Thursday, November 15, 2012

The Morning Call--Obama's initial negotiating position


The Morning Call

11/15/12

The Market
           
    Technical

            The indices (DJIA 12570, S&P 1355) suffered some severe whackage yesterday, with both Averages breaking below the lower boundaries of their recently re-set short term downtrends (12685-13152, 1363-1417).  In addition, the Dow penetrated the lower boundary of its intermediate term uptrend (12761-17761), while the S&P is approaching its own uptrend’s lower boundary (1345-1941).

            On the DJIA break of its intermediate term uptrend, our time and distance discipline is now operative.  However, since the S&P is trailing the Dow, they are now once again out of sync.  If recent history repeats itself, then the S&P will follow.  However, as I said yesterday, the intermediate term boundaries are apt to offer some stiff support; so I don’t think that a flush is imminent.  That said, if we do get one, then the next support levels are at 13444/12022 and 1292/1266.

            Volume rose; breadth got crushed.  The VIX traded back above the lower boundary of its very short term uptrend.  Since this occurred on the cusp of our time element, if the VIX remains above the uptrend line, I am going to re-establish the very short term uptrend.  Meanwhile, the VIX remains below the upper boundary of its short term downtrend and above the lower boundary of its intermediate term trading range.

            GLD rose but still finished below its 50 day moving average.  It continues to trade above the lower boundaries of its short term uptrend and its intermediate term trading range.

Bottom line:  the technical picture went from bad to worse with the Averages now challenging the lower boundaries of their intermediate term uptrends.  If those support lines get broken, then stocks are probably in for a very rough ride.  However, as I said yesterday, there will probably be a hell of fight before/if that occurs. 

(1) with the S&P now approaching Buy territory, I am making my list and checking it twice (2) however, I will also focus on those stocks that are near breaking key support levels but are a long way from their Buy Value Range.

    Fundamental

      Headlines

            Lots going on yesterday.

(1)     weekly mortgage and purchase applications were strong but that reflected a rebound from Sandy’ impact the week before; October retail sales were poor, but like mortgage applications, they also were influenced by Sandy; October PPI was much more tame than anticipated; while September business inventories and sales were quite strong.  These latter two stats were clearly positive and keep our forecast on track, ex the fiscal cliff and the implosion of Europe.

(2)     speaking of the implosion of Europe, we got the EU PMI’s and they were not pretty,

European PMI and recession (short):

                  Thursday morning humor or can we rely on the forecasts of the Troika (short):

                  Spain’s unpleasant choice (short/medium):

(3)     meanwhile, back at the OK Corral, after several weeks of rocket attacks from Gaza, Israel retaliated, taking out some high mucky-mucks in Hamas.  That in turn prompted endless high testosterone responses from most of the usual suspects, all of which have had their asses kicked by Israel so many times they have to have Cat Paws tattoos on their cheeks.  That of course is an aside.  What is important is that oil prices spiked; and if things don’t settle down, they are going higher---not good for our inflation forecast.

Egypt responds to Israeli attacks:

(4)     the minutes of the last FOMC meeting were released; and they reflected [a] general agreement that the economy was still struggling {nothing new}, [b] more asset purchases are likely in 2013 {nothing new} and [c] a cat fight over the guidelines to be used to determine when to stop the current easy money policy.  Question: if they can’t figure out at this late date, in what has been the most massive injection of printed money into our economy in history, what will trigger a policy reversal, how confident can we be that they will get the trigger or the timing correct?  Or is this just a re-run of every other Fed failure to restrain monetary growth before inflation takes hold?

(5)     Obama held a news conference in which He addressed the [among other things] fiscal cliff.  In it, He held very tight to the notion that tax rates had to rise.  True, this could be a negotiating position.  But it was not greeted well by the Markets.  More important, rumors are that He is going to insist on $1.6 trillion in tax increases---which is double the amount He asked for last year in His failed negotiations with Boehner.

Equally important, neither Obama nor anyone else in the dem camp is talking about spending.  Remember the deal that failed in 2011 was two to three dollars of spending cuts for every one dollar of tax increases.  So the current negotiation process is focused on tax increases with Obama’s opening bid twice what He asked for last year and no mention of spending cuts.  Meanwhile, the republicans are also talking about the magnitude of the increase in tax revenues and have said almost nothing about spending cuts.  You see the pattern here? 

If we get a ‘grand bargain’, it will be a miracle.  More likely, the result will something close to my original assessment: a cross between falling off the cliff and the ‘grand bargain’ and we may not get that until the very last minute; meaning that: if our political class repeats its historic behavior pattern (1) it will scare the living s**t out of taxpayers/investors before any deal is done, and (2) it will be such lame ass excuse for a solution [more spending just not as much, tax increases just not as much] that the economy is will still likely experience some of the negative effects of the fiscal cliff anyway, to wit, a slowdown in an already paltry rate of economic growth.
  
                 Obama has an uphill battle (medium):

                 The math on spending, taxes and the deficit (medium):

     Bottom line: the economy at this moment in time is doing about as well as we could expect.  Unfortunately, it faces two problems: (1) the fiscal cliff.  While I continue to believe that our political class won’t drive us off the cliff, they are likely going to make it as painful as possible on all parties [except of course themselves] before it happens and then it will probably be a far from optimal solution, (2) a completely dysfunctional EU.  The eurocrats just can’t get their act together in spite of the fact that the economy is going into the toilet and their citizenry is in revolt.

Clarity now is the fundamental issue because prices are starting to reflect the potential for something other than a Goldilocks resolution of the aforementioned problems.  How long it takes these morons running the show to provide the necessary clarity is likely directly proportional to how long equity prices remain in a state of malaise.

That said, lower prices equal buying opportunities; and they are not that far away.

      Subscriber Alert

            The stock price of UPS (UPS-$70) has fallen below the lower boundary of its Buy Value Range.  Hence, it is being Removed from the Dividend Growth and High Yield Buy Lists.  Both Portfolios will continue to Hold UPS.

            The stock price of Sun Hydraulics (SNHY-$24) has traded below the upper boundary of its Buy Value Range.  Accordingly, it is being Added to the Aggressive Growth Buy List.  The Aggressive Growth Portfolio owns a 50% position in SNHY.  However, no new shares will be purchased at this time.
                       

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