Friday, September 6, 2013

The Morning Call---Better economy or no Syria or both?


The Morning Call

9/6/13

The Market
           
    Technical

            The indices (DJIA 14937, S&P 1655) inched higher yesterday.  The Dow remains within its short term trading range (14190-15550), while the S&P continues to confuse me as to its primary short term direction.    Both are below their 50 day moving averages; while the DJIA is below its 100 day moving average and the S&P is above.  In short, the short term direction of the Market continues uncertain.

            Nevertheless, both of the Averages are well within their intermediate term (14715-19715, 1568-2154) and long term uptrends (4918-17000, 715-1800).

            Volume fell; breadth was mixed.  The VIX was off fractionally, closed within its short term trading range and its intermediate term downtrend.  Its recent price action reflects a trendless short term Market.

            The long bond got whacked again, leaving it within its short term downtrend.

            GLD also took it in the snoot.  It is nearing the lower boundary of its very short term uptrend, but remains within its short and intermediate term downtrends.  I previously noted that if GLD trades down to that lower boundary of its very short term uptrend and bounces, I would be tempted to nibble.   GLD is now close; I am waiting for the rebound.

Bottom line: there remains no clear trend in the Averages; though on balance there are more negatives at the moment than positives.  Yesterday’s pin action---stocks up, bonds down, gold down---suggests one of two thing or perhaps both: a stronger economy, therefore, an increased likelihood of ‘tapering’ [better profits, higher interest, less fear] and/or a declining probability of US involvement in Syria [investor relief, less pressure to find safe havens like bonds and gold].  Either or both would be fine by me.  That said, one day’s performance is not a lot to make a bet on.  Hence, I think the best place to be is the sidelines.

            Our optimist on interest rates (medium):

            Valuation versus the VIX shows complacency (short):

    Fundamental
    
     Headlines

            Yesterday’s US economic stats were upbeat (as has the data flow for the entire week): the August ADP private payroll number was up, in line; weekly jobless claims fell; second quarter productivity and unit labor costs were better than expected; July factory orders declined less than anticipated; and the August ISM nonmanufacturing index was very strong.

            Investors were seemingly in a ‘good news is good news’ frame of mind, i.e. strong economic numbers means a better economy that won’t be negatively impacted by ‘tapering’, so equity prices were up while bond and gold prices fell.   Or, as I noted above, it could also mean that they were breathing a sigh of relief as the likelihood of congressional approval of military action in Syria appeared (at least temporarily) to decline.

            That said, I think that the Fed remains confused and conflicted over what to do about ‘tapering’ and I know that Obama doesn’t have a clue what to do about Syria.  That heightens the odds of an unexpected turn of events.  So while I am encouraged by both the better economic numbers and current lack of support for Syrian intervention in congress, too much uncertainty remains on both counts to get jiggy about either.

Bottom line: as I noted yesterday, the improving economy and the lessened risk of US involvement in Syria are positive.  However, remember that our forecast calls for a growing economy and no war in Syria.  So the fact that they are happening as we planned is good but it does nothing to alter our Model’s Fair Values---which as you know prices equity values much lower than current levels.  

The only way that I can get our Model to reflect present prices is to assume that the Fed transitions money supply from easy to tight with relative success and the our political class can come to a ‘grand bargain’ (lower government spending, reform taxes, lower government interference in the economy [cough, Obamacare, cough]).  Since history tells us the Fed will fail and the evening news tells us that our ruling class has no motivation to act in a fiscally responsible manner, I have to stick with our economic forecast and the results of our Valuation Model.

            A pictorial of the naval standoff in the Mediterranean (short):

                This on Syria from one of my favorite liberal blogs (medium):

                Spill over into Iraq (short):

                Finally, the good news (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 Investing For Survival is to help other investors build wealth and benefit from the investing lessons he learned the hard way.

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