Tuesday, September 25, 2012

The Morning Call-The election is coming into focus

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The Market
           
    Technical

            The indices (DJIA 13558, S&P 1456) had another typical negative Monday (down in 15 of the last 16 Mondays).  However, damage was not that bad and both index ended within its (1) short term uptrend [13265-14035, 1407-1485] and (2) intermediate term uptrend [12410-17410, 1307-1907].

            Volume fell while breadth deteriorated significantly.  The VIX rallied, closing once again above the lower boundary of its intermediate term trading range---negating the violation of this trend for the second time.  It remains well below the upper boundaries of both its very short term and short term downtrends.
           
            Here is a long but thorough look at the technical underpinning of the Market:

            GLD declined fractionally but finished above the lower boundaries of its very short term and short term uptrends and the intermediate term trading range.

            Buyer beware (medium):

            Bottom line: given that it is becoming an established pattern for stock prices to decline on Mondays, there is no reason to read anything into yesterday’s pin action.  Both primary trends are up and the Averages are well above the lower boundaries of those trends.  However, the structural indicators are weakening and our internal indicator is not pointing to a strong uptrend.  In addition, the fundamentals suggest that stocks in general are overvalued.  Our Portfolios have lightened up on those equities whose prices have entered overvalued territory and are closely monitoring those that are close but not quite there.

    Fundamental
    
     Headlines

            We got a couple of secondary indicators yesterday morning---the August Chicago Fed national activity index and the September Dallas Fed manufacturing index.  Both were a disappointment.  That may have helped to set the tone for the day; but as I said above, Mondays in general have been down of late.  That this data didn’t make a normally down day worse, tells us that the bulls are still in control.

            Other than the above, there really wasn’t a lot happening. 

(1)   there were some news stories out of Spain, none good.

Catalonia seeks independence and the Spanish military is not happy (medium):

(2)   the debate on the goodness or badness of QEIII continued.  As you know, I think that it is bad.

            The dividends of an easy Fed (medium):

(3)   and the election is now starting to come into focus.  If you believe the polls, in particular intrade, then you are now coming to the realization that an Obama victory is the most likely outcome---at least if voting were to occur today.

That’s OK, in the sense that every citizen gets to vote and the outcome is what it is.  That’s way democracy works.  On the other hand, if an Obama second term is a continuation of His first [and I see no reason assume anything to the contrary], then the economy will continue to face the burdens of too much government spending, too much regulation and too few incentives to invest---none of which are likely to have a positive impact on corporate earnings.

It also means that Bernanke will get another term; and God only knows what that means for monetary policy; though I am fearful about what it means for inflation.
           
            ***overnight the Bank of China joined the money easing parade.

            Bottom line: stocks remain overvalued (as defined by our Model).  While the economy continues to plug along, its progress is below average from an historical perspective.  For this short term forecast to avoid becoming long term, government spending as a percent of GDP has to decline, industry needs less government regulation, fiscal policy needs to incent investment and monetary policy needs to become much lass activist.  This economy is suffering from a huge overdose of government; and in my opinion, won’t show long term improvement until we get less of it.

            And if Obama is re-elected, don’t count on less government.  As an individual voter, you may want that.  All I am saying is that it will play ‘hell’ with your Portfolio.  That doesn’t mean that this country is going down the drain; it just means that it terms of economic growth and innovation, its best days are in the past (think England, France).

            It also doesn’t mean that at some price US stocks aren’t attractive; but it is just not at current levels.  So I continue to work our Sell Discipline and derive comfort from our cash and GLD holdings.

            The latest from David Rosenberg (medium):

            The latest from John Hussman (medium):

            Beware complacency (medium):

            What’s priced into stocks (medium):

            Here is the argument for a strong market.  While our forecast is in line with his fundamental assumptions, he misses the critical point of market valuation, i.e. what do you pay for the good news.  Further, he admits there could be problems but apparently doesn’t want to account for that either in the valuation.
            http://www.businessinsider.com/the-myth-of-the-central-bank-driven-rally-2012-9



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.

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