exists. That is why I want a decent sized cash position and a price cushion before committing it. I am not touting a doomsday scenario; I am simply saying that the risks at current price levels are sufficient to warrant a cautious approach to this market.

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.