Wednesday, October 9, 2013

The Morning Call--Is it Kabuki theater or are they really that stupid?


The Morning Call

10/9/13

The Market
           
    Technical

            The indices (DJIA 14776, S&P 1655) took it in the snoot yesterday.  The Dow finished its second day below the lower boundary of its intermediate term uptrend (14987-19987).  If it stays below the aforementioned boundary through the close on Thursday, the break of the intermediate term uptrend will confirmed.  In addition, it remains below its 50 day moving average and is nearing its 200 day moving average.

            The S&P closed below the lower boundary of its short term uptrend (1681-1835) and its 50 day moving average for the second day.  A close below the lower boundary of its short term uptrend today will confirm the break of this trend.  It is some distance from its 200 day moving average.  It is well within its intermediate term uptrend (1593-2179).

Both of the Averages are within their long term uptrends (4918-17000, 715-1800).

            Volume rose; breadth remains poor.  The VIX was up another 5% and is approaching the upper boundary of its short term trading range.  It continues to trade within its intermediate term downtrend.

            S&P now oversold (short):

            Trading in the long Treasury remains calm, as it closed unchanged within its short term trading range and intermediate term downtrend.

            GLD rose fractionally but like the Treasury is not showing signs of investor concerns.  It finished below the upper boundaries of its very short term, short term and intermediate term downtrends.

Bottom line:  given the acrimony in Washington, it is not surprising that the Averages continue to challenge multiple support levels. We need to keep in mind that odds remain high that the shutdown/debt ceiling issues will be solved with no default; so any such resolution will almost certainly result in a bounce. 

The issue is, have the recent antics of both the Fed (to taper or not to taper) and our elected representatives (budget, debt ceiling) chastened investors sufficiently to alter their far too optimistic view of corporate earnings growth.

Given the magnitude of the current level of overvaluation (at least according to our Model), there are a lot more support levels that will have to be violated before equities become attractive for purchase.  In other words, I am not concerned that the S&P and/or the DJIA may be breaking the aforementioned support levels. 

On the other hand, if the pin action improves and one of our stocks trades into its Sell Half Range, our Portfolios will act accordingly.

            Market breadth worries (medium):

            And:

    Fundamental
    
     Headlines

            Yesterday’s US economic data was mixed:  September small business sentiment declined slightly from its August reading though it was a touch above expectations; weekly retail sales were down on a weekly basis but still up year over year.  Overseas, the September Chinese service PMI fell while the German trade surplus grew.

            Investors were barraged with news conferences yesterday as the ruling class continued its Punch and Judy Show.  However, the current whackage in the stock market notwithstanding, most of the pundits are in agreement that the budget/debt ceiling problems will be resolved within causing a significant drag on the economy or a default. At the moment, both the Treasury and gold markets appear to be in agreement. 

I noted in last weekend’s Closing Bell that it always makes me nervous when there is general consensus on an issue because often events have a way of making fools of us all.  What makes me particularly worried about the current dilemma is the ideological bent of the president, His tendency toward self righteousness and His continuing to behave like the Campaigner in Chief versus Commander in Chief.  It concerns me that He will choose to go down with the ship before He will compromise. 

Not that the GOP’s behavior isn’t equally unreasoned.  They have done more than their fair share of deficit spending and are in no position to be wagging their fingers at the dems.  In addition, initially conflating Obamacare with the general issue of irresponsible fiscal policy was a big mistake.  Finally, the republicans have their own ideologically driven members.

I am not predicting a failure to compromise.  I am saying the risk is there; but more importantly, the longer the emotional verbal warfare goes on, the more likely it is that American confidence could be further damaged, assuring that the country will have little chance to emerge from its below average secular growth path.

Bottom line: ‘(1) the shutdown is not a significant economic risk, (2) a government default on its debt following a stalemate on the debt ceiling could cause problems [higher interest rates, declining dollar], (3) the rhetoric notwithstanding, a stalemate is a no win strategy for the party that the electorate faults; they will read the polls and salvage what they can, (4) there is some small probability that this judgment is far too optimistic, that the shutdown/debt ceiling won’t be resolved which would likely do considerable damage to the Markets, (5) there is a larger probability that the whole process, even if it ends well, [a] will cause investors to rethink their current overly optimistic view of the Market and stocks could trade down to Fair Value {S&P 1440} and [b] will reinforce businesses and consumers unwillingness to invest and spend; and hence, doing nothing to lessen the economic headwind of a highly unreliable fiscal policy, and finally (6) given our Portfolios large cash position, neither (4) nor (5) above represent a calamity; indeed, that is the point of our Price Disciplines---sell high, but low.’

            Martin Feldstein on the risk of default (short):

            The latest from Doug Kass (medium):

            What is happening in the investment banking world (short):

            ***over night, it was announced that Janet Yellen will be nominated for Fed chief; and August UK industrial production plunged 1.1%.

      Subscriber Alert

            The stock price of Target (TGT-$62) has fallen below the lower boundary of its Buy Value Range.  Hence, it is being Removed from the Dividend Growth Buy List.  It is still well above its Stop Loss Price, so the Dividend Growth Portfolio will continue to Hold TGT.

            The stock price of  South Jersey Industries (SJI-$57) has declined below the upper boundary of its Buy Value Range.  Accordingly, it is being Added to the Dividend Growth Buy List.  The Dividend Growth Portfolio already owns SJI, so no new shares will be purchased.

The stock price of  British American Tobacco (BTI-$104) has declined below the upper boundary of its Buy Value Range.  Accordingly, it is being Added to the High Yield Buy List.  The High Yield Portfolio does not own BTI, but no new shares will be purchased.

In our annual review of Walgreen (WAG-$55), it failed to meet the quality/growth criteria of the Aggressive Growth Universe.  Therefore, the stock is being Sold out of the Aggressive Growth Portfolio at the open this morning.  WAG remains in the Dividend Growth Universe although the Dividend Growth Portfolio does not own it.



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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