The Morning Call--There is no silver lining to Sandy

The Morning Call

11/1/12

The Market

           

    Technical

            The indices (DJIA 13096, S&P 1412) had a flattish day (Dow down a little, S&P up a little).  They remain (1) well within their intermediate term uptrends [12650-17650, 1335-1931], (2) above their  interim support levels [12973/1395], (3) as well as their 200 day moving averages [12973/1378].

            Having busted through a triple support zone, the Averages are poised to challenge a double support zone, i.e. the interim support level and the 200 day moving averages.  I think that it is likely that the indices will test this zone; and despite that this level is Fair Value for the S&P, I believe that there is a decent probability that economic circumstances will fuel a penetration to lower prices.

            Volume was flat with last Friday’s close while breadth was mixed.  The VIX was up 4%, remains near the upper boundary of its short term downtrend and well above the lower boundary of its intermediate term trading range.

            GLD had a good day, closing right on the upper boundary of a newly formed short term downtrend.  If it moves cleanly above this boundary, our Portfolios will likely buy back a portion of their trading position in GLD.

Bottom line:  stocks tried to rally in spite of the huge wealth destruction of Sandy, terrible news out of Europe and some more poor reports from individual companies.  Ultimately, it failed though not as much as I would have thought. 

That left them slightly above a double support zone with the 200 day moving average being the stronger of the two.  In the end, I don’t think this support level will hold but that is a function of my concerns about real trouble in the EU.

            S&P index with share weighted earnings average (short):

            http://www.ritholtz.com/blog/2012/10/sp-500-index-with-share-weighted-earnings-average/

    Fundamental

    

     Headlines

            Yesterday’s economic news was a bit disappointing although it came from secondary indicators: both mortgage and purchase applications were down big while the October Chicago PMI was a tad short of estimates.  Mildly negative; but nothing about which to get excited.

            The rest of the news flow centered largely (1) on the recovery efforts from Sandy and (2) what a boon it (the spending to rebuild) will be to the economy---I assume none of these talking heads checked with those in the hurricane’s path.

            Hurricanes do not have a silver lining (medium):

            http://www.zerohedge.com/news/2012-10-31/guest-post-hurricanes-do-not-have-silver-lining

 

            And (medium):

            http://www.zerohedge.com/news/2012-10-31/guest-post-tremendous-economic-benefits-superstorm-sandy

            Meanwhile, economic conditions in Europe continue to deteriorate.  Of course, an implosion there would wipe out more wealth than three or four Sandy’s; so on the same logic that a disaster will generate economic activity, the same group of idiots must be positively giddy over a collapse in Spain. 

Another Greek budget; another really bad joke (medium):

            http://www.zerohedge.com/news/2012-10-31/greece-releases-another-budget-hilarity-ensues

            And speaking of bad jokes, one word: France (short):

            http://www.zerohedge.com/news/2012-10-31/frances-fiasco-one-fine-chart

Bottom line:  Sandy is dissipating but the after effects will be with us for some time.  It is true that the recovery activity will spur short term economic growth but for the wealth that has been destroyed to be replaced will siphon productivity from the economy longer term and hence is not going to help us get out of the ‘slow, sluggish recovery’ scenario.   In the meantime, economic conditions in Europe are going from bad to worse.  That too will hamper the rate of any rebound in the US. 

The good news is that the election is just a week away; and there exists the prospect that US fiscal, monetary and regulatory policy could undergo a significant change---prospect being the operative word.  However, even if this occurs, economic growth over the near to intermediate term horizon is apt to be worse than if Obama wins---a subject that I have belabored enough.

None of the above suggests a reason to get jiggy about stocks (though a Romney win could provide the impetus for a short rally) even though the S&P is approaching Fair Value.  However, given the extent of the downside associated with the aforementioned problems, the only thing that will get my animal spirits aroused is lower stock prices.  To be sure, the EU may ‘muddle through’ and our economy may track close to our forecast; but I continue to believe that some additional caution in the form of above average cash position is necessary.

            The latest from David Rosenberg (medium):

            http://www.ft.com/cms/s/0/e91f9c86-121f-11e2-b9fd-00144feabdc0.html#axzz2Au3Soyub

            The latest from Bill Gross (medium):

            http://www.zerohedge.com/news/2012-11-01/bill-gross-ours-country-superpac-superpac-and-superpac