Wednesday, May 22, 2013

The Morning Call + Subscriber Alert--Must see video on the yen carry trade


The Morning Call

5/22/13
The Market
           
    Technical

            It was Tuesday, so stocks have to be up (now 19 in a row).  The indices (DJIA 15387, S&P 1669) had another decent day, closing within all major uptrends: short term (14484-15202, 1588-1665 [both were above their upper boundary]), intermediate term (13969-18969, 1481-2069) and long term (4783-17500, 688-1750).

            Volume rose slightly; breadth was mixed.  The VIX was up again on an up price day---continuing to build support for owning volatility as a hedge.

            GLD reversed its big Monday rally, selling off substantially.  As you know, I am watching GLD closely; but I want a clear change of direction (up) before feeling comfortable re-building this position.  Let’s see what it does today.

Bottom line: stocks continue to advance while the number of technical indicators portraying hyper extension grows (see below).  Sooner or later, one of those two things have to change---if for no other reason than if all technical indicators are pointing down, the number of indicators pointing up has to increase.  Until that happens, I grin and bear it.

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.  I believe that we will have a chance to buy these shares back at much lower price.’

            Risk appetite index (short):

            Another extreme sentiment indicator (short):
           
            A history of DJIA recoveries (short):

    Fundamental
    
      Headlines

            Another day with few economic numbers either here or abroad.  The one datapoint was weekly retail sales in which all readings were up for the first time in several weeks.  That’s great; but this is a secondary indicator which by itself isn’t going to cause anyone to alter their forecast.

            The rest of the day was spent focused on our ruling class:

(1)      Apple CEO Tim Cook defended before the senate his company’s tax accounting policies---quite well I think.  By the end of his testimony, it was apparent that instead of congress putting him on the witness stand for taking advantage of the tax laws as they are written, it is congress that should have been on the stand for authoring a totally dysfunctional, f**ked up tax code

(2)      former IRS head tried to defend his organization before the senate with considerably less success than Mr. Cook; and the entire administration is scrambling to explain how they knew that the IRS was culpable in zeroing in on conservative groups but didn’t tell Obama [hint: plausible deniability].  It will be interesting to see how this ends.

(3)      two regional Fed bank heads made speeches, both sounding fairly dovish.  Perhaps they were anticipating the Ber-nank’s congressional testimony today as well as the release of the minutes of the latest FOMC meeting.  Ordinarily, those two events would likely dominate the headlines for the day; but in a week ahead of a holiday [lots of people leaving early] that has little data, Bernanke’s testimony and the minutes may be the sole focus of investors.

 Regulators refuse to rein in bank derivative trading (16 minute video but a   must watch):

                Another bit of clarity from the Fed (just kidding):

               Although you won’t find the Fed trumpeting this tidbit (medium):

                Is the Fed failing to inflate (short):

***over night the Japanese central bank met and reiterated its triple down, all in, balls to the wall monetary easing.

Everything you wanted to know about monetary easing but were afraid to ask (20 minute video but today’s absolute must watch):

               Irrational exuberance in Europe? (short):

            Bottom line:  ‘stocks (as defined by the S&P) get more overvalued (as defined by our Model) every day; and as long as investors’ mood remains highly optimistic, that is not likely to change.  I have no idea how much higher stocks will go.  But I don’t think that is the appropriate measure. The issue is, are you smart enough to ride what is left of this rally and get out before stock prices are lower than they are today. 

If you are, you have my utmost admiration.  I, regrettably, am not that smart.  So I rely on a Model that has worked on a long term basis for four decades.  I am wrong to have our Portfolios at 40% cash today.  I am content to be wrong on a short term basis to be sure my principal stays in tact long term.’

            This article on confirmation bias is particularly apropos for me in the current market.  My reply is that (1) the equations in our Valuation Model were developed long ago and updated as events dictate and (2) the Sell Half Price targets are determined by applying current data to the historical relationships set in (1).  So I can choose to rely on those historical relationships or I can ignore them and go with arguments like ‘it’s different this time’ or the Fed will successfully manage the transition from ease to tightening---for which there is not one iota of historical proof basis.  I choose the former.

            EBITDA and the S&P (short):

            Goldman’s bullish call (short):

      Subscriber Alert

            In its most recent review, Total System Services (TSS) failed to meet the quality criteria for inclusion in the Dividend Growth Universe.  Accordingly, it is being Removed from the Dividend Growth Universe and Sold from the Dividend Growth Portfolio.




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

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