The Morning Call
I leave for the OU/Baylor game
after this is posted. So no Closing
Bell. See you on Monday.
The Market
Technical
The indices
(DJIA 17554, S&P 2031) continued their incredible strength yesterday. The Dow finished within uptrends across all
time frames: short term (16053-18819), intermediate term (16053-21053) and long
term (5159-18521). It also ended above
its 50 day moving average.
The S&P closed
above the upper boundaries of its short and intermediate term trading ranges
(1820-2019, 1740-2019). A finish above
2019 today will re-set the short term trend to up, above 2019 on Monday, the
intermediate term will re-set to up. It
also closed within a long term uptrend (775-2032) and above its 50 day moving
average.
Volume fell;
breadth deteriorated. The VIX was off again, finishing within a short term
uptrend and an intermediate term downtrend.
It did end below its 50 day moving average.
The long
Treasury declined, ending within a very short term trading range, a short term
uptrend, an intermediate term trading range and above its 50 day moving
average.
GLD dropped,
closing below the lower boundaries of its very short term, short term and
intermediate term downtrends. It finished
below the lower boundary of its long term trading range for the fifth day,
confirming the break and re-setting the long term trend to down.
Bottom line: the
Averages continue their relentless advance, despite having been in an
overbought condition for over a week. In
addition, the S&P is ever closer to re-syncing with the Dow to the
upside. At the moment, no amount of poor
economic or geopolitical news seems sufficient to break the magic of free and
easy money, the feel good generated by the upcoming Holidays and the relief
that Obama is almost gone and until He is, His political agenda will be restrained.
So the path of
least resistance seems to be up; but as I noted yesterday, the big question is
how far up? ‘Given our fundamental work, the answer would be ‘not far’. But fundamentals haven’t meant diddily in two
years. So the answer then becomes
predicated on when an exogenous event snaps investors back into reality; and,
by definition, that is unknowable. Hence
it appears that I will have to be satisfied with an equity exposure of 55-60%
and remain patient with what today is too large a cash position.’
That
said, if stocks continue to move higher, I will continue to use this rise in
prices to Sell stocks that are near or at their Sell Half Range or whose
underlying company’s fundamentals have deteriorated.
Fundamental
Headlines
Yesterday’s
US economic news was a bit more upbeat than it has been of late: weekly jobless
claims fell more than anticipated while third quarter nonfarm productivity and
unit labor costs were better than expected.
We need more of this.
Overseas,
we only got one number: German September factory orders were much weaker than
estimates. We need less of this.
***overnight,
German industrial production came in well short of estimates.
In
addition, the ECB met and left key interest rates unchanged. In a subsequent news conference, Draghi
promised more QE, joining the BOJ (operative word: ‘promised’); and undoubtedly
making the yield chasers and carry traders everywhere feel all warm and fuzzy
inside. Here is his formal statement:
Unfortunately,
not all Europeans have a fine appreciation for the EU ruling class’
monetary/fiscal policies. Granted QE is
an attempt to improve conditions; but I guess Draghi et al haven’t read the endless
analysis on how QE hasn’t worked anywhere, in any amount and, more importantly,
that it will do nothing to solve the EU’s real problems (medium and a must
read):
Meanwhile,
two days after Russia received its first payment from Ukraine, events are
heating up---again. (medium):
Bottom line: stocks
continue to levitate as a result of (1) Japanese all in, triple down, go for the
gusto, balls to wall QE---an experiment that will not end well, (2) the hope of
a milder version of QE from the ECB---an experiment which may not even start
well, given political constraints, (3) it is a feel good time of the
year---that’s great but how many multiple points is that worth when stocks are
already richly valued and (4) the beginning of the end of the move to more
concentrated government power in the hands of our ruling class---we hope.
I have no doubt
that these factors can and likely will drive stock prices higher. But that will happen without the benefit of
basic arithmetic. Earnings, ROE,
interest rates, debt to equity, inflation, book value and many more are numeric
measures of corporate profitability and health.
Yet no matter how positively I can reasonably assume them to be, they
portray significant stock overvaluation. I have no idea what starts the process
of adjusting price to value; I just know that our Models have never been at
such odds with reality that a correction didn’t re-set what was a very
considerable difference between price and value.
I
can’t emphasize strongly enough that I believe that the key investment strategy
today is to take advantage of the current high prices to sell any stock that
has been a disappointment or no longer fits your investment criteria and to
trim the holding of any stock that has doubled or more in price.
Bear
in mind, this is not a recommendation to run for the hills. Our Portfolios are still 55-60% invested and
their cash position is a function of individual stocks either hitting their
Sell Half Prices or their underlying company failing to meet the requisite
minimum financial criteria needed for inclusion in our Universe.
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