Wednesday, August 08, 2012

The Morning Call-Reality is slowly emerging

The Market


The indices (DJIA 13160, S&P 1401) had another good day drawing nearer to the upper boundaries of their short term trading ranges (12022-13302, 1266-1422). They remain well within the boundaries of their intermediate term uptrends (12124-17124, 1276-1856).

Volume was up modestly; breadth improved a bit. The VIX rose fractionally, remaining close to the lower boundary of its intermediate term trading range (and the neckline of a developing head and shoulders pattern.

GLD was off but continues to meander above the lower boundary of its intermediate term trading range.

Bottom line: stocks are approaching the upper boundaries of their short term trading ranges. Given that they are above Fair Value (as calculated by our Model), there is neither technical nor fundamental reason to be buying at current price levels. Our strategy at this point is to monitor our holdings and if any trade into their Sell Half Range, to take appropriate action.



There were a couple of secondary economic indicators reported yesterday: (1) weekly retail sales which improved over last week’s poor numbers and (2) June consumer credit which rose over May’s reading but was well short of estimates. Mixed results among secondary indicators is a wart on a goat’s ass in the scheme of things; so no further comment needed.

Investors remain on a whirlwind honeymoon with the Fed and the ECB, believing that both will come through with ever more money to paper over unsustainable fiscal policies and fuel overvalued (as calculated by our Valuation Model) stock prices even higher. And they may be rewarded by both central banks, but:

(1) while I believe investors will be correct about further Fed easing, I also believe that they will wrong about its impact on both the economy and the securities markets,

(2) as if history hasn’t repeated itself enough with the lies/phony fixes of the eurocrats, the news flow out of Europe yesterday suggested that it is about to happen once again---irrespective of the happy horses**t spewing forth from the main stream media [Germans say nein, Italians are in dire need of help, and the Spaniards are smoking dope---see below].

***overnight, Spanish and Italian 10 year rates are nearing 7% again.

As quickly as hopes seemed to rise regarding an EU bank/sovereign insolvency resolution, they now seem to be fading---German comments didn’t help (medium):

The problem with Italy (short):

Spain just put in its two cents worth---and two cents is about what it is worth (medium):

Now capital is flowing entirely out of the eurozone (medium):

Bottom line: the economic and political scenario in the US is unfolding pretty much as we have assumed in our Models. Given that and that stocks are slightly overvalued, normally our cash position would be roughly one half of current levels. I could remedy that today by either Buying or Adding to the stocks on our Buy List. But I am not because the risk of a Spanish/Italian default/restructuring remains high enough and the magnitude of the downside should that occur large enough, that, in my opinion, the extra cash cushion is needed.

Indeed, even if the eurocrats come up with some plan to pump more money into the Spanish/Italian banks, in the absence of substantive fiscal reform, my response would not be to Buy stocks but to Buy more GLD.

More doubts about this rally (short):

Where has the retail investor gone (short):

Thoughts from Goldman on third and fourth quarter earnings seasons (short):

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.