The Morning Call--Ryan's hope

-->

The Morning Call

1/29/13

The Market

           

    Technical

            The indices (DJIA 13881, S&P 1500) rested yesterday.  The Dow remains above the upper boundary of its short term uptrend (13160-13821) and within its intermediate term uptrend (13214-18214).  The S&P closed right on the upper boundary of its short term uptrend (1431-1500) and within its intermediate term uptrend (1397-1992).

                        Volume was down as was breadth.  The VIX rose but continues to trade in an intermediate term downtrend.

            Are we in a buying stampede? (medium):

            http://www.minyanville.com/business-news/markets/articles/Are-We-in-a-Buying-Stampede/1/28/2013/id/47672

            GLD turned in a disappointing day.  It finished below the lower boundary of that very short term uptrend---not a hopeful sign.  Further, it remains within its short term downtrend and intermediate term trading range.

             Bottom line: It shouldn’t be unexpected that the Averages would take a break from the red hot sizz they have been on.  What is somewhat surprising is that the most significant retreat it can manage is merely fractional.  I think that indicative of (1) a strong bid under the market and (2) the likelihood that this current move up will reach at least the 14140/1576 level.

            More on the January indicator (short):

            http://blog.stocktradersalmanac.com/post/January-Indicator-Trifecta-Leads-to-Next-Eleven-Month-Gains-889-of-the-Time

    Fundamental

    

     Headlines

            Yesterday’s economic news couldn’t have been better: December durable goods orders were gangbusters while the Dallas Fed manufacturing index beat expectations, unlike other recent regional Fed reports. So nothing here that would cause me to question our forecast.

            The political chit chat mostly focused on Ryan’s Sunday morning comments suggesting the sequestration will likely happen.  I hope that he is right; I hope the GOP has decided to make this the ‘line in the sand’.  If so, it would be the first sign in sometime that someone in DC is actually ready to step up and deal with the necessity and subsequent pain of a move to fiscal responsibility.  And if they actually go through with it and reduce government spending in a meaningful was, my long term view of the economy could brighten.  However, the trade off is that short term our forecast would likely be too optimistic---most estimates I have seen is that sequestration would cut 0.5% off 2013 economic growth (remember that this is on top of the 1.2-1.5% hickey from are the resumption of FICA deductions).

            Also bandied about during the day was what appears to be a rise in the risk of a ‘currency war’.  We certainly seem to be heading in that direction though for the US there may be more smoke than fire to this worry.

           

A policy guide to currency war (medium):

            http://www.zerohedge.com/news/2013-01-28/policymakers-guide-playing-global-currency-wars

           

            Bottom line:  neither surprisingly good economic data nor potentially disturbing political developments (sequestration, currency war) had much impact on investor sentiment yesterday.  Of course, they didn’t have any effect on the assumptions in our Models either.  So no big deal.  However, what remains a big deal for me is that  our Valuation Model has stocks (S&P) 7% overvalued.  So my focus is to either come up with a set of assumptions that meaningfully alter the valuations (a successful GOP stand on spending would improve our long term growth rate assumption) generated by our Model or to maintain our Sell Discipline and continue to lighten up on fundamentally overvalued or technically overextended stocks.  At the moment, it is far too early to  build a case for the former so our Portfolios pursue the latter.

Fraud is the biggest bubble (medium):

            http://www.ritholtz.com/blog/2013/01/fraud-is-the-biggest-bubble-in-history/

            The latest from John Hussman (medium):

            http://advisorperspectives.com/commentaries/hussman_12813.php

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.