Thursday, February 28, 2013

The Morning Call--The joys of ignorant bliss


The Morning Call

2/28/13

The Market
           
    Technical

            The bulls returned yesterday.  The indices (DJIA 14075, S&P 1515) smoked to the upside but remained within their (1) short term uptrends [13509-14169, 1472-1541] and intermediate term uptrends [13419-18419, 1421-2015].

            Volume declined, breadth continued to improve.  The VIX sold off, finishing within its short term and intermediate term downtrends.

            GLD got hit after a couple of up days.  It remains within its short term downtrend; so the immediate direction is down and will remain so, until that downtrend is successfully challenged.

Bottom line: yesterday’s pin action notwithstanding, I think that the jury is still out as to whether the Market is in a topping process or positioning itself for an attack on the 14140/1576 levels.  Whatever occurs, our strategy hasn’t changed.  If prices continue to the upside, our Portfolios will raise more cash; if it rolls over, they will wait for a return to more reasonable values to put their current cash position to work. 

Main street versus Wall street (short):

    Fundamental
    
     Headlines

            Yesterday’s economic data was mixed: weekly mortgage and purchase applications were down, January durable goods orders also declined rather sizably but that was primary a function of poor aircraft orders---ex transportation, orders rose well above expectations.  Not great but it fits.

            Bernanke did a second day on the Hill and just in case anybody had any doubts after Tuesday’s testimony that the Fed would be printing dollars as fast as it could buy the paper and ink, he re-emphasized the point.  As you know, there wasn’t much of a question in my mind that easing would go on for an extended time.  But I think he wanted to be sure that those who interpreted last week’s FOMC minutes as a foreboding of future Fed tightening were completely assured that it ain’t happenin’.   Obviously, investors were overjoyed to know the Fed intends to do all it can to support stock prices irrespective of the underlying valuation.

            More low lights from Bernanke’s testimony (medium):

            Great graphic providing a slightly different take on Bernanke’s record on inflation (short and a must read):

            One day older and deeper in debt.  The sequestration effective date is tomorrow.  Obama continues to do what He does best---campaign, this time for tax hikes; but so far, the GOP is hanging tough.  As you know, I believe that all the whining over the coming cuts will be proven wrong; I believe that for there to be any chance of a return to fiscal responsibility, the sequester has to be implemented; indeed, I believe that there is a reasonable probability that the cuts in government spending could have a positive impact on economic growth. 

Hence, I am encouraged; and to the extent that yesterday’s optimism reflects investors’ agreement with that position, then I understand their upbeat mood.  However, a move back from ever growing budget deficits will not be a day in the park.  It will take time; and the burdens of too much inefficient government spending will continue to impact growth for several years.  So even in the best case, corporate profits are not going to suddenly explode to the upside; and I suspect that the readjustment of the US economy will cause sufficient heartburn that multiples aren’t going to expand until it is truly clear that the ruling class has the will to complete the task.  In sum, with stocks already overvalued, I can’t make a case for higher prices under even the optimum scenario.
           
            The tired rhetoric of sequestration (medium):

            More nanny state regulatory authority for the Fed (medium):

            A failing Italian economy and political process couldn’t dampen investor enthusiasm.  However, I believe that the third Act of this play has not yet started---and this is a tragedy.  The news is not likely to improve.

            The Germans are upset; but it may not matter (medium):

            And (medium):

            A century of French and Italian economic decline (medium):

            Unfortunately, at present, it is more than just the French and Italian economies that are declining (medium):

Bottom line:  I continue to be encouraged by the economic progress the US is making.  In addition, I am encouraged that the sequestration process could prove to the first step back in the direction of fiscal responsibility.  While not a magic elixir that will smooth over years of profligate behavior, if it proves to the tipping point then that is enough for today.

That said, I believe that the Fed is digging itself into such a hole that it will never be able to right the sum total of its wrongs without causing either a more significant economic slowdown or a more destructive level of inflation than would otherwise occur with a less aggressively expansive monetary policy.

In addition, I am losing what little confidence I had in the eurocrats’ ability to fix a hangnail much less the growing sovereign/bank insolvency problem.  This is a stick of dynamite stuck up the global financial system’s ass.  A wrong move could be very painful for us all.

I like our cash position.

            The latest from Cumberland Advisors (medium):

            The latest from David Rosenberg (medium):

            Bill Gross’ latest monthly letter (medium):

     Investing for Survival

            Bermuda tax haven (medium):

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