The Morning Call
The Market
Technical
The
indices (DJIA 14802, S&P 1656) ended up, just barely, on the day; not much
of a bounce from an oversold position on a day when Yellen is nominated for Fed
chief. The Dow closed for the third day
below the lower boundary of its intermediate term uptrend. If remains there in today’s trading, the
break of that uptrend will be confirmed and re-set to an intermediate term
trading range. Simultaneously, the short
term trend will re-set to down. In
addition, the DJIA remains below its 50 day moving average; in yesterday’s
trading, it touched its 200 day moving average intraday but managed to close
above it.
The
S&P confirmed the break of its short term uptrend, which re-sets to a short
term trading range (1626-1729). It is
also trading below its 50 day moving average but remains well above its 200 day
moving average. It continues to trade
within its intermediate term uptrend (1595-2181).
Both of the
Averages are within their long term uptrends (4918-17000, 715-1800).
Volume
was flat; breadth improved. The VIX fell
4%, finishing within its short term trading range and intermediate term
downtrend.
The
long Treasury continues to snooze its way through the current stock market
hiccup although it did trade down slightly on the day. It closed within its short term trading range
and intermediate term downtrend.
GLD
declined, remaining below the upper boundaries of its very short term, short
term and intermediate term downtrends.
Bottom
line: I was surprised by the lack of
strength of yesterday’s rally, given that the Market was oversold, Yellen was
officially nominated to Fed chief and there was some mild mewing about movement
toward negotiations on the budget/debt ceiling issues. I still anticipate a more enthusiastic bounce
when, as and if progress starts being made; although I am concerned that the
current DC follies has done further damage to the long term secular growth
prospects of the economy via impairment of business and consumer confidence.
Nearer term, given
the magnitude of the current level of overvaluation (at least according to our
Model), it is easy to rationalize the current fiscal slugfest driving prices
lower. So I am not concerned that the
S&P and/or the DJIA are breaking support levels.
On the other
hand, if the pin action improves and one of our stocks trades into its Sell
Half Range
Rallies
end when ‘good news’ is sold (short):
Fundamental
Headlines
Only
one secondary US
economic indicator released yesterday---weekly mortgage applications rose but
the more important purchase applications fell.
The minutes from the last FOMC (no taper) meeting were released. In summary, while the participants worried
about the risks in fiscal policy, they still seemed to agree that tapering
should start this year and end next.
Overseas,
August UK industrial production was very disappointing.
To
date, there has been little data that causes in cognitive dissonance with
respect to our forecast. Of course, if
the worse case scenario (default) occurs, there will undoubtedly be negative
economic repercussions. But I still
think that a low probability outcome. On
the other hand, as I suggested above, if
our elected representatives walk the budget/debt ceiling negotiations to the
edge of the cliff and look over, it will likely, in my opinion, sustain
business and consumer suspicions of continued fiscal ineptness and, hence,
restrain investment and consumption.
There
was a lot of time and many words spent yesterday opining on how Janet Yellen
will perform as Fed chair. When all is
said and done, she is very much a disciple of the Greenspan/Bernanke easy money
school. So I see little reason to
question the monetary policy assumptions in our Model.
The
rest of the day was spent dwelling on our torturous political process. About the only thing new was that a number
(yet to be determined) of republicans are going to the White House today for
talks. Some heart seems to have been
taken from this news; although I seem to remember the last meeting between the
GOP house leadership and Obama ending with John Boehner red faced and
sputtering before the microphones.
Bottom line: ‘(1) the shutdown is not a significant
economic risk, (2) a government default on its debt following a stalemate on
the debt ceiling could cause problems [higher interest rates, declining
dollar], (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, (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, (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 (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.’
Don’t
get spooked by the Treasury bill market (medium):
The
latest fro Joseph Stiglitz (medium and today’s must read):
Subscriber Alert
The
stock price of Kinder Morgan Energy PTRS (KMP -$80)
has fallen below the lower boundary of its Buy
Value Range KMP .
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