The Morning Call
The Market
Technical
The
indices (DJIA 14054, S&P 1514) couldn’t muster any follow through to
Wednesday’s big up day. The S&P
bounced off the 1525 to the downside.
That is the fourth time in the last two weeks; so 1525 has become a tell
for the very short term. A successful
penetration would point to a run at 1576; a continuing inability to do so
suggestive that a major top is forming.
In the meantime, the Market stays in the volatile, schizophrenic churn
that has characterized recent trading.
Volume
was up sizably, but that was largely a function of month end window dressing and
index re-balancing by the institutional set.
Breadth weakened. The VIX rose
but remains well within both its short term and intermediate term uptrends.
GLD
continues unable to get out of its own way, selling off again and closing near
the lower boundary of its short term downtrend.
Bottom line:
yesterday’s pin action leaves open the question, is the Market in a topping
process or positioning itself for an attack on the 14140/1576 levels? While I am biased towards the former, our
strategy is set in either case---if prices continue to the upside, our
Portfolios will raise more cash; if the Market rolls over, they will wait for a
return to more reasonable values to put their current cash position to
work.
Risk
on/risk off index (short):
Chris
Martenson on the coming sell off (medium):
Bullish
sentiment plummets (short):
Fundamental
Headlines
Yesterday,
the economic data continued its winning
streak: jobless claims fell, fourth quarter GDP
was revised up and the Chicago PMI came in
better than expected. There were some sour
notes---the Kansas City Fed manufacturing index was not good at all and the
fourth quarter GDP deflator was a bit hotter
than forecast (Bernanke would call this a positive). Nothing here suggests either recession or a
more robust recovery; so our forecast remains on track.
In
the only development on the political front, the senate feigned trying to
prevent the sequester by bringing two ‘compromise’ bills to the floor---both of
which had been widely regarded as DOA.
In another
meeting designed to help sell newspapers, congressional leaders are meeting
with Obama today---the supposed purpose is also to reach a negotiated
settlement on sequester. My guess is that nothing happens; and, as you know, I
think that is good news.
I had been
doubtful that the republicans would stand firm; so barring a deal today, I will
have been wrong on that call. But I
rejoice in being wrong. Somebody has
finally said enough (government spending) is enough. The key now is just how tenaciously the GOP
will stick to its new found fiscal responsibility in the upcoming debt ceiling
and continuing resolution debates---both of which will occur this month; and
while I might have less reason to question the republicans resolve today, I
will remain a skeptic until they at least get through those negotiations with
their spending cut creds in tact.
Bottom
line: the economy remains a positive for
Your Money; and for the moment, at least if or until the GOP reverts to its old
spend thrift ways, we can rate fiscal policy as a neutral. However, given those inputs to our Valuation
Model, equities are still over priced (current Fair Value is S&P
1409). While not an outrageously
stretched valuation, it is, on the other hand, not a screaming endorsement of
buying stocks at these levels.
Under normal
circumstances, at the current prices, our Portfolios would be 15% in cash, give
or take. However, our Portfolios have
been aggressive in lightening up on technically overextended stocks because of
my concerns about tail risks to this Market.
The eurozone
sovereign/bank insolvency crisis is my primary concern. The EU governments have far too much debt and
far too big deficits to allow anything other than anemic growth. All that has to happen to push one or more of
them into bankruptcy is for funding costs of all that debt to skyrocket (making
servicing that too large debt difficult to impossible).
Further, the
banks are highly levered and most of that leverage was used to by the sovereign
debt of their parent countries. Even
worse, these banks have hedged these positions with derivative strategies that
virtually no one understands, including bank management and the
regulators. Two words---Lehman Bros; and
the s**t hits the fan.
Of lesser but
mounting concern is the endless money printing of most central banks, not the
least of which is our own Fed. No one
has explained how these guys are going to be able to unwind all the liquidity
without causing severe economic problems.
I like our cash
position.
Whence
the junk bond market (medium/long):
Crash
amnesia (short):
Frequently
repeating ‘the worst is over’ doesn’t make it so (medium and a must read):
Stocks
and the Fed Kool Aid (short):
Investing for Survival
More
regulation coming on off shore accounts (short):
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