Time to start selling
Steve Cook on Disciplined Investing

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Economics

   This Week’s Data

   Other

    The argument for lower corporate tax rates:
    http://mjperry.blogspot.com/2008/12/wake-up-call-to-washington-cut.html

Politics

  Domestic

  International War Against Radical Islam

The Market
    
    Technical

    An update on money flow:
    http://traderfeed.blogspot.com/2008/12/money-flow-lagging-stock-market-rally.html

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    Yesterday, the indices (DJIA 8934, S&P 909) had another good day closing well above the September to present downtrend (resistance) line that I have been focused on of late.  In addition, they both finished the day slightly above the last high of the move up since November 19.  Right now, I am watching the uptrend line off the November 19 low (DJIA 8602, S&P 864) for support and the highs set in late October (DJIA 9264, S&P 985) as resistance.  The volatility index declined slightly (58) but it remains at a level that shouts at us to be cautious.  Volume was up again--that’s great; we want volume increasing as stock prices go up.
http://bespokeinvest.typepad.com/bespoke/2008/12/sp-500-breaks-out-of-downtrend.html


   Fundamental
    
Some historical perspective on where 2008 ranks in terms of stock price performance:
    http://gregmankiw.blogspot.com/2008/12/life-in-left-tail.html

    Our strategy doesn’t involve fixed income securities, but long corporate yields look very competitive right now:
    http://econompicdata.blogspot.com/2008/12/real-yield-of-treasuries-vs-corporates.html

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    The fundamentals driving investor enthusiasm were (1) the massive infrastructure commitment proposed by Obama over the weekend and (2) the sense that the auto companies were going to get their bail out. While I think that both of these factors contribute to fear abatement among investors, I am not sure they represent any kind of long term positive. 

    The bail out package, at least as it is currently drafted is a joke: no conditions on labor, nothing about debt holders, nothing about revamping vehicle models or dealerships.  The only conditions mentioned are no increased pay for executives and no dividend distributions--which I am OK with; but they will hardly put the auto companies on the road to financial recovery.  Here is a summary with a link to the entire draft:
    http://senateconservatives.com/2008/12/08/text-of-auto-bailout/

    One more learned opinion on an auto bailout:
    http://www.ritholtz.com/blog/2008/12/the-road-to-saving-gm-and-the-taxpayer-lies-through-bankruptcy/

    My problem with Obama’s infrastructure spending is that it does nothing to stimulate business investment or profitability.  I am not against many of the measures; but the US government has been spending money on exactly these kind of programs for a decade via rampant profligate pork barrel expenditures; and none of that did anything to prevent this crisis and I seriously doubt that it will do much to alleviate its conditions.  Further, the specter of big government stepping forward to prevent a financial collapse may make us all feel warm and fuzzy right now, but it will do nothing to improve corporate profitability--and that and that alone is what will move stock prices higher in the long term.

    The point here being that there is nothing in these proposals, good or bad, to suggest that stock prices will move outside their current trading range.
http://www.ritholtz.com/blog/2008/12/various-bears-see-a-hibernation-period-ahead/


     
    At the Market open this morning, our Portfolios are going to start building cash.  Before getting into the details, I want to re-state a point that I made a couple of weeks ago:  I have been doing this for forty years, I have never regarded myself as a trader, I don’t want to be a trader.  But we have been dealt a hand whose defining characteristic is volatility--witness the current level of the VIX is twice the level that has historically been thought of as extreme.  As a result, a buy and hold strategy is simply not going to produce the performance that it historically has.  Hence, our strategy of aggressively managing our Portfolios’ cash position.

    Yesterday at the Market open, our Portfolios Bought stock.  How then can they be Selling this morning?  For one, while the Averages were up 3-4% (which is a big move in itself) our Portfolios were up between 5% and 8%.  Those moves are huge; an 8% increase is a year’s worth of performance in more normal times.  In addition, many of the stocks in our Portfolios were up double digit rates.  So while I think stocks probably have more on the upside before any meaningful reversal, prudence demands that we start to take some money off the table--so we are Selling both stocks that have done well and those that couldn’t move up even in a explosive market like we have had.  Further price moves to the upside will prompt additional sales.





Posted 12-09-2008 8:25 AM by Steve Cook
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