Wednesday, February 27, 2013

The Morning Call--Bernanke doubles down

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The Morning Call

2/27/13

The Market
           
    Technical

            The indices (DJIA 13900, S&P 1496) rebounded yesterday, though the pin action was largely that of an oversold bounce.  The Market is starting to give the impression that it is drifting into another one of its schizophrenic phases (lots of volatility, no direction).  That said, the Averages remain within their (1) short term uptrends [13509-14164, 1469-1539] and (2) intermediate term uptrends [13410-18410, 1421-2015].

            Volume declined; breadth recovered.  The VIX fell but finished within both a short term and intermediate term downtrend.

            GLD rallied hard, though it is well within its short term downtrend.  The recent recovery has been on above average volume, suggesting the potential that we have seen the lows.  However, we won’t know or consider taking action until the current short term downtrend has been successfully challenged.

Bottom line: the recent churn on better volume is suggestive of a pitched battle between the bulls and bears and/or, more ominously, a topping process.  We likely won’t know which for a while; but the erratic pin action relieves somewhat the pressure of being under invested.  For the moment, equities remain in a technical uptrend---and will remain so until they are not. 

If investors are rethinking their overactive optimism, the Averages will tell us when given the chance to challenge those uptrends.  If not, our Portfolios will continue to Sell into rising prices.

            The lead/lag report (medium):

            Market performance in post election years (short):

                Major correction or bear trap? (short):

    Fundamental
    
     Headlines

            Lots of economic data was reported yesterday and it was universally good: weekly retail sales showed growth, the Case Shiller home price index was up more than expected, new home sales were very strong as was consumer confidence and the Richmond Fed’s manufacturing index was up versus estimates that it would be negative.  In sum, very supportive of our forecast and clearly a reason for investors’ positive mood.

            Bernanke kept the party going by:

(1) promising to keep the presses running into infinity and shrugging off the risks associated with an ‘all in’ liquidity surge.  As long as all that money remains as reserves on bank balance sheets, he will be correct.  But when, as and if velocity ever picks up, he [and the rest of us] will have a problem,

(2) doubling down by supporting the doomsayers on sequestration.  Given the Keynesian economic model and orientation of the Fed staff, this opinion is not a surprise.  I was a bit taken back that Bernanke ventured into fiscal policy---something the Fed normally eschews.  I can understand that if he believes that the economy could weaken and worries that everyone will be looking at the Fed for even more ease to offset that weakness, then he would rightfully be nervous about expanding the Fed’s balance sheet beyond its current gluttonous and ever growing size. 

Frankly, the only reason that I even care about Bernanke’s opinion on sequestration is the extent to which he could influence the GOP determination to hold fast.  Obama will likely be blitzing the media with Bernanke’s comments and urging the public to pressure their congressmen to ease up.  The good news is that He only has two days to do it.  The line in the sand is still there.
           
Must read excerpts from Bernanke’s testimony (medium):

Bernanke downplays the risks of too easy money (medium):

            And how about this for a troublesome chart (short):

And finally, this from Charles Biderman (5 minute video):

Investors chose to ignore the potential fall out from the Italian elections---probably because no one seems to know exactly how things will play out.  However, the Italian and Spanish bond markets paid attention and the result was whackage.  My guess is that the political crisis in Italy won’t be disregarded by US investors for long.

Can the euro exist without a fiscal union (medium):

What the Germans think (medium):

But how much of a euro disaster is already priced into stocks?  Good point. (short):

Bottom line:  yesterday’s economic data was welcome after a period of more ‘mixed’ results.  Bernanke’s re-emphasis of monetary easing was not surprising, though his pitch for backing off sequestration concerns me.  If Obama uses it to successfully bludgeon republicans into backing off their stance, it would be.....unfortunate.

Just because investors elected to overlook the potential financial problems that could result from an anti austerity administration in Rome doesn’t mean that they don’t exist.

I like our cash position.




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.

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