Wednesday, August 15, 2012

The Morning Call--Not much difference between Ryan and Obama budgets---unfortunately


The Market

Technical


The indices (DJIA 13172, S&P 1403) had another quiet, mixed day (Dow up, S&P down), leaving them (1) near the upper boundaries of their short term trading ranges [12022-13302, 1266-1422] and (2) well within their intermediate term uptrends [12162-17162, 1280-1860].

Volume was up a bit but still anemic; breadth improved somewhat. The VIX spiked (another unusual move, i.e. up big in a flat market). This is the fifth day of the original break under out time and distance discipline. I delayed a confirmation call Monday night because the first two days of the break were barely a break at all ($.12). I am going to delay it again because yesterday’s surge retraced most of the losses incurred Friday and Monday. I am not trying to dodge a confirmation call; but I do want a substantive enough breach for a clear call.


The tipping point for the VIX (short):
http://www.crossingwallstreet.com/archives/2012/08/vix-on-pace-for-5-year-low.html

More on the VIX (short):
http://www.zerohedge.com/news/what-happened-last-two-times-vix-closed-below-15

GLD fell, remaining above the lower boundary of its intermediate term trading range but backing even further off the level of the last lower high.

Bottom line: the Averages continue to trade at the upper end of their short term trading ranges---a level that in my opinion is more suited to Selling than Buying. Hence my focus on those stocks near either their Sell Half Range or a trading high.

More for the bulls (short):
http://advisorperspectives.com/dshort/guest/Georg-Vrba-120814-Is-Next-Bull-Market-Already-Here.php

And the bears (short):
http://advisorperspectives.com/dshort/guest/Chris-Kimble-120814-Dow-Update.php

Fundamental

Headlines


Yesterday, July retail sales blew away expectations---positive in and of itself; but remember retail sales have been the only weak indicator of the big four. So these numbers have added significance.
http://advisorperspectives.com/dshort/updates/Big-Four-Economic-Indicators.php

That said, the rest of the day’s US data was mixed (weekly retail sales) or negative (July PPI, June business inventories and sales)---so the pattern of a struggling economy continues.

We also received the GDP stats from Europe. As a whole, they were negative, though the German and French reports were a bit better than anticipated. However, there was nothing in these figures to suggest that the EU is any less likely to experience a painful and enduring recession.

***overnight the Greeks asked for a two year extension to meet their budget goals that are the conditions for their bailout. Surprise, surprise.

More on Italy and Spain (medium):
http://www.nakedcapitalism.com/2012/08/political-trouble-bubbles-in-italy-and-spain.html

And Europe in general (medium):
http://www.zerohedge.com/news/financial-decline-europe-continues

The debate on Ryan and his potential contribution to the campaign and the economy also continued, sparked by a thrashing from David Stockman in the New York Times.

David Stockman on the Ryan plan (medium):
http://www.nytimes.com/2012/08/14/opinion/paul-ryans-fairy-tale-budget-plan.html?_r=2&ref=opinion

Grover Norquist’s reply:
http://video.cnbc.com/gallery/?video=3000109187

Goldman compares Obama’s and Ryan’s budget proposal (medium and today’s must read):
http://www.zerohedge.com/news/ryan-versus-obama-budget-plans-mean-fiscal-tightening-either-way

Bottom line: stocks are modestly overvalued (as defined by our Model) given a struggling economy, a paralyzed political class (though the election could correct that) and a Europe that is ‘muddling through’. As you know, the latter is the big risk to both our Economic and Valuation Models.

Hence, even in our most optimistic scenario, there is little incentive to be buying stocks at current levels. That wouldn’t necessarily preclude our Portfolios from Adding to those stocks on our Buy Lists. But the downside exposure should Europe run off the tracks is so significant, discretion at this moment trumps valor.




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.