The Morning Call
The Market
Technical
The
indices (15401, S&P 1701) were off yesterday. Short term, the Dow, which had challenged the
upper boundary of its short term trading range (14190-15550) and failed,
remains within that trading range. On
the other hand, the S&P finished within its short term uptrend
(1661-1815). This leaves the Averages
out of sync and directionless on their short term trends.
Both of the
Averages are well within their intermediate term (14856-19856, 1583-2169) and
long term uptrends (4918-17000, 715-1800).
Volume was
anemic; breadth was mixed. The VIX was
up 9%, but continues to trade within its short term trading range and its
intermediate term down trend. The long
Treasury was up, closing within its short term trading range and its
intermediate term downtrend.
GLD fell,
finishing within its very short term, short term and intermediate term
downtrends. For the moment, I am staying
away.
Bottom
line: following last Wednesday’s ‘no tapering’ announcement and the Market
explosion to the upside, there was almost no follow through---something to
which I always pay attention. As I noted
above, the Dow spiked though the upper boundary of its short term trading
range, spent one more day above that resistance level then gave back all the
‘no tapering’ advance.
This lack of
follow through doesn’t bode well for further upside and supports my observation
last week that with the Averages are near the upper boundaries of 80 year
uptrends, the upside seems limited.
The question is,
have the Markets grown suspicious of money for nothing and no longer respond to
a very easy Fed monetary policy or is the politicians’ persistent desire to
commit fiscal hari kari overwhelming the QEInfinity jigginess?
If stocks continue
to the upside, our Portfolios will use the advance to lighten up on any stock
trading in its Sell Half
Range
Bull
market corrections (short):
A
look at the ‘down Friday/down Monday’ indicator (short):
Percentage
of stocks above their 50 day moving average (short):
Fundamental
Headlines
Yesterday’s
US economic news was mixed: the August Chicago Fed National Activity Index came
in better than expected but the September Markit PMI
manufacturing index disappointed.
Overseas, the news was upbeat: Merkel won the German elections, which
means the EU can now return to working its way out of its sovereign/bank debt
problem; aiding that effort, the EU composite PMI
was ahead of estimates; finally, the Chinese flash PMI
hit a six month high. In sum, the
economic news flow was sufficiently positive to give the Market an upward bias.
Unfortunately,
our ruling class commands the headlines.
At the moment, that includes the rapidly approaching deadlines for the
continuing resolution and the debt ceiling, complicated by the FY2014 sequester
and the drive to meaningfully address the unworkability of Obamacare---which,
as you know, is the pin in the budget grenade right now. All the back and forth acrimony raises
concerns that ultimately there is some kind of government shutdown or even
worse a default on our debt.
I
doubt that any of the worse case assumptions will materialize. These clowns invariably take the fight right
up to the edge of the cliff, then find someway to avoid disaster. To be clear, I am not suggesting that any
solution will be anymore fiscally responsible than the other policies that they
have saddled the electorate with over the past decade. In the end, I expect a lot of sound and fury
that will accomplish little other than kicking the can down the road. But that is our forecast; so I am not getting
all that nervous about the upcoming internecine cat fight even if it results in
a short term government shutdown.
To be sure, a default
on the debt or a downgrade of the US credit rating would be much more
worrisome---the real negative consequences coming in the form of a higher risk
premium imbedded in US government debt, raising, perhaps dramatically, its
funding costs which means bigger deficits, more debt, an enormous unrealized
loss on the Fed’s balance sheet and higher interest rates and taxes for you and
me.
In addition, Fed
officials spent the day seemingly trying to walk back Bernanke’s QEInfinity
comments last week. What in the world is
going on ? I am amazed that a Fed that
professes to be the most transparent in history is so oblique. Making multiple conflicting statements
simultaneously is worse than saying nothing.
That said, it really doesn’t matter what these yahoos are saying because
in the end, all that does matters is the risk associated with a massively
overextended Fed balance sheet and the Fed’s historical ineptness at
transitioning from easy to tight money.
That risk is alive, well, will likely end very badly and is by far the
greater threat than fiscal policy to the economy, in my opinion.
Bottom line:
despite the attention being given to the fiscal policy circus, I think it a sideshow to the growing disaster
that is monetary policy. Yes, we might
get a government shutdown (I would rejoice); and we might even get a technical
default on US
government debt and a downgrade in our credit rating. Certainly, that would not make great reading
especially with the media likely to go over board to paint it as the GOP’s
fault. But in the end, the politicians
usually manage to come up with some sort of half assed remedy that keeps the
country functioning simply because their ideological differences are not as
important as facing the electorate (keeping their jobs).
On the other
hand, the Fed has no such problem. It is
free to pursue its ivory tower Models with no negative consequences even if those
Models prove inadequate and lead to serious unintended consequences. I am not suggesting any deliberate
malfeasance on the part of the Fed; I am suggesting intellectual hubris. In the current circumstance, barring some
near term epiphany, I believe that the only
way this massive, misguided expansion of the Fed ‘s balanced sheet ever stops
is for the Markets to hold the Fed to account; and as I have said, I don’t want
a heavy equity exposure when (not if) that happens. The question now is, how long will money for
nothing dominate investor sentiment before they start discounting the
inevitable?
.......in my opinion, that stocks are way over valuing the likely
earnings that can be produced from an economy on the current trajectory of the US
The
impact of tapering on risky assets (medium):
The
real taper problem (medium):
Update
on the ‘misery’ index (short):
Investing for Survival
Nine
things investors don’t need (medium):
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