Thursday, December 13, 2012

The Morning Call--Bernanke's new and improved policy for disaster

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The Morning Call

12/13/12

The Market
           
    Technical

            The indices (DJIA 13245, S&P 1428) had a roller coaster day, rising in early trading but closing flat on day.  The S&P closed above the upper boundary of its short term trading range (1343-1424) while the DJIA remains below its comparable level (12460-13302). As a reminder, under our technical discipline, to confirm the break out of this range, both of the Averages must do so.  Further, they continue to trade within the boundaries of the intermediate term uptrends (12927-17927, 1365-1960).

             Volume was flat, breadth was down.  The VIX rose but remained below its 50 day moving average (a positive for stocks) and between the upper boundary of its short term downtrend and the lower boundary of its intermediate term trading range.

            Advance/decline at new highs:

            Gold rose but is still trading below its 50 day moving average (a negative for GLD) but above the lower boundaries of its short term uptrend and its intermediate term trading range.


Bottom line: yesterday had all the characteristics of a ‘sell on the news’ day---the news being QEIV.  On the other hand, the S&P remains above the upper boundary of its hoer term trading range for the second day; and both of the indices remain above their 50 day moving averages.

I still want to see whether or not the Averages can confirm a break to the upside from the short term trading ranges.  Since the indices are above Fair Value, I spent time yesterday looking for stocks that were nearing either their Sell Half Ranges or critical trading junctures.  A move up will likely push several candidates to Sell trigger prices.

            P/E ratio peaks and troughs in secular market cycles (short):

            The January barometer (short):

    Fundamental
    
     Headlines

            Only one datapoint released yesterday and it was a secondary indicator: mortgage and purchase applications were both up.

            Of course, investors’ primary focus shifted, at least for the day, from the fiscal cliff to the FOMC meeting, the statement released after the meeting and Bernanke’s subsequent press conference.  The bottom line: it is QE to infinity but with a dash of opacity.

            The Fed will begin purchasing $45 billion in US Treasuries per month in addition to the $40 billion (in mortgages and treasuries) it is already buying in exchange for shorter term government notes; that is, it is putting the pedal to the metal on money printing.

            Bernanke also introduced some guidelines for policy actions though it is not all clear how they will be implemented.  The first, QEIV will be carried out until  unemployment falls to 6 ½%.  I am not sure is that means a one time print.  I am also uncertain what happens if the economy grows, unemployment declines but all those people who have technically been dropped from the labor force start returning leading to a condition where unemployment remains stuck even as the consensus grows that the economy is getting healthier.

            The second is that interest rates will stay low until inflation reaches 2 ½%.  Here again, the narrative was confusing.  The inflation rate can rise above that level as long as long term inflationary expectations remain anchored---whatever that means.

            I will conclude by saying that sitting through the press conference and listening to Bernanke tap dance around the aforementioned guidelines. I was reminded of some of the discussions I sat through in my college philosophy courses (it was a minor) in which we students tried to sound intelligent discussing great metaphysical concepts like how many angels can dance on the head of pin.   He really dazzled with his bulls**t.

            Question: how long will it take for the other central banks to respond to the Fed’s new ‘upping the ante’ on its ‘all in’ policy?

            FOMC formal statement:

            Why it won’t work (medium):

            A short history of Market reaction to the QE’s (short):

            The shrinking timeframe between central bank interventions (short):

Bottom line:  I noted in yesterday’s Morning Call that I didn’t share the Market’s enthusiasm on Tuesday for QEIV (1) because the whole QE process, save perhaps QEI,  has been an economic disaster and (2) the Market rise following each subsequent QE has been less and less.  This time around the price rise was measured in hours not days.

Meanwhile, the politicians showed little progress on a compromise on the fiscal cliff.  However, I remain convinced that we will get an agreement---one way or the other.  Though I still believe that there is a decent argument that it won’t happen until the Market nosedives and the politicians panic.

            Inside the making of a ‘fix’ (short):

The important dates related to the fiscal cliff (short):

In spite of this less than inspiring news, stocks continue to trade slightly above Fair Value (as calculated by our Model).  As I have noted before, under similar valuation environments I have in past Bought stocks on our Buy Lists.  However, the magnitude of the potential downside from another chapter in the EU sovereign debt crisis makes me content to hold an oversized cash position and risk missing some upside if I am wrong.

            Greece’s two stage default (short/medium):

            Italy leaving the euro? (medium):

            Interest rates and stock prices (medium):

            For the optimists amongst you (medium):

            A summary of Ray Dalio’s latest investment thoughts (short):

            Thursday morning humor:

            Equities as an inflation hedge (medium and today’s must read):

            Outlook for fourth quarter earnings (short):




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 Strategic Stock Investments is to help other investors build wealth and benefit from the investing lessons he learned the hard way.

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