The Morning Call---Don't worry, be happy

The Morning Call

10/1/13

The Market

           

    Technical

            The indices (DJIA 15129, S&P 1681) sold off yesterday.  The Dow closed within its short term trading range (14190-15550) and below its 50 day moving average.  The S&P finished within its short term uptrend (1673-1827) and near its 50 day moving average,  So short term, the Averages remain out of sync (directionless).

Both of the Averages are well within their intermediate term (14940-19940, 1587-2173) and long term uptrends (4918-17000, 715-1800).

Volume picked up; breadth was mixed.  The VIX rose but not as much as I would have thought.  It remains within a short term trading range and an intermediate term downtrend.

The long Treasury fell but ended within its short term trading range and intermediate term downtrend.

GLD declined but closed within very short term, short term and intermediate term downtrends. 

Bottom line:  the recent bias of the Averages has been to the downside as investors worried about the impending deadlines for the budget resolution and the debt ceiling.  In spite of that, the S&P remained a short term uptrend, though the lower boundary of that trend is now within striking distance.

History tells us that Market weakness resulting from the lack of political congress tends to be shallow and short lived.  Hence, I am not expecting a lot of follow through to the downside, even if the government shuts down. 

The Market during past shutdowns (short):

            http://chartsetcetera.blogspot.com/2013/09/government-shut-down-remain-calm-keep.html

            You shouldn’t have worried then and you shouldn’t worry this time (medium):

http://www.thestreet.com/story/12051422/1/why-investors-shouldnt-panic-if-the-government-shuts-down.html

I continue to believe that this is a time to do nothing unless you are skilled trader.  The exception being if one of our stocks trades into its Sell Half Range, our Portfolios will act accordingly.

           

            The loss of momentum (short):

            http://theshortsideoflong.blogspot.com/2013/09/stock-rally-losing-momentum.html   

    Fundamental

     Headlines

            We got two upbeat numbers from the manufacturing sector yesterday: both the Chicago PMI and the Dallas Fed manufacturing index came in above expectations.  Overseas, the Chinese PMI was revised down from its initial positive reading, the Eurozone CPI trended lower and Italy is drifting toward a political crisis (see below).

            Once again, our ruling class held center stage as the likelihood of a government shutdown rose (the senate stripped out Obamacare defunding and sent a ‘clean’ continuing resolution back to the house; the house then passed a new resolution, this one containing two new provisions---a one year delay in the implementation of Obamacare and eliminating congressional exemption from Obamacare; last night the senate declined to vote; today, the government shuts down.)

            From a practical standpoint, a shutdown wouldn’t be that disastrous for the economy, assuming that it doesn’t go on for months.  Necessary government functions will continue as if nothing happened.  I have no idea how this little spat ends; but I don’t think that it matters.  The GOP has done what it needed to do---go on record objecting to all the exemptions Obama has given to His special interest groups and the immediate implementation on what is an unworkable plan, at least in its current form.  Assuming the dems win, we can all just sit back and watch Obamacare sink of its own weight.  Next year is an election.  If the polls are right and the electorates hate this legislation as much as they say, then changes in the composition of congress will occur and Obamacare can be put out of its miserable existence properly---by the will of the people.  The danger is that the republicans do something really stupid and precipitate a real economic crisis.

What happens in a government shutdown (short):

            http://www.zerohedge.com/news/2013-09-30/what-are-unintended-consequences-government-shutdown

            Government shutdown noise (medium):

            http://www.minyanville.com/business-news/markets/articles/Jeff-Saut253A-Tune-Out-the-Government/9/30/2013/id/51995

The Fed as an enabler (medium):

            http://www.zerohedge.com/news/2013-09-30/guest-post-fed-gave-congress-bottle-whiskey-and-car-keys

            Bottom line: please note that the above discussion was about the economy, not the Market.  On the surface, I see no reason why the intramural bickering in DC would lead a damaging decline.  However, given the extent to which stocks are overvalued (at least according to our Model), you never know what will spawn serious investor reflection and lead to a reversion to the mean.  I am not saying this latest episode of an internecine food fight will ignite a Market flush; I am just saying that it could.

    

            .......in my opinion, stocks are way over valuing the likely earnings that can be produced from an economy on the current trajectory of the US’.

            How ‘greater fools’ are created (medium):

            http://blogs.wsj.com/moneybeat/2013/09/27/how-many-greater-fools-does-it-take-to-make-a-bubble/

QE and Market distortions (short):

            http://pragcap.com/can-qe-cause-market-distortions-even-bubbles

           

            The latest from John Hussman (medium):

            http://advisorperspectives.com/commentaries/hussman_093013.php

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.