The Morning Call
The Market
Technical
The indices (DJIA 15409, S&P 1660) had
another good day. Of course, it was
Tuesday, so stocks had to go up (now 20 in a row). The Averages closed within all major
uptrends: short term (14551-15265, 1596-1673 [ the Dow was above its upper
boundary]), intermediate term (14002-19002, 1486-2074) and long term
(4783-17500, 688-1750).
Volume
rose; breadth improved. The VIX was up
again on a strong up price day. In
addition, bond prices are falling across the yield curve and high dividend
paying stocks are getting whacked. I
don’t regard this development as healthy unless the economy is or is about to
begin growing at a much faster rate---which I don’t think that it is.
And
then there is the Japanese bond market (short):
***over
night the Organization for Economic Cooperation and Development (OECD) lowered
its forecast for global economic growth in 2013.
GLD
fell. It finished below the lower
boundary of its intermediate term downtrend but above both its recent double
bottom and the lower boundary of its long term uptrend. Despite the clamor among technicians and gold
bears that prices are going lower, I think GLD has performed admirably of
late. Nonetheless, I would like to see a
bounce above at least one of its short term downtrends before venturing back into
GLD.
Bottom line: stocks
continued to their relentless advance.
As I noted yesterday, until ‘buying the dips’ ceases to be a winning
strategy, there is nothing for me to do but sit on the sidelines and wait. It is not like I am in agony; our Portfolios
are still 60% invested. So we are making
money. Nevertheless, our Sell Discipline
pushed our Portfolios to a higher cash position sooner than, in retrospect, I
would have liked. That said, I review
the assumptions and conclusions of our Valuation Model regularly; and so far I
have no reason to doubt that it won’t ultimately prove correct on
valuations---it was just premature in timing.
Meanwhile, (m)y strategy continues to be to take
advantage of what I consider unwarranted optimism by lightening up on positions
when the stock price trades into its Sell Half Range
Margin
debt hits all time high (short):
Update
on the Shanghai Composite (short):
Fundamental
Headlines
A
slew of stats were out yesterday, most of them above expectations: the March
Case Shiller home price index rose as did May consumer confidence. In addition, the May Richmond Fed’s
manufacturing index while down was better than anticipated. On the other hand, the May Dallas Fed’s
manufacturing index came in worse than estimated.
However,
what made investors feel all warm and fuzzy was....drum roll....more comments
from the central bankers (this time the ECB and the BOJ) about the need for
lower rates and easier money. The magic
elixir of free money will continue to drive stock prices up until investors
finally figure out just how painful the exit is going to be. Until then..........
Bottom line: the
above datapoints fit perfectly with our ‘sluggishly growing economy’
scenario. So this keeps our Economic
Model on track and me mildly encouraged.
That said, our economic scenario produces considerably lower equity
prices in our Valuation Model than currently exists in the Market. Further, if interest rates continue to
advance, that will act as a negative on discount rates (P/E’s).
It is clearly
disconcerting to me that factors that would lift equity valuations (economic
growth, both here and abroad, earnings growth) are struggling not accelerating
and those factors that would lower valuations (monstrous infusions of money,
increasing interest rates) are rising and perhaps accelerating. None of this squares with current Market
performance; and I have no erudite explanation of why it is so.
More
on valuation (medium):
The
economics of stock buybacks (medium and a must read):
http://www.zerohedge.com/news/2013-05-28/presenting-full-impact-stock-buybacks-sp-500-earnings
http://www.zerohedge.com/news/2013-05-28/presenting-full-impact-stock-buybacks-sp-500-earnings
Another
great analysis on valuations from Lance Roberts (medium and also a must read):
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