Playing the hand that you are dealt
Steve Cook on Disciplined Investing

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Economics

   This Week’s Data

    October industrial production rose 0.1% versus expectations of a 0.4% increase; capacity utilization came in at 70.7, in line with estimates.

    Weekly mortgage applications dropped 4.7%.

    October housing starts fell 10.6% versus expectations of a 1.8% increase; building permits declined 4.0% versus estimates of a 1.7% rise.
    http://www.calculatedriskblog.com/2009/11/housing-starts-decline-sharply-in.html

    The October consumer price index rose 0.3% versus forecasts of a being up 0.2%; core CPI increased 0.2% versus expectations of a 0.1% rise.
   
   Other

    A different take on yesterday’s PPI number (chart):
    http://www.businessinsider.com/chart-of-the-day-producer-price-index-crude-goods-2009-11?utm_source=Triggermail&utm_medium=email&utm_campaign=Clusterstock%20Chart%20of%20the%20Day%2C%20Tuesday%2C%2011%2F17%2F09

    An update on the Baltic Dry Index, which is smokin’ (chart):
    http://mjperry.blogspot.com/2009/11/baltic-dry-index-roars-back-1025-gain.html

Politics

  Domestic

Why universal standard (as in healthcare) are not as good as they sound (medium):
http://cafehayek.com/2009/11/universal-standards.html?utm_source=feedburner&utm_medium=email

    What was Belichick thinking (medium):
    http://www.weei.com/sports/boston/patriots/christopher-price/2009/11/16/when-it-comes-fourth-down-belichick-anything-con

  International War Against Radical Islam

The Market
    
    Technical

    The DJIA (10437) remains within its up trend off the March lows (9953-11888).  The important issue on my mind is, will the S&P (1110) hold above the 1102 level long enough to effectively re-establish its up trend (1056-1338).  Yesterday it did in the face of a higher dollar; although volume was once again abysmal.  Nevertheless, the sellers tied to push the S&P lower and couldn’t get it done.  So score one for the bulls and assume the increased likelihood of at least one more leg up in this Market.

    As I noted, the dollar was up but so were stocks, gold and most commodities.  Another off-again day.  The VIX traded down and remains in a trading range.
   
   Fundamental
   
      Headlines

    The Chinese lectured Obama on US monetary/fiscal policy and indicated that they had no intention of allowing the yuan to appreciate.  Not good news for the dollar which I assume means that it will continue to burn.  And if the inverse dollar/stock-gold-commodities relationship holds, then stocks it seems are going to keep going up. 
    http://online.barrons.com/article/SB125838307659350463.html?mod=BOL_hpp_dc (long)

I have made it clear that the whole notion of a declining dollar being good for stocks sets me on edge because of my Market experience in Nixon/Carter years. Ultimately easy money which drives the dollar down also drives inflation up; and when inflation goes up, the discount rate goes up; and when that happens, P/E multiples shrink and bond prices and stock prices go down.  Having seen it up close and personal, I know that it happens.  I appreciate that in the first instance massive infusions of liquidity will drive asset prices up. But sooner or later, we have to pay the piper.  I thought that we had reached the ‘sooner or later’ two weeks ago.  But the Market is telling us, not so.  So clearly, I am just not smart enough to know when the ‘sooner or later’ occurs; and till it does, we have to play the game as it is being dealt. 

    It could be that the ‘seasonal’ factor is in play; that is, historically, stocks tend to rise in the November/December period.  Maybe it is because investors get all warm and fuzzy on the Holidays and their tendency is to be more positive than they might otherwise be.  So right now perhaps they are just choosing to ignore or postponing having to deal with the longer term implications of the combination of disastrous monetary and fiscal policies.  Maybe it has to do with the fact that most hedge funds fiscal year ends in October and the big boys have retreated to sidelines to plan how to spend their bonuses.  Whatever the reason, the seasonality has been there historically and it may be working its magic now. 

I also understand that if the institutional community is as underinvested as some say (another favorite reason to be bullish quoted by the experts), that there are good reasons not related to valuation for portfolio managers to buy stocks. However, that notion doesn’t make any more sense to me than stock prices going up because inflation is rising.  That is why our Portfolios keep lowering their exposure to the US Market, upping their percentage invested in gold and foreign ETF’s and that is why our cash equivalents emphasize the TIPS treasuries and short term notes.

    A look at gold versus the S&P (chart):
    http://www.ritholtz.com/blog/2009/11/is-gold-really-in-a-bubble/

    Large caps outperforming (chart):
    http://traderfeed.blogspot.com/2009/11/more-large-cap-outperformance-among-us.html
   





Posted 11-18-2009 8:36 AM by Steve Cook