The Morning Call--the odds of an EU crisis have not diminished

The Market
Technical

The indices (DJIA 13107, S&P 1410) continued to drift yesterday, finishing the day slightly to the upside. The remain within (1) their short term trading ranges [12022-13302, 1266-1422] though they are in a position to challenge the upper boundaries and (2) their intermediate term uptrends [12266-17266, 1291-1871].

Volume was up modestly; breadth improved. The VIX rose again but is still below the upper boundary of its short term downtrend. However, its recent spike is a bit incongruous with stock prices meandering in a tight range---suggesting that investors are anticipating more volatility in the near future. It remains above the recently re-set lower boundary of its intermediate term trading range.

Don’t worry about the low volume (short):
http://www.marketwatch.com/story/low-volume-forgetaboutit-2012-08-29?link=home_carousel

GLD declined, falling below the upper boundary of its short term downtrend. Under our time and distance discipline, this close negates the recent break, leaving the downtrend in tact.

The technical picture on gold looks good (medium):
http://www.zerohedge.com/news/euro-gold-technicals-look-near-perfect

Bottom line: stocks seem to be in suspended animation right now awaiting news from Jackson Hole on Friday and from Europe in September. I am a bit surprised that investors are willing to hold equities when the most positive outcome is fully priced in. Clearly I could be wrong on that judgment; but I can’t come up with a plausible scenario that is more positive that which is currently expected. So I am holding to the position that stocks are near their near term highs and focusing on the Sell side in our Portfolios.

Fundamental
Headlines

The economic news yesterday continued to depict a sluggishly growing economy: mortgage applications were disappointing, the first revision of second quarter GDP was in line with expectations and the latest Beige Book report was modestly upbeat. Nothing either Market moving or assumption changing.

As was the case Monday and Tuesday, investors were either on vacation, asleep or sitting on their hands watching (1) the talking heads critique the Ann Romney and Chris Christy speeches [boring], (2) the press conference following the Merkel/Monti meeting [boring], playing (3) the ‘will he or won’t he’ game on Bernanke’s Jackson Hole presentation [I continue to believe that it won’t matter].

Martin Feldstein on the Fed’s [and the ECB’s] dilemma (medium and today’s must read] :
http://www.project-syndicate.org/commentary/is-inflation-returning-by-martin-feldstein

(4) and continue to ignore any cognitive dissonance that doesn’t seem to fit current price expectations---like the deteriorating economies in Greek, Portugal and Spain.

Conditions continue to get worser and worser (medium):
http://www.nakedcapitalism.com/2012/08/spain-worse.html

Valencia joins Catalonia demanding more money (medium):
http://www.zerohedge.com/news/dominoes-resume-tumbling-valencia-follows-catalonia-demanding-eur35-billion-bailout

***overnight comments from Merkel advisor (short):
http://futures.tradingcharts.com/news/futures/DJ_Merkel_Adviser__Unlimited_ECB_Bond_Purchases_Would_Violate_Mandate_184625183.html

And Italians joins the Portuguese selling gold to survive (medium):
http://www.zerohedge.com/news/math-behind-italys-28000-cash-gold-outlets

Citi: the losses are unquantifiable (medium):
http://www.zerohedge.com/news/citigroup-has-best-summary-europes-fiasco-yet-losses-are-unquantifiable

Bottom line: it is tough constructing an exciting, fun filled narrative when the principal point that you have to make you have already made ad nauseum---in this case stocks are at best fairly valued and investors seem to be ignoring significant potential risks. I have long since positioned our Portfolios in what I think is the best way to wait out the resolution of the European sovereign and bank debt crisis and try not to be too repetitious in my comments in the meantime.

The good (or bad) news is that the lazy, hazy days of summer are near an end and the action is about to ramp up. Whether I am right or wrong on my current strategy, we will know soon enough; and when that happens, I will at least have something new to say. In the meantime, I am happy with an elevated cash position and a growing GLD position.

The latest from Mark Grant (medium):
http://www.zerohedge.com/news/place-your-bets

The latest from Jim Grant (11 minute video):
http://www.zerohedge.com/news/jim-grant-refuses-get-lost-hall-mirrors-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.