The Morning Call--Is the confidence warranted

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The Morning Call

1/15/13

The Market

           

    Technical

            The indices (DJIA 13507, S&P 1470) had a mixed day (Dow up, S&P down), remaining within their (1) short term uptrends [13031-13682, 1416-1485] and (2) intermediate term uptrends [13132-18132, 1387-1984].

            Volume was flat; breadth mixed.  The VIX rose fractionally, closing within its intermediate term downtrend.

            GLD rose and finished within its short term downtrend and intermediate term trading range.

            http://www.zerohedge.com/news/2013-01-14/it-begins-bundesbank-commence-repatriating-gold-new-york-fed

Bottom line:  the price momentum remained to the upside yesterday.  Both of the Averages are approaching their September resistance 2012 highs (13682/1474).  Our analysis suggests that these levels will get taken out, making the next definable resistance level circa 14140, 1576.  A confirmed move above 13682/1474 will generate additional sales from stocks that are either in the Sell Half ranges or are technically overextended. 

            A bear in a bull market (medium):

            http://www.minyanville.com/business-news/markets/articles/A-Survival-Guide-for-Bears-in/1/14/2013/id/47332

            New bull market in China (short)?

            http://www.bespokeinvest.com/thinkbig/2013/1/14/has-a-new-china-bull-market-begun.html

            UST 10 year yield: breakout or fake out (short)?:

            http://www.bespokeinvest.com/thinkbig/2013/1/14/us-10-year-yield-breakout-or-fake-out.html

    Fundamental

    

     Headlines

            No US economic data yesterday.  However, European industrial production came in below expectations (and this morning German 2012 GDP was well below estimates).  This follows a couple of weeks of modestly improving EU stats which had raised my hopes that the European economy might be gaining some strength---or at least had stopped deteriorating.  That still may be the case, but the production number was clearly disappointing.

            Nouriel Roubini looks at euroland (medium):

            http://blogs.reuters.com/great-debate/2013/01/14/the-year-ahead-in-the-euro-zone-lower-risks-same-problems/

                The pain in Spain (medium):

            http://www.bloomberg.com/news/2013-01-14/draghi-s-bond-rally-masks-debt-doom-loop-trapping-spain.html

            And on a very personal level (short):

            http://www.zerohedge.com/news/2013-01-14/greeks-raid-forests-search-wood-heat-homes

            However, most of the news flow centered on two things (1) Apple slashing orders for components of its new iPhone 5 and rumors of Dell going private and (2) the upcoming debate on the debt ceiling/sequestration/spending cuts.  Both sides did some finger pointing---Obama saying that raising the debt ceiling is not negotiable and Boehner stating that the house will produce a budget that cuts spending.  Not exactly the same issue; so clearly, they are talking passed each other right now.  Bernanke added his two cents worth, urging congress to raise the debt ceiling and promising to keep buying $85 billion in Treasuries a month---whew, what a relief and just what the doctor ordered.

            Once again, investors seem more focused on the benefits to stocks from easy monetary policy than on any damage to the economy or the country’s credit rating should our political class fail to resolve the debt ceiling or put the budget on a more fiscally responsible path.

Bottom line: our strategy remains at odds with a Market that seems eager to value stocks above what our Model considers Fair.  Clearly, this makes my stomach churn and keeps me constantly challenging the assumptions in our Models.  Certainly, I can get  valuations higher but it necessitates that our elected representatives produce a budget that is far more fiscally responsible than anything they have done in almost two decades.  They could do it; but it seems a stretch to bet money on that assumption.  As a result, I am more comfortable accepting the opportunity cost of not participating in any further price rise in order to avoid the risk that prices could quickly retreat to 5% to 10% undervalued if our political class stumbles on debt ceiling/sequestration/spending cut problem. 

            ETF’s are eating everything (short):

            http://www.aei-ideas.org/2013/01/top-ten-trends-to-watch-in-%EF%AC%81nance-for-2013-no-1-is-the-revenge-of-john-bogle-and-the-etfication-of-investing/

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.