The Morning Call
The Market
Technical
In
reaction to a CNBC story that the Fed will
start to taper in December, the indices (DJIA 15973, S&P 1802) took a nap,
remaining within uptrends along all timeframes: short term (15496-20496, 1746-1900),
intermediate term (15496-20496, 1651-2232) and long term (5050-17400,
728-1900).
Volume
was anemic; breadth poor. The VIX rose,
finishing within a short term trading range and an intermediate term
downtrend. This indicator continues to
provide little info on Market direction.
The long Treasury rose
(despite the CNBC story), closing within a
short term trading range and an intermediate term downtrend and continuing to
build a head and shoulders formation.
GLD
spiked (in spite of the same CNBC story), but
remained within its short and intermediate term downtrends. It did break above the upper boundary of a
very short term downtrend. In
combination with the recent unsuccessful challenge of the lower boundary of its
long term trading range, that at least raises some hope that the worst is over
for GLD. However, with the number of
head fakes that it has given in the current decline, I think patience is needed
before any action is contemplated.
Bottom
line: I was surprised by the (stock,
bond and gold) Markets reaction to the aforementioned CNBC
story of a December tapering---all of them performing the opposite of what I
would have expected. That could mean
either (1) nobody believes CNBC ---not
entirely surprising or (2) tapering is in the price of all asset classes and
this was a ‘sell the news’ event.
If the latter is
the case, then I am going to be dead wrong about the Market reaction to
tapering. It is certainly too soon to
know; but it clearly won’t be long until we do.
Since bad news
went unheeded, presumably there is more upside to come. As surprised as I was by the lack of Market
reaction, I continue to believe that the most logical target is the upper
boundaries of the Averages long term uptrends (17400/1900) ---which doesn’t
leave a lot of reward, especially when viewed relative to current Fair Value
(11600/1440) as measured by our Model.
If one of our
stocks trades into its Sell Half
Range
Is
the Market at a triple top (medium):
Fundamental
Headlines
The
US economic
news yesterday was mixed: weekly retail sales were neutral to poor, October
wholesale inventories were up but more than sales and the November small
business optimism index came in right in line.
As you know, I have been concerned about DC antics negatively impacting
consumer and business sentiment; and this is the second indicator in a row
showing that confidence remains in reasonably good shape with both. Clearly this worry is fading.
International
economic news was also mixed: Italy reported the first upbeat GDP
number in two years while November Chinese industrial production
slowed---lessening the pressure on the Chinese central bank to tighten---more
good news.
In
other developments:
(1)
as I noted above, CNBC
has predicted that tapering will begin this month [12/17-18]. As you know, I have doubted that the Fed will
take any tightening action until forced to do so. I would love to be wrong,
Counterpoint
(medium):
(2)
the Volcker Rule was approved. While we still don’t know all the details
[900 pages], it does appear that while some restrictions are placed on bank
prop trading activities, it in no way solves the ‘too big to fail’ problem. Hence, this is no solution.
The looming problem on second mortgages (medium and today’s must read):
(3)
the budget deal was announced after the Market closed
yesterday. Again, the terms were much as
rumored: [a] the sequester caps have been busted. Don’t be fooled; this is just like Graham
Rudman---once the handcuffs are off, the tendency is always to spend more
money. To be sure, some of the sequester
related cuts have been maintained; but there is nothing to prevent those cuts
from being negotiated away in the future, [b] there are no new taxes; but there
are new ‘user’ fees.
As I noted
yesterday, there is some good news in this budget news. First and foremost, investors [the
electorate] won’t have to suffer through another ‘shutdown or no shutdown’
episode. Secondly, the increased
spending is not that much short term and could have a slightly stimulative
effect on the economy. That said, lack
of fiscal discipline is lack of fiscal discipline no matter how you explain it
away; and with the debt rising and likely to accelerate as Obamacare is
implemented, too much government spending remains a burden to us all.
Bottom line:
unfortunately, the budget deal and the new Volcker Rule provide only marginal
improvement in the outlook for government spending and the balance sheet risk
of our ‘too big to fail’ banks. While
‘marginal improvement’ is better than nothing, there is nothing forecast
altering about these developments.
The CNBC
story could prove correct; though I doubt it. Nonetheless, if true, it is a positive in the
sense that the sooner the Fed goes about the business of tightening, the less
severe the consequences. That said, I
believe the consequences will still be painful whenever the transition starts. As I noted above, the Markets’ reactions to
this news item surprised me in its lack of concern. So, again, if this story is true and the news
has all been priced in, I will be wrong on the expected Market
consequences---at least in the short term.
We will then have to wait and see if the economic consequences are as
mild as implied by the Markets’ reaction.
All that aside,
stocks are still considerably overvalued even if the above developments lead to
a better economy than the one in our forecast.
In the meantime, my task is to be sure that our Portfolios take profits
when our Sell Half Discipline becomes operative.
More
on valuation (short):
And:
Guidance
for fourth quarter earnings is declining (medium):
Thoughts
from Deutschebank (medium)
And
(short):
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