Thursday, August 23, 2012

The Morning Call + Adding to our GLD position

Today in my 70th birthday; friends and relatives will start arriving this afternoon for a weekend bash. So no Morning Call tomorrow or Closing Bell on Saturday. I am hoping to be sober enough to do Monday’s Morning Call.

The Market


The indices (DJIA 13172, S&P 1413) turned in a mixed performance (Dow down, S&P up), remaining (1) within their short term trading ranges (12022-13302, 1266-1422) and (2) their intermediate term uptrends (12223-17223, 1285-1865).

Volume was lower; breadth was weak. The VIX was up fractionally, continuing to trade in its short term downtrend. However, as I noted yesterday, I am still not convinced that its recent performance isn’t either a ‘fat tail’ to our time and distance discipline or that the VIX simply shifted the lower boundary of the trading range to a slightly lower level.

GLD was up strongly again, closing within its intermediate term trading range. It is the second day above the level of the last lower high; however, it also faces resistance from the short term downtrend. I want to take our Portfolios’ GLD position from 15% to 20%---which will be done by Buying 2 ½% today at the open and an additional 2 ½% when GLD breaks the upper boundary of that short term downtrend.

Pimco adds to gold position (short):

Gold miners may be close to a break out (short):

Bottom line: even though the Averages rallied late in the day to end flattish after a morning decline, they still made no attempt to re-challenge the 13302/1422 level. Until there is a successful challenge, my story is that these levels will hold; and I am sticking with it. My focus remains on those stocks nearing either their Sell Half Ranges or significant trading highs.

Bullish sentiment at new highs (short):

But Wall Street strategists are not so sanguine (short):



Yesterday started with two housing stats reported: weekly mortgage applications were down though purchase applications were up slightly; and July existing home sales grew albeit at a modestly slower than expected pace. Both datapoints were well within the parameters of our Model.

This is a great piece on why a recession is in the offing (medium and a must read):

In addition, there was a bevy of international news---most of it bad: Spanish and Czech political turmoil over austerity, Greece once again raising the estimate of its deficit, Japan reporting some terrible trade data and Russia saber rattling in the Middle East. All this weighed on stock prices through out the morning

***overnight China reported a bad flash PMI as well as lousy export numbers.

Then later in the day:

(1) eurochief Juncker, who was in Athens, threw a bone of hope to the Market that all would end well in Greece. Of course, not everyone believed him, but the headlines lifted investor spirits,

Juncker’s press conference (short/medium):

For the bulls on the EU (medium):

Citi sees Greek exit from EU (medium):

And last but not least, this latest (overnight) almost comical development in Draghi’s interest rate cap plan (short and a must read):

(2) the minutes from the August 1st FOMC meeting were released; bottom line: economic conditions appear to warrant QEIII [I tol’ you], though timing appears to be a question.

I had assumed as much. On the other hand, I am of the opinion that any further easing will likely accomplish nothing other than raising inflation fears and that it won’t take the Market very long to figure that out. The only possible steps that could impact our economy would be for the Fed to flatten the yield curve, i.e. take long rates to 25 to 50 basis points. That would likely create a huge temptation to borrow from which some economic activity would result. However, I can’t imagine the Fed doing this because it would increase exponentially the future risk of unwinding all the resulting trades.

Here are some critical excerpts from the minutes (short/medium):

And here is why current Fed strategy is ultimately doomed (medium and today’s must read):

And why a flat yield curve would be a disaster (long, but you should read this also):

Bottom line: in an event filled day, nothing occurred yesterday that would improve my assumptions in either of our Models. Yes, we will likely get QEIII sooner or later; but it will do no good and likely raise inflation fears. I still believe that Greek will exit the EU, whatever Juncker says. And even if the ECB is dumb enough to throw good money after bad into Greece, it will still be insolvent and the ECB will only be aiding and abetting the Fed is stimulating global inflation fears.

If you think that the above doesn’t sound like a recommendation to Buy stocks, then you can pass Go and collect $200. It does suggest that it may be time to start adding to our GLD position.

Subscriber Alert

The stock prices of Target (TGT-$63) and Pepsico (PEP-$73) have traded above the upper boundaries of their respective Buy Value Ranges. Accordingly, TGT is being Removed from the Dividend Growth Buy List and PEP is being Removed from both the Dividend Growth and Aggressive Growth Buy Lists. Both stocks are full positions in their respective Portfolios.

As noted above, approximately an additional 2 ½% will be Added to all Portfolios GLD holdings.

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.