The Morning Call--Recent economic data is impressive

The Morning Call

10/18/12

The Market

           

    Technical

            The indices (DJIA 13557, S&P 1460) had another good day, closing well within their primary uptrends: (1) short term uptrend [13429-14280, 1441-1533] and (2) intermediate term uptrend [12572-17572, 1325-1923].  I continue to watch the recent Market highs (12653, 1469) as a sign of whether stocks are bouncing off an oversold position or in a new leg up.

            Volume rose, breadth was mixed.  The VIX fell slightly, remaining between the upper boundary of its short term downtrend and the lower boundary of its intermediate term trading range.  It closed for the second day below its 50 day moving average, suggesting the possibility for more downside (upside for stocks).

            Gold rose, finishing the above (1) its interim support level [168.4] and (2) the lower boundaries of its (a) short term uptrend and (b) intermediate term trading range.

            http://www.zerohedge.com/news/2012-10-17/three-scenarios-gold

Bottom line: the Averages continued their climb to recent highs (13653, 1469).  How they handle this level will be a sign as to whether my call for lower prices near term is wrong.  In the meantime, I am taking my Tums and remain focused on our Sell Discipline.

            Historical stock performance November to January (short):

            http://blog.stocktradersalmanac.com/post/Regardless-of-Outcome-Elections-are-a-Drag-SPY

    Fundamental

        Headlines

            We got another strong headline economic datapoint yesterday: September housing starts and building permits were unexpectedly strong.  Weekly mortgage applications weren’t so good but this stat is much less consequential than the housing numbers.  That said, this makes three very positive reports of three very important economic indicators in a row (retail sales, industrial production, housing).

            The temptation, of course, is to start considering revising our forecast to the upside.  But remember, it was only a month or so ago that we resisted lowering our outlook based on two weeks of negative reports.  This is not to say that the economy isn’t starting to click at a higher rate than is reflected in our forecast; it is to say that it is too early to make that call.  Clearly, I will be mindful of this potential as we get more data.  On the other hand, an easier call to make is that the risk of recession is fading---barring a blowup in the Europe or war in the Middle East.

            Eurozone bank supervisor plan found illegal (medium and today’s must read):

            http://www.zerohedge.com/news/2012-10-17/eurozone-bank-supervisor-plan-found-be-illegal

            And a primer on what comes next (a bit long, definitely ugly but should be read):

            http://www.zerohedge.com/news/2012-10-17/once-jollying-markets-faith-hope-and-charity-fails-what-comes-next-primer-europes-ne

            The latest from Spain (medium):

            http://www.bloomberg.com/news/2012-10-17/spain-banks-face-more-losses-as-worst-case-scenario-turns-real.html

            And Greece (short):

            http://www.zerohedge.com/news/2012-10-18/athens-full-day-strike-turns-violent-tears-gas-petrol-bombs-exchanged

            Also worth mentioning is that yesterday’s positive pin action had to fight earnings disappointments in two tech bell weathers: IBM and INTC.  So it would seem that this earnings season is being subordinated to an improving economic environment.

    

Bottom line:  the current string of positive readings of significant economic indicators is impossible to ignore.  This not only suggests that the risk of recession is declining but also, if the trend continues, the probability that our 12 to 18 month growth estimates may be too low.  However, as I noted above, any revisions are not going to happen immediately because (1) it is simply too soon and (2) as I noted yesterday, the election will play a role in that 12-18 month forecast. 

That all said, even if I did raise the economic growth rate in 2013, it would still likely be below the historical rate of recovery in the US because as I opined yesterday, even a Romney win and a full on attack on the accumulated fiscal, monetary and regulatory mischief heaped on us by the prior two administrations would not allow us to escape the pain of that mischief---anymore than two aspirin and a glass a water is going to alleviate a hangover.

Nevertheless, such a scenario would vastly improve our long term outlook;. Although for the moment, that is just the stuff that dreams are made of because  I  am not going to make  Herculean assumptions in either our Economic or Valuation Models until there is some hard evidence on the table. 

So stocks are overvalued on our current outlook.  Recent data provides hope that that outlook could be improving.  However, absent any other occurrence, the increase in the economic growth rate might move 2013 Year End Fair Value up a half percent.  Hence, it would not be a basis for assuming stock prices much higher than current levels.