Friday, December 7, 2012

The Morning Call--Investors too sanguine


The Morning Call

12/7/12

The Market
           
    Technical

            The indices (DJIA 13074, S&P 1413) had another decent day, closing within their (1) short term trading ranges [12460-13302, 1343-1422] and (2) their intermediate term uptrends [12899-17899, 1363-1958].

            Volume declined; breadth was mixed.  The VIX rose fractionally, again finishing right on its 50 day moving average and between the upper boundary of its short term downtrend and the lower boundary of its intermediate term trading range.  On a positive note, all this churning in place has worked off an overbought condition.

            On the other hand, margin debt is near a high (short):

            GLD was up, remaining above the lower boundaries of its short term uptrend and its intermediate term trading range.  If the lower boundary of its short term uptrend is broken, our Portfolios will likely Sell a portion of their investment positions.

Bottom line: the S&P remains locked in a pretty tight range (1395-1422) and continues to be unable to successfully challenge its 50 day moving average (1416).  As long as this directionless trading continues (which happens to coincide with our current 2012 Year End Fair Value), I see no reason to either Buy or Sell.

            The increasing correlation of US machinery and tech hardware stocks to the Shanghai composite (short):

    Fundamental
    
     Headlines

            Yesterday’s sole datapoint was the weekly jobless claims number; and they were quite positive---which extends what has been a fairly upbeat week for data.

            Investors/the media cared for about a nanosecond; then resumed their ‘fiscal cliff’ watch.  That said, it seems like Market participants aren’t concerned.  It may be that consensus reflects our scenario: (1) a deal will get done even if it occurs next year and is applied retroactively and (2) it will incorporate a business as usual solution of higher taxes and high spending.

            From a fundamental standpoint, I can’t argue with that conclusion simply because that is our scenario.  I just have a tough time believing that sentiment will remain as calm as it is when the real crunch time occurs.

            Across the pond, conditions continue to deteriorate as the eurozone economy shows more signs of weakness; and political unrest has spread to Italy as a local newspaper predicts Monti’s government is living on borrowed time.  Nonetheless, investors seem to be as sanguine about the EU economic stability as they are about our own fiscal cliff.

            European economic data in the outhouse (medium):

            Including employment (short):

            ***over night, the Bundesbank lowered its growth estimate for Germany and Greek debt plunges.

Bottom line: well, good for investors.  I believe that there is more to be written on both the fiscal cliff and the EU sovereign/bank debt crisis and that right now investors are a bit too sanguine on both.  Yes, it would seem that on the fiscal cliff they are simply agreeing with our forecast.  However, the difference between us is that our Portfolios have 30% cash partially as a hedge against being wrong on this issue and the Market is near peak highs in margin debt.  That leaves investors little flexibility if things don’t go a scripted.

In addition, I honestly can’t figure out what investors are thinking regarding Europe because they clearly aren’t reading the same newspapers that I am; and they clearly haven’t done the math---and as Steny Hoyer said yesterday, this is a problem of arithmetic. And it is a bigger than our own fiscal cliff.  Not that it can’t or won’t be solved.  But at the moment, it is not being solved.  Here again, our outlook assumes Europe muddles through; but it is less because I believe it and more because I can’t figure out how to Model and discount not muddling through.  And that is the other reason for our large cash position as well as our GLD holding.

            Update on the Q Ratio valuation (medium):

            How stock analysts performed in 2012 (short):

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