This Market could break to the upside; but I don't believe it.....yet
Steve Cook on Disciplined Investing

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The Market
    
    Technical

    Yesterday was mildly positive.  The S&P (1136) closed above the 1120 and the down trend off its October 2007 high (1128) for the second day in a row; the DJIA (10569) didn’t fare as well, closing above the S&P comparable 1120 level (10530) but under the down trend off its October 2007 high (10578).  Volume picked up a bit (though it is still anemic) and breadth remained good--although surprisingly our internal indicator weakened.

    The dollar was up fractionally (scoreboard: stocks mixed, gold up, oil up); and the VIX declined again, this time below a former support level--a continuing positive. 

    Bottom line: the positive close of the S&P adds another day (time) to the recent penetration of the down trend off its October high which would ordinarily carry some weight with me; however, the deterioration of our internal indicator keeps me firmly anchored so the side line--at least for the time being.

   Fundamental
 
  
    Strategists’ final 2010 prediction (short):
    http://www.bespokeinvest.com/bespoke/2010/01/final-2010-strategist-predictions.html


    I am not sure what to make of this accusation that the Fed is manipulating the index futures market; but it is a ‘must read’ (medium):
    http://www.zerohedge.com/article/marketwatch-calls-out-fed-disprove-it-manipulating-index-futures


     Headlines

    I noted in yesterday’s Morning Call that following the release of ISM manufacturing index, the chatter among the talking heads was that the economy was stronger than expected.  So one would have expected that following yesterday’s  report that November factory orders were much stronger than anticipated that stock prices might experience another surge.  Nope.  The point here being that I am still struggling with  what could drive stock prices up from here.  It was once avoiding disaster, then an improving economy, then political ‘gridlock’ that kept prices advancing.  But that process seems to have ended and every new hypothesis regarding a new impetus that would drive stock prices has fallen by the wayside.  Perhaps the resurrection of the ‘improving economy’ thesis will ultimately be proven valid.  But as of yesterday, it doesn’t seem to be the case thus far.

In addition to supporting the above notion that there doesn’t seem to be a theme to drive stock prices higher, the other economic data released yesterday (weekly retail sales mixed, December auto sales OK and pending home sales a disaster) also address another point on the economy I made in Tuesday’s Morning Call, that is, the economic data being released of late has done nothing to alter my view of the economy.  There is no evidence of a ‘V’ shaped recovery and until proven otherwise, we are still faced with the consequences of ‘a damaged financial system, a fiscally irresponsible budget process, the likelihood of higher taxes, an increasing inefficient economy resulting from rising government regulations, the crowding out of corporate investment capital by the government and rising protectionist sentiment in congress.’ 

    Bottom line: I think that the economy is in a weak recovery and will continue to until the data proves me wrong; and I think that the problems outlined above in addition to the programmed increase in taxes (at the end of 2010) on capital gains and dividends (which will alter the present value of all stocks immediately) will make further stock prices increases  tougher to come by than we experienced March to November 2009.

    The other item that had investor attention yesterday was another negative report, this time on Goldman Sachs, from bank uber bear Meredith Whitney.  The good news is that Goldman and most other financial stocks actually held up well following the report’s release.  Given the Market’s reception to her past reports (universally negative), that has to be viewed as a positive for stocks and is a reminder to me that while I may have a less optimistic view of the current political/economic environment than some, the worst is still behind us.  So while the upside might be limited from here, so likely is the downside; and at 23-25% cash, I feel comfortable that the risk/reward is reasonably balanced--at least for today.
    http://www.bespokeinvest.com/bespoke/2010/01/goldman-sachs-gs-breaks-free-of-the-whitney-effect.html

Economics

   This Week’s Data

    The International Council of Shopping Centers reported weekly sales of major retailers up 1.5% versus the prior week and up 2.5% on a year over year basis;  Redbook Research reported month to date retail chain store sales rose 1.6% versus the comparable period last year.

    November factory orders increased 1.1% versus expectations of +0.5% and +0.6% recorded in October.

    US December auto sales improved a bit:
    http://econompicdata.blogspot.com/2010/01/auto-sales-improved-but-still-long-way.html
   
   Other

    This is a disturbing chart plotting manufacturing jobs versus government jobs (chart):
    http://www.businessinsider.com/chart-of-the-day-goods-producing-wrokers-vs-government-payroll-2010-1?utm_source=Triggermail&utm_medium=email&utm_campaign=Clusterstock%20Chart%20of%20the%20Day%2C%20Tuesday%2C%201%2F05%2F10

    According to this chart from Morgan Stanley, the first Fed rate hike is still nowhere is site.  (Keep in mind my argument for inflation is that the Fed has historically always waited too long to tighten.):
    http://www.investmentpostcards.com/2010/01/06/chart-du-jour-no-signs-of-imminent-rate-hike/?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+wordpress%2FVYxj+%28Investment+Postcards+from+Cape+Town%29&utm_content=Yahoo!+Mail


    Another view on Bernanke’s ‘head in the sand’ remarks regarding the culpability in the financial crisis (long):
    http://www.nytimes.com/2010/01/06/business/economy/06leonhardt.html


    The New York Fed Treasury spread model indicates that the recession is over and the chances of a double dip are nil (chart):
    http://mjperry.blogspot.com/2010/01/ny-fed-treasury-spread-model-economic.html
   
    Here is my argument for a stunted recovery only from a couple of University of Chicago economists (medium/long):
    http://online.wsj.com/article/SB10001424052748703278604574624711732528426.html

Politics

  Domestic

Charlie Rose interviews Paul Volcker (long):
http://www.businessweek.com/magazine/content/10_02/b4162011026995.htm

    Taxing stock trades--another really great idea from your elected representatives (long):
    http://www.poorandstupid.com/2010_01_03_chronArchive.asp#8425265229821228106

    Another fatal flaw in the healthcare bill (medium):
    http://scottgrannis.blogspot.com/2010/01/fatal-flaws-in-heathcare-reform-5.html









Posted 01-06-2010 8:31 AM by Steve Cook