Another bout of Market schizophrenia
Steve Cook on Disciplined Investing

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Have You Seen This?


The Market
    
    Technical

    Is this pin action confusing, or what?  Yesterday the Averages (DJIA 9974, S&P 1067) opened on a positive note; and for most of the day, it appeared they would turn in a strong performance.  It even seemed probable that the S&P would end the trading session above the 1084 support turned resistance level.  Nope.  Late in the day, stock prices turned and sprinted south, closing down on the day.  However, it is important to note that they remain above their May 6th lows (9868, 1065) which means under our technical discipline, stocks remain in a trading range.

    Volume was once again strong, while breadth was mixed to weak.  The dollar was up (scoreboard: stocks down, gold up, oil up).  The VIX, after three big down days, experienced a huge flush in early trading and seemed to be signaling that stocks were in the process of breaking to the upside.  Nope.  In line with stock trading, it reversed late in the day and closed up for the day.

    Bottom line: we have seen schizophrenic markets several times in the last couple of years and it would appear that we are there again.  I remain encouraged that equity prices are holding above the May 6th intraday lows; however, Mr. Market’s inability to mount a move in either direction suggests caution.  Let’s let him tell us what he going to do before taking action.

   Fundamental
    
      Headlines
  

    Once again the pin action itself was the center of attention versus what might be behind it.  However, there were two news items worth mentioning:

(1)    discord on the Korean peninsula.  South Korea reported the disappearance of four North Korean  subs.  It may be a strictly defensive move by the whack jobs running that country.  On the other hand.................
http://www.zerohedge.com/article/south-korea-alert-north-korean-subs-disappear-east-sea

(2)    China.  The country’s foreign reserve manager reportedly told the press that in light of the recent decline in the euro, the central bank was reviewing its allocation to euros.  That’s news? Give me a break.  What rationale central banker wouldn’t be constantly reviewing how their country’s reserves were invested irrespective of how one or more of their holdings were performing price wise?  Not exactly a revelation.  Nonetheless, this bit of news is what drove stock prices down at the end of the day as investors were again worried about the collapse of the euro and the resulting deflation spreading worldwide.

Look, Angel if you held billions and billions of euros in your portfolio, you would be imminently aware of their value, whether it was rising or falling, Beer six months ago, the Chinese said the same exact thing about their dollar holdings.  And what happened? zilch, nada, zero.  Indeed, no one is worried about what China thinks of the dollar today, because they are stampeding to buy it, Coffee even if China is wee weeing in its pants over euro devaluation,  it has a ‘to who’ problem, i.e. it owns such a huge position to whom is it going to sell them and at what price? Drinks Europe is China’s biggest customer.  It has absolutely no interest in creating chaos there.

So while there may be a risk of a collapse of the euro resulting in a major deflationary impulse, I have a tough time believing that it would be precipitated by a change in Chinese reserve policy.
         http://www.zerohedge.com/article/china-preparing-divest-its-630-billion-eurozone-bond-holdings

            (Note: overnight, the Chinese denied having made the above statement.)   

    Bottom line:  it sure looks like fundamentals are not driving Market action.  Stock prices are up when news events would suggest a decline and visa versa.  The Market schizophrenia brought on by a battle between the bulls and bears which I referred to in yesterday’s Morning Call persists. Until these forces resolve themselves, the best place to be is the sidelines.

    For the bears amongst you (long):
    http://www.minyanville.com/businessmarkets/articles/europe-gold-germany-euro-bearish-todd/5/19/2010/id/28384?camp=featuredslidealso&medium=home&from=minyanville

    And something for the bulls.  A look at historical valuation (short):
    http://econompicdata.blogspot.com/2010/05/equity-valuation-matters.html

    More pain and suffering to come in the PIIGS.  The problem with this measure described herein is that while forcing banks to face up to losses is good; it is not so good if it results in them defaulting on counterparty transactions.  The EU central bank needs to guarantee the banks’ liquidity (medium).
    http://www.zerohedge.com/article/bank-spain-tells-lenders-take-30-loss-provisions-foreclosed-real-estate-held-over-two-years

    Here is a great 10 minute interview (video) with Pimco’s El Erian on Europe, the US and investment strategy.
    http://www.investmentpostcards.com/2010/05/26/el-erian-on-the-global-shake-up/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+wordpress%2FVYxj+%28Investment+Postcards+from+Cape+Town%29&utm_content=Yahoo!+Mail

Economics

   This Week’s Data

    April new home sales surged by 15.8% versus expectations of a 3% increase.  One result was a major decline in the backlog of unsold homes.
    http://econompicdata.blogspot.com/2010/05/new-home-sales-jump-test-comes-next.html

    Weekly jobless claims fell 14,000 versus estimates of a 16,000 decline.
    http://www.calculatedriskblog.com/2010/05/weekly-initial-unemployment-claims-at_27.html

    First quarter gross domestic product rose 3.0% versus earlier forecasts of an increase of 3.4%; the first quarter price deflator came in at +1.0% versus expectations of +0.9%; corporate profits were up at an annualized rate of 44.8% versus 37.0% recorded in the fourth quarter of 2009.
    http://econompicdata.blogspot.com/2010/05/gdp-revised-slightly-down-to-3-in-q1.html
   
   Other

    More on the durable goods order number reported yesterday (medium):
    http://www.capitalspectator.com/archives/2010/05/durable_goods_r.html#more

    Employment continues to lag (chart):
    http://www.businessinsider.com/chart-of-the-day-total-nonfarm-employment-2010-5?utm_source=Triggermail&utm_medium=email&utm_campaign=CS_COTD_052610

    Unemployment and the welfare state (short):
    http://mjperry.blogspot.com/2010/05/worker-shortage-in-washington-one-farm.html
   
    More positive anecdotal data (both short):
    http://mjperry.blogspot.com/2010/05/fedex-restores-flight-hours-to-pre.html
    http://scottgrannis.blogspot.com/2010/05/shipping-activity-continues-to-be.html

    For the bulls amongst you, here is a more sanguine take on the impact of the European sovereign debt crisis on the US (medium):
    http://www.slate.com/id/2254974

    Public debt levels of emerging markets (short):
    http://www.bespokeinvest.com/thinkbig/2010/5/26/emerging-market-vs-g7-public-debt-levels.html










Posted 05-27-2010 8:13 AM by Steve Cook