Wednesday, April 24, 2013

the Morning Call---An amazing day


The Morning Call

4/24/13

The Market
           
    Technical

            The indices (DJIA 14719, S&P 1579) had an amazingly good day, closing within all major uptrends: short term (14121-14828, 1548-1622), intermediate term (13769-18769, 1458-2052), and long term (4783-17500, 688-1750).  The S&P finished above its prior all time high (1576) for the second time.  This triggers our time and distance discipline which on the time element means that a close above 1576 next Monday will confirm the break out and put the S&P back in sync with the Dow.

            Yesterday’s pin action also played hell with the developing head and shoulders pattern.  If prices reverse down today and head back toward the necklines, these formations will still be in tact.  However, a continuing move to upside will negate this developing formation.

            Volume was down (another up day on declining volume); breadth was quite positive.  The VIX finished down and remains within its short and intermediate term downtrends.

            GLD fell, leaving it well below the lower boundary of its short term downtrend and a newly re-set intermediate term downtrend.  The bright spot is that it has not challenged the lower boundary of its long term uptrend.

Bottom line:  the spike yesterday got the red light flashing on that head and shoulders formation.  Further upside will likely close out the possibility of the pattern working to completion.  In addition, we now have the clock ticking on the confirmation by the S&P of a break to all time highs.  So we are clearly at an important juncture, technically speaking. 

            The historical performance of stocks in May (short):

            ‘Big’ money has never been so bullish (short):

    Fundamental
    
     Headlines

            Yesterday’s US economic data were mixed: weekly retail sales were OK, March housing starts were up though just a tad below expectations and the Richmond Fed’s manufacturing index was a big disappointment.  It is good to have a mixed day in the midst of what may be a developing trend of more negative data flow.  I will take that when I can get it.

            On the other hand, the over night stats from the rest of the world were not so hot.  The manufacturing PMI’s from China, Germany and the EU were not good.  Perversely enough (as has been the situation for some time), economic conditions are looking so bad that the investor consensus seems to be that the eurocrats will have to do something, like err, uh, joining the race for global money printing champion.  The ECB meets next week, so I think much of yesterday’s buoyancy was anticipating lower rates, more money creation, easier credit or all of the above.  As a result, the EU markets smoked and pulled the US along. 

            CEO of Saxobank looks at the EU’s future (medium):

                Spain yields to Germany (short):

I am left with two problems:

(1) our Economic/Valuation Models assume a ‘muddle through’ scenario in Europe which as you know has become very much in question of late as economic deterioration occurs across the continent.  Nevertheless, stocks have remained near all time highs.  Assuming there will be new monetary policies employed in the EU and assuming they halt the current march toward recession, won’t that just insure our ‘muddle through’ scenario holds?  And if the Market is already trading near all time highs on a ‘muddle through’ scenario, why will it go higher simply because the odds of that scenario improve?

(2) haven’t the Fed and the BOJ proven beyond a shadow of a doubt that pumping money into an overleveraged economy has limited impact?

Bottom line: as irrational as the Market seems to me, I think I understand---stocks are smoking in the face of mediocre global economic growth  because most central banks with a printing press and access to paper and ink are dancing as fast as they can; and investors now seem convinced that those banks are about to be joined by another big player---the ECB.  In short, don’t fight the Fed.

But the US economy is stumbling along.  Many believe that it is slipping back into recession---in spite of an $800 billion stimulus package and a Fed that doesn’t know the meaning of the word ‘restraint’.  Japan has been through a decade of no growth while the federal government spent, spent, spent.  In other words, the Markets may not be fighting easy money, but the real economies certainly aren’t cooperating.

Now Europe, most of  whose sovereigns are woefully in debt but are starting to show some stability after having endured the rigors of austerity to rid themselves of inefficient labor, over regulation and bloated bureaucracy, is seemingly toying with the idea of resurrecting policies that (1) got the aforementioned sovereigns in trouble in the first place and (2) the US and Japan have demonstrated are less than effective.

 How long this disconnect between markets and economies will last, I haven’t a clue.  But with or without EU participation, I think that risks of an unhappy ending to the unbridled global expansion of liquidity are increasing. 

I am sufficiently concerned to hold an above average position in cash.
           
            Corporate excuses rise as earnings and revenues fall (medium):

           
Apropos of the above discussion on unfettered central bank expansion, this article in defense of the Fed was no one of my favorite websites (medium):


                        I think it incorporates much of the confused thinking about how the unprecedented explosion in liquidity is not a problem---to which I had to response in brief:

(1)     printing money increases the money supply---we know that’s not correct.  Printing money increases bank reserves which some day have to be drawn down; and that is the rub.

(2)     QE is pumping cash into the stock market. [a] the Fed has to buy those $85 billion bonds per month from someone.  They argue it is all from bond funds.  In fact, it is not.  The Fed is buying them from the Treasury to finance the debt. [b] take a look at institutional cash holdings {usually treasuries}; they are at near record lows. That means, by definition, stock holdings are near record highs.  [c] if you think the big banks are sitting on all those reserves and not doing anything with them {cough, prop trading, cough}, I have a bridge in Brooklyn that I will sell you cheap.

(3)     QE will create runaway inflation.  [a] we never said ‘runaway’, we said high.  There is a difference. [b] the MIT survey shows higher prices, just not runaway. [c] have you been the grocery store lately? [d] ‘yet’ ain’t here yet.

(4)     QE causes high oil prices.  This has to be filler so they could get to five reasons.  Oil prices are down.

(5) QE has debased the dollar.  No, the Fed has debased the dollar.  Burns, Miller, Greenspan et al have been doing it for years---long before anyone ever heard of Bernanke---he is just the worst; and by the way, the book hasn’t been written on QE yet.

      Subscriber Alert

            In my periodic review of Schwab (SCHW), it failed to meet the minimum quality and growth criteria for inclusion in either the Dividend Growth or the Aggressive Growth Universes.  Accordingly, at the open this morning, both the Dividend Growth and Aggressive Growth Portfolio will Sell their holding of SCHW.

            In addition, CME Inc (CME) failed to meet the minimum quality and growth criteria for inclusion in the Aggressive Growth Universe.  Hence, the Aggressive Growth Portfolio will Sell its position in CME at the Market open.  CME remains in the Dividend Growth Universe and Portfolio.





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

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