The Morning Call--the imperative to raise cash

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The Morning Call

2/15/13

The Market

           

    Technical

            The indices (DJIA 13973, S&P 1521) were mixed again yesterday (Dow down, S&P up), finishing within both their short term uptrends (13386-14038, 1457-1526) and their intermediate term uptrends (13347-18347, 1412-2007).

            Volume declined; breadth was weak.  The VIX was off, closing within its intermediate term downtrend.

            GLD fell again, finishing right on a very short term support line.  A break of this level with likely prompt additional sales of GLD.

Bottom line: the technical story remains unchanged---(1) the Averages tracking the upper boundary of their respective short term uptrend, (2) 14140/1576 continues to be a reasonable technical price objective and (3) our Portfolios will continue to Sell as prices advance.

    Fundamental

    

     Headlines

            The sole US economic datapoint yesterday was the weekly jobless claims number.  It was very good and helps keep the recessionistas at bay.  On the other hand, the latest GDP stats out of both Europe and Japan were weak which is not a positive for US growth given the size of our trade with these countries.  Further, the lack of economic growth in Europe is clearly not strengthening the balance sheets of either the sovereigns or their banks.

Here is a more pessimistic take on the economy (medium):

            http://www.zerohedge.com/news/2013-02-14/guest-post-search-economic-recovery

            Over night at the G20 (medium):

            http://www.reuters.com/article/2013/02/15/us-g20-currency-idUSBRE91E00520130215

            The rest of the day was filled with pundits debating on the Market (Market topping or about to break out to new bull Market high), the economy (improving or rolling over), Europe (still broken or healing) and sequestration (happening or not) and its potential effects (recession or a spur to the private sector)---which probably explains the quiet pin action.

Bottom line:  the US economy continues to perk along despite the headwinds of  a bloated government budget, a money printing free for all that has our forests on the endangered species list and the economies of some of our major trading partners stumbling.  That this is possible is a tribute to American business acumen. 

However, our Valuation Model has equities over priced on this scenario.  Despite the imperative to raise cash in this environment, our Portfolios have a much higher cash position than would be normal for roughly 7% overvalued Market.  The reason is the magnitude of the tail risks associated with the aforementioned problems, in particular, the precarious Fed balance sheet and financial condition of EU sovereigns, their banks and the unknown scale of the counterparty derivative risks on their balance sheets.  Hence, our Portfolios will continue to chip away at stocks that are either in their Sell Half Range or are technically overextended. 

            Total yield (short):

            http://www.thereformedbroker.com/2013/02/14/why-investors-need-to-understand-total-yield/

            How cheap are equities (short):

            http://www.ritholtz.com/blog/2013/02/how-cheap-are-equities/

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.