The Morning Call---Brussels, we have a problem

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The Morning Call

2/26/13

The Market

           

    Technical

            The indices (DJIA 13784, S&P 1487) had a roller coaster day, opening up big and falling out of bed later.  Nonetheless, they ended within their (1) short term uptrends [13462-14116, 1465-1535] and (2) their intermediate term uptrends [13398-18398, 1418-2013].

            Volume rose; breadth crashed.  The VIX soared (+34%) closing near the upper boundary of a short term downtrend but well within its intermediate term downtrend.

            GLD was up big, finishing back above the lower boundary of its short term downtrend and above the lower boundary of its intermediate term trading range.

Bottom line: equities took investors on a wild ride yesterday.  The late day sell off on top of last week’s hiccup seems to be telling us that investors are at last starting to be concerned about some of the problems about which I have been harping on for far too long.  It is too soon the suggest that prices could be heading back to Fair Value---although it is clearly possible that the Averages will challenge the lower boundaries of their short term uptrends.  Until those boundaries are broken, it remains probable that stocks can reach the 14140/1576 level.

            Five signs the rally is on hold (short):

            http://www.thereformedbroker.com/2013/02/24/five-signs-the-rally-is-on-hold/

            Market behavior in February (short):

            http://blog.stocktradersalmanac.com/post/Typical-February-Market-Behavior-DJIA-DIA

    Fundamental

    

      Headlines

            Two regional Fed banks reported yesterday: (1) the Dallas Fed’s February manufacturing index grew but at about half the expected rate and (2) the January Chicago Fed’s national activity index was disappointing.  Not great news but not alarming within the context of our forecast.

            Overseas, Chinese PMI was below estimates.  As you know, a strong Chinese economy is a source of strength in our outlook.  So any additional weakness would be of concern.

            None of this mattered anyway as investors focused on several of the macro themes garnering attention of late:

(1)     Obama and Boehner held dueling press conferences, neither giving any hint of backing off their current positions on the sequester.  As you know, I consider this a positive scenario; although Obama’s ‘end of the world’ rhetoric does seem to be having a negative affect on investor sentiment,

(2)     Bernanke testifies before congress today and Wednesday.  Some investors apparently haven’t yet let go of last week’s FOMC minutes; so some chattering about tighter money  policy helped raise the level of yesterday’s heart burn,

http://advisorperspectives.com/commentaries/fta_022513.php

(3)     finally and perhaps most importantly, in the Italian elections, Berlusconi outpolled the current ruling coalition.  While no one is sure whether a new government can be formed or if new elections must be held, the anti austerity vote appears to have been something of a wake up call for all those EU Pollyanna’s.  Not that they won’t be lulled back to sleep; but if investors are suddenly realizing that Italy, Spain, Greece, etc still have problems and that little to nothing has been done to correct the underlying causes of those problems, then we are apt to see more days like yesterday in the Markets.

Citi’s take (medium):

http://www.zerohedge.com/news/2013-02-25/citi-first-european-election-which-voters-didnt-do-right-thing

***overnight, Italian markets are not happy; and Spain’s political problem worsens:

http://www.zerohedge.com/news/2013-02-25/next-domino-spain-main-suspect-rajoy-graft-scandal-has-passport-confiscated

Bottom line:  the economy continues to track our forecast; and I continue to believe that the risk of Fed tightening and/or the risk of economic weakness resulting from sequestration are straw men.  To be sure, we are still faced with debt ceiling and the continuing resolution negotiations.  But I just don’t see any critical economic impacts coming out of either.  There could be a psychological plus if our elected reps actually do the right thing; but I am not losing sleep on that outcome.

The 800 pound gorilla is European sovereign/bank insolvency.  It is way too early to tell if the Italian elections will erode investor confidence, drive interest rates up and spawn another funding crisis in Italy, Spain, Greece, etc., etc.

I like our cash position.

            The latest from Gary Shilling (long but worth the read):

            http://www.forbes.com/sites/steveforbes/2013/02/25/gary-shilling-why-you-should-sell-stocks-and-buy-treasurys/

            Is a great rotation underway (medium):

            http://pragcap.com/is-a-great-rotation-underway

            Don’t blame the Fed for your investment mistakes (medium):
            http://www.fool.com/investing/general/2013/02/22/dont-blame-the-fed-for-your-own-investment-mistake.aspx

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.