The Morning Call--It's a Bizzaro World

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The Market

           

    Technical

            The indices (DJIA 13456, S&P 1447) rallied yesterday, remaining within their (1) short term uptrends [13265-14025, 1413-1503] and (2) intermediate term uptrends [12441-17441, 1310-1910].  This move took the S&P back above the 1442 resistance turned support level after having violated it on Tuesday.  That leaves this support level in tact.

            Volume was off; breadth improved though on balance volume remains quite negative.  The VIX fell considerably one day after confirming the break above the upper boundary of its very short term downtrend.  However, the drop was not sufficient to take it back to that former trend line.  So the penetration was validated.  This index is still well below the upper boundary of its short term downtrend.

            GLD (172.1) bounced powerfully, leaving it above the lower boundaries of its very short term and short term uptrends as well as the intermediate term trading range.  It is approaching the upper boundary (175.5) the same trading range.

            Bottom line: yesterday’s pin action halted the three day downtrend and negated the break of the S&P 1442 support level; and it leaves the Averages in an uptrend.  I know that my thesis of a weakening internal market structure is (1) getting old and (2) likely irrelevant to most investors. 

Nevertheless as our Portfolios actions yesterday illustrate, more stocks keep trading into their Sell Half Ranges while still others are breaking major technical support.  This is just not the kind of Market in which I want to be buying stocks.  It can be argued that I should have been more aggressively buying stocks six months ago---and that is a valid criticism.  But being wrong six months ago is not a reason to be wrong today.  Therefore, I continue to focus on the Sell side, except for GLD.

            Citigroup index records high complacency (short):

            http://www.zerohedge.com/news/2012-09-27/peak-macro-complacency

            Market performance in the fourth quarter of an election year (short):
            http://blog.stocktradersalmanac.com/post/Q4-Not-So-Magical-In-Election-Year

            Bullish sentiment shows a decline (short):

            http://www.bespokeinvest.com/thinkbig/2012/9/27/bullish-sentiment-shows-a-modest-decline.html

    Fundamental

  

     Headlines

            Yesterday’s economic data did not paint a pretty picture.  While weekly jobless claims were down more the expected, second quarter (revised) GDP grew much less than originally reported and August durable goods orders were down right awful.  The two latter numbers point at a weakening economy, as does the balance of data reported thus far this week and as did the stats from last week.  Nevertheless, it is too soon to consider altering our Model although the alert lights are flashing yellow.

            GDP and capital goods orders (a bit long but worth the read):

            http://www.zerohedge.com/news/2012-09-27/guest-post-gdp-and-durable-goods-heading-recession

            GDP per capita (medium):

            http://advisorperspectives.com/dshort/updates/Real-GDP-Per-Capita.php

            That said, only in a bizzaro world could investors decide to ignore these negatives and instead choose to get jiggy about:

(1)     China joining the global money easing party.  I have dwelt on this issue ad nauseum and how the ongoing printing of money may be a ‘nose hit’ short term but will end very badly.  In addition, recent history has shown that the time period and magnitude of advance of the liquidity ‘high’ from each successive ‘nose hit’ keeps getting shorter and rising less.  Indeed, the euphoric reception given Bernanke’s ‘all in’ statement lasted seven trading days.   I can only wonder how long the Chinese ‘nose hit’ will last, especially given that we can’t trust anything these guys tell us.

(2)     more eurocrat smoke blowing out of Spain.  Ostensively, the Spanish parliament imposed more stringent austerity measures than the EU would have demanded in order to receive a bail out.  In other words, Spain met the conditions before they were even imposed, thus assuring a bail out. 

Not to toss too much cold water on this deal, but as I understand it:

     [a] Spain will impose several new measure meet the EU austerity demands

     [b] it plans new laws to bolster economy,

OK, so far so good; but now comes the good part:

[c] in meeting the goals of austerity, Spanish authorities assume GDP will fall by 0.5%.---to which I ask, what are those guys smoking?  With a soaring unemployment rate and the entire continent falling into recession, that simply makes no sense.  But of course, we know that because this is like every other eurocrat wet dream---it will never happen and will insure that Spain will follow Greece in serial misses of its austerity goals

[d] and this doozy, the country will tap its social security reserves for E3 billion to meet its liquidity needs---this by the way is the same fund invested in........drum roll....Spanish bonds.  Any bets on the odds of more riots?

           

            More analysis:

            A close look at what is occurring in Spain (medium/long):

            http://www.zerohedge.com/news/2012-09-27/summarizing-what-spain-just-announced-and-what-was-left-unsaid-hint-cash

            More analysis from the Telegraph’s Ambrose Evans-Pritchard (medium):

            http://www.zerohedge.com/news/2012-09-27/ambrose-evans-pritchards-contrition

            The current German position (medium):

            http://www.zerohedge.com/news/2012-09-27/not-counted-does-not-mean-not-there

            The EU’s false narrative (medium):

            http://www.realclearmarkets.com/articles/2012/09/27/violent_protests_mar_draghi_and_the_ecbs_false_narrative_99904.html

            Berlusconi is back (short):

            http://www.zerohedge.com/news/2012-09-27/berlusconis-back-new-grand-plan

Bottom line: stocks overvalued (as defined by our Model); but investors just keep drinking the Kool Aid.  It seemed like reality was raising its ugly head on Wednesday.  But then yesterday in the face of data pointing to an economy that could be going into stall speed, the focus was on more money printing and another Walt Disney fairy tale out of the EU. 

Don’t get me wrong, our Portfolios are positioned for more money printing (GLD and foreign ETF’s); so that is great for Our Money.  But I hate betting money on a scenario that will lead to destructive inflation.

As for Europe, our forecast is that it will ‘muddle through’.  But implicit in that assumption is that ‘muddling through’ will be a long, painful process that will avoid catastrophe while inching toward fiscal responsibility.  Yesterday’s announced Spanish austerity plan doesn’t move toward fiscal responsibility because it is not mathematically honest.  To be sure, the ‘muddle through’ scenario will prevail as long as investors give these lying bastards a pass; my concern is what happens when, as and if the markets cease believing the bulls**t.

       Investing for Survival

            Dealing with potential food inflation (medium):

            http://www.zerohedge.com/news/2012-09-27/guest-post-two-no-brainer-ways-play-rising-food-prices

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.