The test that we have been waiting on
Steve Cook on Disciplined Investing

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Have You Seen This?

Economics

   This Week’s Data

    The January leading economic indicators rose .4% versus expectations of a .1% increase; however, absent the expansion in the money supply, this indicator would have been down.
http://econompicdata.blogspot.com/2009/02/leading-economic-indicators-january.html

    The February Philadelphia Fed business outlook survey index (secondary indicator) was reported at a disastrous -41.3 versus forecasts of -27.0 and January’s reading of -24.3.

    The consumer price index (CPI) was reported up .3% versus estimates of up .2%; core CPI rose .2% versus expectations of up .1%.
http://www.capitalspectator.com/archives/2009/02/a_whiff_of_refl.html#more

   Other

    For all the bleak news, consumer loans continue to grow:
    http://mjperry.blogspot.com/2009/02/consumer-loan-growth-10.html

    More on what is behind foreclosures:
    http://www.economist.com/world/unitedstates/displayStory.cfm?story_id=13145239&source=features_box_main

    George Will on the stimulus plan:
    http://www.jewishworldreview.com/cols/will021909.php3

    And Alan Reynolds on the foreclosure mitigation plan:
    http://online.wsj.com/article/SB123500284970517737.html

    Money supply is rapidly expanding both here:
    http://www.calculatedriskblog.com/2009/02/federal-reserve-assets-starting-to.html

    And abroad:
    http://www.ritholtz.com/blog/2009/02/ecb-boe-assets/

Politics

  Domestic

This is a must read article on the consequences of bailing out the auto industry:
http://www.american.com/archive/2009/february-2009/driving-toward-a-trade-war

    And this on the absurdity of auto union legacy costs:
    http://mjperry.blogspot.com/2009/02/uaw-start-at-age-18-retire-at-48-spend.html

  International War Against Radical Islam

The Market
    
    Technical

    The Averages (DJIA 7465, S&P 778) closed ever closer to the lower boundary of the broader range I am now watching (7437, S&P 766).  Away from the indices, I am seeing deterioration in the prices of the stocks in our Portfolios--witness the number of stocks that have fallen below the lower boundary of their Buy Value Ranges in the last three days.
   
   Fundamental
   
    Everyone who I talk to that is managing money is about to puke.  Tests of lows are never pleasant experiences and this one is no different--if indeed we are lucky enough for this to be a test.  Given yesterday’s close near the low and the poor performance of the overseas markets and where the futures are trading, it is shaping up like today will be a pivotal day in terms of whether the November 2008 lows hold. 

It is always very difficult to do nothing at a point like this, i.e. sweating out whether or not stocks in general will hold a critical support level which if they do, will likely be followed by a significant rally, while individual stocks we own are starting to violate important price discipline levels which may be a precursor to a steep decline if stocks don’t hold that critical support level.

    The thing that is the most worrisome about holding fire while we are waiting to see if this test is successful or not is that the Market appears to be in the second stage of decimating the insurance stocks much as it did the bank stocks two months ago.  While our Portfolios don’t have a lot of exposure to this industry, what we do have is taking it on the chin.  I have deliberately not been aggressive in stopping out these positions because (1) a couple of them were whacked on bad earnings reports and I was waiting to see if they bounced and (2) I have been assuming a successful test of the lows followed by a sharp subsequent rebound which would allow a more graceful exit.  Unfortunately, stocks have been down six out of the last seven days.  Given the indices proximity to their lows, I am still doing nothing--but this is a moment to moment strategy subject to immediate change.
   
    The strategy today is await the outcome of the current test.  If successful, then we continue to pursue our current strategy; if not, given the downside that I outlined in last week’s Closing Bell, I will take cash to 30%, gold to 7.5%.  Finally, I have been experimenting with the S&P ETF’s (both long and short) as a way of hedging our Portfolios and supplementing our returns as long as the Market remains as volatile as it is; and I like the results.  We are at a perfect point to utilize one or the other of those instruments (the S&P long, symbol SPY or double long, symbol SSO and the S&P short, symbol SH or double short, symbol SDS) depending on which way stocks break.  Should I decide to do this, I caution that carries risk and each of you needs to decide if that extra risk is appropriate for you.

    Given the volatility that we are seeing in the futures, pre-opening, I would expect this to be a day of action.









Posted 02-20-2009 8:19 AM by Steve Cook