Friday, August 03, 2012

The Morning Call-Draghi's wet dream


The Market

Technical


The indices (DJIA 12878, S&P 1365) declined with a bit more authority yesterday, but remained within their primary trends: (1) short term trading ranges [12022-13302, 1266-1422] and (2) intermediate term uptrend [12089-17089, 1273-1853].

Volume declined; breadth was down for the fourth day in a row. The VIX dropped but finished above the lower boundary of its intermediate term trading range (and the neck of the developing head and shoulders formation).

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

Bottom line: yesterday’s price decline moved the Averages out of the upper quadrant of their short term trading ranges; however, they remain above the mid point of that trading range and are only slightly below Fair Value. Hence, I still am not motivated to spend any of our Portfolios’ cash. In the absence of any dramatic improvement in the fundamentals (especially in Europe), only a move to the S&P 1250-1300 level will prompt nibbling.


Fundamental

Headlines


Yesterday’s economic data was really lousy: jobless claims rose and factory orders were very disappointing--so not a good day. However on balance, this week’s stats have been mixed and therefore, in line with our forecast.

Of course, the big news was the lack thereof; that is, following the ECB meeting, Draghi failed to come through with any plans to deal with the EU bank/sovereign debt insolvency problems ‘by any means necessary’. Actually to be perfectly fair, he has a plan (the timing of which is unclear) to have a plan (the terms of which are largely unknown) and apparently is crossing his fingers that the Germans will go along. In other words, it was business as usual among the eurocrats.

Central banks do nothing (short):
http://pragcap.com/central-banks-do-nothing-promise-more

While the sands in the hourglass...........(short):
http://pragcap.com/europe-running-out-of-time

BNP’s economist on Draghi’s press conference (medium):
http://www.zerohedge.com/news/bnp-furious-draghi-jumped-gun

Stratfor on the EU crisis (4 minute video):
http://www.zerohedge.com/news/beggars-choosers-unemployment-and-bailouts-europe

What surprised me was the temerity of investor response. After pushing stocks up 400 DJIA points in two days last week on the prospects of an easier Fed and a more aggressive ECB, I would have thought that equities would be off more than half of that increase when neither occurred.

Perhaps, investors are praying for a positive nonfarm payroll number this morning before giving up (***they got it, see below); or perhaps we are just in one of those Markets that wants to go up---in which good news is good news and bad news is no news. I have no idea; but until we get come clarity on Draghi’s plan (if he in fact has one that includes something other than a wet dream) and German reaction, it seems overly optimistic to be bidding up stocks from current levels.

The bond guys trash the eurobond market, while the stock jockeys are only mildly disappointed (medium):
http://www.zerohedge.com/news/european-bonds-give-all-draghi-believe-gains-worst-day-over-decade

Bottom line: what do you say about a Market that seems driven more by hope than reality? At current price levels, stocks as represented by the S&P are Fairly Valued as calculated by our Model. That Model assumes that Draghi was (is?) going to deliver a plan that incorporates sufficient fiscal reforms to backstop overleveraged banks/sovereigns which continue to experience declining cash flows (‘muddle through’). Draghi by his own words doesn’t have a plan (just a plan to develop a plan); absent that, stocks are overvalued. Hence, my desire to await lower prices before committing funds.

Earnings growth estimates for European companies plunge (short):
http://www.zerohedge.com/news/thin-blue-line-between-hopium-and-reality

Investors keep piling into dividend paying stocks. No wonder so many of our holdings are hitting their Sell Half Range (short):
http://www.zerohedge.com/news/have-no-fear-you-can-always-hide-high-dividend-paying-stocks

The latest from Lacy Hunt (medium and today’s must read):
http://www.zerohedge.com/news/lacy-hunt-unintended-consequences-well-intended-policies



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.