Thursday, October 10, 2013

The Morning Call---Today's pow wow will be a tell

The Morning Call

10/10/13

The Market
           
    Technical
   
            The indices (DJIA 14802, S&P 1656) ended up, just barely, on the day; not much of a bounce from an oversold position on a day when Yellen is nominated for Fed chief.  The Dow closed for the third day below the lower boundary of its intermediate term uptrend.  If remains there in today’s trading, the break of that uptrend will be confirmed and re-set to an intermediate term trading range.  Simultaneously, the short term trend will re-set to down.  In addition, the DJIA remains below its 50 day moving average; in yesterday’s trading, it touched its 200 day moving average intraday but managed to close above it.

            The S&P confirmed the break of its short term uptrend, which re-sets to a short term trading range (1626-1729).  It is also trading below its 50 day moving average but remains well above its 200 day moving average.  It continues to trade within its intermediate term uptrend (1595-2181).

Both of the Averages are within their long term uptrends (4918-17000, 715-1800).

            Volume was flat; breadth improved.  The VIX fell 4%, finishing within its short term trading range and intermediate term downtrend.

            The long Treasury continues to snooze its way through the current stock market hiccup although it did trade down slightly on the day.  It closed within its short term trading range and intermediate term downtrend.

            GLD declined, remaining below the upper boundaries of its very short term, short term and intermediate term downtrends.

Bottom line:  I was surprised by the lack of strength of yesterday’s rally, given that the Market was oversold, Yellen was officially nominated to Fed chief and there was some mild mewing about movement toward negotiations on the budget/debt ceiling issues.  I still anticipate a more enthusiastic bounce when, as and if progress starts being made; although I am concerned that the current DC follies has done further damage to the long term secular growth prospects of the economy via impairment of business and consumer confidence. 

Nearer term, given the magnitude of the current level of overvaluation (at least according to our Model), it is easy to rationalize the current fiscal slugfest driving prices lower.  So I am not concerned that the S&P and/or the DJIA are breaking support levels. 

On the other hand, if the pin action improves and one of our stocks trades into its Sell Half Range, our Portfolios will act accordingly.

            Rallies end when ‘good news’ is sold (short):

    Fundamental
    
     Headlines

            Only one secondary US economic indicator released yesterday---weekly mortgage applications rose but the more important purchase applications fell.  The minutes from the last FOMC (no taper) meeting were released.  In summary, while the participants worried about the risks in fiscal policy, they still seemed to agree that tapering should start this year and end next.

            Overseas, August UK industrial production was very disappointing.

            To date, there has been little data that causes in cognitive dissonance with respect to our forecast.  Of course, if the worse case scenario (default) occurs, there will undoubtedly be negative economic repercussions.  But I still think that a low probability outcome.  On the other hand, as I suggested above,  if our elected representatives walk the budget/debt ceiling negotiations to the edge of the cliff and look over, it will likely, in my opinion, sustain business and consumer suspicions of continued fiscal ineptness and, hence, restrain investment and consumption.

            There was a lot of time and many words spent yesterday opining on how Janet Yellen will perform as Fed chair.  When all is said and done, she is very much a disciple of the Greenspan/Bernanke easy money school.  So I see little reason to question the monetary policy assumptions in our Model.

            The rest of the day was spent dwelling on our torturous political process.  About the only thing new was that a number (yet to be determined) of republicans are going to the White House today for talks.  Some heart seems to have been taken from this news; although I seem to remember the last meeting between the GOP house leadership and Obama ending with John Boehner red faced and sputtering before the microphones. 

Bottom line: ‘(1) the shutdown is not a significant economic risk, (2) a government default on its debt following a stalemate on the debt ceiling could cause problems [higher interest rates, declining dollar], (3) the rhetoric notwithstanding, a stalemate is a no win strategy for the party that the electorate faults; they will read the polls and salvage what they can, (4) there is some small probability that this judgment is far too optimistic, that the shutdown/debt ceiling won’t be resolved which would likely do considerable damage to the Markets, (5) there is a larger probability that the whole process, even if it ends well, [a] will cause investors to rethink their current overly optimistic view of the Market and stocks could trade down to Fair Value {S&P 1440} and [b] will reinforce businesses and consumers unwillingness to invest and spend; and hence, doing nothing to lessen the economic headwind of a highly unreliable fiscal policy, and finally (6) given our Portfolios large cash position, neither (4) nor (5) above represent a calamity; indeed, that is the point of our Price Disciplines---sell high, but low.’

            Don’t get spooked by the Treasury bill market (medium):

            The latest fro Joseph Stiglitz (medium and today’s must read):

     Subscriber Alert


            The stock price of Kinder Morgan Energy PTRS (KMP-$80) has fallen below the lower boundary of its Buy Value Range.  Hence, it is being Removed from the High Yield Buy List.  Since it remains well above its Stop Loss Price, the High Yield Portfolio will continue to Hold KMP.



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 Investing For Survival is to help other investors build wealth and benefit from the investing lessons he learned the hard way.

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