Yesterday was ugly, so is the Open; Patience for the moment
Steve Cook on Disciplined Investing

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Economics

   This Week’s Data

    Weekly mortgage applications fell 12% despite lower interest rates.

   Other

    Mitt Romney on the auto bail out:
    http://www.nytimes.com/2008/11/19/opinion/19romney.html?_r=2&hp&oref=slogin&oref=slogin

    Environmentalists look at the auto bail out:
    http://www.american.com/archive/2008/november-11-08/stop-the-green-carjacking


    The real cost of a bail out:
    http://mjperry.blogspot.com/2008/11/auto-bailout-would-be-terrible-for-free.html


Politics

  Domestic

A great editorial on Obama/Clinton (Secretary of State) by Tom Friedman:
http://www.nytimes.com/2008/11/19/opinion/19friedman.html?ref=opinion


  International War Against Radical Islam

The Market
    
    Technical

    The current decline in perspective:
    http://calculatedrisk.blogspot.com/2008/11/four-bad-bears.html


    Current chart on credit spreads and it is not pretty:
    http://bespokeinvest.typepad.com/bespoke/2008/11/high-yield-spreads-no-slowdown-in-sight.html


*************************************

    Feel like puking?  Yesterday was that kind of day.  The DJIA (7997) closed above its 10/10 intraday low (7853) though the S&P (807) didn’t (839).  The question clearly is which index is giving us the correct read on the general direction of stock prices?  I looked at our Portfolios for a hint; and they pretty much reflected the Averages, i.e. most of the stocks in the Dividend Growth Portfolio (big cap, high quality names, like the DOW) not only held their 10/10 lows but held their up trends off the 10/10 lows while the stocks in the Aggressive Growth Portfolio (smaller cap, lower quality, like NASDAQ and parts of the S&P) got beaten brutally.

     As I look at this, the first thing that has to happen is that the indices need to get in sync, i.e. either the DJIA breaks its 10/10 lows or the S&P bounces.  If the S&P bounces, nothing has changed; that is stocks remain in a trading range.  Were this to occur, our Portfolio would get aggressive about moving from 20% to 15% in cash.  If the DJIA breaks its 10/10 lows, I still would like to give stocks time (a couple of days) and/or distance (1-2% additional downside move) before accepting the end of the current trend.  Nevertheless, if this proves to be the case (1) the next identifiable support level is the October 2003 lows, circa DJIA 7146 and S&P 766, (2) our purchases yesterday will clearly prove to have been ill timed [the only good news, if I can call it that, is that we only put an additional 1% of the Dividend Growth and High Yield Portfolio at risk and even less of the Aggressive Growth Portfolio] and (2) defense returns as the dominant feature of our investment strategy and our Portfolios return to a more aggressive Stop Loss posture.

   Fundamental
     
    On the fundamental side, what gives me the most pause is the comedy routine played out on national TV in the congressional hearings on the auto industry bail out.   Everyone knows these companies are bankrupt in everything but name only; everyone knows that management has been abysmal (except perhaps Ford’s Mulally who just got there), union contracts uneconomic and the dealer network excessive.  Yet the boards of directors of these companies are silent and congress seems either too ill informed, too inflexible or too caught up in an ideological battle to respond to this dilemma pragmatically.  Regrettably, allowing this situation to drag out hammers the national psyche and investor confidence.  My fear is that in absence some sensible leadership from either our political class or the AWOL boards of directors both the economy and the securities markets face much tougher times (and the murky technical picture discussed above resolves itself to the downside).     

    Bottom line; we stay patient, at least in the first hours of the trading day, and see if either the S&P bounces or a shift in trend is in the making. By the end of the day the Market’s action should help to sort all of this out.  But as of this moment prior to the Market open, I am not dismissing the DJIA 7853--9707; S&P 839--1062 trading range as dead though my confidence in its viability is certainly shaken.  You will likely hear from me intraday as the technical picture becomes clearer.





Posted 11-20-2008 8:30 AM by Steve Cook
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