The Morning Call
The Market
Technical
The
indices (DJIA 13982, S&P 1520) turned in a mixed performance yesterday with
the Dow down and the S&P up. Both
closed within their short term uptrends (13363-14023, 1455-1525) and their
intermediate term uptrends (13339-18339, 1411-2006).
Volume
rose; breadth fell. The VIX increased,
remaining within its intermediate term downtrend.
GLD
(159.05) declined, finishing within its short term downtrend and its
intermediate term trading range. Short
term support exists at 158.27.
Bottom line:
both of the Averages continue to hug the upper boundary of their respective
short term uptrend---which they have been doing for the last three weeks. Until something changes, the trend remains
your friend. 14140/1576 continues to be
a reasonable technical price objective, though as you know, I find little
fundamentally justifiable about this level.
Our Portfolios will continue to Sell as prices advance.
Fundamental
Headlines
Another
mixed day for the economic data: mortgage and purchase applications were
disappointing, business inventories and sales were slightly below expectations
and January retail sales were up a bit and in line with estimates. In other words, the economy continues to grow
but with a struggle---our forecast.
As
you might expect, the news flow of the day centered on the SOTU Tuesday night
with a side sample of pity for Marco Rubio.
The question of the day was, how can all those new programs not cost ‘a
single dime more than we are already spending’?
The answer, of course, is that they can’t.
More important,
there was no sign that Obama was willing to take tax increases off the table in
the sequester debate. That is fine as
long as the GOP hangs tough and allows the sequester to happen. Not to be repetitious, but this remains my
line in the sand. If the republicans
fold, I will lose all hope of getting fiscal policy back on a more responsible
path, at least till after the 2014 election.
If not, then I would interpret this as a positive sign that 2014 could (the
operative word) bring the kind of change in spending and tax policies that
would return the economy to a sounder financial basis.
While the
sequester would definitely improve my attitude about the long term economic
prospects for this country, it will have no impact on our Economic Model for
two huge reasons:
(1)
according to the Rogoff and Reinhart study, countries
whose national debt is more than 90% of GDP
grow at below average rates as a result of being encumbered by policies that
are required in order to service that debt.
Today that debt to GDP ratio in the US GDP
ratio back to the point where the economy is free to grow at its historic
secular rate. Hence, in the short term,
the sequester and any other subsequent spending cuts will not have an immediate
impact of economic/profit growth,
(2)
the Fed is now sitting with $3 trillion on its balance
sheet, headed for $4 trillion by year end 2013.
I have no clue how it intends to withdraw this excess liquidity from the
banking system while avoiding either recession or inflation. Regrettably, neither does anyone else except
those that are, what I believe, blindly optimistic that ‘somehow’ it will be
able to manage it. Let me repeat an oft
repeated refrain in these notes---the Fed has never, ever, in the history of
the world managed to tighten money while avoiding either recession or
inflation. And in every other instance,
the magnitude of the required tightening was much, much less than this time
around. This is a huge potential
negative overhanging our economy. There
is no way I can get jiggy about solid, stable US economic growth at its
historic secular rate until this problem has been resolved or at least appears
to be getting resolved with only minor disruptions.
And none of
the above addresses the problems [i.e. rapidly rising interest rate payments on
the debt and a hole in the Fed’s balance sheet that would have to be filled by
additional money printing] that would arise if bond investors take the Fed to
task for its prolific money printing and push rates higher, faster than the Fed
expected.
Bottom
line: the economy is doing the best it
can, given the current political environment.
Tuesday night, Obama revealed that He is going to do little to change
that environment. On the other hand, the
republicans have stated that they intend to induce change via the
sequestration. I will believe it when I
see it. Still if it occurs, I will be
encouraged.
That said,
sequestration will be only a first step in a long journey to fiscal
responsibility. So even if the GOP holds
firm, nothing will alter our forecast anytime soon; and hence, nothing is going
to change in our Models anytime soon.
That leaves stocks overvalued at current levels.
Thursday
morning humor (short):
Warren
Buffett’s favorite valuation metric (short and a must read):
Another
valuation measure (short):
And
yet another (short):
http://www.zerohedge.com/news/2013-02-13/one-chart-stock-and-bond-holders-should-be-paying-attention
If
corporate profits are near record highs, how come taxes paid are still 30%
below their peak? (medium):
http://www.zerohedge.com/news/2013-02-13/some-taxing-questions-about-not-so-record-corporate-profits
And
Japan GDP (short):
Subscriber Alert
The
stock price of Western Gas Ptrs (WES -$57)
has traded above the upper boundary of its Buy
Value Range WES .
Investing for Survival
The
immutable laws of money (long/medium):
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