Tuesday, August 27, 2013

The Morning Call--A whole lot of huffing and puffing going on

The Morning Call


The Market

            Yesterday, the indices (DJIA 14946, S&P 1656) sold off in late trading.  The Dow closed in a short term trading range (14190-15550) and below its 50 day moving average; while the S&P finished within its short term uptrend (1632-1757) but once again below its own 50 day moving average.  Both finished within their intermediate term (14657-19657, 1556-2144) and long term uptrends (4918-17000, 715-1800).

            Volume was anemic; breadth was poor.  The VIX rose, remaining with its short term trading range and its intermediate term downtrend.  Somewhat surprisingly, bonds ended up on the day, but closed within its short and intermediate term downtrends.

            GLD rose again.  It finished above its very short term uptrend but remains well within its short and intermediate term downtrends.

            Bottom line: the Averages remain out of sync but both closed below their 50 day moving averages---leaving the technical yellow light flashing.  On the other hand, the S&P has been gyrating above and below its moving average; so I am not getting too beared up.  Indeed, I believe that how the S&P handles its 50 day moving average should give us a hint as to near term Market direction.


            Yesterday’s economic data was nothing to shout about: July durable goods were very disappointing; and while the Dallas Fed’s August manufacturing index headline number was okay, there was some worrisome weakness below the surface.  Overseas Greece reportedly needs another bailout and Italy is in political turmoil.  However, investors appeared to be in the ‘bad (economic) news is good news (re: no ‘tapering’)’ mindset and stocks traded were up for the better part of the day.

Investors aren’t worried about what the Fed is going to do, but what it has already done (medium):
            Is the Treasury sell off overdone (medium):

            Then late in the afternoon, secretary of state Kerry held a new conference pointing the finger of blame at Syria’s Assad regime as the culprit in the gassing of Syrian civilians.  While he sort of whimped around about the consequences, saying the US would ‘confer with allies’ (no mention of congress, which, you know, has the war declaring responsibility) versus ‘Obama said there was a red line, the Assad regime crossed it, get ready to rumble’, it nonetheless created enough anxiety about mounting instability in the Middle East to force a late in the day sell off.

            While our political class is getting all righteously indignant over the gassing incident, I frankly don’t really care.  As I said in last week’s Closing Bell, I think it a shame both sides can’t lose.  Further, while I think it terrible that a couple of hundred civilians were gassed, no one in our government got their panties in wad over the genocide of tens of thousands of civilians in Rwanda, Chad or Somalia

Not only that but the Russians have a small fleet off the coast of Syria and the Iranians have boots on the ground---meaning this dog fight may not be just the US versus Syria.        Not that I have a problem with going toe to toe with the Russians or the Iranians, if (1) there is something in it for the US.  In this case, assuming we destroy the Assad regime and the Russians/Iranians don’t escalate the conflict, what will happen?   According to military sources, there will probably be a civil war among multiple parties none of whom are any better than Assad and indeed, could be worse and (2) I had an ounce of confidence that our leadership had a set of balls and a modicum of experience in foreign affairs---think Egypt, Benghazi, etc.

  As a result, I can’t see a win in any of the alternatives.  If the US does nothing, then all of Kerry’s puffery will simply add to our image of impotency.  On the other hand, if we eliminate Assad, he will likely be replaced by something worse and in the meantime the risk of a confrontation with more powerful foes escalates.  The point here is that none of this will likely be a positive for the Market. 
Bottom line: stocks are overvalued at least as calculated by our Valuation Model.  Often, such periods of high prices can go on for an extended period of time until some exogenous event occurs that slaps some sense into overly optimistic investors.  The recent realization that the transition from easy to tight money was upon us has the Markets on edge.  All that it would take is for some hedge fund with a big exposure to the ‘carry trade’ to blow up to create that exogenous event.  And now we have another potential flash point---the US stepping on its own d**k in Syria.

To be clear, I am not suggesting that either will happen.  I am suggesting that risk of either happening has risen.  Caution.

            The latest from John Hussman (medium):

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 Investing For Survival is to help other investors build wealth and benefit from the investing lessons he learned the hard way.

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