Be wary of politicians bearing gifts
Steve Cook on Disciplined Investing

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Have You Seen This?


The Market
    
    Technical

    Yesterday the Averages (DJIA 10138, S&P 1070) followed through on Wednesday’s huge rally; the caveat being that they did so on lower volume and poorer breadth.  Nonetheless, they remain within their current down trends (9216-10404, 980-1104). 

The VIX fell again and is approaching an intermediate term support level; as I have observed previously, if it breaks that level, it will be a strong signal that the recent decline is over.  In addition, our internal indicator improved marginally--another sign that the internal strength of the Market is better than the indices portray.  In the past given this indicator’s stellar record, I would be considerably more optimistic about the current rebound.  However, as many of you may remember, it failed us earlier this year; so I need it to re-prove itself before I allow it to influence investment strategy again

Bottom line: as much as I am tempted to follow the lead of our internal indicator, the general puniness of the volume and breadth stats keeps me very wary.  As I said in yesterday’s Morning Call, I am waiting for stocks to make either a higher low (than 9645, 1009) or the break the upper boundary of the current down trend (now at 10404, 1104) before turning positive.

   Fundamental
     
     Headlines

    We received more positive long term news yesterday which I am sure kept investors feeling warm and fuzzy:

(1)    the International Monetary Fund released a revised economic forecast raising its estimate for global growth in 2010.  This improved outlook clearly addresses investor concerns regarding an economic slowdown in the rest of the world [China and Europe] negatively impacting US progress--and that’s great, if it occurs.  The IMF has a much checkered record of economic forecasts.  So while I am not saying it ain’t so, I am suggesting that it be accepted with caution.
http://mjperry.blogspot.com/2010/07/imf-forecasts-continuing-global.html

(2)    in an interview Wednesday night, Geithner suggested that the administration was considering a 20% maximum tax rate on dividends and capital gains when the Bush tax cuts expire [thought he still expects the tax rate on upper income earners to rise].  If this isn’t political/election year rhetoric, it could be significant in that it would remove a potential impediment to new investments--a concern that I have recently been harping on ad nauseum.  Of course, we won’t know for sure till after November.

(3)    the Treasury [has Tiny Tim been busy or what?] released a report in which it made positive statements regarding China’s recent move to increase the flexibility of the yuan’s conversion rate and it omitted any statement about China being a ‘currency manipulator’.  This is a plus for free trade.

As an aside, I have to ask myself if all these headlines on free trade and lower tax rates are an election year charm offensive by Obama and his lackeys to try to blunt the disaster that likely awaits them in November or is He, in Clintonesque fashion, really coming to His senses, giving up His purist, liberal, statist ideology and recognizing the error of His way?  Color me skeptical; but we have to allow for the possibility of a transformation.

In support of my skepticism, I cite the administration’s reaction to the late in the day Appeals Court ruling yesterday that basically upheld the stay on the moratorium on offshore drilling (which is great news).  In response, the administration said that if the final ruling (August) goes against it, it will instate a new moratorium (I thought Marbury vs. Madison established that the actions of the executive branch were subject to the rulings of the Court).  This is the same group of clowns that is suing Arizona for passing a law that allows it to enforce Federal law.  That kind of above the law/we know better than the collective wisdom arrogance that has characterized the Obama administration since its inception is clearly still on display and suggests that the free trade/tax reduction speeches are not to be believed.

There were some disappointing economic stats covering recent trends released yesterday (see below): slightly lower than anticipated June retail same store sales and a decline in consumer credit in May; but clearly, investors overlooked them. 
http://www.zerohedge.com/article/consumer-credit-plunges-may-april-revised-much-lower-government-only-marginal-lender-two-mon

Bottom line: I think that investors have to be suspicious of most of the factors driving yesterday’s optimism.  That doesn’t mean that Obama hasn’t changed His stripes. It does mean that there are likely to be periods of both optimism and pessimism regarding His motives between now and November; and until we see action instead of just rhetoric, we should be circumspect about betting money on His conversion to a more free market agenda.
  
     Thoughts on Investing--from the Apprenticed Investor

    This if the first in a series of from the above author.

Most investors do not have the tools to play a bottom-guessing game. They lack the ability to wait for lows, and they lack the skill set to see the bottom when it's there. Too few employ stop losses or risk management. Worst of all, even when they do, they lack the discipline to follow their own rules.

So you ask: Is it safe yet?

Unless you know -- and can avoid the dentists drill -- waiting for a major downtrend to be broken is the best way to preserve capital and redeploy cash intelligently.

One of the key differences between individual investors and institutions is their respective job descriptions. Mutual funds, pension plans, hedge funds get paid to take extraordinary risks in order to improve their returns.
Individuals, on the other hand, do not...

Might today be the bottom? My best guess is that we are getting nearer a tradable low -- the oversold point where a rally can run a few days to a few weeks. But my instinct is that we are nowhere near the 2008/2009 recession bottom (This was written in June 2010). But why guess? Why not wait until the downtrend is decisively broken?

The advantages of nailing a bottom precisely right for the individual are quite minor, especially relative to the disadvantages of being too early and losing precious capital.

Economics

   This Week’s Data

    June retail same store sales grew 3.1% versus expectations of a 3.2% increase.  Further, most retailers declined to comment or provide guidance for the second half of the year--not a sign of optimism.  Nor was the $9.1 billion decline of consumer credit in May.
    http://www.calculatedriskblog.com/2010/07/consumer-credit-declines-sharply-in-may.html

   Other

    I have argued repeatedly that the sovereign debt crisis is not over (even though some progress is being made).  Here is a long explanation as to why>
    http://www.zerohedge.com/article/must-read-reflections-gmos-edward-chancellor

    Here’s more (medium):
    http://www.bloomberg.com/news/2010-07-07/european-stress-tests-underestimate-probable-losses-on-bonds-analysts-say.html

    Rail traffic is still strong (short):
    http://mjperry.blogspot.com/2010/07/weekly-rail-traffic-tops-comparable.html

Politics

  Domestic

Water toxicity samples from the Gulf (short):
http://www.zerohedge.com/article/samples-confirm-corexit-ingredients-gulf-spill-area-far-above-toxic-concentrations

 









Posted 07-09-2010 8:25 AM by Steve Cook
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