Friday, October 11, 2013

The Morning Call--Close but no cigar


The Morning Call

10/11/13

Tomorrow is the Texas OU game.  It is an early game (11am); that means, the pre-party starts a 8am.  Today is also filled with pre-game events; plus I need to do the signs for the bus and finalize the skit---which is a long way of saying, no Closing Bell tomorrow.

The Market
           
    Technical

            What a difference a conversation can make.  The indices (DJIA 15126, S&P 1692) did their best impression of a Titan III shot yesterday.  The Dow surged back above the lower boundary of its intermediate term uptrend (15002-20002), negating the potential break down of this trend.  It remains within its short term trading range (14190-15550) but below its 50 day moving average.

            The S&P rose back above the lower boundary of the short term uptrend which it confirmed as broken yesterday (1685-1835); depending on today’s pin action, it is likely that this break will also be negated.  It also closed above its 50 day moving average.  It finished within its intermediate term uptrend (1598-2184).

Both of the Averages are within their long term uptrends (4918-17000, 715-1800).

Volume was up, but only slightly---a bit surprising for such a dramatic price increase.  Breadth was up.  The VIX fell 16%, closing well within its short term trading range and its intermediate term downtrend.

The long Treasury continued to snooze through the budget/debt ceiling stock volatility.  It was up fractionally and remained within its short term trading range and its intermediate term downtrend.

            GLD fell, finishing below the upper boundaries of its very short term, short term and intermediate term downtrends.  In addition, it is nearing the neckline of a developing head and shoulders pattern---a negative.

Bottom line:  the strength that the pin action lacked on Wednesday was more than made up for yesterday.  No doubt that part of the rally was a rebound from an oversold condition, part of it was short covering; but clearly, investor relief was palpable based on the assumption that the tail risk associated with a default was being taken off the table via the resumption of negotiations between the GOP house and Obama.   Strangely, at least to me, was that this emotional swing was based on surprisingly little firm indication of a compromise other than the meeting itself.

However, even if we make the assumption that a deal gets done, the question is what difference does it make long term?  Certainly, nothing has been done or is likely to be done to improve the long term economic growth prospects.  Indeed, I have argued that it is likely that the Washington antics have further damaged business and consumer confidence.

If the euphoria continues and one of our stocks trades into its Sell Half Range, our Portfolios will act accordingly.

            Stock Traders Almanac looks ahead (short):

    Fundamental
    
     Headlines

            Yesterday’s economic news was disappointing: weekly jobless claims rose substantially (but much was attributed to the shutdown and a glitch in the California computer system tracking unemployment benefits) and September retail chain store sales were flat.

            All of which meant nothing, as investors read the news of an afternoon meeting between Obama and house GOP leaders as a sign of diminishing tail risk from default.  At the moment, it looks like there is chance of a six week extension of the debt limit in exchange for negotiations talks on the budget.  

            ****but as Russell Dowripple said, ‘not yet’;  hope springs eternal.

            Thoughts on a potential rapprochement on the budget/debt ceiling problems from one of my favorite liberal blogs (medium):

            Of course, there are two games going on here.  One is just to avoid the problems associated with a government default.  The other which is nothing more than a gleam in republicans eyes right now, is that the aforementioned budget negotiations would involve a ‘grand bargain’, i.e. entitlement reform (read reduced spending) and tax reform (read lower rates and broaden the base).  To be sure, a ‘grand bargain’ would be an enormous positive and would alter the assumptions in our Model.  However, it is, as I said, simply a gleam in the GOP’s eye.  I can’t imagine such an out come barring a substantial change in congressional membership---meaning after November 2014; and therefore, it is nothing on which I would make a bet today. 

At the moment, about the only thing I would bet on is a six week kick the can down the road respite before we are once again faced with a problem.

Bottom line:

‘(1) the shutdown is not a significant economic risk, ---still true,

(2) a government default on its debt following a stalemate on the debt ceiling could cause problems [higher interest rates, declining dollar],---still true,

(3) the rhetoric notwithstanding, a stalemate is a no win strategy for the party that the electorate faults; they will read the polls and salvage what they can,---it looks like the GOP is folding,

(4) there is some small probability that this judgment is far too optimistic, that the shutdown/debt ceiling won’t be resolved which would likely do considerable damage to the Markets,---this is appears to being taken off the table,

(5) there is a larger probability that the whole process, even if it ends well, [a] will cause investors to rethink their current overly optimistic view of the Market and stocks could trade down to Fair Value {S&P 1440} and [b] will reinforce businesses and consumers unwillingness to invest and spend; and hence, doing nothing to lessen the economic headwind of a highly unreliable fiscal policy, and finally ---to be determined.

(6) given our Portfolios large cash position, neither (4) nor (5) above represent a calamity; indeed, that is the point of our Price Disciplines---sell high, but low.’ ---still true.

            Following Street forecasts (medium):

            Living in a low return world (medium):

            Food for thought (medium):

            Today’s must read article on US debt.  The quote of the day from this article ‘collapsing bubbles are deflationary’ (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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